Doubling Down on a Bad Bet: Liability for Portfolio Company Pension Obligations After Sun Capital
Just what more is there to say about Sun Capital at this point? The decision, out of the First Circuit, concerns the withdrawal liability for a multiemployer pension plan of the private equity owners of a portfolio company that was a member of the pension plan, with the First Circuit finding that, while a certain claim against the private equity owners could not proceed for technical reasons, they could nonetheless be liable for the pension obligations of the portfolio company. The decision has been written on by almost every large firm with a significant private equity practice (either in actuality or hoped for down the road), with much more haste than they often display in getting out client alerts.
And of course that is completely understandable, as the short form take away from the decision is that private equity ownership can be liable for the pension obligations of portfolio companies. This is of course a tremendously significant issue for investment shops of that nature, and it raises highly technical questions going forward for structuring acquisitions, in terms of examining whether it is possible to legally structure the acquisition and ownership of a portfolio company in a manner which will insulate the acquirer from unfunded pension obligations or, if it is not certain whether that can be achieved, will at least make it as hard as possible for potential plaintiffs to recover, thus hopefully dissuading future lawsuits of the type at issue in Sun Capital. Of course, as those of us who often represent investors, emerging companies, start ups and other oft targeted defendants know, dissuading lawsuits is almost as good as having a highly defensible legal position in the courtroom itself.
Among the many, many good client alerts out there on Sun Capital are this one, and this one, which can provide you with the details of the decision itself. If you are engaged in structuring corporate acquisitions and need to be concerned about protecting yourself or a client against pension liabilities, frankly, you need to read the decision itself, which you can find here.
Perhaps the more interesting issue, though, is to step away from the legal questions, which really concern how best to structure a transaction to insulate the acquirers after the acquisition has been settled on, and to look instead at the more fundamental issue that an excessive focus on the technicalities of the decision in Sun Capital itself can mask. As Susan Mangiero notes – almost uniquely among prominent bloggers writing about the decision, perhaps because she is a business expert, rather than a lawyer, and approaches the world from that vantage point – the most important take away from the opinion concerns the decisions made long before the legal structuring of the transaction, which concern valuing the pension exposures of the target company and accounting for that exposure financially in the purchase price. Do that correctly, and you have already accounted for the possibility of being forced to cover the portfolio company’s exposure; do that incorrectly, and you may have – as occurred in Sun Capital – doubled down on a losing proposition.