How trustees should approach corporate takeovers

Trustees usually have little, if any, formal role in a takeover of a scheme sponsor. As a matter of general law, there is no section 75 debt, no trustee consent requirement, no need to consult with the trustees and no formal role for The Pensions Regulator (TPR). Theresa May recently announced proposals for new powers for TPR, but their scope has yet to be clearly defined.

However, scheme funding legislation provides trustees with some helpful tools. Trustees can unilaterally adopt a more defensive investment strategy, reducing expected returns and therefore the discount rate. Even a minor reduction can substantially increase the technical provisions at the next valuation, which can result in higher employer contributions.

There are limits to this strategy. It might be appropriate to take a more defensive approach in response to a takeover that is detrimental to the employer covenant, but the investment power must be exercised in good faith, i.e. in the interests of the scheme. Also, as schemes continue to de-risk more generally, the scope for further de-risking is reduced.

Moreover, employer contributions won't increase until the next valuation process is completed. While the trustees can bring forward the start of the valuation process, the level of contributions usually has to be agreed with the sponsor. Critically, if the sponsor cannot afford to increase the contributions, there may be no benefit in increasing the deficit or calling an early valuation.

Poison pills and unilateral powers

There are circumstances, however, which give the trustees very significant leverage in a takeover scenario. Although it is comparatively unusual, the scheme rules or other contractual arrangements could contain a so-called "poison pill" - rights or obligations that are triggered by a change of control. Alternatively, the trustees might enjoy other powers which could be a major concern for a purchaser, such as a unilateral power to wind-up the scheme (triggering a section 75 debt for the full buyout deficit) or to set employer contribution rates.

In these circumstances, the purchaser will almost certainly want to engage with the trustees and may need comfort on certain matters before it is willing to proceed with the takeover. If so, the trustees might seek to negotiate a price for giving that comfort.

Public takeovers

Public takeovers are a slightly different animal. The trustees will find out about the proposed takeover when it becomes public, if the parties have not already brought them into the loop, and most public takeovers are subject to additional legal requirements. It is important to understand which regime(s) would govern a takeover - this usually depends on where the ultimate parent company is listed.

The key provisions for a transaction covered by the UK Takeover Code were introduced in 2013. In summary, the trustees must be provided with certain information and the bidder must state its intentions for the 12 months after the offer period with regard to employer contributions into the scheme, accrual of benefits for existing members and admission of new members. The trustees may state their opinion on the effects of the offer on the scheme in an appendix to the target's circular to its shareholders, though they are not required to do so.

While this gives trustees access to information and a platform to state their views, it may provide little leverage to influence the process or to extract commitments or concessions beyond an initial 12 month period. Nor is the bidder required to provide information about the impact on employer covenant, which is usually the trustees' principal concern.

Practicalities and common sense

Trustees' actions will necessarily be informed by the extent of their rights, obligations and powers. They should therefore be prepared.

Trustees should understand the particular circumstances of their scheme and may want to maintain a basic action plan which can be implemented if needed to convene meetings, get the right advice or deal with press or member enquiries. Takeovers can move very quickly and trustees should be able to respond with speed and agility.

But preparation can only go so far. When the time comes, the trustees and their advisers must assess the likely impact on the scheme based on the specifics of the particular transaction, and the results of that assessment will largely determine how the trustees react.

Common sense applies - a takeover which is positive for the scheme should be welcomed, and the trustees should not overplay their hand. Equally, bidders may wish to engage with trustees at an early stage where possible. After all, a constructive trustee-sponsor relationship is in both parties' interests.

Tom Jackman is a senior associate at Sackers.

• Tweet  
• Facebook  
• LinkedIn  
• Send to  

• Topics
• Defined Benefit
• section 75
• s75
• Sackers
• Mergers and Acquisitions
• M&A
• Takeover Code