Regulator’s call means pension deficits could prevent takeovers, warns lawyer

Published on 13/02/2012 12:14

LEGAL rulings in high-profile court cases featuring collapsed US investment bank Lehman Brothers and broadcaster ITV could put the brakes on already low merger and acquisition (M&A) activity, a senior Scottish lawyer has warned.

Sarah Phillips, the newly-appointed head of pensions law at Burness, said decisions over where pension schemes rank in the list of creditors could put companies off taking part in M&A.

In October, the Court of Appeal upheld a ruling by London’s High Court that the pension schemes of Lehman Brothers and failed US telecoms firm Nortel ranked above other creditors when it came to handing out cash from administrators.

Judges in both cases said the laws over pensions and insolvencies clashed in this area, with commentators speculating the UK government may be forced to legislate to clarify the issue.

Phillips – whose clients include publisher Harper Collins and restaurant chain Pizza Hut – expects the case will now go to the Supreme Court.

She added that another case, involving ITV, could also make companies think twice about buying companies with pension deficits.

Last month, the Pensions Regulator ordered ITV to give financial assistance to the pension scheme of TV rental firm Box Clever, which is burdened with a £62m deficit.

Box Clever was created in 2000 as a joint venture between Granada, which is now part of ITV, and Thorn. Both companies put their TV rental businesses into the new company, which then collapsed in 2003 under the weight of its £860m debt.

Phillips, who trained at “magic circle” law firm Clifford Chance and worked at pensions boutique Sackers before joining Burness, said: “When it was set up in 2004, the Pensions Regulator was given the power to force companies or individuals to support their pensions schemes. It is now applying those powers historically to cases that occurred before it was created.

“The ITV case will make companies think very carefully about transactions they take part in.

“If you have a company with a defined benefits, or final salary, pension scheme, then a potential buyer will want to make sure it is fully-funded.

“In a climate when there’s not a lot of M&A activity anyway, this is something that can make it even more difficult, especially as the banks would not want to fund deals if there’s a pension scheme deficit.”

ITV could still appeal against the Pension Regulator’s decision.