Law School Case Brief
In re KKR Fin. Holdings LLC S'holder Litig. - 101 A.3d 980 (Del. Ch. 2014)
Under the business judgment rule, the judgment of a properly functioning board will not be second-guessed and absent an abuse of discretion, that judgment will be respected by the courts. To avoid application of the deferential business judgment standard, the plaintiff must produce evidence that rebuts the business judgment presumption. There are a number of ways a plaintiff can rebut the business judgment presumption, including by showing that: (1) a controlling stockholder stands on both sides of a transaction or (2) at least half of the directors who approved the transaction were not disinterested or independent. If the plaintiff rebuts the business judgment presumption, the court applies the entire fairness standard of review to the challenged action and places the burden on the directors to prove that the action was entirely fair.
This action involves the novel claim that a holder of less than one percent of the stock of a Delaware corporation was a controlling stockholder and thus owed fiduciary obligations to the other stockholders of the corporation.
In April 2004, KKR & Co. L.P. ("KKR") acquired KKR Financial Holdings LLC ("KFN") in a stock-for-stock merger involving two widely-held, publicly-traded companies. Seeking to overcome the presumption that business judgment review would apply to such a transaction, plaintiffs argue that entire fairness should apply because KKR was a controlling stockholder of KFN despite its less than one percent ownership and because a majority of the 12 members of the KFN board that approved the merger was beholden to and not independent from KKR.
Plaintiffs' controlling stockholder theory is based on the terms of a management agreement whereby an affiliate of KKR managed the day-to-day business of KFN, making KFN operationally dependent on KKR. Since KFN's inception, however, the ultimate authority for managing its business and affairs, including the decision whether to approve a merger with KKR, was in the hands of a board of directors subject to annual stockholder election.
Whether a holder of less than one percent of the stock of a Delaware corporation was a controlling stockholder and thus owed fiduciary obligations to the other stockholders of the corporation.
In this opinion, the court concluded that, although the allegations of the complaint demonstrate that KKR's affiliate managed the day-to-day operations of KFN, they do not support a reasonable inference that KKR controlled the board of KFN when it approved the merger, which is the operative question under Delaware law for determining whether a stockholder is controlling in this case. For this reason, the court dismissed plaintiffs' fiduciary duty claim against KKR premised on the theory that KKR was a controlling stockholder of KFN.
The court also concluded that plaintiffs' fiduciary duty claim against the directors of KFN fails to state a claim for relief because the board's approval of the merger is subject to business judgment review for two independent reasons. First, plaintiffs have failed to allege facts from which it is reasonably inferable that a majority of the KFN board was not disinterested in the transaction or independent from KKR. Second, even if plaintiffs had alleged sufficient facts to reasonably support such an inference, business judgment review still would apply because the merger was approved by a majority of disinterested stockholders in a fully-informed vote. The action was dismissed with prejudice under Rule 12(b)(6) for failure to state a claim for relief.
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