A Federal District Court recently called investments in private companies that participate in a multiemployer pension plan (MPP) a “risky gambit” because of the potential for exposing the MMP’s investors to withdrawal liability. This type of liability is sometimes referred to as a “hidden liability” because, in some situations, investors may have exposure for the liability even if they did not affirmatively assume the liability under a purchase agreement.
As a part of the collective bargaining process, employers with union workforces oftentimes agree to contribute to an MPP, to which other union employers also contribute. If an MPP is underfunded when the employer stops contributing to the MPP (e.g., sells or liquidates its business, exits the union, etc.), federal pension law imposes an exit penalty, referred to as “withdrawal liability,” by allocating a portion of the unfunded vested benefits in the MPP to the withdrawing employer. If the withdrawing employer cannot pay the withdrawal liability, the liability will be assessed to any commonly owned businesses of the employer, which can include an investment in a private company. For this purpose, commonly owned businesses are businesses in a controlled group with or under common control with the contributing employer. A controlled group could include two entities, one of which owns 80% or more of the other.
Two private equity funds formed by Sun Capital Partners, a private equity firm that owned an interest in a withdrawing union employer, were recently held liable for a private company’s withdrawal liability even though each fund’s ownership separately fell below the applicable statutory 80% common control threshold. The court imposed the withdrawal liability on both funds because the funds were deemed active investors and there was evidence of a joint venture between the two Sun Capital funds. This case was initiated in 2010, has already been ruled on by a federal district court or federal appeals court four times and is currently before a federal appeals court for the second time. Sun Capital could potentially prevail, but not without spending significant sums on attorneys’ fees.
While there are at least 17 exceptions that reduce or eliminate withdrawal liability, the Sun Capital precedent poses a threat to investors. Private equity firms should perform significant due diligence to ascertain the risk and exposure to withdrawal liability. Further, care should be taken to properly structure deals.
Read “Surprise! You may be liable for union pension plan withdrawal liability” for a full explanation of risks to individuals and entities, other than the employer, when the participating employer becomes insolvent and can’t pay the withdrawal liability, as well as certain exceptions that reduce or eliminate withdrawal liability.
 SUN CAPITAL PARTNERS, III, LP, SUN CAPITAL PARTNERS III QP, LP, and SUN CAPITAL PARTNERS IV, LP v. NEW ENGLAND TEAMSTERS AND TRUCKING INDUSTRY PENSION FUND, 329 F.R.D. 102 (D. Mass 2018).