| | 90-1 |
| | March 20, 1990 |
| | REFERENCE: |
| | >4069(b)> |
| | 4204 Sale of AssetsSale of Assets |
| | >4204(a)(1)(A)> |
| | 4204(a)(1)(B) Sale of Assets. Withdrawal - Posting of SecuritySale of Assets. Withdrawal - Posting of Security |
| | 4204(a)(1)(C) Sale of Assets. Secondary Liability of Seller Sale of Assets. Secondary Liability of Seller |
| | >4204(b)(1)> |
| | 4218 Withdrawal - No occurrenceWithdrawal - No occurrence |
| | OPINION: |
| | We write in response to your request for an opinion of the Pension Benefit Guaranty Corporation ("PBGC") regarding the |
| | application of section 4204 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), in a case |
| | where the buyer in a sale qualifying under that section re-sells the purchased operations before the expiration of the five- |
| | plan-year period commencing with the first plan year beginning after the first sale. |
| | Your request involves the anticipated sale by your client, a corporation, of an unincorporated division (the "Division"). You |
| | state that the Division "employs [union]-represented employees for whom it contributes to an underfunded [multiemployer] |
| | pension plan." Your client acquired the Division and other assets in 1987 in a transaction ("first sale") that is assumed for |
| | purposes of your request and this opinion to have met the requirements of section 4204. Your client is now negotiating a |
| | sale of the Division to another corporation, and prefers to structure this sale ("second sale") as a sale of assets meeting |
| | the requirements of section 4204. |
| | Section 4204(a)(1) of ERISA provides that: |
| | A complete or partial withdrawal of an employer (hereinafter in this section referred to as the "seller") under this section |
| | does not occur solely because, as a result of a bona fide, arm's-length sale of assets to an unrelated party (hereinafter in |
| | this section referred to as the "purchaser"), the seller ceases covered operations or ceases to have an obligation to |
| | contribute for such operations, if -- |
| | (A) the purchaser has an obligation to contribute to the plan with respect to the operations for substantially the same |
| | number of contribution base units for which the seller had an obligation to contribute to the plan; |
| | (B) the purchaser provides to the plan for a period of 5 plan years commencing with the first plan year beginning after the |
| | sale of assets, a bond issued by a corporate surety company that is an acceptable surety for purposes of section 412 of |
| | this Act, or an amount held in escrow by a bank or similar financial institution, satisfactory to the plan, in an amount equal |
| | to the greater of [the amount calculated under clause (i) or the amount calculated under clause (ii)]; and |
| | (C) the contract for sale provides that, if the purchaser withdraws in a complete withdrawal, or a partial withdrawal with |
| | respect to operations, during such first 5 plan years, the seller is secondarily liable for any withdrawal liability it would have |
| | had to the plan with respect to the operations (but for this section) if the liability of the purchaser with respect to the plan |
| | A second sale that meets the requirements of section 4204 will not result in the withdrawal of the second seller. You ask, |
| | however, whether a second sale will result in the disqualification under section 4204 of the first sale, and trigger the |
| | withdrawal of the original seller. In this regard, you point out that a second sale will relieve the second seller of the |
| | obligation that it assumed as the purchaser in the first sale "to contribute to the . . . Plan for 'substantially the same |
| | number' of contribution base units" as the original seller, as section 4204(a)(1)(A) requires. |
| | The circumstances of the first sale, about which we have no information, may be relevant to your inquiry since the |
| | legislative history of section 4204 indicates that the requirement of section 4204(a)(1)(A) was intended to "be applied for a |
| | period of time after the transaction that is reasonable in light of the circumstances of the transaction." Staff of Senate |
| | Comm. on Labor and Human Resources, 96th Cong., 2d Sess., Report on S. 1076, The Multiemployer Pension Plan |
| | Amendments Act of 1980: Summary and Analysis of Consideration 16-17 (Comm. Print 1980). In addition, the |
| | circumstances of the second sale must be considered in light of the purposes of section 4204(a)(1)(A). That section was |
| | meant to "be read with a view to protecting the plan against significant harm as a result of a particular transaction." Id. at |
| | 16. It was intended to provide for uninterrupted contributions to the plan and "to protect the plan . . . against a significant |
| | diminution of its contribution base without compensation through withdrawal liability." Id. |
| |
The plan's contribution base is protected in the context of a second sale meeting the requirements of section 4204 by the |
| |
new purchaser's assumption, pursuant to section 4204(a)(1)(A), of the "obligation to contribute to the plan with respect to |
| |
