Focus on Private Equity - April 2014

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In This Issue:

- Private Equity Firms Face Potential Liability Under Plant Closing Laws

- Incentivising Management Across the Pond

- Excerpt from Private Equity Firms Face Potential Liability Under Plant Closing Laws:

The federal Worker Adjustment and Retraining Notification Act (WARN) requires an employer with 100 or more employees to provide 60 days’ advance notice of a “mass layoff” or “plant closing,” as defined in the statute, unless an exception is applicable. Several states have comparable laws that typically are triggered at a lower threshold of employment losses. Failure to provide the 60-day notice often results in class action litigation and potential liability for the pay and benefits that the affected employees would have received if the employer had given proper notice. Private equity firms and their holding companies and advisory firms often are drawn into the litigation based on allegations that, whether as a parent entity or a lender, they are liable along with the (frequently bankrupt) portfolio company. Avoiding such litigation and exiting quickly from litigation that could not be avoided will depend on the degree to which the private equity participants proactively manage their activities in light of the criteria the courts use to assess their potential liability.

For example, in December 2013, the U.S. Court of Appeals for the Second Circuit (with jurisdiction over New York, Connecticut and Vermont) ruled in Guippone v. BH S&B Holdings LLC that a private equity firm or its holding company may be liable to a class of employees for the failure of its portfolio company to comply with the WARN law. Essentially, Steve & Barry’s was a chain of retail apparel stores owned and operated by Steve & Barry’s Industries, Inc. (S&B Industries), the assets of which were purchased by BH S&B Holdings LLC (Holdings), which was wholly owned by BHY S&B Holdco, LLC (HoldCo), a holding company, which in turn was owned by various private equity investment firms. Holdings, the operating company that employed the employees, lacked a board of directors of its own, and the officers of Holdings included representatives from the private equity firms. After Holdings’ lender exercised its rights under its loan agreement and “swept” roughly $30 million from Holdings’ account, the Holdco board passed a resolution authorizing Holdings to file for bankruptcy protection. It did, quickly followed by store closings and employee terminations. The trial court dismissed the private equity firms at the pleading stage, but denied HoldCo’s motion to dismiss. After discovery, the trial court granted HoldCo’s motion for summary judgment on the basis that there were not sufficient facts to permit a jury to conclude that HoldCo was a single employer with Holdings.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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