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Massachusetts Court Holds Private Equity Funds Liable for Portfolio Company’s Pension Obligations


4/13/16

As a result of a recent U.S. District Court decision involving Sun Capital Partners, Sun Capital Partners III LP v. New England Teamsters Industry Pension Fund, No. 10-10921 (Mass. 2016),  it is recommended that private equity firms consult with their advisors concerning the shared investments of their funds and the potential exposure under the ERISA rules regarding  common control of investments.
 
Issue
The U.S. District Court for the District of Massachusetts was asked to decide whether two funds were engaged in a trade or business, and whether the funds could be aggregated for purposes of determining common control of a bankrupt portfolio company.  Both factors are critical in determining the funds’ liability for underfunded pension obligations under the ERISA rules.  
 
The Court decided that the funds received an economic benefit in the form of fee offsets with respect to fees paid by the portfolio company, and were therefore engaged in a trade or business and responsible for the withdrawal liability for a multiemployer pension fund.   The Court also found that the funds’ ownership of the portfolio company (70% and 30%) could be aggregated and could be considered a “deemed partnership”   for purposes of determining control (i.e., 80%) under the ERISA rules. 
 
What does CohnReznick think?
The Court’s decision has important implications under the ERISA rules, but its opinion may also raise some unanticipated tax considerations for private equity firms.  
 
Contact
For more information, please contact Jeremy Swan, Principal and Private Equity and Venture Capital Practice Leader, at jeremy.swan@cohnreznick.com or 646-625-5716.
 

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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