Dealing With Significant Multiemployer Pension Plan Issues in Corporate Transactions
Withdrawal liability could be jointly and severally owed by more than one entity in a corporate chain

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If your company has targeted or is targeting another entity with a unionized workforce, you should pay particular attention to associated pension obligations. In recent years, a combination of industry and economic factors has led to the massive underfunding of many multiemployer pension plans. Such underfunding can result in substantial liability for employers that cease to have an obligation to contribute or significantly curtail their contribution obligations to such a plan. Thus, a buyer contemplating acquiring a business that contributes to such a plan must undertake thorough due diligence to assess the financial ramifications.

Withdrawal liability is generally calculated by determining a contributing employer’s proportionate share of a multiemployer pension plan’s unfunded vested liabilities. Because many multiemployer plans are significantly underfunded, even small shares of this underfunding can result in substantial liability. For example, if a contributing employer’s proportionate share of a plan’s underfunding is only two percent, but the plan’s unfunded vested liabilities are $2 billion, the employer’s aggregate withdrawal liability exposure could be $40 million. Accordingly, parties to transactions involving employers contributing to multiemployer plans must take great care to identify these issues as early as possible in the negotiation.

To complicate matters further, while a buyer of assets is not liable for the debts and liabilities of the seller under general common law successor liability principles, several recent courts have held that asset buyers may be responsible for asset sellers’ withdrawal liability under a successor liability theory. This article addresses this topic and furthermore covers controlled group rules and how withdrawal liability could be jointly and severally owed by more than one entity in a corporate chain.

What Is Withdrawal Liability, and How Is It Triggered?

A company with an obligation to contribute to a multiemployer pension plan is responsible for a portion of the plan’s unfunded vested benefits when the company ceases or significantly curtails its contribution obligations to the plan. This sharing of the plan’s funding shortfall is referred to as “withdrawal liability.” Notably, the obligation to pay withdrawal liability can arise even when the employer has made all of its required contributions under the plan and applicable collective bargaining agreements.

A company contributing to a multiemployer pension plan can trigger three general types of withdrawals: complete, partial, and mass withdrawals. Each type of withdrawal has different consequences and concerns for parties to a corporate transaction.

A “complete” withdrawal generally occurs when an employer either a) permanently ceases to have an obligation to contribute to the plan (e.g., a collective bargaining agreement expires) or b) permanently ceases the business activity that gave rise to its participation in the plan (e.g., upon the employer’s sale of the business in an asset deal).

A “partial” withdrawal occurs in three different situations, one based on a quantitative test and two based on qualitative factors. First, a partial withdrawal occurs when there is at least a seventy percent decline in historical contribution base units over a designated three-year testing period. Second, a partial withdrawal can be triggered when an employer ceases to have an obligation to contribute for one or more but fewer than all collective bargaining agreements, but continues to perform previously covered work in the jurisdiction of the collective bargaining agreement, or transfers such work to another location or to an entity owned or controlled by the contributing employer. Third, a partial withdrawal can occur when an obligation to contribute ceases at one or more but fewer than all facilities, but the employer continues to perform covered work at the facility without an obligation to contribute to the plan.

A “mass withdrawal” occurs upon the withdrawal of all or substantially all of the contributing employers. For these purposes, there is a presumption that any employer who withdraws within three years of a mass withdrawal has withdrawn as part of the mass withdrawal. A mass withdrawal generally results in greater withdrawal liability to each withdrawing employer than does a complete or partial withdrawal. It is therefore important to assess the health of the fund to determine the likelihood of this type of systemic event.

Sellers in transactions often posit that withdrawal liability is irrelevant to deal pricing, because it will be triggered only if the buyer chooses to cease its contribution obligation to the multiemployer pension plan. In this regard, it is important to note that, while a withdrawal from a multiemployer plan is generally employer initiated, certain situations arise where liability can be triggered against the wishes of the employer and/or without any affirmative action. For example, a union decertification, a significant business downturn, or an asset sale can trigger withdrawal liability, even when an employer did not intend to cease contributing to the plan.

[P]rivate equity funds and other companies should consider partnering with unrelated minority investors or structuring their investment so that a target company with significant withdrawal liability exposure is not part of their or their other portfolio companies’ controlled group.

