KKR’s $2.6 Billion KFN Unit Buyout Flawed, Judge Told

KKR & Co.’s $2.6 billion buyout of its publicly traded credit business KKR Financial Holdings LLC amounts to an insider deal that unfairly shortchanges shareholders, a lawyer for investors argued.

KKR’s acquisition of KKR Financial, commonly known as KFN, in an all-stock deal, amounted to a controlling-shareholder buyout that didn’t provide enough to stockholders, Stuart Grant, a lawyer for KFN shareholders, told a judge today. KKR officials said in April that 98 percent of KFN investors approved the deal in a shareholder vote.

“KKR was on both sides of this transaction,” Grant told Delaware Chancery Court Judge Andre Bouchard at a hearing in Wilmington today. Bouchard is weighing KKR’s request to have investor suits over the deal thrown out. The New York-based private-equity firm sought to “pull a fast one” on KFN investors as part of the acquisition, Grant said.

Arguments over the KFN buyout come two weeks after KKR, led by George Roberts and Henry Kravis, agreed to buy a stake in hedge fund BlackGold Capital Management LP as it continues a push to develop business beyond leveraged acquisitions, a person with knowledge of the deal told Bloomberg News. The firm will share in BlackGold’s earnings, which include fees for managing money, said the person, who spoke on the condition of anonymity July 14 because the deal hadn’t been announced.

KKR, along with competitors such as Blackstone Group LP, is diversifying its business by acquiring stakes in hedge-fund firms. Blackstone in February used client funds to buy a piece of Senator Investment Group LP. KKR’s agreement with BlackGold is its second such deal, after the firm took a stake in Nephila Capital Ltd. last year.

No Control

In the KFN case, KKR’s lawyers refute investors’ claims that the buyout fund controls the board of the holding company, say in court filings that KKR owns less than 1 percent of KFN’s stock and has no power over KFN’s directors.

“There’s no credible allegations of boardroom control” on KKR’s part, William Savitt, a lawyer for KFN’s directors, told Bouchard.

Grant countered in court filings that under KFN’s management agreement with KKR, the buyout firm handles all operations and KFN has no employees. The company was set up in 2004 as a mortgage and real estate-investment trust and sold its shares to the public the following June, raising more than $800 million.

KFN directors have acknowledged they are “totally reliant” on KKR for information about the value of the holding company’s investments and some board members have conflicting interests that may favor KKR, Grant told the judge.

‘Unique Circumstances’

Bouchard said the case raised unusual questions about whether an investor with far less than 51 percent of a company’s shares could still be considered a controlling shareholder because of the management agreement.

“This is a pretty unique circumstance,” the judge said. Bouchard said he’d rule later on whether KFN investors can proceed with the suits over KKR’s buyout.

The case is In Re Financial Holdings LLC Shareholder Litigation, 9210, Delaware Chancery Court (Wilmington).

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