A recent decision of the United States District Court for the District of Columbia (Pension Benefit Guaranty v. Asahi Tec Corporation) allows the Pension Benefit Guaranty Corporation (PBGC) to proceed with a claim against a non-U.S. corporation for the pension-related liabilities of its wholly owned U.S. subsidiary.
Under the Employee Retirement Income Security Act (ERISA), each member of a controlled group (which includes a corporation’s subsidiaries, parent and other subsidiaries of the parent, provided an 80% ownership threshold is met) is jointly and severally liable for underfunded pension liabilities and termination premiums to the PBGC when a defined benefit pension plan is terminated. While there is nothing under ERISA that excludes non-U.S. entities from the controlled group, a key limitation on the PBGC’s enforcement of such claims is the ability to assert personal jurisdiction over the non-U.S. entity. Under prior case law, the mere existence of a parent-subsidiary relationship did not give rise to personal jurisdiction in the United States in the absence of sufficient contact with the United States. However, the court’s decision to allow the PBGC’s claim to proceed may lead to increased exposure of non-U.S. corporations for the pension-related liabilities of their U.S.-controlled group members, particularly in the bankruptcy context in which non-U.S. entities typically do not file for bankruptcy protection along with their related U.S. entities.
In 2007, Asahi Tec Corporation, a Japanese automotive parts manufacturer, acquired Metaldyne Corporation, a U.S.-based automotive parts manufacturer. As part of the acquisition, Asahi performed due diligence on Metaldyne, including with respect to the underfunded pension liabilities of Metaldyne’s defined benefit pension plan. In 2009, Metaldyne filed for bankruptcy protection and the PBGC subsequently terminated the pension plan. Before terminating the pension plan, the PBGC requested that Asahi assume sponsorship of the pension plan, but Asahi refused.
The PBGC filed a complaint against Asahi in November 2010 for approximately US$175 million, seeking recovery of the full amount of the pension plan’s liabilities, termination premiums and litigation costs. On April 8, 2011, Asahi filed a motion to dismiss the PBGC’s claim, arguing lack of personal jurisdiction.
The court denied Asahi’s motion to dismiss for lack of personal jurisdiction, concluding that specific jurisdiction existed because the PBGC had demonstrated that Asahi purposefully directed activity toward the United States through its acquisition of Metaldyne and related assumption of controlled group liability, and that the PBGC’s claims against Asahi arose directly out of such conduct. Under ERISA, the potential liability for the PBGC’s claims arose when Asahi acquired Metaldyne and subjected itself to controlled group liability. Asahi’s lack of involvement with the funding decisions or the decision to terminate the pension plan was irrelevant, because the PBGC’s claims were not based on the pension plan’s underfunding or termination.
The court noted that before the acquisition, Asahi conducted thorough due diligence and hired a compensation consultant to review Metaldyne’s employee benefit programs and provide analysis on the long-term benefit plan liabilities. Asahi was also informed about the possibility of controlled group liability for the pension plan, and factored in the assumption of such liabilities in its purchase price for Metaldyne.
As the court held that it could exercise specific jurisdiction, it did not consider whether Asahi maintained sufficient contact with the United States to exercise general jurisdiction.
Implications of the Ruling
Although this ruling reflects the opinion of only one federal district court and it has not yet been determined whether Asahi is in fact liable for the pension plan’s underfunded pension liabilities, this ruling may help the PBGC assert personal jurisdiction over other non-U.S. corporations for controlled group liabilities, even when such non-US entities were not otherwise involved in decisions regarding the pension plan. As U.S. corporations with underfunded pension plans continue to file for bankruptcy, the PBGC may increasingly look to non-U.S.-controlled group members to satisfy pension plan shortfalls upon plan termination – thereby exposing the non-U.S. entities to significant claims.
Non-U.S. corporations acquiring U.S. entities should conduct a thorough due diligence review of the target’s defined benefit plans to assess the potential controlled group liabilities and make any necessary adjustments to the purchase price. In addition, every member of a controlled group should be aware of the pension-related liabilities within the group.
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