When it comes to private equity fund litigation, all claims are not created equal, with some having the ability to do more damage than others, explains DLA Piper associate Dianne LaRocca on The Labor Dish.
While the number of suits involving these funds is increasing, LaRocca says the ones that warrant the most concern are those arising because the portfolio company is failing or after the entity has been flipped.
She cites the case involving Palladium Equity Partners [PDF] as a good example of an expensive issue, withdrawal liability. LaRocca says the claim results when an employer participates in, but then completely or partially withdraws from, an underfunded multiemployer defined benefit pension plan. In the Palladium case, she says, the amount of liability at stake was more than $9 million.
To avoid these “killer” claims:
- Set ground rules in the portfolio company’s bylaws and other corporate governance agreements on indemnification and limit direct and indirect investments in any entity participating in multiemployer pension plans to less than 80 percent.
- Avoid micromanagement of the portfolio company since this opens the door to exposing the private equity fund to the portfolio company’s employment liabilities and litigations.
- Plan the exit from the portfolio carefully, ensuring that all laws are adhered to.