IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
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`C.A. No. 2024-0808-JTL
`
`PUBLIC VERSION
`FILED ON: AUGUST 5, 2024
`
`STEAMFITTERS LOCAL 449
`PENSION FUND,
`Plaintiff,
`
`v.
`HENRY KRAVIS, GEORGE
`ROBERTS, JOSEPH BAE, SCOTT
`NUTTALL, DAVID SORKIN,
`ROBERT LEWIN, ROBERT
`SCULLY, MARY DILLON,
`PATRICIA RUSSO, THOMAS
`SCHOEWE, XAVIER NIEL,
`ADRIANE BROWN, ARTURO
`GUTIERREZ HERNANDEZ, DANE
`HOLMES, JOSEPH GRUNDFEST,
`JOHN HESS, EVERCORE GROUP
`L.L.C.,
`
`Defendants,
`
`– and –
`KKR & CO. INC.,
`Nominal Defendant.
`
`VERIFIED COMPLAINT
`Steamfitters Local 449 Pension Fund (“Plaintiff”), by and through its
`
`undersigned counsel, based upon knowledge as to itself and information and belief,
`
`including the review of publicly available information and non-public documents
`
`{FG-W0514731.}
`
`EFiled: Aug 05 2024 05:02PM EDT
`Transaction ID 73950256
`Case No. 2024-0808-JTL
`
`
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`x
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`C.A. No. 2024-0808-JTL
`
`PUBLIC VERSION
`FILED ON: AUGUST 5, 2024
`
`STEAMFITTERS LOCAL 449
`PENSION FUND,
`Plaintiff,
`
`v.
`HENRY KRAVIS, GEORGE
`ROBERTS, JOSEPH BAE, SCOTT
`NUTTALL, DAVID SORKIN,
`ROBERT LEWIN, ROBERT
`SCULLY, MARY DILLON,
`PATRICIA RUSSO, THOMAS
`SCHOEWE, XAVIER NIEL,
`ADRIANE BROWN, ARTURO
`GUTIERREZ HERNANDEZ, DANE
`HOLMES, JOSEPH GRUNDFEST,
`JOHN HESS, EVERCORE GROUP
`L.L.C.,
`
`Defendants,
`
`– and –
`KKR & CO. INC.,
`Nominal Defendant.
`
`VERIFIED COMPLAINT
`Steamfitters Local 449 Pension Fund (“Plaintiff”), by and through its
`
`undersigned counsel, based upon knowledge as to itself and information and belief,
`
`including the review of publicly available information and non-public documents
`
`{FG-W0514731.}
`
`EFiled: Aug 05 2024 05:02PM EDT
`Transaction ID 73950256
`Case No. 2024-0808-JTL
`
`
`
`obtained pursuant to a demand to inspect books and records of KKR & Co. Inc.
`
`(“KKR” or the “Company”) under 8 Del. C. § 220 (“Section 220”), as to all other
`
`matters, alleges as follows:
`
`NATURE OF THE ACTION
`This case is about two Wall Street titans who wanted to enrich
`
`1.
`
`themselves and their fellow private unitholders because their peers had done so.
`
`KKR’s founders, Henry Kravis and George Roberts (the “Founders”), saw that the
`
`founders of The Carlyle Group (“Carlyle”) and the founders of Apollo Global
`
`Management (“Apollo”) had given themselves multi-hundred-million-dollar payoffs
`
`in connection with corporate restructuring transactions at their respective alternative
`
`asset management firms. Kravis and Roberts sought a similar payoff.
`
`2.
`
`Carlyle converted from a publicly traded partnership into a corporation.
`
`Apollo converted from an “Up-C” structure into a corporation. Both restructuring
`
`transactions contemplated a tax-free exchange of the founders’ partnership units
`
`into shares. A tax-free exchange had the practical effect of eliminating and
`
`rendering worthless the founders’ contract right under a tax receivable agreement
`
`(“TRA”) to potential future payments arising out of future taxable exchanges of
`
`partnership units. The founders of Carlyle, and then Apollo, demanded hefty
`
`compensation for the hypothetical loss of future payments from hypothetical future
`
`{FG-W0514731.}
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`2
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`
`
`
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`taxable exchanges. The founders and other private unitholders at Carlyle received
`
`$344 million for the supposed loss of their TRA rights. The founders and other
`
`private unitholders at Apollo received $570 million.
