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.
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
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