Can trustees “nuke” your deal?

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We live in uncertain times, when a popular voting movement or an unstable dictator might overturn the accepted status quo in an instant. Even the business world seems to be influenced to an extent by those uncertain influences.

In this uncertain world, do the trustees of defined benefit pension schemes add another layer of entropy into the mix? Increasingly, businesses have become aware that trustees can scupper a transaction and need to be taken into account, but is this issue over-emphasised? Really, can the trustees nuke your deal?

Trustees ‎have become increasingly aware of their ability to affect deals. Emboldened by comments from the Pensions Regulator, they can often demand payments into the pension scheme or first charge security simply because a transaction is taking place. They aren’t simply being difficult for the sake of it – deals can cause real problems for a pension scheme. Most schemes run with significant deficits, and the trustees have to have an eye to the ability of the business to fund the scheme and the level of protection to the scheme if the employing company gets into difficulties.

As a matter of law, trustees can’t actually stop a de‎al happening. It is up to the buyers and sellers to do the deal they want to do. However, the trustees can definitely disrupt the process in a number of ways.

The most straightforward thing that trustees might do is use their powers to demand payments into the scheme. Some trustees have powers to make one-off demands, but all have the right to negotiate a scheme valuation (with attached contribution plan) every three years, and call an early one if they are concerned about the company’s viabillity. If trustees are concerned about the business following a deal they must assess the scheme funding in a more prudent (ie expensive) way, and will negotiate for the deficit to be repaid more quickly. It may be possible to ignore trustees during the deal, but angry trustees will cost money down the line.

The trustees can also involve the Pensions Regulator. In certain circumstances the Regulator can demand payments from directors and shareholders into a pension scheme, and if ‎the deal has materially damaged the position of the trustees as a creditor, the Regulator may have grounds for doing so. In practice, the Regulator tends not to use these powers often, but the risk remains that it may do so, particularly if it feels the trustees’ concerns are being ignored. A serious risk of such powers is usually enough to deter most well-informed buyers and kill the deal.

H‎owever, the biggest threat from trustees is their ability to talk. Trustees can explain their concerns to the Regulator, to a range of bidders and to shareholders (on occasion, with spectacular effect on listed company bids). These types of communications have the ability to derail a deal. Everyone knows that a defined benefit pension is a big deal on a transaction, and unhappy trustees can make the risks and liabilities much more of a concern for the parties. Conversely, happy and engaged trustees can provide the comfort to a purchaser that gets the deal across the line.

So, yes, trustees can certainly nuke a deal. However, unlike Kim Jong Un, a sensible engagement with their concerns can ensure that they ‎do no such thing.

Rosalind Connor, Partner, ARC Pensions Law

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