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

Heading: The Acquisition of Scott Brass, Inc.

Text: 7 This sort of fee arrangement is common in private equity funds. See S. Rosenthal, Taxing Private Equity Funds as Corporate 'Developers', Tax Notes, Jan. 21, 2013, at 361, 362 n.6 (explaining that equity funds usually pay the fees to their general partners, which often redirect the fee to a management services company that renders the management services for the partnership, and that the general partner or management company will often receive fees from the portfolio company, in which case the partnership (the equity fund) receives a fee offset). -9- In 2006, the Sun Funds began to take steps to invest in SBI, the acquisition of which was completed in early 2007. Leder and Krouse made the decision to invest in SBI in their capacity as members of the limited partner committees. SBI, a Rhode Island corporation, was an ongoing trade or business, and was closely held; its stock was not publicly traded. SBI was a leading producer of high quality brass, copper, and other metals used in a variety of end markets, including electronics, automotive, hardware, fasteners, jewelry, and consumer products. In 2006, it shipped 40.2 million pounds of metal. SBI made contributions to the TPF on behalf of its employees pursuant to a collective bargaining agreement. On November 28, 2006, a Sun Capital affiliated entity sent a letter of intent to SBI's outside financial advisor to purchase 100% of SBI. In December 2006, the Sun Funds formed Sun Scott Brass, LLC (SSB-LLC) as a vehicle to invest in SBI. Sun Fund III made a 30% investment ($900,000) and Sun Fund IV a 70% investment ($2.1 million) for a total equity investment of $3 million. This purchase price reflected a 25% discount because of SBI's known unfunded pension liability.8 SSB-LLC, on December 15, 2006, formed a wholly-owned subsidiary, Scott Brass Holding Corp. 8 The Sun Funds contend that they reduced the purchase price based on the expectation that a future buyer would pay less for a company with unfunded pension obligations, not because of a concern that they were incurring potential withdrawal liability. -10- (SBHC). SSB-LLC transferred the $3 million the Sun Funds invested in it to SBHC as $1 million in equity and $2 million in debt. Id. at 111. SBHC then purchased all of SBI's stock with the $3 million of cash on hand and $4.8 million in additional borrowed money. Id. The stock purchase agreement to acquire SBI's stock was entered into on February 8, 2007.9 On February 9, 2007, SBHC signed an agreement with the subsidiary of the general partner of Sun Fund IV to provide management services to SBHC and its subsidiaries, i.e., SBI. Since 2001, that general partner's subsidiary had contracted with SCAI to provide it with advisory services. In essence, as the district court described, the management company acted as a middle-man, providing SBI with employees and consultants from SCAI. Id. Numerous individuals with affiliations to various Sun Capital entities, including Krouse and Leder, exerted substantial operational and managerial control over SBI, which at the time of the acquisition had 208 employees and continued as a trade or business manufacturing metal products. For instance, minutes of a March 5, 2007 meeting show that seven individuals from SCP attended a Jumpstart Meeting at which the hiring of three SBI salesmen was approved, as was the hiring of a consultant to analyze 9 The cover page of the agreement states the agreement is dated February 8, 2007, but the text of the stock purchase agreement says it is dated February 9, 2007. The discrepancy is not of importance here. -11- a computer system upgrade project at a cost of $25,000. Other items discussed included possible acquisitions, capital expenditures, and the management of SBI's working capital. Further, Leder, Krouse, and Steven Liff, an SCAI employee, were involved in email chains discussing liquidity, possible mergers, dividend payouts, and concerns about how to drive revenue growth at SBI. Leder, Krouse, and other employees of SCAI received weekly flash reports from SBI that contained detailed information about SBI's revenue, key financial data, market activity, sales opportunities, meeting notes, and action items. According to the Sun Funds, SBI continued to meet its pension obligations to the TPF for more than a year and a half after the acquisition.