Pittsburgh Comprehensive Municipal Pension Trust Fund filed a shareholder derivative lawsuit against Carlyle Group, challenging a $344 million payment to the private equity manager's founders and other executives related to the firm going public a decade ago.
The lawsuit, filed Wednesday by the $991 million pension fund in Delaware Chancery Court, alleges the payment to Founders William E. Conway Jr., Daniel A. D'Aniello and David M. Rubenstein, along with other executives including former co-CEOs Kewsong Lee and Glenn Youngkin among others, paid for "tax receivable agreement rights" that were actually worth nothing, according to the court filing. Mr. Lee is now sole CEO of Carlyle.
The founders and executives comprise a "control group" through its control of Carlyle Group Management LLC, which holds 42.8% of the manager's voting power, according to the filing.
Carlyle Group, in connection with its initial public offering, came to an agreement that allowed the control group to "exchange their private units of Carlyle's subsidiaries into public traded units of the public entity on an ongoing basis" and "required these exchanges to be taxable to the control group and pre-IPO owners," according to the filing.
The filing said those exchanges created tax assets that Carlyle could use to reduce its taxable income, and that the exchange agreement prohibited tax-free exchanges.
Meanwhile, Carlyle also entered into a tax receivable agreement requiring it make payments to the control group and pre-IPO owners equal to 85% of cash savings from its use of the tax assets while retaining the other 15%, the filing said.
The lawsuit alleges the control group by 2019 had exchanged very few of their units in the subsidiaries for publicly traded units, and that the control group was eager to receive tax receivable agreement payments even though the company had not earned taxable income, according to the filing.
"The control group's solution was to push through a conversion of the public partnership into a corporation and then to exchange their units in Carlyle's subsidiaries for publicly traded shares on a tax-free basis," the filing says. The lawsuit alleges that because that conversion allowed the control group and pre-IPO owners not to pay taxes, it created no tax assets for the company that would result in payments under the tax receivable agreements. Still, the lawsuit alleges, the control group proposed the company pay them $344 million and Carlyle did so, paying $344 million in Carlyle stock.
Joel Friedlander and Jeffrey M. Gorris, partners at Friedlander & Gorris, attorney for the plaintiff could not be immediately reached for comment. A Carlyle Group spokeswoman declined to comment