First Circuit: Private Equity Fund May Be “Trade or Business” and Subject to Portfolio Company Pension Liabilities


The First Circuit Court of Appeals has recently held in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, No. 12-2312 (July 24, 2013), a case of first impression at the Circuit Court level, that a private equity fund that exercises sufficient control over a portfolio company may be considered a “trade or business” for purposes of Title IV of the Employee Retirement Income Security Act of 1974 (ERISA). This means that the fund and any of its 80 percent or more owned portfolio companies would be part of an ERISA controlled group and, accordingly, jointly and severally liable for the defined benefit pension obligations of any member of the controlled group.

Summary -

Under Title IV of ERISA, if a company withdraws from a multiemployer defined benefit pension plan, or terminates an underfunded single-employer defined benefit pension plan, that company and all members of its “controlled group” are jointly and severally liable for any withdrawal liability or termination liability triggered by such withdrawal or termination. For an organization to be a member of a separate company’s controlled group, two factors must be present: (1) the organization must be under “common control” with the company (generally, 80 percent or greater common ownership by vote or value, going up and down the chain of ownership, including parent-subsidiary and brother-sister affiliations), and (2) the organization must be a “trade or business.” In addressing the second factor, the First Circuit Court of Appeals held in Sun Capital that a private equity fund that exercises sufficient control over a portfolio company may be considered a “trade or business.” The First Circuit reversed the district court, which had granted summary judgment in favor of the Sun Capital investment funds, ruling that the funds were not engaged in a trade or business.

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