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New Case Increases ERISA Controlled Group Liability Concerns of Private Equity Funds
29 July 2013
The First Circuit Court of Appeals recently held that the normal activities of a private equity investment fund are sufficient to constitute a trade or business for purposes of the controlled group liability provisions of the Employee Retirement Income Security Act (“ERISA”).
If this conclusion is correct, the consequence would be that the assets of a fund can be exposed to liability if a portfolio company that the fund is deemed to control under ERISA incurs a withdrawal liability with respect to a multiemployer plan or sponsors an ERISA plan that terminates when it is underfunded, such as in a bankruptcy situation.
This also means that one portfolio company could become obligated for the pension liabilities of another portfolio company, if both are “controlled” by the same fund.
The ruling leaves open the possibility that private equity funds may avoid controlled group liability if their investment is divided between multiple funds such that the 80% control element under ERISA is not met.
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