the operations for substantially the same number of contribution base units for which the seller had an obligation to |
| |
contribute to the plan." Moreover, in the event of a withdrawal by the new purchaser, that purchaser will be liable for |
| |
withdrawal liability in an amount determined under section 4204(b)(1). The plan will also be protected by the secondary |
| |
liability of the second seller under section 4204(a)(1)(C) and, under section 4204(a)(1)(B), by the bond or escrow provided |
| |
by the new purchaser. Finally, the plan will be protected (for the remainder of the period of five plan years commencing |
| |
with the first plan year beginning after the first sale) by the bond or escrow provided by the second seller when it |
| |
purchased the assets in the first instance. However, to ensure that this protection will be adequate in the event of the new |
| |
purchaser's withdrawal, it is necessary to consider how the amount of the new purchaser's bond or escrow, and the |
| |
amount of the new purchaser's potential withdrawal liability, are to be determined. |
| |
Under section 4204(a)(1)(B), the amount of the bond or escrow that the purchaser in the second sale must provide is equal |
| |
to the greater of -- |
| |
(i) The average annual contribution required to be made by the seller with respect to the operations under the plan for the 3 |
| |
plan years preceding the plan year in which the sale of the employer's assets occurs, or |
| |
(ii) the annual contribution that the seller was required to make with respect to the operations under the plan for the last plan |
| |
year before the plan year in which the sale of the assets occurs . . . . |
| |
Under these provisions, the amount of the bond or escrow provided by the purchaser in the first sale is based on the |
| |
contributions required to be made by the original seller. In turn, the amount of the bond or escrow provided by the |
| |
purchaser in the second sale will be based on the "average annual" or "annual" contribution required to be made by the |
| |
second seller, who was the purchaser in the first sale, during the periods described in section 4204(a)(1)(B)(i) and (ii). In |
| |
the circumstances you describe, however, the seller in the second sale has been required to contribute to the plan for |
| |
fewer than two years. In such circumstances, it is our opinion that the amount of the bond or escrow to be provided by |
| |
the purchaser in the second sale must be calculated with reference not only to the second seller's required contributions, |
| |
but also to any contributions required to be made by the original seller during the 3-plan-year period described in section |
| |
4204(a)(1)(B)(i) (or the plan-year period described in section 4204(a)(1)(B)(ii), if relevant in the circumstances). In other |
| |
words, the original seller's required contributions must be attributed to the seller in the second sale for purposes of |
| |
calculating the amount of the bond or escrow provided by the purchaser in the second sale. |
| |
We believe that the same principles must apply with respect to determining the amount of the withdrawal liability of the |
| |
purchaser in the second sale if that purchaser withdraws during the first five plan years commencing with the first plan |
| |
year beginning after the second sale. In this regard, section 4204(b)(1) requires that -- |
| |
the liability of the purchaser shall be determined as if the purchaser had been required to contribute to the plan in the year |
| |
of the sale and the 4 plan years preceding the sale the amount the seller was required to contribute for such operations for |
| |
such 5 plan years. As with the amount of the bond or escrow determined under section 4204(a)(1)(B), the liability of the |
| |
first purchaser in the event of a withdrawal within 5 plan years after the first sale is based on the contributions required to |
| |
be made by the original seller in the year of the first sale and the 4 plan years preceding that sale. Similarly, the liability |
| |
of the purchaser in the second sale, if the purchaser withdraws in the relevant period under section 4204(a)(1)(C), will be |
| |
based on the second seller's required contributions in the year of the second sale and the four plan years preceding the |
| |
second sale. However, if the second seller has not contributed to the plan for the relevant period by the time of the |
| |
second sale, the liability of the purchaser in the second sale must reflect, to the extent relevant, the original seller's |
| |
We believe that these results are consistent with the purpose of section 4204: "to assure the protection of the plan with the |
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least practical intrusion into business transactions." Staff of Senate Comm. on Labor and Human Resources, 96th Cong., |
| |
2d Sess., supra, at 16. Attribution of the original seller's contribution history to the second seller assures that the plan will |
| |
be protected in the event of an early withdrawal by the purchaser in the second sale. See id. The plan will be protected by |
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a meaningful bond (or escrow) provided by the purchaser in the second sale, and will be adequately compensated by |
