A crucial activity of any due diligence effort in an acquisition is to review the employee benefits offered and maintained by the target company. This sort of review is vital whether the intended deal structure is an asset purchase or a stock purchase, and the objective is to identify all of the potential issues and liabilities that flow from the target company’s employee benefits. After the identification process is complete, the goal is to adequately address all of the issues in the acquisition agreement.

In a stock purchase deal, the target company’s employees will continue their employment, with the buyer automatically inheriting all of the target’s employee benefit plans. This is actually preferable to a termination situation, which will trigger payments to the employee pursuant to existing employee benefit plans. Thorough due diligence is crucial to identify the types, compliance status, and legal status of any employee benefit plans maintained by the target company. At the same time, due diligence should reveal whether there are potential issues related to current benefit plans.

A qualified attorney should be retained to review the various types of documents related to employee benefits plans that may be relevant to an acquisition. Those documents may be very numerous and include, among others, employment, retention, and severance agreements; stock option or any equity compensation plans; non-qualified deferred compensation plans; health and welfare plans; qualified retirement plans; and post-retirement benefit plans.

The stock purchase agreement will contain a section of representations and warranties relating to employee benefits. In these sections, the target company undertakes specific promises to the buyer concerning the types of employee benefit plans, practices, agreements, policies, etc., that it maintains; whether such plans comply with applicable law; and the liabilities associated with these plans. Hiring an attorney to perform a thorough due diligence review will assist buyers in protecting themselves from potential issues and liabilities and will assist targets in maximizing deal value while limiting liability and contingencies.