`
`3.
`
`Kravis and Roberts similarly demanded a massive payment (a “TRA
`
`Termination Payment”) to themselves and the other private unitholders of KKR in
`
`the context of a contemplated tax-free conversion of their partnership units into
`
`shares as part of KKR converting from its Up-C structure to a corporation (the
`
`“Reorganization”). Initially, the Founders sought a TRA Termination Payment
`
`valued at
`
`, which would include 8.5 million newly issued shares of KKR
`
`common stock worth over $500 million. The Founders’ proposal was expressly
`
`justified with reference to Carlyle and Apollo as “two recent market comps for TRA
`
`termination payments.”
`
`4.
`
`The Founders’ proposal ran into a speed bump that should have been a
`
`roadblock. Outside legal and financial advisors to KKR knew that stockholders at
`
`Carlyle and Apollo had served Section 220 demands challenging the above-
`
`referenced TRA payoffs to those firms’ founders. KKR’s advisors understood that
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`{FG-W0514731.}
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`3
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`
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`those Section 220 demands cogently argued that the payoffs could not be justified
`
`by the loss of TRA rights.1
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`5.
`
`A TRA is beneficial to unitholders in a partnership only to the extent
`
`that the unitholders are motivated to monetize their holdings by means of 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 Up-C
`
`structure create contingent tax assets for the corporation that the corporation can use
`
`in the future to offset taxable income. A TRA allocates the contingent future tax
`
`savings between the corporation and an exchanging unitholder. Typically, the
`
`exchanging unitholder is entitled to 85% of the value of the tax savings to the
`
`corporation, and the corporation keeps the remaining 15%. This TRA contract right
`
`to 85% of the corporation’s future tax savings resulting from future taxable
`
`
`1 The payoffs to the founders and pre-IPO owners of Carlyle and Apollo are
`currently being litigated. Vice Chancellor Zurn sustained the central claims
`respecting the Carlyle transaction. See City of Pittsburgh Comp. Mun. Pen. Trust
`Fund v. Conway, 2024 WL 1752419, at *1 (Del. Ch. Apr. 24, 2024) (“Plaintiff
`satisfies this exception by pleading Carlyle LP’s general partner, acting through
`various defendants in this action, concealed or obfuscated material information from
`the conflicts committee to ensure it did not learn the Private Unitholders lacked the
`leverage to extract a payment for their TRA rights. At the pleading stage, Plaintiff
`has established that the good faith safe harbor is unavailable.”). Briefing is
`underway on a motion to dismiss the Apollo litigation, Anguilla Social Security
`Board v. Black et al., C.A. No. 2023-0846-JTL (Del. Ch.).
`4
`
`{FG-W0514731.}
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`
`
`
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`exchanges of units for shares is of no value to unitholders, including billionaire
`
`founders, who do not monetize their partnership units through taxable exchanges
`
`that provide the corporation with tax assets.
`
`6.
`
`Neither Roberts nor Kravis engaged in taxable exchanges of their units
`
`since KKR’s IPO in 2010. They never “sold a share of KKR stock.”2 The Section
`
`220 documents do not indicate that Kravis or Roberts had any expressed intention
`
`of engaging in future taxable exchanges. If the Founders wanted liquidity, the
`
`Founders could use the “buy, borrow, die” strategy of borrowing against their KKR
`
`equity, which would allow them to hold their low-basis KKR units until their deaths,
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`at which time their heirs would receive a tax-basis step up and no TRA payments
`
`would ever be due.3
`
`7.
`
`The prior restructuring transactions at Carlyle and Apollo, and the
`
`challenged restructuring transaction at KKR, allowed the founders and other private
`
`unitholders to exchange their units into publicly traded shares tax-free, thereby
`
`avoiding a massive tax liability. Accordingly, no tax assets were created, and there
`
`
`2 See Lydia Moynihan, KKR’s billionaire founders could look to cash out after
`stepping down, experts predict, N.Y. Post (Oct. 12, 2021).
`3 See, e.g., David Rae, How The Rich Use The Buy, Borrow Die Strategy To Avoid
`Large Tax Bills, Forbes (July 14, 2022).
