Proposed Change in Pension Accounting

May 10, 2006

The Financial Accounting Standards Board recently announced that it is reconsidering accounting for pensions. Among the issues being considered is a proposal that would require pension underfunding – i.e., generally, the excess of the present value of pension liabilities over the fair value of pension assets – to be reflected as a liability on the balance sheet. Currently, pension underfunding is required to be disclosed in footnotes to GAAP financial statements, but is not required to be recognized in full as a liability on the balance sheet. If adopted, the proposal would significantly impact stockholders’ equity for companies with significant pension underfunding. A final rule is expected to be adopted in 2006, and the balance sheet impact would be immediate upon adoption.

We attach a “Dataline” prepared by PricewaterhouseCoopers that summarizes the proposal. We direct your attention, in particular, to the section of the Dataline on page 4 under the heading “What Companies Should Do Now.”

From a legal perspective, the following considerations are also noteworthy:

1. Delaware’s General Corporations Law restricts the ability of Delaware corporations to pay dividends other than out of surplus capital. Any issuer whose stockholders’ equity may be significantly affected by the proposed accounting change should consider whether the impact would include potential limitations on its ability to pay dividends under the corporate law of the jurisdiction in which it is incorporated.

2. Agreements entered into in connection with the purchase and sale of a business typically include closing conditions related to the occurrence of a material adverse change in the financial condition of the business being sold. Such agreements sometimes provide for price adjustments based on balance sheet items. All such agreements should be reviewed in light of the proposal. Similarly, in addition to loan agreements, financial agreements such as derivative contracts that may be used by companies in corporate finance or in operating businesses (for example, currency and interest rate swaps) may have financial covenants that could be affected by the proposed accounting change.

3. Issuers whose financial condition may be materially impacted by the change should consider whether disclosure is appropriate in any offering document relating to the sale of securities or in periodic reports filed under the Securities Exchange Act of 1934.

Companies should also note that pension underfunding can vary based on actuarial and financial assumptions used to determine pension liability, including the discount rate and, typically, the rate of assumed future compensation increases. The underfunding amount can be sensitive to changes in these variables. As a result, consideration should be given to the potential consequences of significant year-to-year variations in the balance sheet liability, the appropriate assumptions to be used and the appropriateness of disclosure concerning the sensitivity of the liability to changes in assumptions.

The variability noted above can be influenced by the asset allocation strategy implemented for the investment of plan assets. Under pension law, any plan investment decision must be made in the interests of the plan and not for the purpose of decreasing the volatility of the plan sponsor’s balance sheet. However, there may be investment strategies that are in the best interests of the plan that have a favorable collateral effect on the plan sponsor because of their effect on the variability of plan underfunding.

Please feel free to call any of your regular contacts at the firm or any of our partners and counsel listed under Corporate Governance or Employee Benefits in the Our Practice section of our web site if you have any questions.