One of the most difficult rules for our non-U.S. based clients
to accept is controlled group liability for plan termination under
Title IV of the Employee Retirement Income Security Act of 1974, as
amended (ERISA). Under these rules, all members of the controlled
group may be jointly and severally liable for underfunding when a
plan is terminated, even if they did not sponsor or contribute to
the plan and even if they have no employees covered under it. There
is no exclusion for non-U.S businesses, and they may seem like a
deep pocket because they are not included when there are U.S.
The U.S. Pension Benefit Guaranty Corporation's (PBGC)
position has long been that it may reach affiliates anywhere in the
world to recover unfunded pension termination liabilities. A lien
arises in favor of the PBGC under Section 4068 of ERISA upon
refusal of PBGC's demand that a responsible person pay the
pension termination liability. The lien is limited to 30 percent of
the controlled group's net worth.
A common question we hear after explaining the rules is: how
can the PBGC recover from us if we do not do business in the United
And, in fact, prior case law calls into question the PBGC's
ability to obtain jurisdiction automatically over foreign
affiliates notwithstanding the language in ERISA that purports to
pierce the corporate veil of a controlled group of companies.
However, a recent memorandum opinion issued by the United States
District Court of the District of Columbia,
Pension Benefit Guaranty Corporation v. Asahi Tec Corporation,
permitted the PBGC to proceed against a Japanese parent of the plan
sponsor. While this decision represents just one lower federal
court's opinion, we think it may make it easier for the PBGC to
obtain personal jurisdiction over affiliates of U.S. plan
This lawsuit arose after the PBGC took over the Metaldyne
Pension Plan to force an involuntary termination. PBGC seeks $175
million from the parent company of Metaldyne, which filed for
bankruptcy reorganization under Chapter 11 of the U.S. Bankruptcy
Code and did not fund its pension plan. The non-U.S. parent
company, Asahi Tec, moved unsuccessfully to dismiss the PBGC's
complaint on the ground that Asahi had no role regarding the U.S.
plan or its termination.
The court found that the plain language of the statute subjected
Asahi to personal jurisdiction when it became a member of the
controlled group, i.e., when it purchased Metaldyne. It was not
necessary to show that Asahi directed Metaldyne's activities as
an "alter ego" or directed the termination. However, the
court also emphasized the fact that Asahi engaged a pension
consultant to perform due diligence before the closing and that it
was not only aware of the potential pension liability, but also
adjusted its offering price to take it into account. It acquired
Metaldyne "with its eyes wide open."
Of course, we worry about the tone of this opinion, which,
despite the language suggesting automatic jurisdiction, seems in
other places to suggest that if Asahi had remained ignorant of its
U.S. pension liabilities it might have avoided the long-arm of
ERISA and the PBGC.
Prior case law is inconsistent with this decision. For example, the
PBGC was previously unsuccessful in its attempts to assert Title IV
liability against a Canadian parent and against two U.K. entities.
In both cases, the courts found the parent-subsidiary relationship
insufficient to establish personal jurisdiction. In at least one
instance, PBGC has also pursued its claims in a foreign
jurisdiction, but its suit relating to Ivaco Corporation in a
Canadian court was ultimately settled. (Note, however, that Section
4068(d) of ERISA provides that PBGC must bring action to enforce
its lien "in a district court of the United States.")
It is important to remember that the Asahi decision is law only
in the D.C. Circuit and could be appealed. Further, the Court
merely allowed PBGC to proceed with its claim, and did not
determine that Asahi was liable, though that may follow from the
reasoning in the initial decision.
Meanwhile, as PGBC becomes more aggressive in pursuing these
claims, thorough due diligence about a target's defined benefit
plans becomes increasingly important. Despite the suggestion in the
Asahi decision, ignorance is not bliss. You cannot adjust the
purchase price of a target or plan to manage liabilities if you do
not know about them.
Carol has practised in the employee benefits
field for over 30 years, advising clients on all aspects of
employee benefits and retirement plans, including questions
relating to 401(k), defined benefit and employee stock ownership
plans, welfare plans, fiduciary responsibility, prohibited
transactions and plan asset issues arising in investment fund
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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