`
`{FG-W0514731.}
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`5
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`
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`would be no future tax savings or associated TRA payments. These tax-free
`
`restructuring transactions were intended to be value-enhancing to the firms and their
`
`investors. The founders with the largest stakes would be the largest beneficiaries.
`
`8.
`
`For the above reasons, 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 that could possibly
`
`have benefitted KKR. Fully informed outside directors negotiating with the
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`Founders at arm’s-length respecting a tax-free exchange of units as part of a value-
`
`enhancing restructuring transaction should not agree to a massive payoff to the
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`Founders premised on their lost TRA rights. KKR’s outside advisors understood
`
`this.
`
`9.
`
`KKR’s Conflicts Committee retained Evercore Group L.L.C.
`
`(“Evercore”) as its financial advisor. Evercore was conflicted. Evercore had
`
`represented Carlyle’s founders in connection with the payoff to them for their lost
`
`TRA rights. Additionally, Evercore 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.
`
`{FG-W0514731.}
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`6
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`10.
`
`Evercore understood that eliminating future taxable exchanges that
`
`otherwise would occur had negative value to KKR because the Company’s future
`
`tax savings from taxable exchanges would always exceed its TRA obligations by
`
`15%. Eliminating the TRA was thusno justification for KKR making a massive
`
`payout to the Founders and other unitholders. Evercore calculated that eliminating
`
`future taxable exchangesofall outstanding partnership units over time could cost
`
`KKRuptoa in net present value based on the Company’s 15% share of
`
`future tax savings under the TRA:
`
` Potential Sources of Value
`
`& TRA liability is terminated
`
`® No liability exists until there is an exchange that creates an offsetting
`tax asset
`& SharehoKers will lose their 15% benefit of the step-up
`
`a’
`
`11.
`
`Evercore’s understanding of this financial reality put them in an
`
`untenable position. Evercore had staked its position on the negative value to the
`
`Companyof eliminating future taxable exchanges under the TRA. Yet, the Founders
`
`insisted that they wanted to be paid by the Companyfor the elimination of potential
`
`future taxable exchanges, as Carlyle and Apollo had done, and Evercore had helped
`
`engineer the Carlyle payment.
`
`12.
`
`In bad faith, Evercore conceived of an alternative justification for a
`
`massive payoff to the Founders and the other unitholders. According to Evercore,
`
`the Founders could be compensated for the net present value of the future benefit to
`7
`
`{FG-W0514731.}
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`
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`KKRofbecoming a one-share, one-vote corporation upon thefuture relinquishment
`
`of control by the Founders. Evercore presented that the sunset of KKR’s dual-class
`
`structure upon the Founders’ death or disability was worth almost exactly what the
`
`Founders wanted to give up their “future TRA rights”—uptoa.
`
`® Proposed Sunset provision on dualclass
`structure
`
`® Conversion to a single voting class has value (typically of non-
`vi
`control equity value) but will likely not be realized for 12 - 20 years
`® Unlike other alternative asset managers,1 for 1 voting will not occur Pt :
`immediately
`
`13.
`
`Evercore’s financial analysis of its control justification wasartificial
`
`and contrived—ustlike the controljustification itself. Evercore identified supposed
`
`“relevant” precedenttransactions dating back to 1997 in which holders of high-vote
`
`stock had received a premium in dual class recapitalizations (while ignoring the far
`
`more numerousdualclass recapitalizations in which no premium waspaid):
`
`
`
`a
`2
`=
`
`Evercore identified 15 relevant recapitalizations since 1997
`Each precedent has unique circumstances that complicate a direct comparison to other recapitalizations
`These transactions are those in which there was a premium; there are other recapitalizations in which no premium was paid
`
`In dual class recapitalizations, control was immediately transferred from the holders
`
`of high-vote shares to the public stockholders. Typically, fairness opinions were
`
`issued whenhigh-vote holders received a premium. The challenged transaction was
`
`not such a dual class recapitalization. Evercore, unsurprisingly, was unwilling to
`
`providea fairness opinion.
