Law School Case Brief
Corwin v. KKR Fin. Holdings LLC - 125 A.3d 304 (Del. 2015)
Traditionally, Delaware's equitable law of corporations has applied the business judgment standard of review to sales to arms-length buyers when an informed, uncoerced vote of the disinterested electorate has approved the transaction. Delaware corporate law strives to give effect to business decisions approved by properly motivated directors and by informed, disinterested stockholders. By this means, Delaware law seeks to balance the interest in promoting fair treatment of stockholders and the utility of avoiding judicial inquiries into the wisdom of business decisions.
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 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.
Did the Court Of Chancery properly hold that the complaint did not plead facts supporting an inference that KKR was a controlling stockholder of Financial Holdings?
Judgment affirmed. A merger was not subject to the entire fairness standard of review as the acquiring limited partnership (LP) was not the acquired LLC's controlling stockholder as LP owned less than 1 percent of LLC's stock, had no right to appoint any directors and had no contractual right to veto any board action; The investors knew that LLC's primary business was financing LP's leveraged buyout activities and that LLC was managed by LP's affiliate under a management agreement that could only be terminated if LLC paid a termination fee, and the LLC had assets controlled by its board, which could pursue any path its directors chose; The fully informed, uncoerced vote of the disinterested stockholders invoked the business judgment rule standard of review; Gantler was a narrow decision focused on defining ratification and did not determine what standard of review applied.
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