Contract analysis

I. Executive Summary Calderwood & Harkness LLP has been engaged by Ardent Capital GP III LLC (the "General Partner" or "GP"), the sole general partner of Ardent Capital Partners III LP (the "Fund"), a Delaware limited partnership with approximately $2.8 billion in total commitments, to advise on a comprehensive restructuring of its management company, Ardent Capital Management LLC (the "ManCo," an SEC-registered inve

II. Background and Factual Assumptions The following factual background and assumptions are based on information provided by the client and our review of the governing documents of the Fund, the GP, and the ManCo, including the Fund's Second Amended and Restated Agreement of Limited Partnership dated as of April 15, 2019 (the "LPA"), the GP's Amended and Restated Limited Liability Company Agreement dated as of Januar

1. Formation of HoldCo. A new Delaware limited liability company, Ardent Capital Holdings LLC ("HoldCo"), will be formed to serve as the parent holding company for the Ardent Capital platform. HoldCo will have five members: Marcus Aldridge, Priya Narayanan, Robert Hsiao, Elena Marchetti, and Samuel Okonkwo.

2. Formation of GP Intermediate. A new Delaware limited liability company, Ardent GP Intermediate LLC ("GP Intermediate"), will be formed as an intermediate entity between HoldCo and the GP. GP Intermediate will be a wholly owned subsidiary of HoldCo (single-member LLC).

3. Contribution of Interests. The remaining principals (Aldridge, Narayanan, and Hsiao) will contribute their respective membership interests in both the GP and the ManCo to HoldCo in exchange for membership interests in HoldCo. HoldCo will then contribute the GP membership interests to GP Intermediate.

4. Post-Restructuring Ownership. Following the restructuring, HoldCo will be the sole member of the ManCo and the sole member of GP Intermediate. GP Intermediate will be the sole member of the GP. The GP will continue to serve as the sole general partner of the Fund.

5. HoldCo Membership Interests. Post-restructuring, the membership interests in HoldCo will be held as follows:

6. Kellner Retirement. David Kellner will retire effective March 31, 2024. In connection with his retirement, Kellner will withdraw as a member of the GP and ManCo, transition to a Senior Advisor role under a separate advisory agreement with the ManCo, retain 100% of his vested carried interest ($13.14 million, representing 15% of the $87.6 million of accrued carry), and receive an advisory fee of $350,000 per year f

7. Trask Departure. Joanna Trask will depart voluntarily effective April 15, 2024, to join a competing investment firm. In connection with her departure, Trask will withdraw as a member of the GP and ManCo, retain 60% of her vested carried interest ($6,307,200), forfeit 40% of her vested carry ($4,204,800) and 100% of her unvested carry, receive a lump-sum separation payment of $1,250,000, and agree to restrictive co

8. Carry and Fee Reallocation. The carried interest and management fee economics previously held by Kellner and Trask (net of retained vested carry) will be reallocated among the five HoldCo members in accordance with their new HoldCo membership percentages.

III. Tax-Free Formation of HoldCo Under IRC Section 721 The threshold question in the tax analysis of the proposed restructuring is whether the formation of HoldCo and the contribution of existing GP and ManCo membership interests by the continuing principals to HoldCo in exchange for HoldCo membership interests constitutes a taxable event. For the reasons set forth below, we conclude that the formation of HoldCo sho

Section 721(b) provides an exception to the general nonrecognition rule of Section 721(a). Under Section 721(b), the nonrecognition rule does not apply to gain realized on a transfer of property to a partnership that would be treated as an investment company (within the meaning of Section 351) if the partnership were incorporated. Under Section 351(e) and Treasury Regulations Section 1.351-1(c), an investment company

IV. Basis and Holding Period Consequences The tax-free treatment of the HoldCo formation under Section 721(a) is accompanied by a system of carryover and substituted basis rules designed to preserve the built-in gain or loss in the contributed property for future recognition. These rules are set forth in Sections 722, 723, and 1223 of the Code. A. Basis of Contributed Property — Section 723 Under IRC Section 723, the

V. Section 704(b) and 704(c) Allocation of Built-In Gain A. Overview of the Issue At the time of contribution to HoldCo, the GP and ManCo membership interests may have fair market values that differ from their adjusted tax bases. This disparity between fair market value and tax basis creates "built-in gain" (or, less likely in this case, "built-in loss") that must be accounted for under the partnership allocation rul

Section 704(c)(1)(A) of the Code provides that income, gain, loss, and deduction with respect to property contributed to a partnership shall be shared among the partners so as to take into account the variation between the adjusted basis of such property to the partnership and its fair market value at the time of contribution. The purpose of Section 704(c) is to prevent the shifting of pre-contribution gain or loss f

VI. Treatment of David Kellner's Retirement A. Overview David Kellner will retire from Ardent Capital Partners effective March 31, 2024. In connection with his retirement, Kellner will: (i) withdraw as a member of the GP and ManCo; (ii) transition to Senior Advisor status under a separate advisory agreement with the ManCo; (iii) retain 100% of his vested carried interest ($13.14 million, representing 15% of $87.6 mil

Section 736(b) Payments. Section 736(b)(1) defines "payments made in exchange for the interest of such partner in partnership property" as payments for the withdrawing partner's share of partnership property, including the partner's share of the partnership's unrealized appreciation, accrued income, and capital. Payments described in Section 736(b) are treated as distributions by the partnership under Section 731 (wh

Section 736(a) Payments. Section 736(a) treats any payments to the withdrawing partner that are not described in Section 736(b) as either (i) a distributive share of partnership income, if the amount of the payment is determined with regard to the income of the partnership, under Section 736(a)(1), or (ii) a guaranteed payment under Section 707(c), if the amount of the payment is determined without regard to the inco

VII. Treatment of Joanna Trask's Departure A. Overview Joanna Trask is departing voluntarily effective April 15, 2024, to join a competing investment firm. In connection with her departure, Trask will: (i) withdraw as a member of the GP and ManCo; (ii) retain 60% of her vested carried interest, valued at $6,307,200 (60% of $10,512,000, where $10,512,000 is 12% of the $87.6 million of accrued carry); (iii) forfeit 40%