`
`{FG-W0514731.}
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`
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`14. Evercore made no attempt to identify precedents most similar in form
`
`to the unique attributes of the challenged transaction. Evercore rejected
`
`
`
`. Nothing in the Section
`
`220 record or the public record suggested that Kravis and Roberts, both near-
`
`octogenarians, planned on maintaining intergenerational control. They negotiated
`
`to retain absolute control for five years post-closing. Thereafter, Kravis and Roberts
`
`would retain effective working control through their high-status co-Chairmen roles
`
`coupled with the 25% voting block they would enjoy in combination with their
`
`chosen management successors.
`
`15. The Founders never conceived of their proposed transaction as a sale
`
`of control. They insisted on retaining absolute control for a period of years. In their
`
`negotiations, the Founders and KKR management continued to point to the TRA
`
`payoffs in Carlyle and Apollo as precedents. In substance, the Founders and KKR
`
`management always structured the payoff as a TRA Termination Payment, not as a
`
`sale of the Founders’ control. The payoff would be pro rata to all private unitholders
`
`in proportion to number of units they exchanged tax free, with nearly half of the
`
`payment going to unitholders other than the Founders, consistent with the reality that
`
`all private unitholders were being compensated for their hypothetical loss of TRA
`
`rights.
`
`{FG-W0514731.}
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`9
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`16. As a matter of form, KKR management struck the words “TRA
`
`Termination” from the defined term “TRA Termination Payment” in their
`
`presentation materials and draft transactional documents:
`
`However, the documentation ultimately presented to the Board stated: “The TRA
`
`entitlement is exchanged for [8.5 million] Class A Recapitalization Units in Group
`
`
`
`Partnership.”
`
`17. Kravis negotiated the final terms of the challenged transaction with the
`
`head of the Conflicts Committee in undocumented discussions over the course of a
`
`weekend. The negotiated financial term was the issuance to the unitholders of 8.5
`
`million newly issued KKR shares worth more than $500 million (the “TRA Payoff”).
`
`18.
`
`In short, the TRA Payoff was an unjustifiable payment to the Founders
`
`and other private unitholders. The director defendants could not rely in good faith
`
`on calculations by a conflicted financial advisor who was unwilling to opine on the
`
`fairness of the challenged transaction and unable to identify analogous precedent
`
`transactions that made financial sense. Evercore aided and abetted the Founders and
`
`other director defendants in facilitating the unfair TRA Payoff.
`
`{FG-W0514731.}
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`10
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`19. As part of the Reorganization, the Board shoveled other benefits to the
`
`Founders and other senior officers with minimal, if any, analysis or negotiation.
`
`Among other unwarranted handouts, the Board used the Reorganization as a pretext
`
`to allow the Founders to divvy up 3.36 million unallocated KKR partnership units,
`
`worth approximately $220 million, that had been used to compensate KKR
`
`personnel but were forfeited when the personnel left KKR before the units vested
`
`(the “Forfeited Units Payoff,” and with the TRA Payoff, the “Challenged Payoffs”).
`
`20. The Challenged Payoffs are not entirely fair. The Founders did not
`
`condition their proposal on the approval by a fully empowered special committee or
`
`a vote of unaffiliated stockholders. An independent third party acting at arm’s-
`
`length would not have approved the Challenged Payoffs.
`
`PARTIES
` Nominal Defendant KKR & Co. Inc.
`21. Nominal Defendant KKR & Co. Inc. is a publicly traded Delaware
`
`corporation with its corporate headquarters located in New York City.
`
`22. From its 2010 listing on the NYSE until its conversion into an Up-C
`
`corporation in 2018, KKR & Co. L.P. (“KKR LP”) was a publicly traded partnership.
`
`{FG-W0514731.}
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`11
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`
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`23.
`
`In July 2018, KKR LP converted to an Up-C structure, with a publicly
`
`traded parent corporation, KKR & Co., Inc. (“KKR Inc.,” and together with KKR
`
`LP, “KKR”).
`
`24. On May 31, 2022, KKR’s stock was acquired by a new parent company
`
`that took KKR’s pre-merger name, KKR & Co. Inc. (“New KKR”). KKR became
`
`a wholly owned subsidiary of New KKR, and public stockholders of KKR Inc.
`
`became stockholders of New KKR.
