In re KKR Financial Holdings LLC Shareholder Litigation
101 A.3d 980
| Del. Ch. | 2014Background
- KKR acquired KFN in a stock-for-stock merger in 2013-2014; KKR’s affiliate managed KFN under a long-term Management Agreement.
- KFN’s board had annual stockholder elections and retained ultimate authority over management decisions, despite day-to-day management being delegated to KKR’s affiliate.
- KFN’s primary assets were subordinated notes financing KKR’s LBO activities, with valuation and risk management influenced by inputs from KKR affiliates.
- Merger protections included a termination fee, no-shop, and matching rights, with approval requiring a majority of KFN shares, including a majority of unaffiliated holders.
- Plaintiffs allege KKR, holding less than 1% of KFN stock, controlled KFN via the Management Agreement and hence owed fiduciary duties; plaintiffs challenge Counts II and III as well as the process leading to the merger.
- The court ultimately grants Rule 12(b)(6) dismissal, holding no reasonably inferable controlling-stockholder relationship and that the fully informed stockholder vote triggers business judgment review.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether KKR was a controlling stockholder of KFN | Pompano argues KKR’s influence via the Management Agreement controls KFN | KKR contends no control over KFN’s board; ownership <1% | Not reasonably inferable; no controlling stockholder |
| Whether a majority of the KFN directors were non-disinterested/independent | Plaintiffs contend several directors were beholden to KKR | Defendants argue independence; no adequate pleadings to rebut presumption | Presumption of independence stands; majority not shown nonindependent |
| Whether fully informed stockholder ratification triggers business judgment review | Disclosures allegedly incomplete; vote may not have been fully informed | Proxy disclosed relevant facts; vote fully informed | Yes; fully informed vote invokes business judgment review; Counts I and III dismissed |
Key Cases Cited
- Kahn v. Lynch Commc’ns Sys., Inc., 638 A.2d 1110 (Del. 1994) (testing controlling-stockholder standard (second Lynch scenario))
- In re Morton’s Restaurant Group, Inc. S'holders Litig., 74 A.3d 656 (Del. Ch. 2013) (minority control focus; domination required for control")
- In re MFW S'holders Litig., 67 A.3d 496 (Del. Ch. 2013) (countenances enhanced scrutiny where disinterested approval; strong framework)
- Wheelabrator Technologies, Inc. Shareholders Litig., 663 A.2d 1194 (Del. 1995) (stockholder ratification and business judgment rule impact)
- Harbor Finance Partners v. Huizenga, 751 A.2d 879 (Del. Ch. 1999) (independence and business judgment review; impact of disinterested vote)
- Gantler v. Stephens, 965 A.2d 695 (Del. 2009) (clarifies ratification scope; statutorily required vote effect on review)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (independence/dominance analysis for director decisions)