A recent decision of the Court of Appeals for the First Circuit makes it more likely that private equity funds could be liable for the pension obligations of the portfolio companies in which they invest. Key to the decision was the Court’s conclusion that the private equity fund in question was a “trade or business” by virtue of its active role in the management of the business of its portfolio companies. The decision, if applied broadly, will have implications for the drafting of fund documents, the structuring of fund investments, and the role that fund professionals play in managing the business of their portfolio companies.

Under ERISA, each “trade or business” under “common control” is liable for the ERISA liabilities of each member of the “controlled group” of companies. This is a two-part test. For aggregation to occur under the test, an entity must be a “trade or business” and under “common control” with another entity that is also a trade or business.1 Under part one of the test, private equity funds have traditionally taken the position that, as passive investors, the funds are not a “trade or business.” Under the second part of the test, funds typically structure ownership to avoid “common control” under the complex but mechanical ownership rules prescribed by ERISA and the Internal Revenue Code for this purpose.