UPDATE TO: “Handling Pension Plans in M&A Transactions after Sun Capital Partners”

By: Sherrie Boutwell; Boutwell Fay LLP; Irvine, California | Submitted by the Transactional PAC

Last year, we alerted NAMWOLF readers to concerns about a recent First Circuit case – Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, 724 F.3d 129, 56 EBC 1139 (1st Cir. 2013), cert. denied (March 3, 2014). In that case, the First Circuit held that a private equity firm could be liable for the multiemployer pension withdrawal liability obligations of one of its portfolio companies and remanded the case to the District Court for further proceedings.

On remand, the District Court has now imposed that liability on two co-investing private equity funds, holding that by acting in concert, the two funds created a “partnership-in-fact” under federal common law and that the de facto partnership was also engaged in a trade or business. Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund, No. 10-10921-DPW (D.C. Mass., Mar. 28, 2016). As a result, the two co-investing private equity funds were held jointly and severally liable for a portfolio company’s multi-employer pension fund withdrawal liability under ERISA, even though the companies had been structured so that there was no controlled group or group under common control as defined in applicable tax regulations (i.e., less than 80% ownership and control).

In reaching its holding, the Court pointed to another case that involved three co-investing private equity funds: Bd of Trs., Sheet Metal Workers’ Nat’l Pension Fund v. Palladium Equity Partners, LLC, 722 F. Supp. 2d 854 (E.D. Mich. 2010). Palladium settled before the District Court was able to issue a decision, but the Palladium Court took a similar approach and had asked for additional fact finding on the “partnership-in-fact” issue. Although two cases do make a trend (and it remains to be seen whether this latest decision in the Sun Capital Partners saga will be appealed or upheld if it is), private equity funds and their advisors will want to look carefully at these decisions and take appropriate steps to mitigate the risks, including, but not limited to: (1) careful due diligence with respect to companies contributing to multi-employer pension plans, (2) where risks show up – stronger indemnities and holdbacks; (3) reassessment of management fees and services; and (4) possibly less up front coordination and more co-investment between wholly independent investors to keep ownership percentages below 80%.

And of course, private equity funds and their advisors will want to stay tuned – this battle is not likely to end here.

Author Sherrie Boutwell is partner with Boutwell Fay LLP in Irvine, California specializing in Employee Benefits and ERISA. Sherrie often speaks and writes on the subject of correcting defects in qualified retirement plans.