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37 Offices in 18 Countries
Risky Business: Ignorethe UK Pensions Regulatorat Your Peril
May 30, 2012
Philip Sutton, Partner +44 121 222 3541
philip.sutton@squiresanders.com
Stephen D. Lerner, Partner +1 513 361 1220
Stephen.lerner@squiresanders.com
Sandra E. Mayerson, Partner + 1 212 872 9899
Sandy.mayerson@squiresanders.com
2
• Introduction to UK pensions
• Review of UK Pensions
Regulator's powers
• Analysis of overseas
enforcement efforts
• Reaction of the US courts
• Impact on cross-border
restructuring and insolvency
• Value creation opportunities
• Risk limitation strategies
• Tactics for dealing with UK
Plans and Pensions
Regulator
• Why Squire Sanders?
Overview and Highlights
3
Pensions Act 2004
• Established the Pension Protection Fund (“PPF”)
- UK equivalent of PBGC
- Sponsoring employer insolvency triggers "assessment" for PPF
entry
- Compensation formalised if Plan is eligible and meets funding test
• Established the Pensions Regulator (“TPR”)
- Statutory functions include limiting calls on PPF compensation
- New "moral hazard" powers plus power to give "clearance“
- Key concept of “employer covenant”
- Dual "personality" : Regulator and Determinations Panel
4
Financial Support Direction
• A no fault regime
• Requirement to provide financial support to plan as agreed
between target and TPR: cash, shares, guarantee, security
• Available if plan employer is a service company or "insufficiently
resourced"
- sponsoring employer value is less than 50% of its share of the
funding deficit
- sponsoring employer value plus connected / associated person's
value is more than 50% of that deficit
• Connected / associated targets include group companies and
investors with one third or more of voting capital in the employer
• 2 year action period (from "relevant date" or break of connection /
association to Warning Notice)
• Clearance available – at a price
5
Contribution Notices
• Requirement to pay cash to plan
• Available in relation to acts / deliberate failures to act which
prejudice plan re statutory debt position or are "materially
detrimental"
• Also where failure to honour an FSD
• Statutory defence available to material detriment CN
• Targets include group companies, investors (as for FSDs) and
individuals (corporate executives)
• 6 year look back period (from event to Warning Notice)
• Clearance available – at a price (mitigation for weakening of
employer covenant)
6
FSDs and CNs: Reasonableness
FSDs
• Relationship with employer
• Involvement with Scheme
• Benefit received
• Financial position of target
CNs
• As for FSDs but add
• Involvement with events
• Failure to report a notifiable
event
• Purposes of the act / failure to
act
• Likelihood of creditors being
paid
• FSDs / CNs : No look-back limit on reasonableness
7
Cases-to-Date
Year Case Bankruptcy Process Jurisdiction(s)
2007 Sea Containers FSD Bermuda / US
2010 Bonas Group CN Belgium
2010 Nortel Communications FSD US / Canada/ UK
2010 Lehman Brothers FSD US
2011 Desmond & Sons CN UK
2011 Box Clever (a JV company) FSD UK
2012 More expected
Plus numerous examples of threatened use of powers (with mixedresults)
8
Sea Containers
• Service company: no need to tackle "insufficiently resourced" test
• Reasonable because:
- Employer wholly-owned by target
- Service company employed group's management
- Target derived "benefit" from employer
- Officers of target were trustees
- Target had substantial assets
- US insolvency proceedings no reason not to issue FSD
• Target had "benefit" because:
- Not required to pay for employer's "services" within any prescribed
time
- Group structure allowed to target to trade in Europe but retain
advantages of Bermudan tax regime
9
Bonas
• Belgian parent company CN for £5.1m (approximate PPF deficit)
- Financial position
- Close association with scheme
- Control of Bonas
- Control of pre-pack process
NB TPR asked for £23m but settled for £60,000
• Director / chairman CN unreasonable
- No personal benefit
- Concerned with continuity of employment of staff
10
Nortel
• FSD hearing uncontested (breach of stay on proceedings under
US / Canadian insolvency law)
• Nortel found to be insufficiently resourced
• FSD reasonable because :
- Nortel run as single global entity since early 1990s – "benefit"
- Targets "controlled" pension contribution levels ("woefully
inadequate")
- Transfer pricing arrangements inadequately compensated employer
for R&D, sales and marketing etc.
