The two funds were found to constitute a “partnership-in-fact” formed for the purpose of investing and managing their investment in the company. Viewed jointly, their ownership was sufficient to meet the 80% ownership test for “common control” purposes under IRS regulations. Under ERISA, joint and several liability for withdrawal liability exists with respect to an organization other than the directly liable organization if such other organization is a “trade or business” under “common control” with the directly liable organization.
In July of 2015, the First Circuit had ruled that one of the funds was a “trade or business” for this purpose based on an “investment plus” analysis, meaning that the private equity fund was not just a passive investor but rather was actively involved in managing the company. On remand, the District Court likewise found that the second private equity fund (which shared the same sponsor) was a trade or business under this analysis. In doing so, the court focused among other things on the fact that the fund received management fee offsets in respect of monitoring fees paid to the general partners of the fund by the company, although in this case the offset was in the form of a “carry forward” that would offset future management fees rather than current ones.
While certainly fact-specific (and subject to appeal), the ruling stands out for its imposition of alter ego/veil piercing liability on a private equity fund that operates consistently with the traditional private equity fund business model. Withdrawal liability associated with union-sponsored multiemployer pension plans can be significant, so the case is surely one that will provoke concern among investment professionals. Moreover, the regulatory basis for imposing the liability–ERISA’s “single employer” provisions–conceivably can be applied in contexts apart from pension withdrawal liability, including tax qualification of employee benefit plans across all of a private equity fund’s portfolio.