As the U.S. Pension Benefit Guaranty Corporation (PBGC) faces
increasing strain on the pension insurance program it runs, it has
become more aggressive in pursuing deep pockets after underfunded
defined benefit plans are terminated. Companies that do not do
business in the United States may have thought that they could not
be reached by PBGC's long arm, but a new decision by the
federal district court in Washington, D.C. involving
Asahi Corporation has given PBGC's collection efforts a big
Where is PBGC Authorized to Do This?
Under ERISA's controlled group rules, all members of a plan
sponsor's controlled group are jointly and severally liable for
unfunded benefits and for post-termination insurance premiums.
(These rules can be complicated, but in general, a parent
corporation and at least 80% owned subsidiaries are in the same
controlled group.) Joint and several liability means that 100% of
the liability may be collected from any member of the group, but
when all members of the controlled group are in bankruptcy,
PBGC's right to collect may be hollow.
What about non-U.S. businesses that will not be part of the
bankruptcy? Does PBGC have to go abroad to try to get a foreign
court to enforce ERISA? Does the foreign group member need to have
offices, employees or assets in the U.S. before the PBGC can pursue
liability claims against it here? A federal district court in the
U.S. recently said "no" to both questions.
What Was the Dispute?
Asahi was a Japanese parent company which had purchased a
now-bankrupt U.S. subsidiary. The
federal district court previously found that it had
jurisdiction to rule on PBGC's attempt to collect termination
liability from Asahi, over the objections of the parent that it had
no presence here and nothing to do with running the plan or the
decision to terminate it. Now that same court has determined that
Asahi is responsible for the termination liability for what appear
to be the same reasons that led it to find that there was
jurisdiction over Asahi in the first place.
In short, evidence was presented that Asahi received advice from
Mercer regarding the scope of the underfunding as part of its due
diligence for the acquisition, and that it sought a corresponding
reduction in the purchase price. However, this recitation of
favorable facts may have been added to the decision simply to
provide an alternative basis for an appeals court to affirm it,
because the decision also states that in the opinion of this court,
status as a controlled group member is enough to justify an
assessment of liability.
Why is This Significant?
PBGC and multi-employer plans have not been particularly
successful in their past attempts to collect from non-U.S.
entities, and prior decisions have not found that controlled group
membership alone was sufficient to give U.S. courts jurisdiction.
In this case, the court found that due process was satisfied if
Asahi purposefully directed activities here and the litigation
related to injuries that arose from or related to those activities.
The court rejected Asahi's argument that it was severely
disadvantaged litigating in the U.S. by noting that Asahi had
"freely submitted" to U.S. jurisdiction in another case,
and also that it was vigorously putting forward its position in
This may be a turning point for the PBGC, though it remains to
be seen whether other courts will come on board with the district
court's analysis or whether an appeals court would agree with
it. Note that parent companies are not the only entities
that can be pursued. Controlled group liability includes
brother-sister subsidiaries and certain businesses controlled by
the same five or fewer individuals. And the court's decision
would appear to apply to efforts to collect multi-employer plan
withdrawal liability from foreign entities as well, as the same
statutory definition of controlled group applies there.
What steps should be taken now?
This decision underscores the need for careful pre-closing
analysis of ownership levels and potential pension liabilities in
cross-border acquisitions and for considering whether to seek
seller indemnification and price adjustments.
Taken together with the
recent decision in Sun Capital Partners finding that private
equity funds could be trades or businesses for purposes of PBGC
liability, investment funds based outside the U.S. will want to
assess the risk that their activities make them a trade or
business, ramp up their diligence of portfolio companies and
determine the appropriate ownership levels and contractual
protections for their U.S. portfolio company investments.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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