Opinion ID: 1035024
Heading Depth: 2
Heading Rank: 1

Heading: The Sun Funds

Text: Sun Capital Advisors, Inc. (SCAI) is a private equity firm founded by its co-CEOs and sole shareholders, Marc Leder and Rodger Krouse. Sun Capital, 903 F. Supp. 2d at 109. It is not a plaintiff or party in this case. SCAI and its affiliated entities -5- find investors and create limited partnerships in which investor money is pooled, as in the private equity funds here. Moreover, SCAI finds and recommends investment opportunities for the equity funds, and negotiates, structures, and finalizes investment deals. Id. SCAI also provides management services to portfolio companies, and employs about 123 professionals to provide these services. The plaintiffs here are two of SCAI's private equity funds (collectively the Sun Funds), Sun Capital Partners III, LP (Sun Fund III)3 and Sun Capital Partners IV, LP (Sun Fund IV). They are organized as Delaware limited partnerships. SBI is one of their portfolio companies, and the two Sun Funds have other portfolio companies. The Sun Funds do not have any offices or employees; nor do they make or sell goods, or report income other than investment income on their tax returns.4 Id. at 117. The 3 Sun Fund III is technically two different funds, Sun Capital Partners III, LP and Sun Capital Partners III QP, LP. Like the district court, we consider them one fund for purposes of this opinion because they are parallel funds run by a single general partner and generally make the same investments in the same proportions. Sun Capital Partners III, LP v. New Eng. Teamsters & Trucking Indus. Pension Fund, 903 F. Supp. 2d 107, 109 n.1 (D. Mass. 2012). 4 For ERISA purposes, the Sun Funds are Venture Capital Operating Companies (VCOC). According to the Sun Funds' private placement memos to potential investors, this requires that the partnerships: (i) . . . ha[ve] direct contractual rights to substantially participate in or substantially influence the management of operating companies comprising at least 50% of its portfolio (measured at cost) and (ii) in the ordinary course of [their businesses], actively exercis[e] such management rights with respect to at -6- stated purpose of the Sun Funds is to invest in underperforming but market-leading companies at below intrinsic value, with the aim of turning them around and selling them for a profit. As a result, the Sun Funds' controlling stakes in portfolio companies are used to implement restructuring and operational plans, build management teams, become intimately involved in company operations, and otherwise cause growth in the portfolio companies in which the Sun Funds invest. The intention of the Sun Funds is to then sell the hopefully successful portfolio company within two to five years. In fact, the Sun Funds have earned significant profits from sales of various portfolio companies.5 These private equity funds engaged in a particular type of investment approach, to be distinguished from mere stock holding or mutual fund investments. See, e.g., S. Rosenthal, Taxing Private Equity Funds as Corporate 'Developers', Tax Notes, Jan. 21, 2013, at 361, 364 & n.31 (explaining that private equity funds differ from mutual funds and hedge funds because they assist and manage the business of the companies they invest in). As one least one of the operating companies in which [they invest]. An operating company is an entity engaged in the production or sale of a product or service, as distinguished from a reinvesting entity. See also 29 C.F.R. § 2510.3-101(d)(1), (d)(3). We do not adopt the TPF's argument that any investment fund classified as a VCOC is necessarily a trade or business. 5 For instance, Sun Fund IV, the larger of the Funds, reported total investment income of $17,353,533 in 2007, $57,072,025 in 2008, and $70,010,235 in 2009. -7- commentator puts it, [i]t is one thing to manage one's investments in businesses. It is another to manage the businesses in which one invests. C. Sanchirico, The Tax Advantage to Paying Private Equity Fund Managers with Profit Shares: What Is It? Why Is It Bad?, 75 U. Chi. L. Rev. 1071, 1102 (2008). The Sun Funds are overseen by general partners, Sun Capital Advisors III, LP and Sun Capital Advisors IV, LP. Leder and Krouse are each limited partners in the Sun Funds' general partners and, together with their spouses, are entitled to 64.74% of the aggregate profits of Sun Capital Advisors III, LP and 61.04% of such profits from Sun Capital Advisors IV, LP. The Sun Funds' limited partnership agreements vest their respective general partners with exclusive authority to manage the partnership. Part of this authority is the power to carry out all the objectives and purposes of the partnerships, which include investing in securities, managing and supervising any investments, and any other incidental activities the general partner deems necessary or advisable. For these services, each general partner receives an annual fee of two percent of the total commitments (meaning the aggregate cash committed as capital to the partnership6) to the Sun Funds, paid by the limited partnership, and a percentage of the Sun 6 The aggregate capital commitment of Sun Fund IV was $1.5 billion, which the TPF asserts means the management fee at the 2% rate was $30 million. -8- Funds' profits from investments. The general partners also have a limited partnership agreement, which provides that for each general partner a limited partner committee makes all material partnership decisions. Sun Capital, 903 F. Supp. 2d at 110-11. Leder and Krouse are the sole members of the limited partner committees. Id. at 111. Included in the powers of the limited partner committees is the authority to make decisions and determinations relating to hiring, terminating and establishing the compensation of employees and agents of the [Sun] Fund or Portfolio Companies. The general partners also each have a subsidiary management company, Sun Capital Partners Management III, LLC and Sun Capital Partners Management IV, LLC, respectively. Id. These management companies contract with the holding company that owns the acquired company to provide management services for a fee, and contract with SCAI to provide the employees and consultants. See id. When portfolio companies pay fees to the management companies, the Sun Funds receive an offset to the fees owed to the general partner.7