Have You Inadvertently Amended Your Benefit Plans in an Acquisition?

November 29, 2011

Authored by: benefitsbclp

Has your company recently acquired another company or its assets? Did the purchase agreement require continuation of any particular level of benefit for acquired employees or retirees? If so, the Fifth Circuit appears to believe that the purchase agreement may have amended your company’s employee benefit plans to provide those benefits described in the purchase agreement. What does this mean? That acquired employees and retirees can potentially sue your company for benefits described in a contract to which the employees and retirees were neither a party nor a third party beneficiary.

Evans v. Sterling, 2011 WL 4837847 (5th Cir. 2011).

In December of 1996, Sterling Chemicals acquired American Cyanamid’s (“Cytec”) acrylic fibers business in an asset purchase transaction. In connection with the acquisition, Sterling offered employment to certain Cytec employees. The asset purchase agreement included a provision requiring Sterling to provide certain levels of retiree medical coverage for the acquired Cytec employees unless Cytec agreed to changes. Sterling provided these retiree benefits to Cytec employees under its own retiree plans following consummation of the acquisition.

A few years following its acquisition of the Cytec business, Sterling increased retiree medical premiums for the acquired Cytec employees. The acquired Cytec employees sued, and the Fifth Circuit held that Sterling could not increase retiree premiums for the acquired Cytec employees without Cytec’s consent.

The court reasoned that the asset purchase agreement between Sterling and Cytec amended Sterling’s existing retiree medical programs. Following earlier precedent in Halliburton Co. Benefits Committee v. Graves, 463 F.3d 360 (5th Cir. 2006), the Fifth Circuit held that in order for an ERISA plan to be amended all that is required is (i) a written instrument that contains a provision directed to an ERISA plan and (ii) satisfaction of any plan amendment formalities. Because the Sterling retiree medical plans could be amended through board action, the board’s approval of the asset purchase agreement, which contained provisions directed at retiree medical benefits for the acquired employees, effectively amended the Sterling benefits plans. That the purchase agreement did not expressly state an intent to amend Sterling’s retiree medical plans was, in the court’s estimation, immaterial. Moreover, that the acquired Cytec employees were not party to the purchase agreement was also immaterial.

What does this mean for plan sponsors? Followed to its logical conclusion, the Fifth Circuit’s reasoning in Evans is not limited to benefits provisions in purchase agreements – potentially any writing that discusses a plan and is approved by an individual, group, or entity with the authority to amend the plan is an amendment. This could mean, for example, that board resolutions, compensation committee rulings, or other documents not intended to amend a plan could, in fact, amend a plan.

What to do going forward? At a minimum, make sure that any purchase agreement to which your company is a party explicitly states that it does not amend any employee benefit plan. In addition, consider adopting plan amendment procedures that are not likely to be inadvertently invoked. For example, consider requiring that any amendment to a plan must be set forth in a document or board resolution noting that such document formally amends the plan.