A recent decision of the District Court for Massachusetts provides welcome news for private equity funds that invest in businesses that may have significant liability from multiemployer plans. Under the Employee Retirement Income Security Act of 1974 (ERISA), trades or businesses under common control are jointly and severally liable for certain pension plan liabilities, including withdrawal liability from a multiemployer pension plan. Generally, a company would be within the common control group rules if another entity held 80 percent or more of the interest in the company with liability. In the past, private equity funds felt they were not subject to this liability because they were not “a trade or business,” and therefore not subject to the control group rules. In 2007, the Pension Benefit Guaranty Corporation (PBGC) issued an opinion letter indicating that a private equity fund could be a trade or business, finding that a private equity fund’s stated purpose was to make a profit and that the private equity fund’s investment activity was continuous and regular. In a recent case, the District Court for Massachusetts examined the liability of two private equity funds run by Sun Capital Partners. One fund owned 70 percent of the company, Scott Brass Inc., and another other fund owned 30 percent. The district court rejected control group liability, finding that the private equity funds were not a trade or business. The court rejected the rationale of the PBGC opinion and found that the funds were passive investment funds and that activities of the funds were not sufficiently continuous or regular in order to constitute a trade or business. The multiemployer plan had also argued that the private equity funds were liable under an “avoid or evade” theory, given that the ownership may have been split between the two funds based on advice provided to the funds that it would be prudent to keep the ownership interest of each fund below 80 percent. The court also rejected that argument, finding that it would be unlikely that an entity or person purchasing a business would do so with the intent, at the time of investment, that the business would fail or that the failure was imminent. While this decision is good news for private equity funds, it should be noted that the decision is on appeal to the First Circuit and merits further watching. Additionally, it may also be appropriate for private equity funds to limit ownership of the company in any one fund to below 80 percent in order to have a further position that the control group 80 percent ownership test is not satisfied. Sun Capital Partners III L.P. v. New England Teamsters and Trucking Industry Pension Fund (D. Mass., 2012)
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District court rejects private equity fund liability for multiemployer plan withdrawal
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