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DOL Supplements Prior Information Letter on Private Equity in Designated Investment Alternatives

The DOL recently published a supplement statement (the “Supplement Statement”) relating to its June 3, 2020 Information Letter (the “Letter”) regarding the use of private equity investments in designated investment alternatives for individual account retirement plans. The Letter stated that a plan fiduciary would not violate the fiduciary duties under ERISA solely due to the plan fiduciary’s offering of a professionally managed asset allocation fund with a private equity component as a designated investment alternative, subject to the conditions set forth in the Letter. The DOL noted that the Letter was not an endorsement of such private equity investments and that plan fiduciaries must determine whether such an investment is prudent and made solely in the interests of plan participants and beneficiaries. Our prior blog post regarding the Letter is available here. The Supplement Statement clarified that plan fiduciaries should not misread the Letter “as saying that [private equity]—as a… 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

The DOL Says Certain Private Equity Investments May Be Permissible Designated Investment Alternatives Under Individual Accounts Plans

On June 3, 2020, the DOL issued an information letter addressing the possibility of including a private equity type investment as a ?Ç£designated investment alternative?Ç¥ under a participant directed individual account plan. The DOL concluded that, as a general matter, ?Ç£a plan fiduciary would not . . . violate [ERISA?ÇÖs fiduciary duties] solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan in the manner described in [the] letter.?Ç¥ The DOL observed that private equity investments ?Ç£involve more complex organizational structures and investment strategies, longer time horizons, and more complex, and typically, higher fees?Ç¥ and they generally have ?Ç£different regulatory disclosure requirements, oversight, and controls?Ç¥ and ?Ç£often have no easily observed market value.?Ç¥ In addition to these considerations, the DOL listed several factors that plan fiduciaries should evaluate when considering whether a… Continue Reading

Evaluating Performance Goals and Incentive Compensation in Light of COVID-19

Boards and compensation committees will be reevaluating their incentive compensation arrangements in light of the COVID-19 pandemic and the resulting market uncertainty. Both long-term and short-term incentive plans can lose motivational and retention value if the performance goals are unachievable or if they do not align with market reality. Companies that have not yet established performance goals for their 2020 equity and bonus awards should carefully consider market conditions and shareholder perception before establishing goals, focusing on motivating their executives with pay for performance that aligns with shareholders?ÇÖ interests, while giving the company flexibility to navigate through uncharted territory. To the extent possible, companies should also consider delaying the issuance of incentive compensation awards until there is more stability in the business and in the financial markets. Companies that have already established goals for their 2020 awards (or that are evaluating the continued effectiveness of performance goals for prior year… Continue Reading

First Circuit Reverses Lower Court Ruling that Private Equity Funds are Liable for a Portfolio Company?ÇÖs Pension Liability

On November 22, 2019, the U.S. First Circuit Court of Appeals reversed a district court?ÇÖs finding that Sun Capital Partners III and Sun Capital Partners IV (collectively, the ?Ç£Funds?Ç¥) formed a ?Ç£partnership-in-fact?Ç¥ in connection with the Funds?ÇÖ investment in a bankrupt portfolio company (Scott Brass) that incurred pension plan withdrawal liability. Our prior review of the district court?ÇÖs ruling is available on our blog here. ERISA imposes joint and several liability on each member of a controlled group for certain liabilities, including pension plan withdrawal liabilities. A ?Ç£controlled group?Ç¥ includes trades or businesses that are under common control, which typically means 80% common ownership. Notwithstanding the fact that Sun Capital Partners III and Sun Capital Partners IV owned 30% and 70% of Scott Brass, respectively, the district court previously determined that by the Funds?ÇÖ co-investment in the portfolio company, the two formed a ?Ç£partnership-in-fact?Ç¥ that owned 100% of Scott Brass… Continue Reading

Court Finds Sun Funds Liable for Withdrawal Liability of Portfolio Company

On remand by the First Circuit Court of Appeals, the Federal District Court of Massachusetts found Sun Capital Partners III, LP (?Ç£Sun Fund III?Ç¥) and Sun Capital Partners IV, LP (?Ç£Sun Fund IV, and together with Sun Fund III, the ?Ç£Sun Funds?Ç¥) liable for the withdrawal liability of Scott Brass, Inc. (?Ç£SBI?Ç¥), a bankrupt portfolio company of the Sun Funds.?á In applying the First Circuit?ÇÖs ?Ç£investment plus?Ç¥ test, the district court found that the Sun Funds received a direct economic benefit and were therefore engaged in a ?Ç£trade or business?Ç¥ for purposes of shared liability under the Multiemployer Pension Plan Amendments Act.?á Even though Sun Fund III and Sun Fund IV held a 30% and 70% interest, respectively, in SBI (which each is under the 80% required for controlled group purposes), the district court found that the Sun Funds operated as a single ?Ç£partnership-in-fact?Ç¥ with no meaningful independence in their… Continue Reading

IRS Issues Proposed Regulations Targeting Management Fee Waivers by Private Equity Funds

The Internal Revenue Service (the ?Ç£IRS?Ç¥) recently released proposed regulations providing that certain arrangements in which a service provider receives allocations of a partnership?ÇÖs underlying income may be treated as compensatory payments for services under the Internal Revenue Code (the ?Ç£Code?Ç¥).?á In releasing such regulations, the IRS is attempting to crack down on certain ?Ç£management fee waiver?Ç¥ practices by private equity firms which try to convert management fees into profits interests in order to get capital gains treatment on such income as opposed to ordinary income treatment.?á The proposed regulations provide a facts and circumstances test and factors to evaluate whether an arrangement should be treated as a disguised payment for services.?á An arrangement that is recharacterized as a disguised payment for services under the proposed regulations will be treated as such for all purposes of the Code.?á Such payment will be subject to tax at ordinary income tax rates,… Continue Reading

November 2022