Private Equity Fund Responsible for Withdrawal Liability of Portfolio Company Under ERISA

This international business case involves a private equity fund that acquired 100% of the shares of a portfolio company that produced copper and brass. The private equity fund had no offices or employees and was managed by its general partners. The general partners maintained the authority to manage and supervise the private equity fund’s investments. The general partners fulfilled their management role through subsidiary management companies that, for a fee, provided management services to the private equity fund and its portfolio companies. The portfolio company was a contributing employer under a multi-employer pension plan. An involuntary bankruptcy petition was filed against the portfolio company and it stopped making contributions to the pension fund. The pension fund demanded that the private equity fund pay the portfolio company’s withdrawal liability of $4.5 million. The private equity fund claimed that it was not liable to pay the withdrawal liability because it did not come under the common control requirement of ERISA.

Question(s) For Expert Witness

1. Can a private equity fund be held liable for the withdrawal liability of a portfolio company if it owns 100% of the portfolio company?

Expert Witness Response

Under ERISA (the Employee Retirement Income Security Act), withdrawal liability is imposed on a private equity fund if a portfolio company either completely or partially stops contributing to an unfunded multiemployer pension plan. ERISA imposes liability on all entities that are “trades or businesses” under common control (i.e. with 80% common ownership). In this case, the private equity fund is most likely liable for the withdrawal liability of the portfolio company because it was not a “passive investor” but sufficiently operated, managed and gained an economic advantage from its relationship with the portfolio company. This means it was probably a “trade or business” under ERISA. Since the private equity fund acquired a controlling equity position in the portfolio company and also worked to enhance the portfolio company through improving corporate governance and hiring an effective management team, it was probably liable for the portfolio company’s withdraw liability under ERISA. The private equity fund probably met the “trade or business” requirement because it had wide-ranging management authority over the portfolio company and got a direct economic benefit from it. This means that the private equity fund was not merely a passive investor was probably liable for the portfolio company’s withdrawal liability because it collectively owned 100% of the portfolio company.