United States: Current Structuring May Not Shield Private Equity Firms From ERISA Liabilities

Last Updated: April 19 2016
Article by Robert A. Davis, Jr., James Frazier, Gillian Emmett Moldowan, Shane J. Stroud and Linda Z. Swartz

Most Read Contributor in United States, August 2018

On March 28, 2016, the U.S. District Court for the District of Massachusetts held that two private equity funds within Sun Capital were jointly and severally liable under the Employee Retirement Income Security Act of 1974, as amended (ERISA), for the $4.5 million multiemployer pension plan withdrawal liability of a portfolio company. This landmark decision appreciably changes the landscape for private equity investment in companies with pension plans or potential pension liabilities.

Practical Takeaways

Whether the analytical principles underpinning the Sun Capital decisions spread beyond the First Circuit or impact other areas of the law where controlled group concepts apply is an open question. However, even outside of the First Circuit, private equity firms and those buying portfolio companies from private equity owners should consider the following in light of Sun Capital:

  • Pricing It In. When valuing a new investment opportunity with pension liabilities, consider the increased possibility that pension liability could go beyond the portfolio company and become a liability of a private equity fund investor. For private equity portfolio companies with existing pension liabilities, consider evaluating the existing business model for the portfolio company to ensure economic assumptions cover the possibility of pension liabilities reaching fund investors ľ for example, increasing management and other fees charged to such companies on an ongoing basis to factor in the possibility that such liabilities could be assessed against the private equity investor.
  • Impact on Diligence. Many private equity firm buyers already have pension liabilities high on their list of diligence priorities when investigating a new investment opportunity, but additional focus on the scope of those liabilities, the likelihood of underfunding issues and the possibility of withdrawal (in the case of multiemployer pension plans) may be warranted. For those buying a portfolio company from a private equity firm, consideration should be given to expanding questions about pension liabilities beyond the target company to the private equity firm and its other portfolio companies as well. While not addressed by Sun Capital, if pension liabilities can reach up to fund investors on a "partnership-in-fact" theory, then using an ERISA controlled group analysis it is possible that a court could find that such liabilities reach back down to other portfolio companies deemed to be in the same controlled group. To the extent a private equity firm does not have centralized data about portfolio company pension contributions, it may want to consider implementing new record keeping procedures in light of the potential for expanded diligence requests.
  • Approach to ERISA Representations. In the context of financing and M&A agreements with respect to which private equity firms or portfolio companies are a party, lenders and buyers should consider expanding ERISA representations to expressly cover the private equity firm and its applicable funds and other portfolio companies. Likewise, private equity borrowers and sellers should evaluate their comfort with the scope of ERISA representations, even if not expanded from current market standard, as the entities that are deemed to be ERISA affiliates may be expanded.
  • Making Use of Club Deals. Based on the factors used by the District Court in finding that the Sun Capital funds and their portfolio company were under "common control," club deals where separately controlled private equity firms invest in a portfolio company each at a level below 80% may better insulate the firms and their funds from pension liability under ERISA.


Under the Multiemployer Pension Plan Amendments Act (MPPAA), all "trades or businesses" under "common control" with an entity contributing to a multiemployer pension fund are jointly and severally liable for any withdrawal liability of the contributing entity. Generally, common control requires companies to be part of a corporate family with a common 80% owner. In light of this control test, private equity funds often structure investments so that no single fund owns more than 80% of a portfolio company.

In Sun Capital, two funds advised by Sun Capital Advisors, Inc. (Fund III and Fund IV) purchased indirect interests in an operating company, Scott Brass, Inc. (Scott Brass). Scott Brass later withdrew from a multiemployer pension plan to which it had contributed and filed for bankruptcy. The pension plan sought to assess withdrawal liability against FundáIII (the 30% indirect owner of Scott Brass) and FundáIV (the 70% indirect owner of Scott Brass), arguing the funds were members of a controlled group with Scott Brass.

In 2013, the U.S. Court of Appeals for the First Circuit found that Fund IV was engaged in a "trade or business" for purposes of ERISA's controlled group test, stating that FundáIV, "through layers of fund-related entities, was not merely a 'passive' investor [in Scott Brass], but sufficiently operated, managed, and was advantaged by its relationship with" Scott Brass. The First Circuit remanded the case to the District Court to determine: (1)áwhether FundáIII was also engaged in a "trade or business" and (2)áwhether FundáIII and FundáIV were under "common control" with Scott Brass.

