Deal Diary

Editor’s Note: Akin Gump is pleased to publish the first in a series of blog posts covering significant issues U.S. boards of directors may expect to face in 2022. In addition to ongoing pressures on the part of boards of directors of private and public companies to continue embracing environmental, social and governance (ESG) principles in connection with developing both short- and long-term growth strategies, directors in the U.S. (and, by extension, overseas) are facing any number of challenges that will need to be navigated in a thoughtful and transparent manner. We expect to publish this series of posts over the next few weeks, as well as updated materials and content as and when events warrant.  

In light of the health and safety concerns related to coronavirus disease 2019 (COVID-19), the U.S. Securities and Exchange Commission (SEC) has recently issued guidance to assist public companies with upcoming annual shareholder meetings.

This week, we highlight a report by the EY Center for Board Matters that analyzes independent directors who were elected by shareholders to the board of a Fortune 100 company for the first time in 2017. The research shows that companies are continuing to bring fresh and diverse perspectives into the boardroom, and enhancing the alignment of board composition with their forward-looking strategies.

This week we highlight Ernst & Young’s “Top Priorities for US Boards in 2017.” The report addresses the importance of focusing on strategy, risk management, shareholder communications and the company’s talent pool, including the board’s own composition, as well as how geopolitical developments, innovation and technology are some of the main drivers of creating a competitive advantage.

Last week, SEC Commissioner Luis Aguilar outlined expectations for directors of public companies to manage cybersecurity risk. If you think it is enough that a board of directors reviews annual budgets for privacy and IT security programs, assigns roles and responsibilities for privacy and security, and receives regular reports on breaches and IT risks, think again. The SEC appears to be raising the bar for directors everywhere to be responsible for overseeing cyber-risk management.

Noting an average annual cybercrime cost of $11.8 million to a sample of U.S. companies, Commissioner Aguilar highlighted major data breaches affecting companies nationwide—Adobe (38 million customer accounts), Target (40 million customers), Snapchat (4.6 million users), U.S. banks (websites offline) and securities exchanges (infrastructure attacks).

A decision last month by the district court for the Northern District of Indiana is the latest in a string of recent judicial decisions to confirm that a plaintiff has successfully stated a plausible claim for relief under the WARN Act on the “single employer” theory.

The case, Young v. Fortis Plastics LLC¹ was filed by a worker laid off by a manufacturing facility in Forth Smith, Arkansas, alleging violations of the WARN Act upon closure of the facility.  The WARN Act seeks to protect workers who suffer job losses due to mass layoffs by requiring that certain employers provide sixty days’ notice to workers before engaging in a mass layoff or plant closure and by enabling aggrieved employees to sue the employer for back pay and benefits upon failure to receive such notice. The federal statute defines “employer” as “any business enterprise” that employs the requisite number of employees. Because the statute does not define the term “business enterprise,” the Indiana district court upheld the application of a multi-factor test based on regulations of the Department of Labor (DOL).  The court stated that, due to the nature of mass layoffs and plant closure at issue in the case, a direct employer will often not have the financial means to pay obligations under the WARN Act.  As a result, the court deemed it reasonable to require Fortis’ private equity parent to assume those obligations where it could be shown that the private equity firm was partially responsible for the decisions leading to the WARN Act liability.

Applying the DOL five-pronged test to the case, the court found that the plaintiff successfully alleged two of the five prongs, common ownership and de facto control, but not the remaining three: common directors and/or officers; unity of personnel policies emanating from a common source; and dependency of operations.  Citing precedent from the Southern District of New York, the court explained that each of the DOL factors is not a necessary element that must be satisfied in order for a plaintiff to succeed under the “single employer” theory, but, rather, that the factors are components of a balancing test that the court will weigh to determine whether the two entities are so interrelated as to constitute a “single employer.”

On September 27, 2013, in Washington, D.C., Tax Analysts hosted a panel discussion, including Akin Gump’s partner Patrick Fenn, on the tax implications of the recent Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund case. 

The panel discussed the First Circuit Court of Appeals case, which involved pension plan termination liabilities, and the court’s decision that a Sun Capital fund was in an active trade or business for ERISA purposes.  This unusual decision could have significant tax and other consequences for private equity funds if they are held to be in an active trade or business.

On July 24, 2013, the First Circuit Court of Appeals held that a Sun Capital Partners (“Sun Capital”) private equity fund constituted a “trade or business” for multiemployer plan withdrawal liability purposes.  This court ruling is particularly important for funds (alone or together with affiliates) that could satisfy “common control” for a portfolio company with underfunded pension liabilities.  Although the “common control” analysis is complex, generally two entities will be under common control if one entity owns 80 percent or more of the other entity or when five or fewer persons directly or indirectly own 80 percent or more of two or more entities and have effective control over each entity. 

The issue arose in connection with a claim by New England Teamsters and Trucking Industry Pension Fund, which argued that investment funds managed by Sun Capital were responsible for pension liabilities for one of its bankrupt portfolio companies.  Private equity funds have previously asserted that no liability accrued to their funds because private equity funds were not involved in a “trade or business” — one component of “control group” liability under ERISA.  ERISA imposes joint and several liability for certain pension plan liabilities for each member of the controlled group. A controlled group is generally two or more trades or businesses that are under common control.