- Targets obtained £467m interest free loan from employer which was
part settled with illiquid assets
11
Lehman
• Service company : no need to tackle "insufficiently resourced"
test
• FSD issued against 6 targets. TPR dropped claims against 29
and lost re 38 other potential targets
• FSD reasonable (despite "no improper or even poor" conduct)
because:
- Group operated on integrated global basis – "benefit"
- Payments for services were outstanding
- Regular cash sweep up to holding company
- Cross-border insolvency processes made FSD "even more
reasonable"
12
Desmond & Sons
• Single customer company lost contract
• Company wound up in a way which triggered the statutory debt
regime - but at a lower level (£0) than might otherwise have been
the case
• No dispute as to lawfulness of company’s action but plan trustees
not involved in discussions and arguably “misled”. Lost
opportunity to use power under rules to force enhanced debt
calculation basis.
• Initial TPR decision : no case to answer
• CN issued against 2 directors for aggregate £1m
• Appealed by directors, plan trustees and TPR
- 6 yr time limit enforced against TPR re potential additional target
- Full rehearing : not limited to facts and arguments before
Determinations Panel at time of original decision
- Scope to increase CN to £10.9m
13
Box Clever
• 1999 : Highly leveraged TV rental JV. The JV’s borrowings were
non-recourse against JV partners (Thorn/Granada)
• JV plan established mirroring Thorn/Granada plans (but no bulk
transfer of assets / liabilities)
• 2000 : special dividends paid to ITV by Granada JV partner
• 2003: administrative receivers appointed to JV under debenture
• Deal / financial structure could not have anticipated Pensions Act
2004, TPR or moral hazard regime
• ITV targets had never participated in scheme. Reasonableness
turned simply on magnitude of the special dividend received by
ITV as a “connected” party
• Jurisdiction turned on terms of the debenture (who “controlled”
the voting capital in the JV post insolvency?)
• Claims of unfairness (clearance granted to Thorn) dismissed
14
Risk Limitation Strategies
• If possible avoid :
- UK service company structure
- Owning more than one third voting capital (investors)
• Understand other key risk factors
- conflicts of interest
- integrated global business model
- intra-group financial arrangements : loans, transfer pricing, terms
for services
• Take care with :
- acquisitions, particularly leveraged acquisitions
- refinancing with security arrangements which could be prejudicial to
plan
- Exit / restructuring strategies
• Get clearance (at a price) or take considered risk
15
Overseas Reach of TPR
• Can TPR really take action overseas?
- Sarbanes-Oxley : Persons outside US liable to criminal sanction from
SEC if in breach
- Pensions Act 2004 : Probably. Not yet tested in the UK courts
- In practice, TPR is looking overseas
- Not had to enforce overseas yet
• Taking action involves two stages:
- Getting appropriate UK Plan claim recognised in overseas jurisdiction
- Enforcement if target fails to honour a successful claim n.b. may
require new regulatory process to convert FSD to CN
16
Overseas Reach of TPR
• Some notable successes to date:
- Kvaerner (Norway) : £101m contribution plan agreed
- Sea Containers (Bermuda / US) : $200m stake in JV despite
bondholder objections
- Bonas Group (Belgium) : £60k settlement – but hardly a ‘success’
- Chemtura Corporation (US) : £60m contribution plan plus security
package agreed
• Memorandum of understanding with equivalent overseas
regulators
17
UK Pension Plans and Claims in USChapter 11 Processes
• Sea Containers – s362(b)(4) Bankruptcy Code automatic stay not
argued
• Automatic stay argued in
- Visteon : successfully defeats claim
- Nortel : successfully defeats claim
- Lehman Brothers : expected to follow Nortel
- Chemtura : claim based on contingent FSD, stay invoked, claim
compromised out of Chapter 11 to the UK regulatory process,
Chapter 11 process concluded, UK Regulator issues Warning Notice
for FSD, deal agreed, FSD proceedings withdrawn
- Chemtura - a model for future action by UK plans / TPR? Did the
debtor do enough?
18
• Legal slugfest around that application of the automatic stay
• Pre-emptive strike by Nortel in having its participation in UK
regulatory process ruled in breach of the stay (Bankruptcy Court)
• Hence Nortel FSD was uncontested in the UK
• FSD issued. UK law requires FSD terms to be agreed so stay
had to be appealed. Action by plan trustees and PPF (not TPR)
• Unsuccessfully appealed to Third Circuit Court
• Seeking leave to appeal to Supreme Court
UK Pension Plans and Claims in USChapter 11 Processes: Nortel Plan
19
The “Police or Regulatory" Exemption
• Automatic stay inapplicable to a "governmental unit" enforcing
"policy and regulatory power"
- can include "department, agency or instrumentality of ….a foreign
state"
- is PPF a "governmental unit"?
