UK Pension Plans Why They Matter to You March 13, 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 36 Offices in 17 Countries
Overview and Highlights 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? 2
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Two Questions When was the last American Civil War pension payment made? In 2011, the FTSE100 companies paid GBP10 billion deficit correction contributions to UK pension plans. What was the effect on their plan deficits? 4
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 5
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 6
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) 7
FSDs and CNs: Reasonableness FSDs CNs Relationship with employer Involvement with Scheme Benefit received Financial position of target 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 8
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 2010 Lehman Brothers FSD US 2011 Desmond & Sons CN UK 2011 Box Clever (a JV company) FSD UK 2012 More expected 9 Plus numerous examples of threatened use of powers (with mixed results)
Sea Containers Risk Characteristics 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 10
Bonas Risk Characteristics 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 11
Nortel Risk Characteristics 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 12
Lehman Risk Characteristics 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 - Regulator cash sweep up to holding company - Cross-border insolvency processes made FSD "even more reasonable" 13
Risk Limitation Strategies Avoid UK service company structure Avoid owning more than one third voting capital (investors) Avoid refinancing with security arrangements prejudicial to plan Avoid value stripping UK businesses: dividends, sales at an undervalue, offshoring Due diligence on acquisitions Understand other key risk factors - conflicts of interest - integrated global business model - intra-group financial arrangements : loans, transfer pricing, terms for services Get clearance (at a price) or take calculated risk 14
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 15
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 16
UK Pension Plans and Claims in US Chapter 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? 17
UK Pension Plans and Claims in US Chapter 11 Processes: Nortel Plan 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 Potential appeal to Supreme Court 18
Penn Terra 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? 19
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 20
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 21
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 22
UK / EU Insolvencies and UK Pension Plans Centre of main interest in UK - Nortel / Lehman litigation : post-insolvency FSD / CN has "superpriority" 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? 23
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 24
Radical Restructuring: Dealing with UK Plans Enforced abandonment TPR intervention a near certainty - Bonas : pre-pack sale out of administration to a new group company - No prior communication with Plan or TPR - But risk limited to real loss Negotiated abandonment (the "PPF drop-in") solvent restructuring - Available if insolvency inevitable and Plan, TPR and PPF agree - Cost : cash, equity other value - best offer first - 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 25
Radical Restructuring Dealing with UK Plans: 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 26
Why Squire Sanders? Joined up approach from award-winning pensions and crossborder restructuring teams Market-leading expertise - Sea Containers first ever FSD; $200m equity settlement agreed on exit from Chapter 11 process - Visteon successful defence of corporate - Focus DIY settlement of regulatory proceedings agreed with former private equity owners of plan sponsor - Armstrong successful defence of corporate - Silentnight on-going case Investment in the area Due diligence / risk assessment services Transaction services 27