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Handling Pension Plans in M&A Transactions After Sun Capital Partners

Submitted on behalf of the Transactional PAC

This term, the United States Supreme Court denied certiorari in the case of 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) ¹, leaving in place a controversial decision by the First Circuit Court of Appeals which held that a private equity firm could be liable for the pension multi employer withdrawal liability obligations of one of its portfolio companies. The Sun Capital Partners case had drawn attention because it appears to deviate from long standing IRS interpretations of the term “trade or business” in the income tax arena.

Under the federal law known commonly as ERISA (the “Employee Retirement Income Security Act of 1974”), employers may, in certain circumstances, be subject to “withdrawal liability” when they cease contributions to multi employer union pension plans. Under Section1301(b) of ERISA, all trades or businesses under common control with the withdrawing employer are treated as a single employer for this purpose and all such commonly controlled businesses are jointly and severally liable for such withdrawal liability.

In the Sun Capital Partners case, one of the private equity owned portfolio companies went into bankruptcy, triggering pension plan withdrawal liability. The plan brought suit and the District Court held that the private equity firm was not liable for the pension withdrawal liability because it was a passive investment fund and was not a trade or business. The First Circuit reversed, holding that the fund was a trade or business for this purpose based on the fact that the private equity fund was in fact actively involved in the business of the bankrupt company. The case has now been remanded back to the District Court for additional fact‐finding.

The First Circuit’s holding agrees with the position long taken by the Pension Benefit Guarantee Corporation (that oversees non‐union plans) that private equity funds are jointly and severally liable for the pension funding liabilities of a portfolio company if the fund is actively involved in the business of the portfolio company.² In an M&A transaction involving private equity funds or their portfolio companies, it will be important to draft representations and warranties that take this into account and to conduct due diligence accordingly.

Some speculate that the Sun Capital Partners case could have implications far beyond the pension plan withdrawal liability situation. For example whether a fund is a trade or business and/or whether it is under common control affects other employee benefit matters, such as non‐discrimination testing, the number of employees for ACA purposes, etc. In addition, and potentially much more importantly, whether a private equity firm is engaged in a trade or business affects how it is taxed and whether foreign investors are taxed in the US. Although the First Circuit made it clear that it was not deciding a tax case, the Court also stated that its holding was consistent with prior U.S. Supreme Court cases interpreting the phrase “trade or business”, closing the door on any change to that view. The IRS, however, has shown no signs of changing the way it interprets the income tax rules. At this point, Sun Capital Partners mainly affects private equity owned companies that sponsor pension plans, but it still bears watching for a whole host of reasons.


² See the lengthy discussion of the PBGC’s position in the Sun Capital Partners opinion. Although the First Circuit gave no deference to the PBGC’s position, it ultimately agreed with the PBGC’s analysis.

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