Private-equity and similar funds sometimes invest in portfolio companies that may have significant liabilities under ERISA and the corresponding provisions of the Internal Revenue Code. A lurking question that has persisted is whether, if a fund's ownership interest exceeds certain percentage thresholds, the fund and its portfolio companies are aggregated under the so-called "controlled group" rules as a single employer. The implications can extend to other matters, such as nondiscrimination testing and COBRA responsibility.

For many noncorporate funds, the analysis can turn in part on the critical threshold question of whether a particular investment fund is a "trade or business" for these purposes. If not, it may be the case that aggregation is not required, regardless of the extent of the fund's ownership of its portfolio companies.

This question has attracted some particular attention in recent years, with the release of a Sept. 26, 2007, letter from the PBGC. The PBGC letter holds that the private equity fund there at issue was a "trade or business," and that certain of its subsidiaries were considered, together with the fund, to be a single employer under ERISA. 

Arguably, the PBGC had taken a result-oriented approach and, in particular, does not seem to have coordinated in the preparation of the 2007 letter with the experts at the IRS/Treasury as to tax analysis that lies at the very heart of the issue.  Nevertheless, as one might expect when a governmental agency speaks, the PBGC letter has caused consternation in the market, despite its arguably dubious reasoning. See generally Oringer, "Investment Funds and ERISA Controlled Groups - Egregious Aggregation?" 35 Pens. & Bens. Rep. (BNA) 1929 (2008); Moulder, "Controlled Group Liability: The Private Equity Fund's Side of the Story," 16 J. of Deferred Comp. 19 (2011).

A recent decision by a Massachusetts federal district court in the case of Sun Capital Partners III v. N.E. Teamsters and Trucking Industry Pension Fund, Civ. Action No. 10-10921-DPW (D. Mass. Oct. 18, 2012), directly addresses the PBGC's 2007 letter. The court decision in the Sun Capital Partners case is an important one, as it is the first one to reject the letter after detailed analysis, and may have extensive ramifications for investment funds and, in particular, private equity funds. 

The court addressed, as a threshold matter, whether it should defer to any extent to the PBGC opinion.  The Sun Capital Partners decision states: "I find the [PBGC] Appeals Board opinion unpersuasive. First, it misunderstood the law of agency in determining whether the private equity firm in that case was a 'trade or business' for purposes of the statute. Second, it misread Supreme Court precedent [relevant to the 'trade or business' question]."

Next, the court, "[u]ndistracted by an errant agency decision, . . . turn[ed] . . . to consideration of whether the Sun Funds were engaged in a 'trade or business' under governing law.". As to that critical issue, the court stated: "Even taken in the light most favorable to the Pension Fund, the record establishes that the Sun Funds are not a 'trade or business.' The Sun Funds do not have any employees, own any office space, or make or sell any goods.". After going through further analysis of the Funds' characteristics and activities, the court added: "Because I find that neither of the Sun Funds is a 'trade or business,' I do not reach, nor do I decide, the issue of 'common control.'" 

Not only does the Sun Capital Partners decision squarely reject the PBGC letter, but it uses striking language in doing so: "unpersuasive," "it misunderstood the law," "it misread Supreme Court precedent," "an errant agency decision."  Maybe, at the end of the day, another decisionmaker will give the PBGC letter more credence. But, at least for now, Sun Capital Partners shows that governmental agencies do not necessarily operate unassailably in an insular bubble. The effect on the market, even of "errant" pronouncements, can be palpable; at a minimum, if there are issues that call for experts in other areas to be consulted, then arguably such consultation should be pursued, notwithstanding that the agency's desired answer may, after due consideration, ultimately be elusive. 

The court's carefully reasoned decision in the Sun Capital Partners case is a welcome addition to the authority regarding the question of whether investment funds may be aggregated with their portfolio companies for purposes of the controlled-group rules. While the final words on the matter may well not yet have been written, Sun Capital Partners may at a minimum cause the PBGC's 2007 letter to be viewed by the market with an increasingly jaundiced eye.



Andrew L. Oringer is a partner and co-chair of the ERISA and Executive Compensation Group at Dechert LLP, and leads the firm’s national fiduciary practice in New York. He counsels clients on their employee benefit plans and programs, benefits-related tax matters and fiduciary issues arising in connection with the investment of employee benefit plan assets. Oringer’s practice includes advising clients regarding ERISA and employee benefits generally, including 401(k) and other retirement plans as well as medical and other welfare plans. His advice to clients encompasses all aspects of corporate transactions and initial public offerings in which benefits and compensation issues play a central part. He regularly counsels financial institutions and plan fiduciaries regarding investments, and has been instrumental in designing complex investment structures to address difficult ERISA issues.

Oringer advises clients with respect to the design and implementation of arrangements relating to executive compensation, including stock option and other equity-based arrangements. His practice extends to the representation of employers and executives in the negotiation of executive employment and termination agreements.

Nationally known for his experience with ERISA and matters relating to executive compensation, Oringer is a frequent speaker and writer on a wide variety of topics. Publications including The Wall Street Journal, The New York Times, Crain’s Pensions & Investments, Newsday, USA Today and The Chicago Sun Times have quoted him in articles on employee benefits issues. He has authored, co-authored or contributed to numerous bar comment letters and reports to regulators on both fiduciary and compensation issues, and has testified at the request of Congress regarding certain proposed Department of Labor regulations.

He holds leadership roles for the American Bar Association and the New York State Bar Association and is a fellow of the American College of Employee Benefits Counsel and an adjunct professor teaching ERISA at Hofstra University School of Law. He is a member of the Bloomberg BNA Benefits Practice Resource Advisory Board and the Advisory Board of the BNA Bloomberg Tax Management Compensation Planning Journal. He holds an A.B. (with distinction in economics), cum laude, from Duke University; an M.B.A. from Adelphi University; and a J.D. (with distinction) from Hofstra University School of Law, where he was associate editor of the law review. Oringer has contributed two reports to the Bloomberg BNA Benefits Practice Resource Center as part of the Benefits Practitioner's Strategy Guide: "Release Us From Confusion Over ERISA Fiduciary Claims" and "Investment Funds and ERISA Controlled Groups-Egregious Aggregation?"

Several major legal directories have recognized Mr. Oringer as a leading lawyer, including The Best Lawyers in America (2010-2012), Chambers USA (2005-2012, at Band One since 2008), the Practical Law Company’s Labour and Employee Benefits Cross-Border Handbook (2007, 2010-2012) and New York Super Lawyers (2006-2012, including in several years, listing among New York City’s Top 100 lawyers across all practice areas).