pic-asher.jpgCONTRIBUTED BY
Asher Bearman

Some potentially concerning news for fund managers with controlling positions in portfolio companies, including controlling relationships that don’t happen by design – you could be liable for unfair labor practices by your portfolio companies.

Recently, the U.S. Court of Appeals for the Fifth Circuit affirmed a ruling by the National Labor Relations Board (NLRB) finding that a fund manager Oaktree Capital Management, L.P., a private fund management entity, and the portfolio company of its fund TBR Property, L.L.C. (Turtle Bay Hotel) were a single employer for purposes of the National Labor Relations Act (NLRA) that governs unfair labor practices.  As such, the fund manager could be responsible for unfair labor practices by the portfolio company.

Essentially, the NLRB determined that the fund manager could be liable as the employer, and the Fifth Circuit court’s decision was that the NLRB’s determination was reasonable (it didn’t need to agree, it only needed to find that a reasonable person may have come to the same conclusion as the NLRB based on the facts presented).

The court’s ruling was based on its finding that Oaktree participated significantly in the financial control of Turtle Bay Hotel and there were some casual references to Oaktree having acquired (rather than merely invested in?) the hotel previously.  The resort also had a person who the NLRB found was acting on behalf of the funds based on his communications with the fund letting them know what he was doing.

I’m a fund and company lawyer, not an employment lawyer, but this ruling seems like a stretch.  First, the court seemed to find the fact that the fund referred to its strategy as both an investment manager and an asset manager to be compelling evidence (unfortunately for Oaktree, this statement apparently was in their legal brief).  This may be good news for fund managers that aren’t asset managers, but I don’t think a generic statement such as this in a brief should be dispositive – presumably they should look only at what the fund is actually doing.  Second, the fact that someone on the ground was reporting back to the fund doesn’t – to me – mean that person was working for the fund.  Any CEO of a portfolio company would report back to its fund investors.  That said, there was some other evidence of a more incestuous relationship between the two.

We’ll keep monitoring this issue as the case law develops, but my guess is that this finding, that the fund is the employer for NLRA purposes, will only happen in rare cases where the portfolio company is essentially wholly-owned by a fund.  However, because of this case law, this is a potential risk that fund managers should be aware of even outside of that circumstance and, accordingly, fund managers should use caution where unfair labor practices are at issue with their portfolio companies.  Even funds that don’t intend to take controlling positions could end up in this context, for example, where they have secured debt in a non-performing company that exceeds the value and leads to them being the only equity holder through bankruptcy or similar events. 

It will be interesting to see whether this case will have long-lasting implications, as the precedential value is uncertain in my mind.  For those who aren’t familiar with how common law precedent works, this decision is not binding on the Ninth Circuit, or any other circuit, but may be instructive should such a court be asked to address a similar issue.  If this decision remains “the law” in the Fifth Circuit, other circuits presented with the issue will need to make their own determinations and, ultimately, the Supreme Court could weigh in if there are major disputes between the districts.  Given that there was a vigorous dissenting (objecting) judge in this case and for the reasons I discuss, I wonder whether a different court addressing this issue would reach the same conclusion. 

Here is a pdf of the court’s decision.