125 A.3d 304, 312–13 (Del. 2015)
KKR Financial Holdings LLC was structured from its inception with a management agreement under which KKR Financial Advisors, an affiliate of KKR & Co. L.P., managed its day-to-day operations.1 The agreement could be terminated only upon payment of a termination fee by Financial Holdings.2 KKR owned less than 1 percent of Financial Holdings stock and had no right to appoint directors or veto board decisions.3 These structural features were known to investors when they purchased shares in Financial Holdings.4
KKR acquired each share of Financial Holdings stock for 0.51 of a share of KKR stock, a 35% premium to the unaffected market price.5 The defendants moved to dismiss the complaint.6 The Court of Chancery dismissed the plaintiffs‘ complaint.7
The appeal was submitted on September 16, 2015, and the Supreme Court issued its decision on October 2, 2015.8
Whether KKR was a controlling stockholder of Financial Holdings?9
Under Delaware law, a stockholder that does not own a majority of the voting stock is a controlling stockholder only if it exercises actual control over the corporation's board.10 This requires a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.11
No. The established facts demonstrate that KKR owned less than 1 percent of Financial Holdings stock, had no right to appoint any directors, and possessed no contractual right to veto board decisions.12 Although Financial Holdings operated under a management agreement with an affiliate of KKR that imposed a termination fee, these structural features were known to investors when they acquired shares, and the independent board retained authority to pursue any strategic path it chose.13 KKR therefore lacked the power to exact retribution by removing directors if they failed to follow its wishes in considering the merger.14
KKR was not a controlling stockholder of Financial Holdings.15
Whether the fully informed, uncoerced vote of the disinterested stockholders invoked the business judgment rule standard of review for the post-closing damages action?16
When a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders, the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action.17
Yes. Because KKR was not a controlling stockholder, the entire fairness standard did not apply to the merger between KKR and Financial Holdings.18 The Chancellor determined that the merger was approved by a fully informed, uncoerced vote of the disinterested stockholders.19 As a result, the business judgment rule governs the post-closing damages action, and the Court of Chancery properly dismissed the complaint.20
The fully informed, uncoerced vote of the disinterested stockholders invoked the business judgment rule standard of review for the post-closing damages action.21