Corwin v. KKR Financial Holdings LLC
125 A.3d 304
| Del. | 2015Background
- KKR & Co. L.P. merged with KKR Financial Holdings LLC in a stock-for-stock transaction (0.51 KKR share per Financial Holdings share), representing a ~35% premium to the unaffected market price.
- Plaintiffs challenged the deal in the Court of Chancery, alleging KKR was a controlling stockholder of Financial Holdings because Financial Holdings was managed by an affiliate (KKR Financial Advisors) under a management agreement that was costly to terminate.
- Plaintiffs claimed that structural and contractual ties effectively deprived Financial Holdings of independent decisionmaking, triggering entire-fairness review.
- The Chancellor dismissed the complaint, concluding the pleadings did not support an inference that KKR exercised effective control (KKR owned <1%, had no director appointment or veto rights).
- The Court of Chancery held that, because the merger was not subject to entire-fairness review and was approved by a fully informed, uncoerced majority of disinterested stockholders, the business judgment rule applied; the Supreme Court of Delaware affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether KKR was a "controlling stockholder" of Financial Holdings | KKR’s contractual and managerial ties (management agreement, economic dependence) gave it effective control despite owning <1% | KKR lacked requisite voting/managerial power (no director appointments, no veto, no ability to remove directors); plaintiffs pleaded no facts showing coercive control | Plaintiffs failed to plead facts allowing a reasonable inference that KKR could control or coerce the board — not a controlling stockholder |
| Effect of a fully informed, uncoerced vote by disinterested stockholders on standard of review | Even if not controlled by KKR, Revlon or enhanced scrutiny should apply to the transaction | A fully informed, uncoerced approval by disinterested stockholders invokes the business judgment rule and insulates post-closing damages claims (absent disclosure/coercion) | The Court adopted the view that such an informed, voluntary disinterested vote invokes business judgment rule; dismissal affirmed |
| Whether Gantler or other precedent prevents giving effect to stockholder approval | Gantler reportedly undermines the rule that informed stockholder approval invokes business judgment review | Gantler addressed the meaning of "ratification" and did not displace longstanding precedent giving effect to informed, uncoerced stockholder votes; the issue was not squarely decided in Gantler | Court reads Gantler narrowly and rejects plaintiff’s contention that it removes effect of informed stockholder vote |
Key Cases Cited
- Gantler v. Stephens, 965 A.2d 695 (Del. 2009) (addressed meaning of "ratification" and involved materially misleading proxy disclosures)
- Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994) (framework for identifying controlling stockholder when less than majority ownership)
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (duties of directors in change-of-control / sale contexts)
- Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) (director duty of care / gross negligence standard)
- Stroud v. Grace, 606 A.2d 75 (Del. 1992) (discusses informed shareholder ratification and enhanced scrutiny)
- Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) (controlling-stockholder transaction principles)
- In re Wheelabrator Techs., Inc. S’holders Litig., 663 A.2d 1194 (Del. Ch. 1995) (Del. Ch. precedent treating informed stockholder approval as invoking business judgment protection)