`
`Plaintiff
`25. Steamfitters Local 449 Pension Fund was a beneficial owner of shares
`
`of KKR during the consideration and approval of the challenged transaction,
`
`continuously owned shares of KKR through the merger in which its KKR shares
`
`were converted to shares of New KKR by operation of law, and has continuously
`
`remained a beneficial owner of New KKR shares.
`
`Defendants
`
`26. Defendants are (i) the two Founders, (ii) four other officers, two of
`
`whom are also on the Board, (iii) ten other current or former members of the Board
`
`who approved the Challenged Payoffs, either as members of the Conflicts
`
`Committee or as members of the Board, and (iv) the Conflicts Committee’s financial
`
`advisor, Evercore.
`
`{FG-W0514731.}
`
`12
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`
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`
`
`The Founder Defendants
`27. Henry Kravis co-founded KKR in 1976 and serves as Co-Executive
`
`Chairman. Until 2021, he served as co-CEO. He continues to be “actively involved
`
`in managing the firm and serves on each of the regional Private Equity Investment
`
`Committees.”4 As a result of the TRA Payoff, Kravis received 2,414,142 KKR
`
`shares worth approximately $158 million.5 As a result of the Forfeited Units Payoff,
`
`Kravis received 535,185 KKR partnership units worth approximately $35 million.
`
`In sum, Kravis received KKR shares worth approximately $193 million in
`
`connection with the Challenged Payoffs.
`
`28. George Roberts co-founded KKR in 1976 and serves as Co-Executive
`
`Chairman. Until 2021, he served as co-CEO. He continues to be “actively involved
`
`in managing the firm and serves on each of the regional Private Equity Investment
`
`Committees.”6 As a result of the TRA Payoff, Roberts received 2,659,772 KKR
`
`shares worth approximately $174 million. As a result of the Forfeited Units Payoff,
`
`Roberts received 535,184 KKR partnership units worth approximately $35 million.
`
`
`4 KKR & Co. Inc., Form 10-K, at 374 (Feb. 29, 2024).
`5 The value of the benefits from the Challenged Payoffs discussed herein are
`calculated using the closing price of $65.51 share on the date the Reorganization
`Agreement was signed.
`6 Id.
`
`{FG-W0514731.}
`
`13
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`
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`
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`In sum, Roberts received shares worth approximately $209 million in connection
`
`with the Challenged Payoffs.
`
`29. From KKR’s IPO through the present, the Founders have maintained
`
`control over KKR. Kravis and Roberts exert control over KKR through the
`
`ownership of the “Golden Share” (i.e., a single share of Series I Preferred Stock held
`
`by KKR Management LLP (“KKR Management”)). As explained in the Company’s
`
`Form 10-K filed on February 29, 2024, “[t]he Series I preferred stockholder has the
`
`ability to appoint and remove members of our board of directors.” KKR
`
`Management is controlled by Kravis and Roberts who, as the original “Designated
`
`Members,” can never be “deemed to represent less than a Majority in Interest of
`
`[KKR Management’s] Class A Members.”
`
`30. Through the Golden Share, the Founders can hire and fire at will the
`
`members of KKR’s unconventional, unclassified board, where directors do not have
`
`pre-established terms of service. Kravis and Roberts also comprise a majority of the
`
`nominating committee. Public stockholders do not vote on the election of directors.
`
`KKR has not issued a proxy statement for more than five years. The Golden Share
`
`also provides the Founders with blocking rights concerning various types of
`
`transactions, including transactions that could otherwise provide a check on the
`
`Founders, such as the adoption of a stockholder rights plan.
`
`{FG-W0514731.}
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`14
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`31.
`
`Even without the Golden Share, the Founders maintain effective control
`
`through a combinationof(i) their status as founders, (11) their continuedroles as co-
`
`Executive Chairmen,(iii) their managerial control through officer defendants Bae,
`
`Nuttall, Sorkin and Lewin, whoare all beholden to the Founders for their careers
`
`and lucrative compensation packages, and (iv) their collective 25% stock ownership
`
`with the officer defendants:
`
`2.15%
`
`86,662,855
`18,476,431
`
`10.08%
`
`Other Interested Officer Defendants
`
`32.
