Apollo faces shareholder lawsuit over nine-figure executive tax payout

In the wake of restructuring efforts to distance itself from its founder, Leon Black, Apollo Global Management has another problem. On Wednesday, a lawsuit was lodged claiming that the company wrongfully agreed to pay  $570 million for the personal tax bills of its key executives.

The changes, hastily put in place, were intended to improve Apollo's management reputation after the fundraising turmoil that followed the controversial exit of Black in March 2021. Black, ousted after news broke of his $158 million dealings with the late Jeffrey Epstein for tax and other services, stands to potentially gain approximately $276 million from this decision. The lawsuit reveals that co-founders Marc Rowan and Josh Harris could each receive upwards of $100 million, with the remaining amount allocated to other senior executives.

The court documents further allege that the founders agreed to secure this staggering payout upon realizing the potential tax implications of dismantling a particular shareholder structure which granted them significant control over Apollo.

The Delaware Chancery Court complaint indicates that the alleged payouts had no valid business justification. The plaintiff, the Anguilla Social Security Board, accuses Apollo's board of neglecting their fiduciary responsibilities and is seeking a return of the funds.

Despite the accusations, Apollo has defended its actions, emphasizing that shareholders have profited since the transaction. The lawsuit claims, however, that a committee that greenlit the payments had close ties to the founders and operated without due diligence.

According to the lawsuit, the controversy surrounds proposals to reimburse the founders for relinquishing a "tax receivable agreement", a move that would be financially beneficial for both parties. Arguments have arisen regarding whether any taxable exchange took place and if Apollo garnered any related tax advantages.

Apollo claims its controversial TRA transaction underwent meticulous evaluation and approval processes.

While such tax receivable agreements are common among boutique investment banks, filings indicate Apollo has already paid $83 million related to these kinds of payments to its executives during 2021 and the first half of 2022.

Adding to Apollo's woes, the lawsuit casts doubt on the integrity of its relationship with independent directors. The Anguilla Social Security Board is also claiming that Apollo's leadership might be too compromised to probe alleged misconduct.

The lawsuit further singles out Richard Emerson, an ex-Apollo director and former Microsoft dealmaker. Post his 2021 appointment, Emerson purportedly reached out to Harris for assistance regarding his son's Harvard University admission, hinting at avoiding any scandal similar to the 2019 "Varsity Blue" controversy.

Tax Receivable Agreements (TRAs) are formal agreements where one company commits to sharing financial benefits from specific tax reductions with another entity. These tax reductions can stem from deductions such as depreciation, goodwill amortization, and net operating losses.

The concept of TRAs began in the early 1990s. While they were present in fewer than 1% of IPOs before 2005, their adoption has grown, with TRAs appearing in 8% of IPOs by 2018.

The plaintiff, Anguilla Social Security Board is a public pension fund for the small 15,000 person Caribbean nation of Anguilla. Its assets amount to approximately $120m.