Last Friday, the U.S. Court of Appeals for the First Circuit ruled that two co-investing Sun Capital private equity funds had not created an implied “partnership-in-fact” for purposes of determining whether the Sun Funds were under “common control” with their portfolio company, Scott Brass, Inc. (SBI) – resulting in a ruling that the Sun Funds were not under “common control” with SBI or a part of SBI’s “controlled group” and, therefore, that the Sun Funds could not be held liable for SBI’s multiemployer pension fund withdrawal liability.
This ruling marks the end (for now) to the seven-year Sun Capital dispute. The ruling has significant implications for both multiemployer pension funds and private equity funds. Among other things, the ruling may hamper the efforts of multiemployer pension plans and the PBGC to collect plan termination and withdrawal liability from private investment funds (and their other portfolio companies) based on a “partnership-in-fact” analysis; on the other hand, private equity fund sponsors should be aware that (i) acquiring an 80% (or more) interest in a portfolio company, whether within one private equity fund or pursuant to a “joint venture” between related (and maybe even unrelated) funds, may trigger joint and several liability for the portfolio company’s underfunded pension or withdrawal liabilities, and (ii) even a smaller ownership interest percentage could possibly trigger the ERISA “controlled group” rules based on complicated “common control” determinations.
See our fuller analysis here.