Private equity firm Sun Capital Partners’ Funds III and IV are jointly liable for $4.5 million in unfunded vested benefits owed by its portfolio company Scott Brass to the New England Teamsters and Trucking Industry Pension Fund, a US district judge ruled in Massachusetts on 28 March.
Sun Capital bought Rhode Island-based metals producer Scott Brass in 2006, giving Sun Capital Partners Fund III and Sun Capital Partners Fund IV an ownership of 30 percent and 70 percent of the company, respectively. Two years later, a drop in copper prices led to Scott Brass’ bankruptcy, which halted the metal company’s payments to the New England pension fund and resulted in Sun Capital incurring $4.5 million in withdrawal liability to the fund, according to the ruling.
This decision comes as a warning to the private equity and venture capital industry as it establishes private equity funds’ responsibilities for their portfolio companies’ pension liabilities. In an earlier decision on the case in 2013, the US Court of Appeals for the First Circuit declared that only Fund IV would be considered a “trade or business” for Scott Brass and as a result be held liable. Sun Capital appealed the decision.
In the latest decision, Judge Douglas Woodlock declared this week that both of Sun Capital funds are considered a “trade or business” that would be held liable for the pension liability of a company in its “common control,” referring to the Multiemployer Pension Plan Amendments Act of 1980, because its funds benefited from management fee offset carryforwards, which allow them to use net losses in a given year for future years’ tax liability reduction.
A controlling interest means 80 percent ownership in a company, and Sun Capital had said it doesn’t qualify to be in common control of Scott Brass, because Fund III owns 30 percent and Fund IV 70 percent of the company, respectively. But Judge Woodlock said the 70/30 split wasn’t from two independent funds dividing their ownership, but was “from top-down decisions to allocate responsibilities jointly.”
“This case is of critical importance to the private equity and venture capital community, as well as other ‘passive’ investors and business owners,” law firm Reed Smith wrote in a litigation alert this week, adding that “investors, particularly those that co-invest with related persons, should carefully consider their structure and operations in light of this decision.
Reed Smith added that although the decision relates to withdrawal liability for multiemployer plans, the court’s analysis would apply similarly to underfunded single-employer defined benefit plan liability and, potentially other Employee Retirement Security Act liabilities of a portfolio company.
Sun Capital Partners’ Fund III is a $500 million investment vehicle raised in 2003. Its limited partners include Massachusetts Institute of Technology, Yale University, fund of funds DuPont Capital Management, fund of funds Adams Street Partners and Wilshire Associates, according to PEI Research & Analytics.
Fund IV is a $1.5 billion vehicle raised in 2005. Its LPs include Duke University Management Company, Ford Foundation, Singaporean sovereign wealth fund GIC, State Universities Retirement System of Illinois, asset manager Mesirow Financial, fund of funds Adams Street Partners and Kentucky Retirement Systems, according to PEI Research.
Boca Raton, Florida-based Sun Capital manages $8.46 billion in assets, according to PEI Research.