Private equity funds may be exposed to ERISA pension liabilities and tax risks: preliminary reflections on the M&A and private equity consequences of the Sun Capital decision

Abstract

Purpose – The paper's aim is to analyze and assess the importance of a recent US Court of Appeals for the First Circuit decision in the case of Sun Capital Partners III LP v. New England Teamsters and Trucking Industry Pension Fund with respect to the court's conclusion that a private equity fund constitutes a “trade or business” for purposes of the ERISA multiemployer pension withdrawal liability and that, therefore, the fund could, under a “piercing the veil” type of approach, be held liable for the ERISA withdrawal liability of a bankrupt portfolio company. Design/methodology/approach – The paper provides historical background on termination and withdrawal liability under ERISA; explains the facts of the Sun Capital case; and offers preliminary reflections on the “investment plus” approach in ERISA context, the significance of the offset mechanism, why the Sun Capital decision is a significant victory for the Pension Benefit Guaranty Corporation, the liability of one portfolio company for the pension obligations of other portfolio companies owned by the same private equity fund, potential unintended consequences for tax-advantaged benefit plans of portfolio companies; the possibility that different pension plans at different portfolio companies may violate non-discrimination rules, the application of Sun Capital beyond ERISA, and the potential effect of this ruling on taxation of carried interest. Findings – The employer and all “trades or businesses” in its “controlled group, including, under certain circumstances, a private equity fund, are liable for the employer's share of unfunded pension liabilities if the employer withdraws from a multi-employer defined-benefit pension plan. Originality/value – Practical guidance from experienced financial services lawyers is given in the paper.