UK: Trustee power
Matthew Claisse and Lorant Porkolab highlight important new proposals regarding the powers of pension fund trustees in corporate transactions
"I run a business and I need to take bloody fucking trustee's permission to take my profit".
So said Mohamed Al Fayed in 2010 (in the London Evening Standard) when asked to explain why he sold Harrods to the Qatari royal family after 26 years of ownership. Now the UK's Takeover Panel has launched a public consultation on the takeover code, which would give UK pension scheme trustees an equal footing with employee representatives where corporate activity is being considered that would affect employers providing financial support to their schemes.
If he still owned Harrods, Al Fayed might not have taken too kindly to the Takeover Panel's proposals, where bidders for companies governed by the takeover code - any UK, Channel Islands or Isle of Man company with securities traded on a regulated market in the UK, or any stock exchange in the Channel Islands or Isle of Man - would have to disclose their intentions and strategic plans in respect of the target's pension schemes within their offer document, and make this documentation available to the pension schemes' trustees.
The Takeover Panel's proposals follow from responses to an earlier consultation to extend employee representative requirements, in which it was commented that trustees and their advisers were often the last to know about takeovers and the impact on pension scheme security given such a change in control. Arguably, starting with the Maxwell scandal in the early 1990s when over £400m (€508m) was stolen from the Mirror Group pension schemes, the security and protection of UK pension scheme members' benefits has been progressively tightened. This is, therefore, by no means a first step in ensuring members' security but rather one more step of a Jacob's Ladder of legislation.
In the early days of occupational pensions, a company's obligations to its pension scheme were seen as a ‘best endeavours' undertaking: the sponsor would try its best to deliver the benefits in the scheme, but if it became unaffordable the sponsor had the option to close down the scheme. In that event, the existing assets of the scheme would be divided between the members and that would be the conclusion. Driven by pressure from lobby groups and pension scheme members who had lost out through corporate events and failures, and from legislation, including from the EU, the screw has been turned, effectively transforming pension commitments into inescapable obligations.
A significant step in this process was taken in April 2005, when the UK government established the Pensions Regulator, and granted ‘moral hazard' powers to target sponsors of UK pension schemes that were trying to shirk their financial responsibilities and obligations. The maximum amount that an individual or company may be required to pay into a pension scheme under these moral hazard provisions is the full debt on employer - the cost of securing all benefits with an insurance company. This represents a ‘belt and braces' approach for the Pensions Regulator to chase those who have acted improperly.
Despite the existence of the Pensions Regulator and its material powers to protect benefits, it seems the Takeover Panel took the view that, as it does not have the power to require bidders to publicly disclose their intentions for a target company's pension scheme(s), that further rules were required. The Panel's governing legislation grants it power to do anything it considers necessary or expedient for the purpose of its functions, driven by a central objective to ensure the fair treatment of all shareholders in takeover bids. The intention is to help ensure that the effects of the offer on the pension scheme(s) could be discussed by the relevant parties at an early stage, with the result that any issues that might arise as a consequence of the potential change of control of the company could then be considered by the affected shareholders. If implemented, trustees would be given a significant step up under the proposals, to have a seat at the table during the offer process, with a view to establishing a framework for debate of pension issues.
In practice, there are likely to be winners and losers. It might be argued this is a ‘nanny state' style overreach of the Takeover Panel's directives into the corporate pensions arena. However, even with the increasing publicity about pension scheme deficits, it is certain that some companies will have overlooked (or underestimated) the potential liabilities from taking on pension scheme obligations. The Panel's initial goal seems grounded and could be a useful opportunity for the bidding company, allowing it to avoid costly, unwanted surprises. What does seem certain is that bidding companies will need to enter transactions with a clear understanding of UK pension regulation, their intentions for the target business and specifically, the impact on its pension schemes, as the Panel's proposals would restrict an acquirer to the stated plans for the pension scheme for a year.
Although the Panel rightly stopped short of requiring trustees to agree to bidders' plans as part of the takeover process, the fact that they have a seat at the table should not be underestimated. If trustees' views on the covenant implications of an acquisition or its financing are too negative, which would likely to lead to some onerous funding requests, the bidder may decide to revise its offer or withdraw it altogether. Bidders will have to hope for pragmatic, commercially minded trustees, who are not only focused on ensuring the continuing security and covenant supporting their pension scheme members' benefits, but also on the transaction's business rationale. Doubtless the process of debate will to some extent be sought by trustees to extract value for their pension schemes in transactions. Trustees could frustrate the transaction with this process.
This framework is not new. Experience of both trustees and corporates shows these same concepts and principles are already being applied in transactions, notwithstanding the formal disclosure and debating requirements.
Before its successful acquisition of Harrods, the Qatari Royal Family was thwarted by the pension scheme trustees of Sainsbury's in its attempt to acquire the supermarket retailer in 2007. In sizeable transactions, particularly those with material pension considerations, it is already commonplace for trustees to be involved at an early stage, given the significant work which goes into an offer process and the risk of failure where pensions matters are not appropriately addressed with trustees as stakeholders.
Implementation would remove the element of choice in a transaction to inform all parties and will ultimately require greater thought and management of pension scheme issues through the transaction process, particularly the covenant implications, as acquisitions can change the employer's capital structure, gearing, profitability, and dividend policy, as well as the security positions of various stakeholders, including of course the pension scheme. Companies involved in bid processes will need to ensure they are appropriately advised on, in particular, pension scheme funding and covenant issues. Otherwise they could waste significant time and money in being ill-prepared for the behaviour and influence of pension scheme trustees under the proposal. The consultation ends on 28 September and it is understood that new rules could be in place by the end of the year.
Matthew Claisse, is senior consultant and Lorant Porkolab is head of covenant advisory services at Punter Southall Transaction Services