KKR founders face suit alleging they got giant payday for no work

A new lawsuit is accusing the company of paying Kravis and Roberts but getting nothing in return. Their windfalls came from a complicated financial structure that has netted billions for other company founders and dealmakers in similar transactions.

A spokeswoman for KKR said the deal offered substantial benefits to shareholders. The firm said the lawsuit is legally deficient and mischaracterizes the transaction. KKR expects to move to dismiss the suit, she said.

The shareholder suit filed by a Steamfitters union local pension fund is one of a string of legal actions that are steadily gaining momentum in Delaware courts that could force many private-equity executives to hand back the payouts. Already, a healthcare company has agreed to pay $71 million to settle a similar lawsuit and judges have issued decisions in other cases that have largely been favorable to plaintiffs.

The KKR suit takes aim at a payment allegedly tied to a tax receivable agreement, or TRA. TRAs are typically combined with specific corporate structures to create and share potentially valuable tax assets between the company and their early investors.

While TRAs are increasingly common, they have also become controversial and prompted a raft of lawsuits against private-equity firms and some of their portfolio companies. Instead of the deals resulting in the tax benefits for the public companies, plaintiffs allege, boards have sometimes used the agreements to largely benefit the early investors, regardless of whether they create anything of value.

“This case is about two Wall Street titans who wanted 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, alleges.

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 similar to other litigation undertaken against rivals Apollo Global Management and Carlyle Group, as well as website host GoDaddy.

The cases are at various stages progressing through the Chancery courts, though judges have issued several decisions favoring plaintiffs in other cases.

Healthcare company Premier agreed to settle a TRA-related suit brought by the same group of plaintiffs’ lawyers for $71 million earlier this year. A judge ruled another case involving a $344 million payment made to Carlyle founders and employees could proceed earlier this year. A 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 allowed to proceed last year.

Spokeswomen for Carlyle and GoDaddy declined to comment on ongoing litigation.

The cases do have distinctions between them, however, prompting pushback from some of the firms.

Apollo, for example, said in a filing that payments to its founders reflected that the firm had made significant TRA payments to rights holders in prior years and that some rights holders were relinquishing their control of the firm. Apollo’s lawyers also said the transaction had been negotiated at length by a conflicts committee of independent directors that concluded the payments were appropriate, and negotiated down from what the co-founders had initially requested.

TRAs are deals between companies and early investors that help companies save on their corporate income taxes. The savings are generated when early, pre-IPO investors sell their stakes on the public markets.

Most of the recent controversies around TRAs involve instances where company boards decided to pay early investors large amounts of money even in cases where the investors didn’t make the sales that create the tax assets, or didn’t make an amount commensurate with the payments from the companies. In many of these cases, several board members themselves stood to benefit from the payments the board authorized.

The suit against KKR alleges that Kravis and Roberts initially sought 8.5 million new shares worth over $500 million at the time as payment for themselves and other TRA rights holders as part of a 2021 corporate reorganization of the firm. They got the shares despite the fact that neither man had ever sold a share that would generate a tax asset for the company.

Instead, KKR’s advisers determined the payment could be treated as compensation for Kravis and Roberts potentially giving up special shares controlling the company in future years.

The lawsuit alleges that the shift was little more than a “rebranding" of the TRA payout. References to “TRA termination payments" were struck through at several points in board materials, though the payment itself was unchanged, the lawsuit alleges.

The pivot during the reorganization also opened up another avenue for Kravis, Roberts, Bae and Nuttall to receive 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. The shares were worth more than $200 million at the time.

Write to Ben Foldy at ben.foldy@wsj.com