Private equity sponsors recently won a significant court victory that may result in increased appetite for transactions involving companies with unionized workforces. On November 22, 2019, the United States Court of Appeals for the First Circuit held [1] that the ownership stakes of related but separate private equity (“PE”) funds in a portfolio company will not be aggregated for purposes of determining whether those funds themselves are part of the portfolio company’s “controlled group” and therefore subject to the portfolio company’s union pension liabilities under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
Background
In a leveraged buyout in early 2007, multiple funds sponsored by Sun Capital Advisers, Inc. (“Sun Capital Funds”) acquired 100% of Scott Brass, Inc. (“SBI”), which had approximately $4.5 million in union pension liabilities. As is increasingly typical in buyout transactions, Sun Capital acquired SBI through multiple funds, which in the aggregate held all of SBI’s ownership interests, although none of the Sun Capital Funds individually owned 80% of SBI. When SBI filed for bankruptcy in late 2008, the union pension fund demanded $4.5 million from the Sun Capital Funds, arguing that the Sun Capital Funds themselves were part of SBI’s “controlled group” under ERISA.
