[Editor’s Note: This piece is authored by Kirkland & Ellis LLP.]
A corporation that owns 80 percent (or in some cases 50 percent) or more of a bankrupt subsidiary is liable for 100 percent of the subsidiary’s unpaid pension obligations under the Employee Retirement Income Security Act (ERISA) regardless of the activities of the parent corporation. However, a PE fund formed as a partnership or LLC (rather than as a corporation) is liable under this ERISA controlled-group-liability doctrine for a bankrupt portfolio company’s pension obligations only if the PE fund is engaged in a “trade or business.”
In July 2013, a federal appellate court (reversing a 2012 district court pro-PE fund decision) concluded that a PE fund (formed as a partnership or LLC) is engaged in a trade or business and hence would be liable for its bankrupt portfolio company’s unpaid pension obligations if it owned the requisite percentage of its stock…
Because this is the first federal court of appeals to weigh in on this complex trade-or-business issue, there is considerable uncertainty whether a PE fund will ultimately be viewed as engaged in a trade or business for ERISA liability purposes and hence liable for an 80 percent(or in some cases 50 percent) or greater bankrupt portfolio company’s pension obligations. Because the ERISA provisions that could make a PE fund and its 80 percent (or in some cases 50 percent) or greater portfolio companies liable for the pension obligations of an 80 percent (or in some cases 50 percent) owned bankrupt portfolio company are exceedingly complex, each PE fund investment (and each restructuring of such an investment) should be reviewed with care
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