The US House of Representatives passed the Main Street Employee Ownership Act (H.R. 5236) on May 8. The bill would be instrumental in facilitating the establishment of employee stock ownership plans (ESOPs) by revamping the rules by which the Small Business Administration (SBA) must abide when assisting small employers interested in transitioning to an employee-owned model. Specifically, it (1) allows the SBA to make loans to companies that can then reloan to ESOPs (prior law only allowed loans made directly to ESOPs), (2) allows ESOP loans to be made under the SBA's preferred lender program (a program providing for expediting the processing of loans with cooperating private lenders), and (3) updates the definition of ESOPs in the current law governing SBA loans so that ESOPs do not need to have full voting rights to qualify.

The bill also makes an exception to an SBA rule that sellers of a company cannot have an ongoing role in the firm. It waives a current SBA requirement for a 10% equity investment in a business transition loan, and it allows financing to be used to cover transaction costs.

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In recent years, we have seen an unsettling trend with courts disregarding the terms of parties’ corporate asset purchase agreements and holding purchasers liable for their target’s multiemployer pension contribution and withdrawal liability under the theory of successor liability. A recent decision by the US Court of Appeals for the Seventh Circuit, Indiana Electrical Workers Pension Benefit Fund v. ManWeb Services, Inc. (ManWeb II), building on the court’s 2015 decision in Tsareff v. ManWeb Services, Inc. (ManWeb I), suggests that the reach of successor liability for multiemployer pension contributions and withdrawal liability may still be expanding.

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Most companies that consider going public evaluate their executive compensation programs and agreements prior to an initial public offering (IPO). This may include executive employment agreements, annual bonus plans, equity compensation plans, or other similar arrangements. Companies that adopt a new equity compensation plan prior to going public eliminate the need for public company shareholder approval and the complexities of the shareholder approval process, including shareholder advisory firms Institutional Shareholder Services (ISS) and Glass Lewis. Please see our previous posts, Recommended Steps to Successful Equity Plan Approval: Part 1 and Part 2 for more information about the approval process for public companies. As such, private companies can be much more aggressive in their plan terms and include many provisions that would definitely draw a no recommendation from ISS or Glass Lewis if they were submitted for approval when a public company.

These provisions may include liberal share-counting terms, evergreen provisions to automatically increase available shares under a plan, liberal change-of-control terms and vesting, and the ability to reprice options without shareholder approval, among others. In our experience, practitioners and compensation consultants have regularly advised pre-IPO clients to take advantage of these provisions, but this advice may be changing. In fact, we have noticed that some companies are changing their approach given ISS’s and Glass Lewis’s influence on shareholders and the general approach to executive compensation today.

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The Pension Benefit Guaranty Corporation (PBGC) introduced its Early Warning Program (EWP) in the early 1990s, but didn’t publish any guidelines or standards for the EWP until mid-2000, in Technical Update 00-3. While the guidelines and standards have evolved since that time, the PBGC has not provided any publicly available update to Technical Update 00-3.

The purpose of the EWP is to identify corporate transactions that, in the PBGC’s view, may increase its insurance program’s exposure by weakening employer financial support for underfunded pension plans. When the PBGC identifies such a transaction, it contacts the pension plan sponsor to try to negotiate additional measures to secure plan funding. These transactions typically have involved controlled group breakups (e.g., sale of a subsidiary or the assets of a financially strong business unit), with or without the transfer of an underfunded pension plan outside the controlled group; leveraged buyouts; payments of extraordinary dividends; or substitutions of secured debt for significant amounts of previously unsecured debt.

The PBGC generally uses publicly available information, such as press reports or SEC filings, to identify these transactions. The PBGC may also rely on information from Form 10 or Form 10-Advance, which plan sponsors are required to file at the occurrence of a statutory reportable event (such as a change in membership of a plan sponsor’s controlled group, a transfer of pension liabilities outside the controlled group, or payment of an extraordinary dividend).

In recent years, the PBGC has focused on transactions affecting pension plans with aggregate underfunding of $50 million or more (determined on the basis of conservative plan termination assumptions) or 5,000 or more participants. This has produced a universe of about 1,500 companies that the PBGC actively monitors. In 2014, however, a brief interest rate increase improved pension plan funding overall. This prompted the PBGC to lower its monitoring standard to $25 million in aggregate underfunding, thus maintaining its active monitoring universe at about 1,500 companies. The current interest rate environment may cause the PBGC again to adjust its monitoring criteria to maintain a stable universe of about 1,500 companies.

