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When the newly established pensions regulator released its guidance on the M&A pensions regime, private equity lawyers joked that it was no coincidence that the new rules came out on April Fool's Day.
The Pensions Act has been a major bone of contention since it was first drafted. Lawyers have long feared that the Government's attempts to make investors and directors liable for pension fund deficits were far too widely drafted.
Alchemy's Jon Moulton was one of the most high-profile figures to lobby the Government, but the Department for Work and Pensions also heard from the Association of Pensions Lawyers, the British Venture Capital Association and R3 during its consultation process.
Fears were allayed to some degree by the post-consultation document put out by the Department for Work and Pensions last year. However, key clauses on the potential liability of private equity-controlled companies for other portfolio companies were not included in the guidance released on 1 April.
The October consultation said specifically that no company that is wholly or mostly owned by a private equity fund will be required to support the pension fund of another company in the same portfolio, unless the two are essentially part of the same business.
Lovells private equity lawyer Alison Hampton says: "It's a sacred principle, that you [private equity houses] won't do anything that will have an adverse impact on other investee companies.
"We'll need to establish a good working relationship with the regulator and give it time to see how these measures are working in practice," she added.
One transactional lawyer warns that the pensions regulator could, in one instance, hold other portfolio companies liable. "They are unlikely to take any action unless there's something going on that has seriously jeopardised the pension fund, like a deliberate action to strip out all the assets," he warned.
The clearance procedure itself is already having a major impact on M&A deals, particularly in the private equity sector.
One private equity lawyer says some auctions were under threat partly because no vendor wanted to be the test case for the new regulator. Another adds that private equity houses are more keen to team up on bids in order to avoid provisions of the new law that kick in only if an investor is the majority owner.
Lovells pensions partner Stephen Ito says: "Getting to grips with the size of any pensions issue and starting to talk to the trustees is going to be high up on a bidder's list of things to do. There won't be much point in wasting time and money on lots of due diligence if this issue is going to be a deal breaker."
Another private equity partner says: "Try explaining to a client, particularly a US private equity house, that you can't negotiate the deed on a pension fund because its 5pm on a Friday and all the trustees have gone home."
The new regime may face its first test soon: the Allied Domecq sale is sure to raise major pensions issues. Last August the spirits group estimated its pensions deficit at £406m and the trustees, who have instructed an esteemed law firm, will play a key part in the deal.
Pernod Ricard, which is using longstanding adviser Macfarlanes, and US company Fortune Brands are expected to launch a £7bn bid for Allied Domecq, subject to a resolution of the pensions issue. Fortune Brands has instructed Herbert Smith's Richard Fleck, while Allied Domecq is using Linklaters partners David Cheyne and Dominic Welham. But Macfarlanes pensions partner Hugh Arthur, enjoying a rare spell in the limelight, has his work cut out.