On March 3, 2014, the U.S. Supreme Court declined to intervene in a case challenging whether private equity funds could be liable for pension liabilities of their portfolio companies under the Employee Retirement Income Security Act (ERISA). Under ERISA and the U.S. Internal Revenue Code (Code), each member of a controlled group (which includes a corporation's subsidiaries, parent and other subsidiaries of the parent that are a "trade or business" provided that an 80% ownership threshold is met) is jointly and severally responsible for various pension-related liabilities. The phrase "trade or business" is not defined in ERISA or the Code.
In Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund (Sun Capital), the U.S. Court of Appeals for the First Circuit held that a private equity fund was engaged in a "trade or business" for the purpose of determining whether the fund was a member of the portfolio company's controlled group. The Court of Appeals adopted the "investment plus" approach to interpret the meaning of the phrase "trade or business", and determined that a fund could be held to be a trade or business if it engages in activities beyond those of a passive investor.
For full analysis of the Court of Appeals decision, please see our August 21, 2013 bulletin U.S. Court of Appeal Decision on Pension Plan Liability Has Significant Implications for U.S. Private Equity Funds and for background information and full analysis of the District Court decision, please see our December 10, 2012 bulletin U.S. Private Equity Fund Is Not Responsible for Pension Liabilities of Portfolio Companies.
Implications for Private Equity Funds
The Supreme Court's decision to let the Court of Appeals ruling on the interpretation of the phrase "trade or business" stand, coupled with the decision of the U.S. District Court of the District of Columbia's decision last fall in Pension Benefit Guaranty Corporation v. Asahi Tec Corporation, which held that a non-U.S parent liable for the pension liabilities of its U.S. subsidiary have important implications for private equity funds based both within and outside of the United States. While the issue of whether common control exists in the Sun Capital case remains to be decided by the District Court, private equity funds should structure their investments in portfolio companies that contribute to multiemployer pension plans or sponsored defined benefit pension plans with care. Private equity funds acquiring U.S. entities should thoroughly conduct due diligence of pension liabilities and consider appropriate seller indemnifications or purchase price adjustments.
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