`
`Joseph Bae joined KKRin 1996 andis currently its co-Chief Executive
`
`Officer. Priorto that, he served as co-President and co-Chief Operating Officer from
`
`2017 to 2021. He has been a memberof the board ofdirectors since July 2017. In
`
`2021, Bae receiveda total of $559,636,148 in compensation from KKR. Asa result
`
`of the TRA Payoff, Bae received 465,629 KKR shares worth approximately $31
`
`million. As a result of the Forfeited Units Payoff, Bae received 1,150,000 KKR
`
`15
`
`{FG-W0514731.}
`
`
`
`partnership units worth approximately $75 million. In sum, Bae received shares
`
`worth approximately $106 million in connection with the Challenged Payoffs.
`
`33. Scott Nuttall joined KKR in 1996 and is currently its Co-Chief
`
`Executive Officer. Prior to that, he served as co-President and co-Chief Operating
`
`Officer from 2017 to 2021. He has been a member of the board of directors since
`
`July 2017. In 2021, Nuttall received a total of $523,142,432 in compensation from
`
`KKR. As a result of the TRA Payoff, Nuttall received 575,356 KKR shares worth
`
`approximately $38 million. As a result of the Forfeited Units Payoff, Nuttall
`
`received 1,150,000 KKR partnership units worth approximately $75 million on the
`
`exchange date. In sum, Nuttall received shares worth approximately $113 million
`
`in connection with the Challenged Payoffs.
`
`34. David Sorkin is currently a KKR Senior Advisory Partner. From 2007
`
`through the first quarter of 2023, Sorkin served as KKR’s General Counsel and/or
`
`Chief Legal Officer. In 2021, Sorkin received a total of $20,644,923 in
`
`compensation from KKR. As a result of the TRA Payoff, Sorkin received 103,464
`
`KKR shares worth approximately $7 million.
`
`35. Robert Lewin joined KKR in 2004 and serves as the Chief Financial
`
`Officer. Lewin has held a number of positions at KKR, including co-leading the
`
`firm’s credit and capital markets businesses, serving as Treasurer and Head of
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`{FG-W0514731.}
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`16
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`Corporate Development and most recently as Head of Human Capital & Strategic
`
`Talent. From 2006 through 2010, Lewin resided in Hong Kong, helping to launch
`
`KKR’s Asia business. In 2021, Lewin received a total of $46,025,091 in
`
`compensation from KKR. As a result of the TRA Payoff, Lewin received 35,874
`
`KKR shares worth approximately $2 million.
`
`Conflicts Committee Defendants
`36. Robert Scully has been a member of the board of directors since July
`
`15, 2010. Scully was the chair of the “Conflicts Committee” that considered and
`
`approved the Reorganization and the Challenged Payoffs. As noted below in the
`
`Demand Futility section, Scully and his wife Nancy Peretsman have longstanding
`
`social and business connections with KKR and its Founders. Scully has received
`
`more than $3.8 million in compensation as a KKR director.
`
`37. Mary Dillon has been a member of the board of directors since
`
`September 6, 2018. Dillon was a member of the Conflicts Committee that
`
`considered and approved the Reorganization and the Challenged Payoffs. Dillon
`
`and Kravis serve on the Executive Committee of the Business Council. The
`
`Business Council is an invitation-only group of approximately 200 of the “world’s
`
`top CEOs,” and the Executive Committee is comprised of approximately 20 of those
`
`CEOs. Kravis was the Chairman of the Executive Committee in 2018-2019, and
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`{FG-W0514731.}
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`17
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`Dillon ascended to the Executive Committee in 2021. Dillon has received more than
`
`$1.5 million in compensation as a KKR director.
`
`38. Patricia Russo has been a member of the board of directors since April
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`15, 2011. Russo was a member of the Conflicts Committee that considered and
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`approved the Reorganization and the Challenged Payoffs. Russo has received over
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`$3.1 million in compensation as a KKR director.
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`39. Thomas Schoewe was a member of the board of directors from April
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`15, 2011 until July 13, 2022. Schoewe was a member of the Conflicts Committee
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`that considered and approved the Reorganization and the Challenged Payoffs.
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`Schoewe received over $2.5 million during his tenure as a KKR director.
