Recent Case Suggests How Private Equity Funds Can Protect Against Unfunded Pension Liabilities Of Portfolio Companies

A recent decision by the U.S. District Court of Massachusetts specifically rejects the 2007 Pension Benefit Guaranty Corporation opinion that private equity funds can be a "trade or business" potentially subject to joint and several liability for a portfolio company's unfunded pension liabilities.

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A significant objective for a private equity (PE) fund when making an investment is to avoid exposing itself to portfolio company liabilities. Generally, corporate law would protect the purchaser of a controlling interest in an acquired corporation against portfolio company liabilities as long as the acquired company is operated independently of the purchaser. However, special considerations apply under the Employee Retirement Income Security Act (ERISA), the federal law that governs employee benefit plans. ERISA makes all members of a controlled group liable on a joint and several basis for any pension-related liabilities of single employer and multi-employer pension plans. The Pension Benefit Guaranty Corporation (PBGC), the federal agency responsible for overseeing these pension plans, has been aggressive in broadly interpreting what is a "controlled group" for this purpose and in pursuing PE funds for pension liabilities incurred by portfolio companies. But a recent case out of the U.S. District Court for the District of Massachusetts signals that courts may not agree with the PBGC's broad assessment of pension liability for PE funds.

In a recently decided case, Sun Capital Partners III L.P. v. New England Teamsters and Trucking Industry Pension Fund, D. Mass., No. 1:10-cv-10921-DPW, 10/18/12, the U.S. District Court for the District of Massachusetts became the first court to reject a multi-employer pension plan's attempt to rely on PBGC precedent to assess a PE fund with a portfolio company's unfunded pension liabilities. While this likely is not the last word on this subject, the Sun Capital Partners case offers a roadmap for how a PE fund may take a position to avoid controlled group liability for single employer and multi-employer pension liability.

Background

Title IV of ERISA imposes joint and several liability with respect to a broad array of pension liabilities, including an employer's minimum funding contributions to a single employer pension plan, unfunded pension liabilities upon plan termination, PBGC premium payments and withdrawal liability under a multi-employer pension plan. Under ERISA, joint and several...