http://www.nakedcapitalism.com/2016/04/sun-capital-ruling-private-equity-investors-on-the-hook-for-shuttering-underfunded-pensions.html
The basis for the ruling. The
short version is that if a “controlled group” that owns more than 80% of a company terminates an underfunded pension plan, it is responsible for withdrawal liability under ERISA. The Department of Labor did not want investors being able to close underfunded plans without incurring a serious cost; otherwise, it would be common for pension plans to be shut down any time they became underfunded, leaving beneficiaries in the lurch.
Sun Capital had sought to get around that by having two Sun Capital funds invest in a company that bought Scott Brass, with one owning 70% and the other 30% so as to fall below the 80% trigger. The Teamsters and Sun Capital sued each other, and the judge’s initial ruling in favor of Sun Capital was overruled in part and returned to Judge Woodlock to determine two issues key to deciding the case: whether the funds were engaged in a trade of business, and whether they were under “common control”.
The active nature of the investment as far as the general partners are concerned would seem to make them meet the “trade or business” test, but what about the passive limited partners?* Interestingly, they were hoist on the sharing of monitoring and transaction fees. The appeals court had already ruled that one of the two Sun funds, by virtue of the investors receiving management fee offsets, met the test.
Woodlock was to determine whether the second fund, where no fee offsets had been paid but had been carried forward and were due and owing, was also in a trade or business. Woodlock concluded yes.
...
Implications. This ruling ought to wake up private equity investors, since the
Sun Capital ruling will not only result in clawbacks to satisfy the withdrawal liability but presumably opens the door to other cases. The beneficiaries of pension plans terminated and were stiffed on withdrawal liability payments by Sun Capital-type structuring for controlling groups to keep the biggest individual owner’s share below 80% would have grounds to sue, or unions representing them might act on their behalf.
Similarly, the Pension Benefit Guaranty Corp., which backstops private pension funds, it itself badly underfunded and should also lodge cases. I have yet to see any commentary on what the statute of limitations is in this area and therefore which plan terminations would be exposed, but you can expect that you’ll be hearing more about this issue.
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