A recent Quebec Superior Court decision has unleashed uncertainty over the liabilities of companies and their directors when a pension deficit appears in the context of a reorganization.
The court authorized a group of defined benefit pension plan members to proceed with a $65 million class action against companies involved in a 2011 reorganization. The class claimed that the reorganization, followed by a 2014 bankruptcy, was a sham that deprived them of the assets required to honour their pensions.
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“The decision could have widespread repercussions in the sense that corporate reorganizations are common, whether by way of mergers, creating subsidiaries or transferring assets and employees, because it suggests that caution is necessary if a pension deficit is on the table,” says Dominque Monet, a labour and employment lawyer at Fasken Martineau DuMoulin LLP, who wasn’t involved in the case.
In 2011, MC Commercial Inc., an international conglomerate with plants in 15 countries, decided to reorganize its Canadian operations in its home appliance business, which was carried on by a single company. The employee groups consisted of management and non-unionized staff who had their own DB plan, and unionized employees who had a separate DB plan.
The reorganization transferred all the company’s commercial and administrative assets, as well as the management DB plan, to a new company for $1. The unionized employees and their plan remained with the original company, which continued operating for three years, engaging in a series of inter-company services and charges with the new company. Throughout this process, both companies had the same directors, senior managers and shareholders.
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In 2014, the original company filed for bankruptcy. At the time, the unionized employees’ plan had a $35 million deficit, which became an unsecured debt in the bankruptcy.
The court ruled that there was sufficient evidence to require a trial on whether the DB plan was a primary motivating factor in the reorganization and the bankruptcy.
“The legal principles enunciated here are not new because Quebec’s Civil Code requires parties to act in good faith, although these principles may not previously have been raised in the pension context,” says Tina Hobday, a pensions and benefits partner at Langlois Lawyers LLP, who wasn’t involved in the case.
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Still, while concluding that the pensioners’ allegations had sufficient basis to require a trial on the merits, the judge did acknowledge that proving bad faith would be difficult because it requires a high standard.
“At a superficial level, the transactions seem odd because the two entities look like they’re the same, with the same directors, executives and even the same head of human resources, so I’m not surprised that people started asking questions and even that the judge authorized the class action,” Hobday says. “But there’s a gap between saying that something looks odd, which may justify a trial on the merits, and proving collusion at that trial.”
However that may be, she believes the decision bears notice. “It is a reminder that parties must act in good faith and in the pension context, this means the companies and their directors have an obligation to minimize a reorganization’s impact on a pension deficit or at least think about it.”