Distress investors often prefer to acquire a troubled business through an asset purchase styled as a sale of all or substantially all of the company’s business under §363 of the Bankruptcy Code “free and clear” of all liabilities, liens, claims and interests against the seller, usually including any legacy obligations. In fact, unfunded pension and retiree health obligations are a frequent driver of the so-called 363 sales. But as demonstrated by the recent ruling against Japanese firm Asahi Tec1 following the 363 sale of its U.S. subsidiary Metaldyne, the Pension Benefit Guaranty Corporation (PBGC) will assert unfunded pension liability against members of the bankrupt seller’s control group, even if they are domiciled offshore.
According to the PBGC 2012 Annual Report, as of Sept. 30, 2012, PBGC’s single-employer insurance program had a negative net position or “deficit” of $29.1 billion, meaning that for U.S. participants in the single-employer program, there exists $29.1 billion in unfunded liabilities. Similarly, the multi-employer program had a deficit of 5.2 billion.2 Not surprisingly, remediation and active management of this liability is a focus for the PBGC. The PBGC is asserting claims for the termination liability as well as the surcharge or special premium for attempting to discharge pension plan liability through a bankruptcy case.3 The Asahi Tec ruling, when coupled with the earlier Sun Capital4 and Oneida5 rulings, underscores the determination of the PBGC to assert liability against affiliates looking to not only the extent to which affiliates controlled and may have actively managed the bankrupt seller, but also the extent to which offshore affiliates subjected themselves to U.S. jurisdiction during the acquisition and ownership process.
