The Expanding Controlled Group: Private Equity in the Crosshairs
John C. Kilgannon
Benefits Law Journal
A doctrine that first came to light in an innocuous Pension Benefit Guaranty Corporation (PBGC) appeals letter appears to be gaining traction with federal courts. Since 2007, the “investment plus” standard has served as a basis to expand controlled group pension liability. The targets of the expanding controlled group are frequently private equity funds that collectively own a controlling interest—more than 80 percent of the equity interests—in a contributing employer. Private equity managers routinely structure acquisitions to ensure that each fund participating in an acquisition does not acquire a controlling interest in the contributing employer. However, courts have held that related private equity funds that collectively own a controlling interest are liable for an employer’s withdrawal liability. In so holding, the courts found that the related funds formed a de facto or unincorporated partnership that falls within the employer’s controlled group and that, through the active participation in the management of the acquired company, the de facto partnership engaged in a trade or business. Although the issue is far from settled, every court that has considered the issue has adopted the investment plus standard.