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`Other Approving Board Members
`40. Xavier Niel has been a member of the board of directors since March 1,
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`2018. Niel approved the Reorganization and the Challenged Payoffs. Niel has
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`numerous professional and personal ties to KKR and its Founders. According to
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`Section 220 documents, “Niel and his partner, Delphine Arnault, are investors in
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`several companies in which KKR is also an investor”; “KKR has entered into a
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`partnership arrangement with Mediawan, a company founded by Mr. Niel”; “
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` Iliad,” a French company that Niel founded and controls; and “Niel
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`stated that when … Kravis visits France, they occasionally join each other for dinner,
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`and that he introduced Mr. Kravis to the French President, Emmanuel Macron.”
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`41. Adriane Brown has been a member of the board of directors since June
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`16, 2021. Brown approved the Reorganization and the Challenged Payoffs.
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`42. Arturo Gutierrez Hernandez has been a member of the board of
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`directors since March 4, 2021. Gutierrez Hernandez approved the Reorganization
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`and the Challenged Payoffs.
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`43. Dane Holmes was a member of the board of directors from March 4,
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`2021 until December 13, 2023 when he accepted an offer of employment with the
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`Company as its Chief Administrative Officer. Holmes approved the Reorganization
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`and the Challenged Payoffs.
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`44.
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`Joseph Grundfest was a member of the board of directors from July 15,
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`2010, until June 15, 2023. Grundfest approved the Reorganization and the
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`Challenged Payoffs. Grundfest had longstanding ties to KKR and its Founders. For
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`example, minutes of a meeting of the outside directors not on the Conflicts
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`Committee state that “Mr. Roberts made an anonymous donation of
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` to
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`Stanford University as part of a $2 million gift by Mr. William A Franke to establish
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`the William A. Franke Professorship in Law and Business at Stanford Law School.”
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`Grundfest holds that chair. In addition, Grundfest created the Stanford Law School’s
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`Directors’ College which was started with a
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` loan from Roberts. Grundfest
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`“
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`” The minutes go on to say that
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`the Law School then created the Roberts Program in Law, Business and Corporate
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`Governance, of which Grundfest was director. The Roberts Program was replaced
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`by the Arthur and Toni Rembe Rock Center for Corporate Governance where
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`Grundfest remains a senior faculty member. Grundfest “has introduced business
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`opportunities to KKR, to its funds, and to KKR principals, including Messrs. Kravis
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`and Roberts.” “Three of these situations have led to investments by Messrs. Kravis
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`and/or Roberts in firms in which Mr. Grundfest is also an investor. Those firms are
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`, and
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`” Those
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`investments “represent approximately
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` to
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` of [Grundfest’s] net worth.”
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`Grundfest received total compensation of over $3.5 million for his service on the
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`KKR Board.
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`45.
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`John Hess was a member of the board of directors from July 28, 2011,
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`until June 15, 2023. Hess approved the Reorganization and the Challenged Payoffs.
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`Hess also had longstanding ties to KKR and its Founders. For example, Hess
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`admitted that he “and his family had made investments in KKR funds” and that he
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`and Kravis “knew each other for many years.” Hess is also a member of “The
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`Business Council” where Kravis and Dillon “serve on the Executive Committee.”
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`Hess and his wife Susan have longstanding social connections with Kravis and his
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`wife, having attended parties with each other in the Hamptons for years. Kravis’s
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`wife, Marie-Josee Kravis, is the Chair of the Museum of Modern Art’s Board of
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`Trustees, and John Hess’s sister Marlene serves as a MoMA trustee. The Hess and
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`Kravis families are both major MoMA donors. Marlene Hess, John’s sister, serves
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`as the Vice Chair of Rockefeller University, where Henry Kravis was a long-time
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`trustee and major donor. In 2015, Kravis pledged $100 million to Rockefeller
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`University. Hess and Kravis are also both members of the Board of Trustees of
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`Mount Sinai Hospital, where Hess has been a trustee at least since 2007 and Kravis
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`has donated at least $25 million, resulting in the naming of the Marie-Josee and
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`Henry R. Kravis Center for Clinical Cardiovascular Health and the Kravis Children’s
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`Hospital. Similarly, Hess and his family are longtime supporters of Mount Sinai
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`Hospital with The Leon and Norma Hess Center for Science and Medicine, which
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`was named after his parents. Kravis and Hess are so close that Kravis attended
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`Hess’s son’s, Mike Hess’s, wedding.
