The Exposure of Foreign Corporations to Pension Liabilities of U.S. Affiliates

Since its enactment in 1974, ERISA has imposed joint and several liability on all members of a controlled group of corporations or other trades or businesses under common control for unfunded benefits of, and certain contributions and premiums in respect of, defined benefit type pension plans (referred to here as “ERISA’s Liability Provisions”). Two recent cases demonstrate the increasing interest on the part of the PBGC to enforce ERISA’s Liability Provisions against corporations within the controlled group that are organized outside of the U.S. In one, the PBGC sought to terminate the pension plan of a U.S. subsidiary because of actions by its foreign parent corporation that might allow the parent to avoid ERISA’s liability provisions. In the other, the PBGC successfully sought to collect liability under ERISA’s Liability Provisions from the foreign parent corporation of a bankrupt U.S. subsidiary.

ERISA: The Employee Retirement Income Security Act of 1974, as amended. The principal U.S. statute governing the operations of employee pension benefit plans in the U.S.

PBGC: The Pension Benefit Guaranty Corporation, a corporation created under U.S. law rather than under the laws of an individual state of the U.S. The PBGC is charged by ERISA with insuring the benefits of defined benefit type pension plans and, to that end, enforcing ERISA’s Liability Provisions.¹

“Under Common Control.” Generally, based on 80% or more equity ownership, by vote or value in the case of ownership of corporate stock.

PBGC Attempts to Terminate Pension Plan of U.S. Subsidiary Based on Proposed Sale of Subsidiary by Foreign Parent

In PBGC v. Saint-Gobain Corporation Benefits Committee, 2013 WL 5525693 (E.D. Pa. October 4, 2013), the PBGC sought a U.S. district court’s approval to terminate an underfunded pension plan maintained by Saint-Gobain Containers, Inc. (“Saint-Gobain U.S.”), over the objections of the plan’s sponsor and the plan’s administrator. ERISA grants the PBGC the authority to involuntarily terminate a pension plan if, among other reasons, “the possible long-run loss of [the PBGC] may reasonably be expected to increase unreasonably if the plan is not terminated.”² In this case, the PBGC argued that its possible long-run loss would increase if the pension plan of Saint-Gobain U.S. was not terminated because the French parent corporation of Saint-Gobain U.S. had agreed to sell Saint-Gobain U.S. to a third party. The (unstated) implication was that the PBGC concluded that the third party buyer was not as credit-worthy as the French parent corporation. Thus, the PBGC presumably anticipated that it could not expect to collect as much from Saint-Gobain U.S. and its future parent corporation (the third-party buyer) if the pension plan terminated in the future as it might collect now from Saint-Gobain U.S. and its current French parent corporation.

The issue before the court was not whether the plan should be terminated but a procedural, albeit important, preliminary question: should the PBGC’s decision to seek termination of the Saint-Gobain U.S. pension plan be reviewed as an action of a federal agency? If so, the court could only reject the PBGC’s termination of the pension plan if the court found that the decision to terminate was arbitrary or capricious based exclusively on the information relied on by the PBGC. If not, the court could accept all relevant information from the parties, even if that information had not previously been provided to the PBGC, and reach its own determination (a “de novo” review). The court determined that ERISA required a de novo review, to be conducted at a later date.

U.S. Court Asserts Jurisdiction over Foreign Corporation to Impose Liability Under ERISA

In PBGC v. Asahi Tec Corporation, 2013 WL 5503191 (D.D.C. October 4, 2013), the PBGC sought to collect under ERISA’s Liability Provisions the unfunded benefits of a terminated pension plan of Metaldyne Corporation (an automotive parts manufacturer based in Michigan, “Metaldyne”) from Asahi Tec Corporation (an automotive parts manufacturer organized under the laws of Japan, “Asahi Tec”). Asahi Tec acquired Metaldyne in 2007 for approximately $1.2 billion in cash and assumed obligations. At the time of the acquisition, Asahi Tec was aware of Metaldyne’s pension liabilities and its potential responsibility for them if it acquired Metaldyne, and considered such liabilities in determining the purchase price. In May of 2009 Metaldyne voluntarily filed for bankruptcy. After the PBGC determined that no party was willing to assume the Metaldyne pension plan, the PBGC successfully terminated the plan. It then filed suit against Asahi Tec seeking to recover the unfunded liabilities of Metaldyne’s plan from Asahi Tec, as a member of a controlled group that included Metaldyne.

The initial question in the Asahi Tec case was also a preliminary question: did a U.S. court have jurisdiction to entertain a lawsuit to enforce ERISA’s Liability Provisions against a corporation organized outside the U.S.? The court determined that it had specific personal jurisdiction with respect to Asahi Tec. The court concluded that Asahi Tec had sufficient minimum contacts with the U.S. to establish specific personal jurisdiction because Asahi Tec purposefully directed its activities at the U.S. when acquiring Metaldyne with knowledge of (i) the underfunded pension liabilities (which were factored into the purchase price) and (ii) its potential liability under ERISA’s Liability Provisions. Having establishing its jurisdiction, the court then proceeded to the ultimate question: is Asahi Tec responsible for the plan liabilities? In granting the PBGC’s motion for summary judgment, the court found that Asahi Tec, as an undisputed member of Metaldyne’s controlled group, was responsible for Metaldyne’s pension liabilities.3

Conclusion

In the Saint-Gobain decision, the foreign parent corporation prevailed on a preliminary procedural question that may help it ultimately avoid ERISA’s Liability Provisions. In the Asahi Tec decision, the PBGC prevailed on a different preliminary procedural question, and then successfully asserted liability under ERISA’s Liability Provisions against the foreign parent corporation. But the true significance of both decisions is much simpler: the PBGC is becoming increasing aggressive in pursuing foreign owners of U.S. businesses to collect the pension plan liabilities of those businesses.

This Alert has been authored by Russell E. Isaia, chair of Bingham’s Employee Benefits and Executive Compensation Group and Peter H. Bruhn, counsel in the Financial Restructuring Group. Please call either, or your regular contact with Bingham, with any questions you may have.

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¹ This Alert focuses on two cases brought by the PBGC to enforce ERISA’s Liability Provisions. Readers should be aware that in the case of one category of pension plans known as “multiemployer pension plans,” a plan itself may attempt to enforce ERISA’s Liability Provisions for liability arising when the U.S. member of the controlled group of corporations ceases contributing to the plan. This type of liability is known as “withdrawal liability” in contrast to the similar liability that can arise on the termination of pension plans that are not multiemployer pension plans. The hallmarks of multiemployer pension plans are that they provide pensions to employees of two or more unrelated employers pursuant to collective bargaining agreements

² The court also found, among other items, that Asahi Tec was liable for the certain termination premiums resulting from the termination of Metaldyne’s pension plan.

³29 U.S.C. § 1342(a)(4).