When Henry Kravis and George Roberts transitioned the day-to-day management of private-equity firm KKR to their successors in 2021, they secured shares now valued at over $650 million.
However, a new lawsuit accuses the company of paying Kravis and Roberts without any tangible return. This significant gain is tied to a complex financial structure that has yielded billions for other founders and dealmakers in similar transactions.
A spokesperson for KKR stated that the deal provided substantial benefits to shareholders, dismissing the lawsuit as legally flawed and misrepresentative of the transaction. The firm plans to file a motion to dismiss the suit.
The lawsuit, filed by a Steamfitters union local pension fund, is part of a growing wave of legal actions gaining traction in Delaware courts. These actions could compel many private-equity executives to return their payouts. In a similar case, a healthcare company agreed to pay $71 million to settle, and judges have issued decisions in other cases that largely favor plaintiffs.
The KKR lawsuit targets a payment allegedly linked to a tax receivable agreement (TRA). TRAs are often paired with specific corporate structures to create and share valuable tax assets between the company and early investors. Although TRAs are becoming more common, they have also sparked controversy and led to numerous lawsuits against private-equity firms and some of their portfolio companies. Plaintiffs argue that instead of benefiting public companies, boards have used these agreements to primarily benefit early investors, irrespective of whether they generate any real value.
"This case is about two Wall Street titans seeking to enrich themselves and their fellow private unitholders because their peers had done so," the complaint, filed in the Delaware Court of Chancery and made public Tuesday, states.
The union pension fund's suit names Kravis and Roberts as defendants, alongside current KKR co-Chief Executives Scott Nuttall and Joseph Bae, other board members, and the company itself. The suit is akin to other legal actions against Apollo Global Management, Carlyle Group, and website host GoDaddy.
These cases are progressing through the Chancery courts, with judges issuing several decisions in favor of plaintiffs in other instances.
Earlier this year, healthcare company Premier agreed to settle a TRA-related lawsuit brought by the same group of plaintiffs' lawyers for $71 million. Additionally, a judge allowed a case involving a $344 million payment made to Carlyle founders and employees to proceed earlier this year. Another case challenging GoDaddy's board's decision to pay $850 million to early investors, including KKR, for obligations the company valued on its own books at $175 million, was also allowed to proceed last year.
Spokespeople for Carlyle and GoDaddy declined to comment on ongoing litigation.
While the cases share similarities, there are distinctions that have prompted some firms to push back. For instance, Apollo stated in a filing that payments to its founders were justified by significant TRA payments made to rights holders in prior years, and some rights holders relinquished their control of the firm. Apollo's lawyers further noted that the transaction was negotiated extensively by a conflicts committee of independent directors, who deemed the payments appropriate and reduced from the co-founders' initial requests.
TRAs are agreements between companies and early investors that help companies save on corporate income taxes. These savings occur when early, pre-IPO investors sell their stakes on the public markets.
Most recent controversies around TRAs involve scenarios where company boards approved large payments to early investors, even when the investors did not make sales that created tax assets or the sales did not justify the payments from the companies. In many instances, several board members themselves stood to benefit from the payments they authorized.
The lawsuit against KKR claims that Kravis and Roberts initially sought 8.5 million new shares, valued at over $500 million at the time, as payment for themselves and other TRA rights holders during a 2021 corporate reorganization of the firm. They received the shares despite neither man having sold any shares that would generate a tax asset for the company.
Instead, KKR's advisers concluded that the payment could be considered compensation for Kravis and Roberts potentially relinquishing special shares controlling the company in the future.
The lawsuit alleges that this shift was essentially a "rebranding" of the TRA payout. References to "TRA termination payments" were crossed out in several board documents, though the payment itself remained unchanged, according to the lawsuit.
Additionally, the reorganization provided another opportunity for Kravis, Roberts, Bae, and Nuttall to acquire more stock at the expense of other shareholders, the plaintiffs allege.
During the reorganization, the four men received an additional 3.3 million shares in unowned stock that had been forfeited by employees who left the firm before their benefits vested. At the time, these shares were worth more than $200 million.
