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Corwin v. KKR Fin. Holdings LLC

Supreme Court of Delaware

September 16, 2015, Submitted; October 2, 2015, Decided

No. 629, 2014

Opinion

 [*305]  STRINE, Chief Justice:

In a well-reasoned opinion, the Court of Chancery held that the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action  [*306]  when a merger that is not subject to the entire fairness standard of review has [**2]  been approved by a fully informed, uncoerced majority of the disinterested stockholders.2 For that and other reasons, the Court of Chancery dismissed the plaintiffs' complaint.3 In this decision, we find that the Chancellor was correct in finding that ] the voluntary judgment of the disinterested stockholders to approve the merger invoked the business judgment rule standard of review and that the plaintiffs' complaint should be dismissed. For sound policy reasons, Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests.

I. The Court Of Chancery Properly Held That The Complaint Did Not Plead Facts Supporting An Inference That KKR Was A Controlling Stockholder of Financial Holdings

The plaintiffs filed a challenge in the Court of Chancery to a stock-for-stock merger between KKR & Co. L.P. ("KKR") and KKR Financial Holdings LLC ("Financial Holdings") in which KKR acquired each share of Financial Holdings's stock for 0.51 of a share of KKR stock, a 35% premium to the unaffected market price. Below, the plaintiffs' primary [**3]  argument was that the transaction was presumptively subject to the entire fairness standard of review because Financial Holdings's primary business was financing KKR's leveraged buyout activities, and instead of having employees manage the company's day-to-day operations, Financial Holdings was managed by KKR Financial Advisors, an affiliate of KKR, under a contractual management agreement that could only be terminated by Financial Holdings if it paid a termination fee. As a result, the plaintiffs alleged that KKR was a controlling stockholder of Financial Holdings, which was an LLC, not a corporation.4

The defendants filed a motion to dismiss, taking issue with that argument. In a thoughtful and thorough decision, the Chancellor found that the defendants were correct that the plaintiffs' complaint did not plead facts supporting an inference that KKR was Financial Holdings's controlling stockholder.5 Among other things, the Chancellor noted that KKR owned less than 1% of Financial Holdings's stock, had no right to appoint any directors, and had no contractual right to veto any board action.6 Although the Chancellor acknowledged the unusual existential circumstances the plaintiffs cited, he noted that those were known at all relevant times by investors, and that Financial Holdings had real assets its independent board controlled and had the option of pursuing any  [*307]  path its directors chose.7

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125 A.3d 304 *; 2015 Del. LEXIS 473 **

ROBERT A. CORWIN, MARGARET DEMAURO, ERIC GREENE, PIPEFITTERS LOCAL UNION NO. 120 PENSION FUND, and POMPANO BEACH POLICE & FIREFIGHTERS' RETIREMENT SYSTEM, Plaintiffs Below-Appellants, v. KKR FINANCIAL HOLDINGS LLC, TRACY COLLINS, ROBERT L. EDWARDS, CRAIG J. FARR, VINCENT PAUL FINIGAN, JR., PAUL M. HAZEN, R. GLENN HUBBARD, ROSS J. KARI, ELY L. LICHT, DEBORAH H. MCANENY, SCOTT C. NUTTALL, SCOTT RYLES, WILLY STROTHOTTE, KKR & CO. L.P., KKR FUND HOLDINGS L.P., and COPAL MERGER SUB LLC, Defendants Below-Appellees.

Notice: PUBLISHED IN TABLE FORMAT IN THE ATLANTIC REPORTER.

Subsequent History: Case Closed October 20, 2015.

Prior History:  [**1] Court Below: Court of Chancery of the State of Delaware, in and for New Castle County. Consol. C.A. No. 9210-CB.

In re KKR Fin. Holdings LLC S'holder Litig., 101 A.3d 980, 2014 Del. Ch. LEXIS 207 (Del. Ch., 2014)

Disposition: AFFIRMED.

CORE TERMS

stockholders, disinterested, merger, standard of review, fully informed, business judgment rule, uncoerced, invoked, controlling stockholder, approve, statutory requirements, ratification, voting, stock, plaintiffs', charter, shareholder, business judgment, second-guessing, contractual, disclosures, decisions, reasons, cases

Business & Corporate Law, Shareholders, Shareholder Duties & Liabilities, General Overview, Mergers & Acquisitions Law, Mergers, Duties & Liabilities of Shareholders, Controlling Shareholders, Evidence, Inferences & Presumptions, Presumptions, Particular Presumptions, Management Duties & Liabilities, Fiduciary Duties, Business Judgment Rule, Duties & Liabilities of Directors & Officers, Burdens of Proof, Allocation, Defenses, Ratification, Civil Procedure, Appeals, Reviewability of Lower Court Decisions, Preservation for Review, Burden Shifting, Causes of Action, Negligent Acts of Directors & Officers, Corporate Governance, Directors & Officers