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`21
`THIS DOCUMENT IS A CONFIDENTIAL FILING.
`ACCESS IS PRO
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`Evercore
`46. Evercore is a Delaware limited liability company with principal place
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`of business in New York, New York. Evercore was the financial advisor to KKR’s
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`Conflicts Committee in connection with the Reorganization.
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`JURISDICTION
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`47. This Court has subject matter jurisdiction over this breach of fiduciary
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`duty action under 10 Del. C. § 341.
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`FACTUAL ALLEGATIONS
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`KKR Goes Public
`In 1976, Kravis and Roberts, who are “[f]irst cousins and the closest of
`48.
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`friends,” founded KKR with Jerome Kohlberg, Jr. In 1987, Kohlberg resigned from
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`KKR and sued Kravis and Roberts for wrongfully increasing their stake in certain
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`deals at the expense of Kohlberg and KKR investors.
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`49.
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`In 2010, Kravis and Roberts took KKR public as a publicly traded
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`partnership. KKR LP registered an IPO of common shares (representing limited
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`partner interests) in a dual class equity structure, which gave the Founders control.
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`KKR LP had no material business operations of its own. Its primary asset was its
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`equity interest in KKR Group Partnership L.P. (“KKR Group Partnership”), which
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`conducted KKR LP’s asset management activities. Kravis, Roberts, and other pre-
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`22
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`IPO KKR employees owned KKR Group Partnership units through a separate entity,
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`KKR Holdings L.P. (“KKR Holdings”).
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`50. Pre-IPO owners had the right to exchange their private KKR Group
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`Partnership units held by KKR Holdings for public equity in KKR LP. Under the
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`Internal Revenue Code, taxable exchanges of units create a “step-up” in basis for the
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`Company, mostly in the form of depreciable goodwill.7 That depreciable goodwill
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`had the potential to be used as a valuable tax asset in a profitable business with
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`taxable income, which the Company could then use over time to reduce the amount
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`of taxes it paid.8
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`51.
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`In connection with its 2010 IPO, KKR entered into a TRA with the
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`Founders and other pre-IPO owners to allocate the tax savings created by their
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`taxable exchanges of privately held units into public equity. The TRA created
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`“symmetry” between the benefits the exchanging unitholder created for the
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`7 The exchanges turn “non-depreciable, self-developed goodwill into depreciable
`goodwill.” Gladriel Shobe, Supercharged IPOs and the Up-C, 88 U. Colo. L. Rev.
`913, 938 (2017).
`8 See Gladriel Shobe, Private Benefits in Public Offerings: Tax Receivable
`Agreements in IPOs, 71 Vand. L. Rev. 889 (2018).
`23
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`Company and the “tax liability they have borne.”9 The TRA contained standard
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`market provisions whereby the Company would share the benefits of the “step-up”
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`by paying the exchanging unitholder “85% of the amount of cash savings, if any,”
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`that the Company realized from its use of tax assets created by the taxable exchanges
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`of KKR units for shares.10 KKR kept the remaining 15% of the cash tax savings
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`realized from its use of tax assets created by these taxable exchanges.11 “The idea
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`is that everybody wins.”12
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`9 See Jeffrey J. Rosen & Peter A. Furci, Monetizing the Shield: Tax Receivable
`Agreements in Private Equity Deals, Debevoise & Plimpton Priv. Equity Rep., at 9
`(Fall 2010) (“The structure described above reserves to the existing owners the tax
`benefits (or 85% of the tax benefits) associated with a basis step-up that results from
`a taxable exchange on which the existing owners were taxable—in short it has a
`certain symmetry because existing owners receive tax benefits associated with a tax
`liability they have borne.”).
`10 KKR & Co. Inc., Form 10-K, at 60 (Mar. 7, 2011).
`11 See Amy S. Elliott, IPO Agreements that Shift Basis Step-Up to Sellers
`Proliferate, 132 TAX NOTES 334, 388 (2011) (explaining that there is “no magic” to
`the eighty-five percent standard and “[i]t was something that was developed in the
`early deals that has stuck”); Joshua Ford Bonnie & William R. Golden, Simpson
`Thacher & Bartlett LLP, UP-C
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