Quantifying Financial Exposure Associated With Withdrawal Liability

Identifying potential withdrawal liability exposure may require extensive due diligence. Unless the target has recently requested and received a formal withdrawal liability estimate from the multiemployer pension plan, the target’s withdrawal liability exposure is not always easy to determine. Unfortunately, the combination of the information that companies are required to disclose about withdrawal liability exposure and the multiemployer pension plan’s publicly filed funding information are generally not sufficient to enable anyone to determine the employer’s actual withdrawal liability exposure.

Multiemployer pension plans must provide contributing employers an estimate of the employer’s withdrawal liability at least once per year upon request. However, plans often take up to six months to produce these estimates. Accordingly, this rule is useful only if the seller has requested such an estimate prior to putting the company up for sale or auction. Sellers sometimes argue that they have neither requested nor will request a withdrawal liability report because doing so would signal to the union that they are being sold. Therefore, it may be advisable for employers to have a standing annual request.

In addition, we note that sellers who do receive a withdrawal liability estimate from a multiemployer pension plan often receive an estimate that is one year “stale.” In these instances, required assumptions regarding changes in the plan’s assets and liabilities are needed to assess the target’s current withdrawal liability exposure.

Where a recent estimate of the company’s potential withdrawal liability is unavailable, due diligence should include collecting information so the practitioner can estimate withdrawal liability exposure. Such diligence should include a review of the plan’s level of funding; a detailed history of the target company’s contributions to the plan; and information about the rest of the buyer’s own and/or the company’s controlled group members that contribute to the plan.

Multiemployer pension plans have several permissible alternative methods to calculate withdrawal liability. For example, withdrawal liability may be calculated based on a measurement of

1) the total plan shortfall times the quotient of an employer’s contributions to all employers’ contributions over the past five years; 2) a pooling of each employer’s share of the increases or decreases in funding over a twenty-year period on a year-by-year bucketing basis; or 3) an allocation based on the plan benefits owed to the employer’s actual employee population. Such alternative methods to allocate withdrawal liability may produce wildly different results for the same level of plan assets and liabilities. Therefore, when conducting due diligence it is important to determine which method the plan uses.

In addition, a number of special rules can increase or decrease the exposure shown under a withdrawal liability estimate. The specifics of these rules are beyond the scope of this article but should be considered in a transaction.

Stock Sales and Mergers Generally Do Not Trigger Multiemployer Pension Plan Withdrawals

Generally, a sale of stock that would move a company from one controlled group to another does not trigger a withdrawal from a multiemployer pension plan, even though the selling control “group” ceases to contribute to the plan, as long as there is no interruption to the obligation of the sold entity to contribute to the plan. Trickier issues come up when sellers want to sell an unincorporated business or want to transfer liabilities associated with multiemployer pension plans from one entity in its controlled group to a different target company. In this regard, a stock seller should be able to avoid triggering withdrawal liability upon the sale of an unincorporated division by taking the following steps.

First, the seller can incorporate the division and drop the applicable assets, including the collective bargaining agreements and all past contribution histories and liabilities with respect thereto, into the newly created wholly owned subsidiary. This act alone would have no withdrawal liability implications, because the new company would, at the time of formation, be part of the company’s “controlled group,” and withdrawal liability is determined and assessed on a controlled-group basis.

Second, depending on the successor provisions of the applicable collective bargaining agreements, the company may need to negotiate with applicable unions to agree to a novation of the collective bargaining agreements. This novation would cause the new company to 1) assume all of the parent company’s obligations under the collective bargaining agreements, including its past contribution histories, and 2) be the permitted contributor going forward. In addition, the novation would permit the removal of the parent company from any obligations (including for both past and future contributions) under the collective bargaining agreements. There is some support under the applicable statute and the related guidance thereunder for the proposition that an asset dropdown followed by a stock sale to an unrelated entity does not trigger withdrawal liability to the selling entity, at least where the contribution history is expressly transferred as part of the dropdown.

We note, however, that some courts have found withdrawal liability to be triggered upon a subsequent sale where the contribution history was not transferred as part of the internal restructuring. (See, for example, Bowers v. Andrew Weir Shipping Ltd., which assessed withdrawal liability against two shipping company entities that transferred assets, including obligations to contribute to a multiemployer pension plan, to a joint venture.) Language in at least one case, however, suggests that the result might have been different if the contribution history was expressly transferred and the transferor corporation clearly retained no obligations or liabilities with respect to it.

