Private Equity Funds: Where Tax and Labor Laws Collide?


Back in 2013, when an appeals court judge used federal income tax principles for purposes of employee benefits law, players in the private equity market stood up and took notice.  At stake was the determination that a private equity fund constituted a “trade or business” that is under “common control” with a portfolio company and, therefore, on the hook for pension fund debt.

Our story began in 2007 when two funds of the private equity firm Sun Capital Partners purchased the business of Scott Brass, a Rhode Island brass and copper manufacturing company.  A year later, Scott Brass went bankrupt and stopped contributing to its pension fund.  The pension fund, run by the New England Teamsters and Trucking Industry Pension Fund, argued that Sun Capital’s funds met the definition of a “trade or business” that is under “common control” and, therefore, under federal law the funds were liable for the $4.5 million pension fund debt of Scott Brass.  The U.S. Court of Appeals for the First Circuit found that one of the funds did constitute a “trade or business” and sent the case back to the District Court to determine whether the other fund also met the definition of a “trade or business.”

On March 28th of this year, U.S. District Court Judge Douglas P. Woodlock (for the District of Massachusetts) found not only that the other fund also met the test as a trade or business but that the two funds were also a “partnership in fact” that was under common control with Scott Brass and, therefore, liable for the pension fund debt.  The question is whether Judge Woodlock’s ruling will be upheld on appeal and whether other courts will adopt it.

What’s at stake?  For one, the decision provides a basis for challenging the favorable manner in which private equity firms are currently taxed:

“In theory, if the I.R.S. were to adopt the same reasoning in a tax context, it could kill the goose that lays the golden eggs of the private equity industry:  its huge tax breaks.  It could do it in a way that would turn the investing world upside down.” – Libby Lewis, The New York Times

For another, the decision could affect the calculus in valuing target companies:

“Before now, private equity firms viewed companies with underfunded pension plans as undervalued targets because the firms were not responsible for funding the plans.  Now that this ruling may render firms responsible to fund target companies’ pension plans, such companies will not be as attractive.” – Marissa B. Wiley, Nixon Peabody

Where tax and labor laws collide, private equity firms stop and take notice.  Is this the end of its favorable tax breaks?  A drastic change in how to value potentially lucrative deals?  The private equity world is watching.

(Photo:  Financial Income Displays Pay Benefits and Pension by Stuart Miles /

Medical Practice M&A: When to Get into the Game?


You may find yourself owning a comfortable medical practice.  You get along with your partners, make your own hours, and share in the profits.  The staff, whom you handpicked, enjoy their time in the office and love coming to work.  The patients are in no short supply, and they appreciate the special care you provide.  Life is good. Continue Reading

The Tale of How One Client Acquired a Tail


One day a client asked a simple question.  He was in the process of selling his business and was thinking about the Company’s commercial liability insurance, that is, the insurance that protects his business against claims for causing bodily injury, property damage, and other harm.  “If we sell off all of the Company’s assets and would no longer be operating the business,” he asked, “will we really need to continue having liability insurance after the closing?” Continue Reading

New Crowdfunding Rules Effective Now


This past Monday, May 16, 2016, new rules went into effect that permit the general public to invest in capital-raising by startup companies through so-called “crowdfunding portals.” Continue Reading

Subordination of Seller Financing: Different Meanings for Different Parties as to How the Storm Will Be Weathered


A buyer and seller are going on a journey together and they have agreed upon their itinerary in the form of a term sheet for an acquisition or merger.  One simple term sheet provision provides for part of the consideration to be paid by a promissory note payable to the seller.  This provision contains the amount, the amortization, the interest rate and the schedule of payments for the seller note.  It also states that the seller note will be subordinate to the financing provided by the senior lender.  It’s so simple and so clear, what more could you possibly need to say?  This post will discuss a few of the issues which are bound to come up when your ship is ready to set sail and the senior lender asks the seller to sign its form of subordination agreement. Continue Reading

Paid Family and Medical Leave – Possibly Coming to an Employer Near You


One of the commonly faced challenges following a successful M&A transaction is how to handle the integration of the entities’ employee benefit plans.  For some employers in the State of Connecticut, there may be in the near future a new plan posing potential integration difficulties. Continue Reading

An Outlook on the 2016 M&A Market


With the close of the First Quarter of 2016 just behind us (where does the time go?) I decided to head out into the middle market M&A arena to get a feel for what market participants are saying about 2016.  During this effort I came across a report from Citizens Commercial Banking discussing the current state of M&A activity for the middle market ($5MM to <$2B in revenue). Continue Reading

Type D Reorganization – Trying the Forward Triangular Merger


Talk about a cliffhanger!  In my July 21, 2015, post I referred to my next post as a visit to the forward triangular merger.  Instead readers were left hanging while I jumped into what I thought would be an interesting look at the Affordable Care Act and its impact on healthcare locally; specifically, on both the blue chip and mid-market segments of Connecticut’s economy.  Well at least I thought it was interesting.  For those readers who decided to take a pass, welcome back. Continue Reading

The Responsible Corporate Officer Killed the LLC


John Bashaw and Mary Mintel Miller, from the firm’s Environmental and Litigation Practice Areas, recently argued a responsible corporate officer (RCO) doctrine case before the Connecticut Supreme Court.  They also published “The Responsible Corporate Officer Killed the LLC” on the topic in the American Bar Association’s Winter 2016 Environmental Litigation Newsletter. Continue Reading

Whose Privilege Is It Anyway? Protecting the Seller’s Pre-Transaction Attorney-Client Communications



Your client, Sally Wholesome, wants to sell her business, Wholesome Green Foods, which produces organic kale products, such as smoothies, chips and packaged salads, using proprietary recipes and packaging processes.  Sally has presented you with a merger agreement proposed by her prospective buyer, Eat ‘em Up, which includes typical representations and warranties about the business of Wholesome Green Foods. Continue Reading