Buyer’s counsel brought us in on a stock sale transaction last year to handle the M&A due diligence on the seller’s employee benefits. In discussing the scope of our work with seller’s counsel and in-house attorneys, we laid out the options in a way that will probably seem familiar to most lawyers who deal with real estate as part of the deal. We could do a Phase 1 “site analysis” and stop there. We could continue on to a Phase 2 in-depth review of problem areas. Or we could do both Phase 1 and Phase 2 and then provide Phase 3 “remediation” of the problems we found. The size and potential liability in this transaction justified all three phases, but not every deal does.
How M&A Phased Due Diligence Works
Phase 1: Documents Review
In Phase 1, we review the employee-benefits related material in the data room. We read plan documents, insurance policies and employee census information. We’re looking for “hot spots.” For example, we’ll review the employee handbook to see if the company’s sick leave policy complies with the California paid sick leave law. We’ll check out the 401(k) plan document to make sure the plan actually covers the employees the sellers think it does (you’d be surprised). We’ll review the health plan for ACA compliance and confirm that a cafeteria plan exists if employees are contributing to their premiums on a pre-tax basis. We write up our findings and detail where we think further investigation may be needed. If the client agrees, we move on to Phase 2.
Phase 2: A Deeper Look At Hot Spots
In Phase 2, we take a deeper look at hot spots we find in Phase 1. If we see in Phase 1 that the 401(k) is administered in-house, we may take a closer look at the timeliness of plan contributions, the available investment options, and whether any match or profit sharing contribution was properly calculated and allocated. We write up our Phase 2 findings including an analysis of the scope of plan failures in terms of cost and time to resolve. We also describe the “remediation” options. We discuss our Phase 2 findings with the client and their deal counsel to decide whether Phase 3 clean-up is necessary and/or desirable at this stage of the transaction. Sometimes, the law requires plan correction, but sometimes the issue is something the parties can negotiate around via disclosures and indemnification in the purchase agreement. If the parties decide to correct the failure, we move on to Phase 3.
Phase 3: Clean Up
Depending on the benefit problem we’re cleaning up, Phase 3 can often be completed post-closing to take pressure off of the transaction timeline. Clean-up can be as simple as drafting a plan amendment or as complex as shepherding a plan through the Internal Revenue Service’s Voluntary Correction Program.
Our M&A Benefits Due Diligence Coverage
We’re not just ERISA lawyers. We are transaction-tested benefits lawyers with tax credentials. And, we are supported by a team of experienced plan administration specialists. We understand how deals get done; we know where the pitfalls are and we offer practical solutions. Click below to learn about the potential pitfalls our M&A benefits due diligence addresses.