Successor Liability in Asset Sales

An asset sale generally triggers withdrawal liability because the “company” will cease to have an obligation to contribute to the multiemployer plan, even if the buyer continues to contribute to the plan at the same level for the same employees post-closing. In an asset deal, the buyer will not typically assume the seller’s corporate liabilities under general principles of successor liability law. However, in certain circumstances courts have found successor liability for the buyer in an asset acquisition.

For example, in Einhorn v. M.L. Ruberton Construction Co., 632 F.3d 89 (3d Cir. 2011), the Court found that a buyer in an asset sale had successor liability where 1) the buyer had notice of the seller’s liability for delinquent pension and welfare contributions and 2) there existed sufficient evidence of substantial continuity of operations between buyer and seller. The Seventh and Ninth Circuit courts of appeals each subsequently held that successor liability can attach to an asset purchaser if it knew or should have known of the withdrawal liability before acquiring the seller’s assets and there was substantial continuity in the operation of the business.

Given this risk, the buyer may want the seller to represent or covenant that the transaction will not result in the imposition of any such liability on the buyer. However, because successor liability typically does not become an issue unless and until the seller has gone out of business or into bankruptcy, the buyer needs to consider that such a representation or covenant may have little practical value. Thus, if the buyer is concerned about successor liability, it should seek to have deal proceeds placed in escrow to fund the seller’s withdrawal liability obligations, along with an agreement that the buyer may draw upon such escrow if and to the extent that it is held liable for the seller’s withdrawal liability as its successor.

Plans that are in critical or endangered status are typically most susceptible to incurring liability due to a minimum funding violation.

Section 4204 Withdrawal Liability Exception in Asset Sales

Section 4204 of the Employee Retirement Income Security Act of 1974 (ERISA), as amended, allows the buyer and seller in an asset sale to go through a statutory process to ensure that the seller will not trigger withdrawal liability under a multiemployer pension plan. Here, a withdrawal would otherwise occur because the seller would cease to have an obligation to contribute to a multiemployer pension plan with respect to its former employees.

Specifically, under Section 4204, withdrawal liability is not triggered if the buyer and seller make the following four commitments. First, the buyer agrees to contribute to the plan for substantially the same number of so-called “contribution base units” or CBUs (e.g., hours worked) as the seller contributed to the plan prior to the closing. Second, the buyer posts a bond (or places an amount in escrow) that is equal to a formula based upon the seller’s recent annual contribution history. Third, the buyer agrees to pick up the past five-year contribution history of the seller. Fourth, the seller agrees to be secondarily liable if the buyer withdraws from the plan within the next five years. Because the buyer is required to contribute to the plan for substantially the same number of CBUs, this alternative is generally viable only if the buyer will continue the operations related to the contributions and is willing to be bound by a collective bargaining agreement with the relevant union.

Under Section 4204, a buyer will often take the position that it agreed to go through Section 4204 merely to “accommodate” the seller and help it avoid triggering withdrawal liability upon the closing. In such instances, the buyer typically seeks an indemnification for withdrawal liability it incurs post-closing that is attributable to the seller’s contributions for employees. On the other hand, a seller may wish to be indemnified for any secondary liability it incurs from a post-closing withdrawal that is triggered by the buyer’s actions. It does so on the theory that any such triggering is solely in the buyer’s discretion. Such a position generally carries more weight in situations where the seller has accepted lower proceeds in the sale than it would have had the buyer not agreed to continue to contribute to the plan and therefore not incur withdrawal liability.

Does Withdrawal Liability Warrant Reducing the Purchase Price?

A threshold consideration for both the buyer and the seller of a company with withdrawal liability exposure is whether current levels of multiemployer pension plan underfunding should result in a purchase price adjustment. Alternatively, the parties may choose to place funds in escrow and/or to run indemnification protections in favor of either the buyer or the seller.

