The recent case of Pension Benefit Guaranty Corporation v. Asahi Tec Corporation [No. 10-1936 (ABJ) March 14 2012] in the US Federal courts has raised the unexpected risk that a non-US parent company of an insolvent US subsidiary could find itself liable for the deficit in the subsidiary’s pension scheme solely on the basis of its ownership interest in the subsidiary at the date the scheme is terminated.
A Japanese company, Asahi Tec Corporation (Asahi), bought a US corporation (Metaldyne) in 2007. Due diligence conducted in connection with the purchase revealed that Metaldyne had an underfunded salary-related pension scheme (the Scheme). Asahi was informed that under US law Asahi, as Metaldyne’s parent company, could be held liable for the Scheme’s deficit upon termination of the Scheme. Asahi proceeded with the purchase of Metaldyne despite this information.
Metaldyne entered Chapter 11 bankruptcy on 27 May 2009, at which date the Scheme had a substantial deficit that Metaldyne was unable to pay.
The Pension Benefit Guaranty Corporation (PBGC), a US governmental body that insures members’ pension benefits in US salary-related pension schemes under the Employee Retirement Income Security Act 1974 (ERISA) and which has similar functions to the PPF in the United Kingdom, asked Asahi to take over the Scheme and the associated pension liabilities.
Asahi refused, seemingly on the basis that it believed it had no liability for the pensions as Metaldyne was the employer that maintained the Scheme and Asahi itself did not conduct any business in the US. Having received this response, the PBGC, using statutory powers granted under Title IV of ERISA, terminated the Scheme and demanded that Asahi pay the deficit.
Asahi failed to pay the deficit. The PBGC filed a lawsuit against Asahi on 10 November 2010 in Federal district court to require Asahi to pay the deficit, termination costs plus interest on the judgement and costs in the case (the ERISA claim).
On 8 April 2011 Asahi filed a motion to dismiss this lawsuit on the basis that the Federal district court did not have personal jurisdiction over Asahi. Asahi asserted that it had no link to the US or to the Scheme other than its ownership of Metaldyne and in any event it had no involvement in the decision to terminate the Scheme.
Under applicable case law in the US, in order to demonstrate that the court had personal jurisdiction over Asahi with respect of the ERISA claim, the PBGC had to show either:
- that the court had “specific jurisdiction” as the ERISA claim arose directly out of the actions of Asahi in purposefully directing its activities towards the US; or
- that the court had “general jurisdiction” arising out of Asahi’s systemic and continuous links with the US regardless of whether those links were related to the ERISA claim.
The Federal district court decided that the PBGC had shown a prima facie case that the court did have personal jurisdiction over the ERISA claim in the form of “specific jurisdiction”. The court noted the following in support of its conclusion that it had specific jurisdiction over this matter:
- by purchasing Metaldyne, whilst fully aware of the existence of the Scheme and its deficit, Asahi had purposefully directed activities towards the US; and
- the ERISA claim arose directly out of the purchase of Metaldyne by Asahi, which under ERISA made Asahi a “controlled group member” and such purchase was the triggering action in respect of the claim. Therefore, Asahi’s involvement in connection with the termination of the Scheme was irrelevant to the issue of jurisdiction.
The court will therefore proceed with a full hearing on this case to consider whether Asahi is liable under ERISA for the Scheme’s pension deficit.
This case will come as a wake-up call to non-US parent corporations who own US subsidiaries that maintain or contribute to a pension scheme. As a result of this case, non-US parent corporations may no longer ignore underfunded US pension schemes thinking that they are immune from the reach of US courts. While it is possible that other courts may ultimately disagree with the analysis in this case, non US parent corporations now face the unappetising prospect that they may be financially liable for the deficit in pension schemes maintained by their US subsidiaries based solely on the fact that they are “controlled group members” by virtue of owning the subsidiary.