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withdrawal liability calculated just as it would have been if the first purchaser had withdrawn during the period described in |
| |
section 4204(a)(1)(C). |
| |
Thus, it is our opinion that a second sale of assets will not trigger the withdrawal of the original seller if the second sale |
| |
meets all the requirements of section 4204, as set forth above. |
| |
You have asked, in the alternative, whether the incorporation of the Division and the sale of the new subsidiary's stock, in |
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a transaction that meets the requirements of section 4218 of ERISA, would result in the withdrawal of the original seller. |
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Section 4218 provides that: |
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Notwithstanding any other provision of this part, an employer shall not be considered to have withdrawn from a plan solely |
| |
because -- |
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(1) an employer ceases to exist by reason of -- |
| |
(A) a change in corporate structure described in section 4069(b) . . . |
| |
if the change causes no interruption in employer contributions or obligations to contribute under the plan . . . . |
| |
* * * |
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[A] successor or parent corporation or other entity resulting from any such change shall be considered the original |
| |
Among the changes described in section 4069(b) are "a mere change in identity, form, or place of organization" and "a |
| |
merger, consolidation or division." In Opinion Letters 83-11 (May 16, 1983), 84-7 (December 20, 1984), and 82-4 (February |
| |
10, 1982), the PBGC expressed its opinion that neither the incorporation of a division nor the sale of the resulting |
| |
subsidiary's stock brings about the withdrawal of the original (parent) corporation if the change causes no interruption in |
| |
employer contributions or obligations to contribute under the plan. Nor, in our opinion, would such a sale result in the |
| |
withdrawal of the original seller in this instance. |
| |
The incorporation of a division and sale of the resulting subsidiary's stock will result in the formation of a controlled group |
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including at least the purchaser of the stock and the purchased subsidiary. That controlled group will become the |
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"employer" for purposes of Title IV. See ERISA section 4001(b). Under the last sentence of section 4218 (quoted above), |
| |
this new controlled group is considered to be the same as the previous contributing employer -- the original purchaser |
| |
under section 4204. Thus, the contribution history used to determine the withdrawal liability of the controlled group in the |
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event of withdrawal will be the same contribution history that would have formed the basis for withdrawal liability if the |
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incorporation and stock sale had not occurred. And, as discussed above, that history includes the contribution history of |
| |
the original seller under section 4204. |
| |
It is also the PBGC's opinion that under the last sentence of section 4218, a withdrawal and failure to pay withdrawal |
| |
liability by the successor employer (the new controlled group) would be treated as if it were the act of the predecessor |
| |
employer -- the purchaser in the first sale (under section 4204). Therefore, in the event of such a withdrawal and non- |
| |
payment, the plan would be entitled to payment of the bond or escrow provided under section 4204(a)(1)(B) and the original |
| |
seller's secondary liability. (The terms of the bond or escrow should provide for payment to the plan upon withdrawal and |
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non-payment of withdrawal liability by the successor employer, and failure of the bond or escrow so to provide -- either |
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explicitly or as a matter of interpretation -- would be equivalent to discontinuance of the bond upon the second sale, which |
| |
would disqualify the first sale under section 4204, unless an appropriate replacement bond or escrow were in place.) |
| |
With the understandings set forth in this letter, it is our opinion that transactions like those you describe would not |
| |
ordinarily result in the disqualification of the first sale of assets under section 4204. |
| |
Of course, the opinions in this letter are subject to the special rule in section 4212(c), which states that -- |
| |
If a principal purpose of any transaction is to evade or avoid liability under this part, this part shall be applied (and liability |
| |
shall be determined and collected) without regard to such transaction. |
| |
If you have any further questions about this matter, please call Deborah C. Murphy of my staff at (202) 778-8820. |
| |
Carol Connor Flowe |
| |
General Counsel |