A decision by Washington’s federal district court concerning Japan’s Asahi confirms risks for private equity funds that did not look into the pension funding of their U.S. portfolio companies, reports Carol Buckmann, counsel at Osler Hoskin & Harcourt LLP. Along with another decision concerning Sun Capital Partners that found private equity funds could be trades or businesses for purposes of U.S. Pension Benefit Guaranty Corp liability, non-U.S. funds should “assess the risk that their activities make them a trade or business, ramp up their diligence of portfolio companies and determine the appropriate ownership levels and contractual protections for their U.S. portfolio company investments.”
PBGC Finds Deep Pocket in Japan: U.S. Court Finds Parent Liable for Termination Underfunding
By Carol Buckmann on October 24th, 2013
Posted in Bankruptcy, U.S. Pensions & Benefits Law
As the U.S. Pension Benefit Guaranty Corporation (PBGC) faces increasing strain on the pension insurance program it runs, it has become more aggressive in pursuing deep pockets after underfunded defined benefit plans are terminated. Companies that do not do business in the United States may have thought that they could not be reached by PBGC’s long arm, but a new decision by the federal district court in Washington, D.C. involving Asahi Corporation has given PBGC’s collection efforts a big boost.
Where is PBGC Authorized to Do This?
Under ERISA’s controlled group rules, all members of a plan sponsor’s controlled group are jointly and severally liable for unfunded benefits and for post-termination insurance premiums. (These rules can be complicated, but in general, a parent corporation and at least 80% owned subsidiaries are in the same controlled group.) Joint and several liability means that 100% of the liability may be collected from any member of the group, but when all members of the controlled group are in bankruptcy, PBGC’s right to collect may be hollow.
What about non-U.S. businesses that will not be part of the bankruptcy? Does PBGC have to go abroad to try to get a foreign court to enforce ERISA? Does the foreign group member need to have offices, employees or assets in the U.S. before the PBGC can pursue liability claims against it here? A federal district court in the U.S. recently said “no” to both questions.
What Was the Dispute?
Asahi was a Japanese parent company which had purchased a now-bankrupt U.S. subsidiary. The federal district court previously found that it had jurisdiction to rule on PBGC’s attempt to collect termination liability from Asahi, over the objections of the parent that it had no presence here and nothing to do with running the plan or the decision to terminate it. Now that same court has determined that Asahi is responsible for the termination liability for what appear to be the same reasons that led it to find that there was jurisdiction over Asahi in the first place.
In short, evidence was presented that Asahi received advice from Mercer regarding the scope of the underfunding as part of its due diligence for the acquisition, and that it sought a corresponding reduction in the purchase price. However, this recitation of favorable facts may have been added to the decision simply to provide an alternative basis for an appeals court to affirm it, because the decision also states that in the opinion of this court, status as a controlled group member is enough to justify an assessment of liability.
Why is This Significant?
PBGC and multi-employer plans have not been particularly successful in their past attempts to collect from non-U.S. entities, and prior decisions have not found that controlled group membership alone was sufficient to give U.S. courts jurisdiction. In this case, the court found that due process was satisfied if Asahi purposefully directed activities here and the litigation related to injuries that arose from or related to those activities. The court rejected Asahi’s argument that it was severely disadvantaged litigating in the U.S. by noting that Asahi had “freely submitted” to U.S. jurisdiction in another case, and also that it was vigorously putting forward its position in this case.
This may be a turning point for the PBGC, though it remains to be seen whether other courts will come on board with the district court’s analysis or whether an appeals court would agree with it. Note that parent companies are not the only entities that can be pursued. Controlled group liability includes brother-sister subsidiaries and certain businesses controlled by the same five or fewer individuals. And the court’s decision would appear to apply to efforts to collect multi-employer plan withdrawal liability from foreign entities as well, as the same statutory definition of controlled group applies there.
What steps should be taken now?
This decision underscores the need for careful pre-closing analysis of ownership levels and potential pension liabilities in cross-border acquisitions and for considering whether to seek seller indemnification and price adjustments.
Taken together with the recent decision in Sun Capital Partners finding that private equity funds could be trades or businesses for purposes of PBGC liability, investment funds based outside the U.S. will want to assess the risk that their activities make them a trade or business, ramp up their diligence of portfolio companies and determine the appropriate ownership levels and contractual protections for their U.S. portfolio company investments.
Photo courtesy of Shutterstock.