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| 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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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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