The District Court Decision

The District Court found that FundáIII was engaged in a "trade or business." In considering whether FundáIII qualified as a trade or business, the District Court applied the "investment plus" approach used by the First Circuit to determine that FundáIV was engaged in a trade or business.1áThe District Court determined that FundáIII received an economic benefit from its investment in Scott Brass that was beyond that available to an ordinary passive investor ľ carryforwards with the potential to offset management fees the fund may otherwise owe to its general partner for managing the investment. The District Court concluded that FundáIII and FundáIV engaged in identical activities, and the court would not accept arguments that differences in the timing of the funds' economic benefit, or the contingencies of FundáIII's benefit, distinguished FundáIII from FundáIV with respect to being engaged in a trade or business.

The District Court found that FundáIII and FundáIV were in "common control" with Scott Brass. The District Court found that Fund III and Fund IV were in common control with Scott Brass because the funds were a "partnership-in-fact", with a 100% ownership interest in Scott Brass, and that the "partnership-in-fact" was engaged in a trade or business. Because the funds were in "common control" with Scott Brass, they were jointly and severally liable for the withdrawal liabilities of Scott Brass.

FundáIII and FundáIV were members of an ERISA controlled group with Scott Brass. The District Court acknowledged that absent the aggregation of FundáIII's and FundáIV's interests, neither would be in an ERISA controlled group with Scott Brass because their individual interests would not put them in an 80% ownership group with Scott Brass. The court went on to find aggregation of the funds' interests was appropriate based on the existence of a "partnership-in-fact" between the funds that together held a 100% interest in Scott Brass, despite the funds' separate legal forms and the fact that all co-investment agreements between FundáIII and FundáIV disclaimed any intent to form a partnership or joint venture. The District Court noted that the intent of ERISA's common control provisions is to prevent organizations from forming separate organizations to avoid ERISA obligations, and a bright-line ownership test is in some tension with that purpose. This tension is heightened where ownership is divorced from control.

The District Court worked from a position that the MPPAA "is a statute that allows for, and may in certain circumstances require, the disregard of such formalities." Further, the formal structure of each fund entity is a creature of state law that may not be respected at the federal level if the facts of operation are in contrast to the formalities. In finding a partnership-in-fact between the funds under federal law, the District Court stated that the funds were not separate investors in the portfolio company brought together by happenstance or coincidence. Rather, prior to making the investment, the funds acted jointly in deciding to co-invest in the portfolio company. The funds also had an existing pattern of investing together. The funds made a conscious decision to split their ownership in the portfolio company so that neither fund owned the requisite 80%, which evidenced a unity of decision making between the funds. The District Court explained that the smooth coordination between the funds of the management and operation of the portfolio company was indicative of a partnership-in-fact, resulting in the funds being in common control with the portfolio company. The District Court also noted that all of the funds advised by Sun Capital Advisors, although formally independent entities with separate owners, tax returns, financial statements, reports to partners, and bank accounts, and largely non-overlapping investors and investments, ultimately made their investment decisions under the direction of the co-CEOs of the funds' advisor.

The "partnership-in-fact" between FundáIII and FundáIV was engaged in a "trade or business." In determining whether the "partnership-in-fact" was engaged in a trade or business, the District Court acknowledged the need to look at the activities of the partnership-in-fact and not just the activities of its partners; however, the court seemed to effectively ignore this pronouncement and impute the activities of the funds onto the "partnership-in-fact." Sun Capital argued that if FundáIII and FundáIV are engaged in trades or businesses actively involved in the management of Scott Brass, there would be no active management work left for the partnership-in-fact to do and, as a result, the partnership-in-fact could not be engaged in a trade or business. The District Court did not accept this argument and instead found that like its partners, the partnership-in-fact's purpose in the investment was to make a profit and that it too was involved in the active management of Scott Brass.


1 áSee our Client & Friends Memo from 2013 for further discussion of the First Circuit's 2013 decision and the "investment plus" analysis.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think youĺve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaqĺs use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributorĺs own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaqĺs Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaqĺs Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaqĺs right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions