Pension Fund Sues KKR, Alleging $500M Payout Had ‘No Value’ to Unitholders

A Pennsylvania-based pension fund is suing private equity firm KKR & Co. Inc., its founders Henry Kravis and George Roberts, and several executives and board members, alleging they breached their fiduciary duty when they collected more than $500 million under a tax receivable agreement that had “no value to unitholders.”

The complaint, filed in the Delaware Court of Chancery on August 5 by the Steamfitters Local 449 Pension Fund, alleges Kravis and Roberts “wanted to enrich themselves” through a taxable receivable agreement termination deal and also accuses investment banking firm Evercore of “aiding and abetting breach of fiduciary duty.”

The union was a beneficial owner of shares of KKR “during the consideration and approval of the challenged transaction,” according to the suit it filed.

Kravis and Roberts allegedly demanded a “massive” TRA termination payment for themselves and the other private unitholders of KKR under the context of a “contemplated” tax-free conversion of their partnership units into shares as part of KKR’s reorganization into a corporation from its umbrella partnership – C corporation structure.

For more stories like this, sign up for the CIO Alert daily newsletter. 

Along with Kravis and Roberts, the lawsuit names as defendants four other officers, including Scott Nuttall and Joseph Bae, co-CEOs who are also on the company’s board, as well as 10 other current or former board members who approved the TRA payoffs.

According to the lawsuit, a TRA is beneficial to unitholders in a partnership only if they are motivated to monetize their holdings by exchanging their units for public shares in a taxable transaction and then selling the shares.

“Under the Internal Revenue Code, taxable exchanges of units for shares in an [umbrella partnerhip C corporation] structure create contingent tax assets for the corporation that the corporation can use in the future to offset taxable income,” the complaint states. “A TRA allocates the contingent future tax savings between the corporation and an exchanging unitholder.”

According to the complaint, the exchanging unitholder is typically entitled to 85% of the value of the tax savings to the corporation, which only retains 15%.

“This TRA contract right to 85% of the corporation’s future tax savings resulting from future taxable exchanges of units for shares is of no value to unitholders,” the complaint alleges. “There was no financial logic in KKR paying the founders and the other private unitholders for the founders’ supposed lost opportunity to engage in hypothetical future taxable exchanges.”

The lawsuit also alleges that Evercore, which KKR’s Conflicts Committee hired as its financial adviser, “was conflicted,” as it had represented KKR in two asset sales by a KKR portfolio company in 2021.

“The Conflicts Committee never asked Evercore for a conflicts disclosure, and Evercore chose to hide its conflicts despite the obvious relevance to the Conflicts Committee process,” the complaint states. It also alleges that Evercore “conceived of an alternative justification for a massive payoff” for Kravis and Roberts and the other unitholders, adding that “Evercore’s financial analysis of its control justification was artificial and contrived.”