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Apollo sued over $570mn tax payout to top executives

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Apollo Global Management improperly agreed to pay $570mn to cover the tax bills of its top executives as part of a shake-up aimed at distancing the private equity firm from its scandal-plagued founder Leon Black, according to a shareholder lawsuit filed on Wednesday.

The dispute casts a spotlight on a series of hasty governance reforms aimed at improving Apollo’s public image amid a fundraising crisis caused by Black’s messy departure in March 2021.

Black, who was forced out over revelations that he had paid $158mn for tax advice and other professional services provided by the late sex offender Jeffrey Epstein, is in line to receive about $276mn from Apollo coffers, according to the lawsuit. 

His co-founders, Marc Rowan and Josh Harris, each stand to receive more than $100mn, the lawsuit adds, with the remainder split between other executives.

The three founders allegedly “concocted a series of untenable justifications” for the $570mn payout after realising that they could face significant tax bills if they followed through with an investor-friendly proposal to eliminate the dual-class share structure that gave them control of Apollo.

But according to a complaint filed in Delaware Chancery Court on Wednesday, “there was no legitimate reason to pay the founders’ personal taxes”, and an aggrieved Apollo shareholder, the Anguilla Social Security Board, has alleged that the Apollo board breached its fiduciary duties and it has demanded that the money be returned to the company.

Apollo, Black and Harris did not immediately respond to requests for comment.

The payments were approved by a three-member “conflicts committee” made up of friends and business associates of the founders, the lawsuit claims. According to the lawsuit, the committee approved hundreds of pages of documents within hours of receiving them, and failed to keep minutes of most of its meetings.

Drawing on emails and internal documents given to the Anguilla board under a court order prompted by earlier litigation, the lawsuit makes claims about the final days of a decades-long compact between three men who built one of the most lucrative groups on Wall Street.

Even as Rowan was elevated to chief executive of Apollo, and Black was pushed out in a leadership scuffle that he later blamed on Harris, the lawsuit claims the trio of billionaires collaborated on a series of proposals that would make them even richer.

Bar chart of TRA payoff ($mn) showing Apollo tax buyouts for executives

One of the proposals is said to have involved the founders seeking payment from Apollo in return for eliminating a “tax receivable agreement” that governed what would happen if the founders gave up the private partnership units through which they held their stake in Apollo, and instead chose to hold the company’s publicly traded shares.

While such “taxable exchanges” would usually have cost the founders money, they should also result in a tax-deductible expense for Apollo. The group promised to pay 85 per cent of this tax saving back to the founders. 

The founders argued that they should be compensated for giving up that agreement, according to internal presentations cited in court documents.

The Anguilla board disagreed, arguing that there had been no such taxable exchange and Apollo had not yet received any tax benefits.

Although the conflict committee’s financial adviser, Perella Weinberg Partners, accepted much of the founders’ reasoning, it “refused to provide a fairness opinion and disclaimed the provision of any tax advice, even though the entire transaction was predicated on complicated tax considerations”, according to the lawsuit.

Perella Weinberg declined to comment.

Several boutique investment banks and private equity firms have created similar tax receivable agreements in connection with their initial public offerings. Apollo paid $83mn in TRA disbursements to executives between January 1 2021 and June 30 2022, securities filings show.

The complaint also criticised what it said were close ties between Apollo executives and the group’s independent directors. Anguilla was using a legal device called a derivative lawsuit to sue the Apollo founders on behalf of the company itself, asserting legal rights that it said the company’s directors were unlikely to enforce because they were too conflicted to investigate any alleged wrongdoing.

One target of the Anguilla board’s criticism is Richard Emerson, a former investment banker and Microsoft dealmaker who resigned as an Apollo director last week.

Shortly after his appointment in 2021, Emerson wrote to his longtime associate Harris, who has since left Apollo, asking for help to secure a place at Harvard University for his son, according to an email cited in the complaint. 

The assistance should be provided “without creating a . . . Varsity Blue taint”, the email said, an apparent reference to a 2019 scandal in which a number of wealthy Americans were prosecuted over allegations they had paid bribes to secure their children places at elite universities.

Emerson did not immediately respond to a request for comment.

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