On Monday, the Supreme Court declined to hear a case that sent shockwaves throughout the private equity industry, triggering concerns that buyout firms could be liable for a portfolio company’s unfunded pension liabilities.
Sun Capital Partners was hoping the Supreme Court would overturn a July ruling that its hands-on involvement in metals manufacturer Scott Brass meant it was acting as a “trade or business”. As such, the private equity firm could be liable for the bankrupt portfolio company’s pension fund under the Employee Retirement Income Security Act (ERISA).
A Sun Capital spokesman declined to comment.
Legal sources called the case “discomforting for private equity”, saying it meant GPs who make significant operational changes at a portfolio company no longer had full confidence that their actions wouldn’t trigger a fund being labelled a business. Last summer, the Private Equity Growth Capital Council warned the ruling would have a “chilling effect” on private equity investment.
However, the trade or business test was only one prong in the case. Sun Capital could still win its case if a lower court, at a yet to be determined date, decides the private equity firm didn’t actually have “common control” of Scott Brass for ERISA purposes.
Sun Capital split its investments across funds to stay under a 80 percent “controlled group” liability test. An appeals court ruled one Sun Capital fund with a 70 percent stake in Scott Brass was a trade or business, but left it to a lower court to decide if a sister Sun Capital fund with a 30 percent ownership stake was also a trade or business, and thus represented a “joint venture”, which if taken with the first fund, would push Sun Capital past the 80 percent controlled group benchmark.
“The common control analysis is more important in the ERISA context and has the potential to have far reaching effects,” said Mike Crumbock, an employee benefits attorney at law firm Pepper Hamilton. “It will likely be hard to litigate as common control evaluations are often incredibly complicated and fact sensitive.”