As first discussed here and here, in July 2013 the First Circuit Court of Appeals held in Sun Capital Partners III, LP, et al. v. New England Teamsters & Trucking Industry Pension Fund that a Sun Capital Partners private equity fund (Sun Capital) constituted a “trade or business” under the controlled group rules of the Employee Retirement Income Security Act of 1974, as amended (ERISA) for multiemployer plan withdrawal liability purposes. Accordingly, a private equity fund (or affiliated funds) can be held liable for pension obligations of a bankrupt portfolio company.

Sun Capital asked the Supreme Court to review the case, but on March 3, 2014, the Supreme Court denied certiorari. The case will be remanded to the district court for additional factual development regarding the “common control” prong of the “control group” test, which is based on economic ownership instead of voting control. Although the “common control” analysis is complex, generally two entities will be considered to be under common control if one entity owns 80 percent or more of the other entity or when five or fewer persons directly or indirectly own 80 percent or more of two or more entities and have effective control over each entity.

Meanwhile, with the First Circuit Court’s decision firmly in place, private equity funds should consider its implications in the context of future acquisitions and their current portfolio company obligations.

Supreme Court Grants Certiorari in the Omnicare Case

Also on March 3, 2014, the Supreme Court granted certiorari in the Omnicare v. Laborers District Council Construction Industry Pension Fund case. The question under review is whether “[f]or purposes of a Section 11 claim, may a plaintiff plead that a statement of opinion was “untrue” merely by alleging that the opinion itself was objectively wrong, as the Sixth Circuit has concluded, or must the plaintiff also allege that the statement was subjectively false—requiring allegations that the speaker’s actual opinion was different from the one expressed—as the Second, Third, and Ninth Circuits have held?” Section 11 of the Securities Act of 1933, as amended, provides a private remedy for a purchaser of securities issued under a registration statement filed with the Securities and Exchange Commission if the registration statement “contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading.”

The Sixth Circuit decision in Indiana State District Council of Laborers v. Omnicare created a circuit split regarding the question of what is required to demonstrate that a statement of opinion is false or misleading.  As this question is central to many securities class actions, which often hinge upon the truth or falsity of opinions, not facts, it will be interesting to see what the Supreme Court will decide.

Supreme Court Extends Whistle-Blower Protection

On March 4, 2014, in Lawson v. FMR LLC, the Supreme Court extended whistle-blower protection to subcontractors of publicly held companies. In its decision, reversing a First Circuit decision, the majority held that the whistle-blower provisions of the Sarbanes-Oxley Act cover employees of private contractors and even subcontractors that are hired by publicly traded companies. The law provides that no public company, or any employee, (sub)contractor or agent of such company, could retaliate against an employee for whistle-blowing, but it was unclear whether the law covered only the employees of public companies, or also employees of contractors who do work for public companies.

The holding in this case extends beyond the mutual fund industry, where most funds are managed by independent investment advisers instead of employees, to cover other professionals who work on a contract basis for publicly held companies, including law firms and accounting firms.