This article explores the current status of a pending litigation that exemplifies the continuing effort by the US Pension Benefit Guaranty Corporation1 to seek to recover pension underfunding from foreign affiliates of US pension plan sponsors.
ERISA and the PBGC
Under the Employee Retirement Income Security Act of 1974, as amended (ERISA), the US Pension Benefit Guaranty Corporation (the PBGC)2 is responsible for the administration and funding of terminated pension plans covered by Title IV of ERISA. Such plans include tax-qualified singleemployer defined benefit pension plans as well as multiemployer plans.3 In the event a pension plan is terminated or receives insufficient contributions from its sponsor, ERISA allows for a PBGC lien on the assets of that plan’s sponsor and certain affiliates thereof to ensure adequate funding for the liabilities relating to that plan.4 Such liabilities may include termination liability of an underfunded plan, liability for a failure to satisfy minimum funding requirements and associated excise taxes, liability for unpaid premiums due to the PBGC, termination premiums and withdrawal liability for multiemployer plans.5
Controlled Group Liability
Each member of the “controlled group” of a pension plan sponsor is jointly and severally liable for obligations related to such plan. Generally, an entity will be within a pension plan sponsor’s controlled group if such entity and such sponsor share at least 80 percent common ownership.6 Such common ownership may exist if a pension plan’s sponsor and an entity have the same owner (i.e., a brothersister relationship) or if an entity owns or is owned by the pension plan sponsor (i.e., a parent-subsidiary relationship).
Foreign Affiliates as Members of a Controlled Group
Under the definition of “controlled group,” foreign affiliates of a pension plan sponsor may be considered members of the sponsor’s controlled group. Nonetheless, historically, the PBGC has not actively pursued the assets of foreign affiliates for controlled group liability. The PBGC’s recent actions and success in Asahi,7 however, may indicate its increased willingness and ability to bring claims against these foreign affiliates.
In Asahi, the PBGC moved closer to successfully reaching a judgment against a foreign controlled group member by withstanding a motion to dismiss based on lack of jurisdiction.
Asahi Tec Corporation, a Japanese corporation (Asahi), acquired a US manufacturing company (the Company) for $1.2 billion in January 2007.8 Thereafter, the Company’s pension plan was terminated following its bankruptcy in May 2009.9 Following such termination, the PBGC asserted that Asahi was liable for any underfunding and related liabilities with respect to the Company’s terminated pension plan as a member of the Company’s controlled group. After giving Asahi more than a year to respond to its 2009 letter demanding that Asahi assume liability for the Company’s terminated pension plan, the PBGC filed a complaint in US District Court for the District of Columbia on November 12, 2010, requesting that Asahi pay termination liability and accrued interest, termination premiums and litigation costs.10 Asahi moved to dismiss the PBGC’s claim due to lack of personal jurisdiction and, in a victory for the PBGC, the district court rejected such motion.11
In rejecting such motion, the district court applied a two-prong legal analysis to support its finding that it had personal jurisdiction over Asahi.12
First, the district court analyzed whether Asahi purposefully directed activities at the United States and held that it had.13 The district court noted that Asahi understood, through its due diligence, that the acquisition of the Company would result in Asahi’s becoming a member of the Company’s controlled group and therefore becoming jointly and severally liable for the Company’s pension plan underfunding and other pension-related liabilities.14 Such understanding was apparent through Asahi’s engagement of a consultant to investigate the nature and scope of the Company’s pension and employee benefits liabilities in connection with the acquisition.15 Further, the district court noted that Asahi specifically took into account any potential controlled group liability when determining the US $1.2 billion purchase price.16 Consequently, the district court held that Asahi acquired the Company with “its eyes wide open”17 and that Asahi purposefully directed activities at the United States by “not only the acquisition but the knowing assumption of the risk of future controlled group liability.”18
Second, the district court analyzed whether Asahi’s acquisition of the Company and its assumption of the risk of controlled group liability were the bases from which the PBGC’s claims arose and thus were sufficient to provide personal jurisdiction over Asahi. Specifically, the district court examined whether the PBGC’s claims arose out of (i) the Company’s own actions after the merger (i.e., the actual termination of its plan) or (ii) Asahi’s particular activities directed at the United States (i.e., Asahi’s acquisition of the Company and its purposeful assumption of controlled group status).19 Asahi maintained that it had no involvement in the termination of the Company’s pension plan and argued that personal jurisdiction could not be established solely due to its status as the Company’s parent company.20 While the district court acknowledged that status as a parent entity does not create personal jurisdiction as a general principle of corporate law, the district court concluded that the PBGC’s claim was unique, in that, “under ERISA … if a [pension] plan is terminated, the [US] corporation and the [foreign members of the] control[led] group incur joint and several liability … by [such foreign members’] mere ownership of the [US] company at the time of termination.”21 Thus, the district court found that Asahi’s lack of involvement in the termination of the Company’s pension plan was irrelevant and its status as the Company’s parent, and thus a controlled group member, alone was a sufficient basis to establish personal jurisdiction for purposes of the PBGC’s lawsuit.22
Consequently, on March 14, 2012, the district court rejected Asahi’s motion to dismiss, holding that the PBGC made a prima facie showing of specific jurisdiction.23
Implications of Asahi
The PBGC’s procedural victory in Asahi evidences both the PBGC’s efforts to expand the reach of its authority and the US courts’ willingness to enforce such authority against foreign affiliates of pension plan sponsors.
As a result, pension plan sponsors should work closely with their legal counsel and other advisors and carefully consider the assumption and imposition of controlled group liability in the early stages of a merger, acquisition, bankruptcy or other corporate transaction. Absent such careful consideration, foreign affiliates may unexpectedly be subject to significant liability or litigation at the hands of the PBGC.