Burke v. HBC Co. May 20, 2008, Ontario C.A.

1. Burke v. HBC Co. May 20, 2008, Ontario C.A. Case Brief presented by Steve Mandziuk, General Counsel, Finning (Canada) September 2, 2008

2. Facts • 1987: HBC spun off its Northern Stores Division to NWC. • NWC agreed to employ 1200 HBC employees and to establish a comparable pension plan (with benefits at least equal to the HBC plan). • HBC agreed to fund the new plan with assets equal to the pension liabilities (accrued pension benefits) associated with the transferred employees. Once funded, HBC would have no further obligations. • The HBC plan was in surplus at the time of the transfer.

3. I. Facts (cont’d) • Former employees sought a court order directing HBC to transfer either a pro rata share of the surplus to the NWC plan or that part of the surplus be held in trust for them. • They argued that because HBC had improved benefits from time to time using surplus, a transfer without surplus would diminish the transferee plan’s potential capacity to grant enhanced benefits. Expectations had been created. • Lower Court granted the Order, stated that the pension was a “classic trust” and therefore, even in the absence of contractual obligations, mere expectations had to be protected. This was a breach of trust.

4. II. The Decision • The Ontario Court of Appeal overturned the lower court’s decision • Plan documentation determines surplus entitlement as well as all other rights and obligations of stakeholders, and there was no requirement that any of the surplus be transferred and no prohibition on contribution holidays. The plan did not provide that the members had any rights to the surplus. It only provided that they would receive defined benefits. • Plan documentation can override general trust law principles, in this case, the “even hand” concept did not require a pro rata transfer of surplus to the new plan: “. . .the trust instrument displaces the even-handed requirement in respect of Plan members by means of the rights it give to the Bay . . .”.

5. II. The Decision (cont’d) • HBC made it clear that booklets given to members were summaries only; members were directed to read the actual plan documents and it was made clear that HBC had the right to amend the plan terms. Adequate disclaimers were in place. • The expectations of certain beneficiaries does not constitute a “ . . .legitimate basis for creating legal rights and obligations at odds with the provisions of the plan documentation”. Wording overrides conduct and expectations.

6. II. The Decision (cont’d) • “In my view, the issue raised on the main appeal can be resolved only by first determining whether the Transferred Employees had any entitlement to surplus at the time of the Sale. If they did not, in light of the terms of the Agreement and the absence of legislation to the contrary, there could have been no obligation on the part of the Bay to transfer any portion of the Plan’s actuarial surplus to the NWC Plan. If they did have such an entitlement, other questions follow before it can be decided what, if anything, must be done in respect of the actuarial surplus in the Plan at the time of Sale, particularly as the Plan was ongoing. . . in my view, the Transferred Employees had no such entitlement.”

7. III. Commentary • Kerry (Canada) Inc. v. DCA Employees Pension Committee is set to be heard by the SCC in November, 2008. • The issue in Kerry arises from another Ontario C.A. decision about the payment of plan expenses. The Ontario C.A. held that expenses could be paid from the plan since there was no statutory requirement that the sponsor pay the expenses and the plan’s language didn’t prohibit such conduct.

8. III. Commentary (cont’d) • The Court of Appeal decision is a departure from the underlying “fairness” approach at the lower court level. • The Court of Appeal does not provide any guidance about what happens to a surplus on the sale of a business where the members are clearly entitled to surplus on a wind-up. • The Court of Appeal followed the Kerry decision in dealing with the other issue in this case: payment of plan expenses from the pension fund. The Court reviews the plan documentation. Absent a clear undertaking in the documentation, there is no legal obligation on the company to pay the expenses. If the documentation is silent, expenses can be paid from plan assets.

9. IV. Conclusion • Questions?