Officials at the Pension Benefit Guaranty Corp. are celebrating a recent appeals court decision that could give them more leverage in collecting pension liabilities for companies held by private equity funds.
The 1st U.S. Circuit Court of Appeals in Boston ruled July 24 in Sun Capital Partners III LP vs. New England Teamsters & Trucking Industry Pension Fund that a private equity fund could have joint and several liability for its portfolio companies' ERISA pension obligations, if the fund holds a sufficient stake in the sponsoring company.
A lower court will now have to address the issue of ownership control in this specific case.
The PBGC has argued since 2007 that private equity funds are “trades or businesses” that should be held liable for pension withdrawal liability. “The court's ruling on private equity funds helps us protect the benefits of all plans connected to these firms,” said PBGC General Counsel Judith Starr in an e-mailed request for comment. “Without it, they could walk away from benefit obligations leaving plans in poor financial shape.”
Legal experts caution that private equity funds will have to take greater care if the decision stands.
“The Sun Capital decision highlights the importance of considering ERISA's joint and several liability rules in structuring private equity investments in portfolio companies,” noted a client alert from the law firm of Ropes & Gray in Boston.
Calls to Sun Capital lawyers were not returned at press time.