Occupational Pensions: Continuing liability for pension obligations after spin-off

By judgment of 22 September 2020 (docket number: 3 AZR 304/18) the German Federal Labor Court [Bundesarbeitsgericht – BAG] has ruled that the subsequent liability of a company involved in a spin-off according to the German Transformation Act [Abspaltung gemäß Umwandlungsgesetz]) with regard to pension liabilities also applies towards the German Statutory Insolvency Protection Fund [Pensionssicherungsverein – PSVaG]. In the event of insolvency, not only the claim of the pension beneficiaries against the insolvent company is transferred to the PSVaG, but also the claim of the pension beneficiaries against the spun-off company, which exists due to the joint liability under transformation law.

After a spin-off under transformation law, the transferring company and the acquiring company are jointly liable for the pension obligations towards the pension beneficiaries for a period of ten years. In this case, the transferring company became insolvent after the spin-off. As a result, the PSVaG took over the pension liabilities towards the beneficiaries, which in turn had the consequence that the beneficiaries’ claims against the insolvent company were automatically transferred to the PSVaG by law. With the transfer of the beneficiaries’ claims, rights that serve to secure these claim are also automatically transferred.

In view of this, the PSVaG argued that the joint liability under the Transformation Act is also to be regarded as such a security right and, as a result, the beneficiaries’ claims against the acquiring company had also been transferred to the PSVaG. The acquiring company rejected this view and argued that no claims would exist in favour of the PSVaG.

The German Federal Labor Court followed the PSVaG’s view and ruled that the claims asserted by the PSVaG exist. The court stated that, on the basis of the transformation law, there is a joint liability of the transferring and the acquiring company for pension liabilities, which is transferred to the PSVaG as a security right. Although the joint liability is not explicitly mentioned in German law as a security right, such rights are also to be classified as security rights (and are therefore transferred) that serve to realize and secure the main claim.

The decision shows that transactions under transformation law can involve far-reaching liability risks that are not apparent at first glance. If a company has been involved in a spin-off under the German Transformation Act within the last 10 years, this may result in liability for pension obligations (for example, towards the PSVaG). It is therefore necessary to check in the context of M&A transactions whether such risks are evident at a target company.