We first note that, although companies that contribute to multiemployer pension plans are required to disclose certain information about the plans in their audited financial statements, companies are not required to disclose the amount of potential withdrawal liability in the event of a future withdrawal. Contrary to how withdrawal liability is treated from a financial accounting perspective, valuation firms such as Moody’s have put out guidance indicating that they treat withdrawal liability exposure as a debt-like item that affects the valuation of the company.

Because triggering of withdrawal liability is generally under the employer’s control, sellers often argue that such liability for a going concern is “mythical” and, therefore, the purchase price should not be affected by contingent withdrawal liability. In contrast, buyers often focus on the risk of withdrawal liability being triggered through no desire of the buyer and the treatment of withdrawal liability from a valuation perspective. In doing so, buyers often argue that withdrawal liability is a debt-like item that should be treated the same as the underfunding associated with a single-employer pension plan and as an item that could affect marketability and valuation during a subsequent sale.

Because withdrawal liability may have significant potential costs, it is important to highlight the issue early on in the transaction so the transaction price appropriately accounts for potential liability. Because a company’s financial statements are not required to disclose the amount of potential multiemployer pension plan liability in the event of withdrawal, we note that buyers often overlook the amount of any such potential liability when setting the purchase price at the bid stage.

Potential Pricing Issues in Addition to Withdrawal Liability

Multiemployer pension plans that are determined to be in “endangered” (less than eighty percent funded) or “critical” (less than sixty-five percent funded) status must adopt a rehabilitation or funding improvement plan that may require increased contributions and surcharges to improve plan funding levels. As part of the diligence process, the buyer should determine and assess the cost of pre-established future increases in contribution rates to underfunded multiemployer pension plans.

If a multiemployer plan fails to satisfy its statutorily imposed minimum funding levels, contributing employers could be subject to excise taxes or be forced, as a matter of contract law with the plan (if and to the extent provided for in any agreement with a plan), to pay a pro rata share of the funding deficiency. These amounts could be substantial and would be determined independent of, and be in addition to, an employer’s withdrawal liability. Plans that are in critical or endangered status are typically most susceptible to incurring liability due to a minimum funding violation. Notably, excise tax liabilities associated with a minimum funding deficiency have been excused under applicable law if and to the extent a plan has a rehabilitation or funding improvement plan in place and is taking steps to come out of rehabilitation. Such excise tax liabilities could ripen, however, when and if the rehabilitation efforts no longer show that the plan is “taking steps to come out of rehabilitation.”

We note that at least one fund has buried language in an agreement with its contributing employers indicating that, upon withdrawal, in addition to statutory withdrawal liability, the withdrawing employer will, as a matter of contract, also owe an amount equal to its share of the minimum funding shortfall. Therefore, diligence in connection with a corporate transaction will have to include inquiry into and review of plan agreements relating to any allocation of minimum funding deficiencies.

Controlled Group Rules & Structuring Considerations

The buyer in a corporate transaction typically insists that the representations cover so-called “ERISA affiliates,” which are generally all companies that are connected with another company through a common ownership chain of eighty percent or more. The concept is important because a company is jointly and severally liable with its ERISA affiliates for withdrawal liability.

The First Circuit Court of Appeals, in what is commonly referred to as the Sun Capital case, recently held that a private equity fund is a trade or business and therefore jointly and severally liable for the underfunded multiemployer pension plan liabilities of its portfolio companies. On remand, the district court ignored the corporate form chosen by Sun (investments of seventy percent by Sun Fund III and thirty percent by Sun Fund IV) and deemed that a partnership/joint venture existed among the related funds rather than the entity formed below them. In this regard, private equity funds and other companies should consider partnering with unrelated minority investors or structuring their investment so that a target company with significant withdrawal liability exposure is not part of their or their other portfolio companies’ controlled group.


Buyers contemplating acquiring a business that contributes to an underfunded multiemployer pension plan must perform significant due diligence to assess the financial ramifications, including the potential effect of such underfunding on the price it is willing to pay for the business. Likewise, because both an asset sale and an attempted transfer of multiemployer pension plan obligations to a joint venture entity can trigger withdrawal liability for the seller, and because sellers must address buyers’ deal pricing concerns associated with participation in multiemployer pension plans, sellers must also consider the withdrawal liability exposure of the target.

Randy McGeorge and Craig Bitman are both partners at Morgan, Lewis & Bockius LLP.

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