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Ordinary Employee Benefits Issues That Can Cause Extraordinary Problems in M&A Deals

Employee benefits rarely drive corporate transactions, but if the benefits of a target company are not reviewed carefully, they can sometimes derail the transaction.  Even some of the most routine facets of benefit plan administration can result in significant potential financial exposure (e.g., additional employer contributions, taxes, penalties, and fees as well as fees associated with the preparation and filing of IRS and DOL correction program applications) that could negatively affect the overall value of the target company. By identifying issues early in the transaction, the seller can prevent costly purchase price reductions and identify issues that need correction, while the buyer can avoid overpaying for a target and ensure that representation and warranty insurance will be available to cover potential claims. Some of those routine compliance issues include, but are not limited to, the following: Failing to timely file an annual Form 5500.  The DOL can assess a penalty… Continue Reading

Controlled Group Companies are Potentially Liable if a Dissolving Company Does Not Terminate its ERISA Plans and is Not Replaced by a New Plan Sponsor

In Pension Benefit Guaranty Corp. v. 50509 Marine LLC,?áthe U.S. Court of Appeals for the Eleventh Circuit held that ?Ç£where the sponsor of an ERISA plan dissolves under state law but continues to authorize payments to beneficiaries and is not supplanted as the plan?ÇÖs sponsor by another entity, it remains the constructive sponsor such that other members of its controlled group may be held liable for the plan?ÇÖs termination liabilities.?Ç¥?á In this case, Liberty Lightening Co. Inc. (?Ç£Liberty?Ç¥) sponsored and administered a pension plan under ERISA (the ?Ç£Pension Plan?Ç¥).?á When Liberty went bankrupt and was dissolved under state law in 1992, Liberty continued to be the de facto sponsor of the Pension Plan, and the Pension Plan continued to operate.?á In 2012, the Pension Plan was formally terminated and taken over by the Pension Benefit Guarantee Corporation (the ?Ç£PBGC?Ç¥) due to the Pension Plan?ÇÖs pending insolvency.?á Six years later, the… Continue Reading

U.S. Supreme Court Denies Cert in Sun Capital Appeal; Leaves Door Open for Private Equity Fund Liability for Portfolio Company Pension Liabilities

In the latest development in the Sun Capital line of cases, on October 5, 2020, the U.S. Supreme Court denied certiorari review of New England Teamsters & Trucking Industry Pension Fund v. Sun Capital Partners. The Sun Capital cases center around the issue of whether affiliated private equity funds, Sun Capital Partners III and Sun Capital Partners IV (collectively, the ?Ç£Funds?Ç¥), can be held liable for the pension fund withdrawal liability of a portfolio company, Scott Brass Inc. (?Ç£SBI?Ç¥), which went into bankruptcy while owned by the Funds. In 2013, the First Circuit held that multiple private equity funds could be jointly and severally liable under ERISA for the withdrawal liability of a portfolio company if such funds were (i) a trade or business and (ii) in the company?ÇÖs controlled group (see our prior blog post on that court decision here). On remand by the First Circuit in 2016, the… Continue Reading

Private Equity Fund Potentially Liable for Portfolio Company?ÇÖs Pension Plan Withdrawal Liability

The First Circuit Court of Appeals recently held that one of two private equity funds, which had invested in a now bankrupt portfolio company, was engaged in a ?Ç£trade or business?Ç¥ for purposes of determining whether the fund could be jointly and severally liable for the company?ÇÖs withdrawal liability from a multiemployer pension plan. ?áTo be liable for the company?ÇÖs withdrawal liability, the fund must be (i) a ?Ç£trade or business?Ç¥ and (ii) in the company?ÇÖs ?Ç£controlled group.?Ç¥ The court held that the fund was a trade or business, not a mere passive investor, because it participated in management activities with respect to the portfolio company and received a direct economic benefit ?Çô an offset against management fees ?Çô that an ordinary passive investor would not receive. ?áThe court, however, remanded the case to the district court to determine whether the fund had the necessary ownership interest to create a… Continue Reading

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