In its recent decision in Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, the First Circuit Court of Appeals decided that two investment funds established by a private equity firm to acquire and provide management services to various portfolio companies were not liable for the withdrawal liabilities for unfunded benefits under a union pension plan contributed to by one of their portfolio companies. Under the Multiemployer Pension Plan Amendment Act of 1980 (MPPAA), all “trades or businesses” under “common control” are jointly and severally liable for the withdrawal liability of any member of that controlled group. The First Circuit held that neither of the funds were under “common control” with the portfolio company, since neither separately owned 80% or more of the stock of the portfolio company, and based upon the facts and circumstances, the funds had not formed a de facto partnership to acquire and own the stock.
The decision suggests that if the facts are right, bifurcating ownership to keep a fund’s ownership of the portfolio company below the 80% “common control” threshold may still be a viable approach to prevent a fund from being obligated to pay the withdrawal liability of the portfolio company. The summary that follows of the facts and circumstances involved in this case, and the court’s analysis of those facts, are instructive for those private equity firms wishing to follow this approach. The First Circuit’s analysis of the “trade or business” prong of the controlled group test also is important for any private equity fund that owns 80% or more of the portfolio company.