Modifications To Retiree Benefits Breaches Merger Agreement

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December 11, 2006

The U.S. Court of Appeals for the Fifth Circuit recently ruled that Halliburton Co., breached the terms of a merger agreement with Dresser Industries Inc. when it made modifications to a health plan for retirees of Dresser without making similar modifications to Halliburton’s health plan for active employees.

In 1998, Dresser merged with a wholly-owned subsidiary of Halliburton. The merger agreement provided that as a result of the merger, Halliburton’s subsidiary would cease to exist and Dresser would continue as the surviving corporation and as a wholly-owned subsidiary of Halliburton.

The merger agreement contained two provisions concerning employee benefit plans. The first provision stated that Halliburton would maintain Dresser’s retiree health plan but could modify the plan if modifications were consistent with changes in the medical plans provided by Halliburton and its other subsidiaries for similarly situated active employees. The merger agreement also provided that until the third anniversary of the merger, Halliburton must provide Dresser employees with benefits comparable to those they had received from Dresser. The court also noted that the merger agreement contained a general prohibition on third-party enforcement of the merger agreement.

After the merger, Halliburton continued to maintain a separate health plan for Dresser retirees, but less than a year after the effective date of the merger, Halliburton amended the plan in several ways that were adverse to the interests of the Dresser retirees.

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In the face of complaints from Dresser retirees, Halliburton filed a declaratory judgment against the Dresser retirees seeking permission to go forward with the amendments and argued that the no-third-party beneficiary clause in the merger agreement barred the retirees from enforcing the terms of the merger agreement and that since three years had passed since the merger, it now had the right to make modifications to the Dresser plan. Halliburton appealed the ruling of the district court in favor of the retirees.

The appeals court determined that the merger agreement constituted a plan amendment to the Dresser retiree health plan placing limitations on Halliburton’s right to amend, modify or terminate the Dresser plan. The court stated that the merger agreement amended Dresser’s plan to provide that Halliburton must maintain the plan except to the extent that any modifications were consistent with changes to the medical plans provided by Halliburton for similarly-situated active employees.

The court rejected Halliburton’s argument that the retirees were precluded by the merger agreement’s no-third-party beneficiary clause from enforcing the provisions in the agreement that limited Halliburton’s ability to modify the Dresser plan. The court reasoned that the retirees were not seeking to enforce the merger agreement itself, but instead were seeking a clarification of their rights to future benefits under the terms of the retiree health plan, as amended by the merger agreement.

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