Court Challenges Private Equity


Flickr CC/ Victor Villanueva

  The First Circuit Court of Appeals ruled this week that private equity funds can now be considered a “trade or business”.  As a business, private equity firms may be liable for employee benefits and payouts as the overseer of any changes to the benefits.  This means that legally, firms may be considered as management entities over investors, which threatens the structure of private equity and increases the risk. 

  The case ruled around a court battle between Sun Capital, an investment firm, and Scott Brass, a brass works and copper company that was acquired by Sun Capital a few years earlier.  Scott Brass lost business during the economic crisis and falling copper prices, and declared bankruptcy in 2008.  Scott Brass’ union of Teamsters billed Sun Capital for the loss of the contribution to workers’ pension funds, a $4.5 million bill.  Sun argued that the pension funds were merely investment interests and that they did not meet the requirements to take on the pension liabilities under the Employee Retirement Income Secuirty Act (ERISA).  The court ruled otherwise.

  Catherine Campbell, attorney for the Teamsters, said that the court’s decision was clear.  She went explain to investors that they acquire companies, make them profitable, and then turn them around and sell them without also accepting responsibility when things so wrong.  She said that private equity firms have a more managerial role in their investments, and that it was their responsibility to compensate the workers.  The relationship was well documented, as Scott Brass paid Sun Capital for “management” and business services.
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on to explain that it did not make sense for an investment firm to

  The decision could affect the way that private equity firms do business in the future.  The First Court’s decision sets a new precedent in a law system that traditionally protects private equity firms from liabilities.  Some analysts say the case could also be used as evidence to support a case for increasing the capital gains tax. 

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