ML BeneBits

In buyout or take private transactions, the management team of the target business is a key constituency that frequently—yet often unknowingly—requires legal counsel to advocate for its interests. The management team’s interests may be implicated in such transactions in various ways, which differ from those of institutional equity sellers, given that members of management are service providers and, in many cases, equity holders of the target business, who are expected to rollover proceeds to align their interests with the purchaser.

In connection with a merger, acquisition, or other corporate (M&A) transaction, buyers often face the dilemma of how to handle the seller’s existing retirement plans covering the continuing employees. Terminating a seller’s existing retirement plan can be complicated if the seller maintains a Savings Incentive Match Plan for Employees (SIMPLE) IRA plan because the “exclusive plan rule” under Section 408(p)(2)(D) of the Internal Revenue Code (Code) provides that a SIMPLE IRA plan may not be maintained for a calendar year if the employer maintains a qualified plan for that calendar year.

A common topic of negotiation in M&A transactions is how to treat performance-vesting equity awards for which the relevant performance period is not yet completed as of the closing of the deal. The target company may have outstanding performance shares, performance-based restricted stock units (PSUs), or other awards that vest based on the achievement of certain companywide or business unit–wide financial metrics over a certain performance period.

When private equity investment transactions close, management and private equity investors are off to the races—generally aligned on strategic and financial objectives. However, as market conditions and the economic climate shift, key parties may become misaligned and management incentive plans (MIPs) could become underwater or ineffective.

The letter of intent has been executed. The due diligence is done. The purchase agreement is signed. The money has been wired. The deal has closed. You’re done—back to business as usual! Think again. For the folks responsible for employee benefits matters, whether it be the CEO, CFO, comptroller, or human resources team, the real work after a merger or acquisition may be just beginning.

One of the most common questions we receive from buy-side clients in mergers and acquisitions (M&A) is how to handle the 401(k) plan of the target company in the context of a stock purchase acquisition: Should they require the target to terminate the 401(k) plan prior to closing? Or should they keep the 401(k) plan in place for a short period of time following closing and then merge it into their own existing 401(k) plan?