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Media Briefing Note: Non-U.S. Parents at Risk of Pension Termination Liability Following U.S. Court Decision

30 May 2012

LONDON, 30 May 2012 - A U.S. District Court ruling in support of the Pension Benefit Guaranty Corporation (PBGC) has raised concern regarding the liability of non-U.S. parents for U.S. plan termination.

Currently, under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA), all members of a controlled group, including non-U.S businesses, may be held liable for underfunding when a plan is terminated, despite not having sponsored or contributed to the plan, nor having any employees covered under it.

The PBGC attempted to recover unfunded pension termination liabilities when it took over the Metaldyne Pension Plan, forcing an involuntary termination.

Metaldyne, the sponsoring employer, had filed for bankruptcy reorganization under Chapter 11 of the U.S. Bankruptcy Code and did not fund its pension plan. The PBGC is seeking $175 million from Metaldyne's non-U.S. parent company, Asahi Tec.

In Pension Benefit Guaranty Corporation v. Asahi Tec Corporation, the PBGC claimed personal jurisdiction under ERISA. Asahi Tec moved to dismiss the PBGC’s complaint on the ground that Asahi had no role regarding the U.S. plan or its termination; however a memorandum opinion issued by the United States District Court of the District of Columbia permitted the PBGC to proceed.

The court ruled that the language of the statute subjected Asahi to personal jurisdiction when it purchased Metaldyne and became a member of the controlled group. Furthermore, Asahi had engaged a pensions consultant to perform due diligence and so was aware of the potential pension liability when it acquired Metaldyne.

Though this decision represents just one lower federal court’s opinion and is law only in the D.C. Circuit, and could be appealed, it raises concerns for non U.S. parents regarding their liability for unfunded plan terminations as the PGBC is likely to become more aggressive in pursuing these claims.

It is important to note, however, that the Asahi ruling merely allowed PBGC to proceed with its claim, and did not determine that Asahi was liable. Further, prior case law is inconsistent with the decision. The PBGC was previously unsuccessful in its attempts to assert Title IV liability against a Canadian parent and against two U.K. entities where, in both cases, the courts found the parent-subsidiary relationship insufficient to establish personal jurisdiction.

Commenting on the ruling Jane Samsworth, Head of Pensions at Hogan Lovells, said:

"This ruling must serve as a warning that thorough due diligence regarding a target’s defined benefit plans is crucial as liabilities are best managed by being fully recognized and reflected in pricing. This is of particular significance if the powers of the PBGC are as extensive as it claims."

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