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Earlier this month, in Resilient Floor Covering Pension Tr. Fund Bd. of Trs. v. Michael's Floor Covering, Inc. (9/11/15), the US Court of Appeals for the Ninth Circuit, for the first time, found successor liability as a means to hold companies responsible for multiemployer pension plan withdrawal liability. Although the Ninth Circuit has previously applied successor liability in other labor and employment contexts, including in situations where multiemployer plans seek delinquent multiemployer pension plan contributions from companies under a successor liability theory, this is the first time the appeals court has explicitly applied successor liability in the context of multiemployer pension plan withdrawal liability.

In Michael’s Floor Covering, the court found that, in general, a successor employer may be subject to multiemployer pension plan withdrawal liability and, in particular, a construction industry successor employer can be subject to such liability, “so long as the successor took over the business with notice of the liability.” For purposes of imposing such withdrawal liability, the court held that “the most important factor in assessing whether an employer is a successor [] is whether there is substantial continuity in the business operations between the predecessor and the successor, as determined in large part by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base.” The court's ruling also sets out the list of factors courts should consider when deciding whether a company is a successor that can be held liable for multiemployer withdrawal liability.

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In light of robust merger and acquisition activity, companies should review their compensation and benefits programs to understand the effect that a change-in-control transaction would have. Often, in the face of an impending change-in-control transaction or at the time that a company puts itself into play, it may be too late to implement new programs or make changes to existing programs. Companies should consider change-in-control implications at the time that they adopt plans or, where applicable, at the time awards under those plans are made.

Many compensation components can be affected by a change-in-control transaction, including equity awards (in particular, those that are unvested), cash-based incentive awards (both annual and long-term) for then-in-progress performance periods, deferred compensation (and any funding of deferred compensation), severance entitlements and triggers, and noncompetition and similar restrictions. Tax considerations and, in particular, the golden parachute rules of section 280G of the Internal Revenue Code must also be taken into account.

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A recent Seventh Circuit Court of Appeals case highlights a troubling trend of courts finding successor liability for multiemployer pension contributions and withdrawal liability following corporate asset sale transactions.

In 1990, the Seventh Circuit held in Upholsterers’ International Union Pension Fund v. Artistic Furniture of Pontiac that under ERISA, a purchaser of assets could be liable for delinquent pension contributions owed by the seller to a multiemployer pension fund, provided that there is sufficient evidence of continuity of operations and the purchaser knew of the liability of the seller.

Subsequently, in 2011, the Third Circuit in Einhorn v. M.L. Ruberton Construction Co. reversed a lower court ruling and held that a purchaser of assets of an employer obligated to contribute to a multiemployer benefit plan may, where there was a continuity of operations and the purchaser knew of delinquency, be held liable for the delinquent contributions.

Recently, in Tsareff v. Manweb Services, Inc., the Seventh Circuit has taken what some may consider a step too far in holding that an asset purchaser could be liable for a seller’s withdrawal liability triggered as a result of an asset sale, provided that the purchaser had known of the seller’s “contingent” withdrawal liability that would be triggered by the sale. The Seventh Circuit found that the buyer knew of the potential withdrawal liability because it engaged in due diligence and addressed withdrawal liability responsibility through an indemnification clause in the asset purchase agreement. The Seventh Circuit remanded the matter back to the district court to determine whether there was a sufficient continuity of operations after the sale for the buyer to be a “successor” and hence liable.

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It is common in a private company sale transaction to have an escrow in place that holds a portion of the sale proceeds to cover the seller’s post-closing indemnification liability. It also common to have an earn-out component, through which payment of a portion of the sale proceeds may be tied to the business’s achieving specified future performance metrics. However, unforeseen complexities may result when compensatory payments to employees of the business, such as the cash-out of stock options or the payment of sale bonuses, are subject to an escrow or earn-out.

For example, if there is an escrow in place for 10% of the sale proceeds and stock options are being cashed out for a payment at closing, 10% of the payment attributable to the cashed-out stock options may be held back in escrow. This commonly used structure ensures that the optionholders are subject to the same indemnification escrow as other shareholders. However, because most escrows are fully funded arrangements, careful consideration must be given to any compensatory amounts that are subject to the escrow.

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