Editor: Please tell us about your professional experience and give us some background on Kelley Drye's Stamford office.
Chargar: Our practice covers a broad range of employee benefits and executive compensation areas. We represent large and medium-sized companies and individuals, including CEOs of Fortune 500 companies, in negotiating their employment agreements. We advise companies on qualified plans, with respect to both plan administration and fiduciary issues. We counsel qualified plan investment committees on fiduciary issues involved in the process of managing the investment of plan assets, which has become a critical area due to the recent turmoil in the financial markets. We also advise companies on welfare plans, including medical, life insurance, disability and dental plans, as well as HIPAA privacy issues. We handle many executive compensation issues from the standpoint of employees and employers. Section 409A continues be a hot area in executive compensation - any time an employee is vested in compensation in one year but is not scheduled to receive it until a future year, section 409A needs to be considered.
We have 25 professionals in the Stamford office, practicing in the areas of private equity, securities, mergers and acquisitions, broker dealer, intellectual property, litigation, real estate, employee benefits and executive compensation. We came to Stamford over 30 years ago, when Union Carbide, a major Kelley Drye client in New York, moved to Connecticut. This led us to open an office in Stamford. Union Carbide was acquired by Dow Chemical and is no longer in existence, but we represent two of its spinoffs, Praxair and Graftech International. We have a number of other clients in Connecticut, including Thomson Reuters, Cengage Learning, IVANS and Terex. Our various offices are well-integrated, so lawyers in the Stamford office often work on matters with lawyers in our New York, New Jersey, Washington, Chicago and Brussels offices and our Mumbai affiliate.
Editor: Would you comment on Dodd-Frank and its repercussions for executive compensation?
Chargar: Dodd-Frank has changed the landscape of executive compensation and has impacted the design of executive compensation programs. With the new say-on-pay provisions, executives and compensation committees are concerned about how a compensation package will look to shareholders, as well as to Institutional Shareholder Services (ISS). My experience is that ISS has become more critical of executive compensation arrangements, especially those involving excess compensation. Companies should take note of ISS, because if ISS makes a recommendation, institutional shareholders are more likely to follow their recommendations than in the past. Because the amount of executive compensation has become something shareholders are focusing on - or at least are perceived to be focusing on - executives and their attorneys in negotiating agreements need to take a hard look at whether the various components of the compensation package they are requesting are appropriate.
Editor: Is say-on-pay a paper tiger, or might it have real long-range effects?
Chargar: Say-on-pay may be a paper tiger in that it's nonbinding. However, shareholders are given the opportunity to approve or not approve compensation of named executive officers (NEOs) and to vote on how frequently compensation will be approved. The expectation is that companies will follow shareholder say-on-pay and say-on-frequency vote recommendations to avoid bad press or negative shareholder reaction. Perhaps this will change as the economy improves and shareholders see the value of their stock go up, but I think that, at least for the short term, say-on-pay and say-on-frequency are issues that companies must consider.
Editor: Employment issues arise in M&A and restructurings. Would you describe your work in that area?
Chargar: M&A is a busy area for us. We negotiate the employee benefits provisions of asset and stock purchase agreements. We also assist in due diligence. Especially if you're the purchaser, you want to kick the tires to make sure you understand the terms and financial implications of the target's employee benefit plans and incentive compensation arrangements.
Executive compensation and section 409A is also very important, because often employees and executives at a company involved in a transaction will be transitioning, so severance and employment agreements will need to be negotiated. A number of executive compensation issues come into play as to how the target's executives will fit into the acquirer's executive compensation programs.
The lion's share of what we do in M&A occurs after the closing, when we advise purchasers on integrating employees of acquired businesses into the purchaser's benefit plans. Many factors come into play, especially with systems and data. If you are buying a company with 5,000 employees and bringing them over into your benefits plan, a whole series of issues arises. For example, an acquirer is merging a target's 401k plan into its own 401k. If the target used Fidelity and the purchaser used Oppenheimer (or a different menu of investment options), the funds in the target's plan may need to be mapped to the new plan, which involves a legal analysis of the proposed mapping strategy, employee communications and systems integration.
Medical plans present similar issues. In many cases, companies like to provide the same level of benefits company-wide because providing different groups of employees with different levels of benefits can create employee relations and administration issues. Employers are also sensitive to the level of benefits provided by their peers and try to offer benefits that are competitive. In M&A situations, very often, employees of acquired businesses are transitioned to another benefit structure, which involves either enhancing or reducing their benefits. The buyer must explain the new programs to employees whose benefits are being changed in a way that gives them a clear idea of what is being modified and how the modifications impact them. We get involved in those employee communications and in the legal issues of transitioning.
Editor: How about retirement plans?
Chargar: We do a lot of work with qualified and nonqualified retirement plans. We advise companies on both types of plans from a design and an administration standpoint. Retirement plan issues frequently arise in M&A. If you're acquiring a business and the target sponsors a qualified plan, the buyer should ask: Has the plan been administered properly? More importantly, how good is the target's data? What do their records look like? In my experience, the number one plan administration issue that comes up with qualified plans in M&A is data.
For example, an acquired company that sponsors a qualified plan may have already been through one or two transactions. An employee who terminated employment 20 years ago at age 45 is now 65, he is about to commence receiving retirement benefits, and there is a dispute as to the amount of the benefit. What were his wages and service 20 or 25 years ago? Often the records aren't there. This is an issue that may not surface during due diligence or until years after the closing of the transaction. The purchase agreement may state that the plan is sufficiently funded, but after a period of time, the reps and warranties expire. When you conduct due diligence, you should try to learn as much as possible about how the plan has been administered and whether thorough data and records have been kept.
Editor: You have written about the Health Care Reform Act, which has been top of mind for many employers. Do many clients need to make major changes to ready themselves for compliance?
Chargar: Many of our clients have needed to make only minor adjustments to their medical plans to comply with the provisions of the new law that are effective in 2010 and 2011, such as covering dependent children up to age 26. That said, in some cases, clients have made minor changes to their medical plans without consulting us where there were no legal issues. We have had a number of issues involving a medical plan's status as a grandfathered plan, although many of the changes dealing with levels of benefits are applicable to both grandfathered and non-grandfathered plans.
Editor: What about challenges to the Act in the courts? Do you think the Act will have to be revamped?
Chargar: I can see the argument that it might be unconstitutional to require somebody to go out and actually purchase medical insurance. On the other hand, one can argue that because insurance is subject to federal law, individuals can be so mandated. Another issue is whether Congress will fund enforcement of the new law. It seems to me that there is a general consensus that some type of healthcare reform is necessary. The two political parties may disagree on what it should look like, but Congress has been looking at healthcare for years. I suspect that, at the end of the day, the new healthcare reform law will be modified but will not change drastically.
Editor: What do you see happening with defined benefit plans?
Chargar: One thing we'll see in the qualified plan area is more defined benefit plans being closed to new participants or frozen because of the volatility in the financial markets, the cost of defined benefit plans, and the mobility in the workforce. In the next couple of years, this will pose a number of challenges. If a defined benefit plan is closed, as time goes by, participants will continue to accrue benefits and their compensation will increase, with the result that the plan may become discriminatory. At that point, employers will have to do one of two things: either terminate the plan or enhance benefits under other plans. Employers will have to think not only about whether they can continue to fund defined benefit plans, but also what they are going to replace the benefit with, such as a 401k plan with an enhanced matching contribution.