- what about TPR?
- is the exemption limited to "public heath and safety" issues?
- is the purpose primarily public or pecuniary?
• TPR may now issue a CN as FSD cannot be implemented
consensually. Out of time?
• Whilst US courts readily enforce "foreign money judgments"
under State law or comity principle, does this apply to a CN?
20
What About Chapter 15?
• In ancillary proceedings, Court more likely to give effect to TPR
order
• Nortel was structured as multiple plenary proceedings: US,
Canada, Europe
• Choice of process increasingly important where UK pension
plans involved
21
What About in The European Union?
• No enforcement proceedings yet
• Brussels Regulation : registered civil or commercial judgments
cannot be reopened substantively by local courts
- is a CN / FSD a "judgment"?
- "police / regulatory" arguments available to challenge stays on
proceedings
- opposite of civil / commercial status required for enforcement
22
And Elsewhere?
• Does UNCITRAL protocol apply? Are ancillary proceedings being
used?
• If so, local court might give effect to TPR order.
• Absent UNCITRAL, is a treaty in place?
• If not, private international law applies.
• Generally speaking, local court will not enforce public law of
another country
23
UK / EU Insolvencies and UK PensionPlans
• Centre of main interest in UK
- Nortel / Lehman litigation : post-insolvency FSD / CN has "super-
priority" over everything except fixed charge holders i.e.
• floating charge holders – receivables; inventory
• trade and other unsecured creditors
• insolvency practitioner expenses
- Armageddon for other creditors
- Decision upheld on appeal
- Further appeal to Supreme Court
- Have claims traders and bond holders properly assessed this risk?
• Potential for "forum shopping" to trump UK super-priority risk
- Only where the facts fit
- Moral hazard risk?
24
Dealing with UK Plans
• Liability management strategies can enhance corporate value
- Scheme change / closure
- Enhanced transfer values
- Pension increase swaps
- Investment strategy
- Mortality hedging
- Buy-out
• Radical restructuring can eliminate pensions problem
- Extreme care required
- Regulatory risk
25
Radical Restructuring: Dealing with UKPlans
• Enforced abandonment – TPR intervention a near certainty
- Bonas / Desmonds
- No prior engagement with Plan or TPR
- Risk linked to plan “loss” (Bonas : low. Desmonds : high?)
• Negotiated abandonment (the "PPF drop-in") – solventrestructuring
- Available if insolvency inevitable and Plan, TPR and PPF agree
- Cost : cash, equity other value
- No deal “formula”. But PPF moving from “insolvency plus” towardsdiscounted value of business-without-plan
- Success is not a given: Reader's Digest; Silentnight
• Risks of “trying it on”
- US parent pushed for PPF drop-in
- UK Plan made wind-up petition
- UK Plan given debenture to withdraw petition
26
Radical Restructuring – Dealing with UKPlans: The Uniq Deal
• Uniq Plan :
- 20,000 DB Members
- £431m deficit in 2010
• Uniq Plc : FTSE listed with market cap of £10m. Plan created
negative perception from investors, customers, suppliers and
creditors
• All agreed that insolvency inevitable absent restructuring and
new capital
• Plan by far the largest creditor. Economic reality was that Plan
owned Uniq.
• Deficit-for-equity swap implemented as part of PPF drop-in. Plan
got 90.2% of equity (via SPV) of Uniq (now listed on AIM)
• Uniq Plc bought for £113m by Greencore Group Plc
- Plan : £100.8m
- Other shareholders : £12.5m
27
Why Squire Sanders?
• Joined up approach from award-winning pensions and cross-
border restructuring teams
• Market-leading expertise
- Sea Containers – first ever FSD; $200m equity settlement agreed onexit from Chapter 11 process
- Visteon – successful defence of corporate
- Focus DIY – settlement of regulatory proceedings agreed with formerprivate equity owners of plan sponsor
- Armstrong – successful defence of corporate
- Silentnight – ongoing case
• Investment in the area
• Due diligence / risk assessment services
• Transaction services
37 Offices in 18 Countries
Risky Business: Ignorethe UK Pensions Regulatorat Your Peril
May 30, 2012
Philip Sutton, Partner +44 121 222 3541
philip.sutton@squiresanders.com
Stephen D. Lerner, Partner +1 513 361 1220
Stephen.lerner@squiresanders.com
Sandra E. Mayerson, Partner + 1 212 872 9899
Sandy.mayerson@squiresanders.com
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