Corwin v. KKR Financial Holdings LLC
125 A.3d 304 (2015)
Rule of Law:
When a merger that does not involve a controlling stockholder is approved by a fully informed, uncoerced majority of the disinterested stockholders, the business judgment rule becomes the applicable standard of review for a post-closing damages claim.
Facts:
- KKR Financial Holdings LLC ('Financial Holdings') was managed by KKR Financial Advisors, an affiliate of KKR & Co. L.P. ('KKR'), under a contractual management agreement.
- The primary business of Financial Holdings was financing KKR's leveraged buyout activities.
- The management agreement contained a significant termination fee payable by Financial Holdings if it terminated the contract.
- KKR owned less than 1% of Financial Holdings' stock, had no right to appoint directors, and held no veto power over board actions.
- KKR proposed and executed a stock-for-stock merger to acquire all shares of Financial Holdings.
- The merger was approved by a vote of the fully informed, uncoerced majority of Financial Holdings' disinterested stockholders.
Procedural Posture:
- Stockholders of KKR Financial Holdings LLC filed suit in the Delaware Court of Chancery (trial court) challenging the merger with KKR & Co. L.P.
- The plaintiffs alleged that KKR was a controlling stockholder, subjecting the merger to the entire fairness standard of review.
- The defendants filed a motion to dismiss the complaint.
- The Court of Chancery granted the defendants' motion to dismiss, holding that KKR was not a controlling stockholder and that the disinterested stockholder vote invoked the business judgment rule.
- The plaintiffs (appellants) appealed the dismissal to the Delaware Supreme Court (highest court).
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Issue:
Does the approval of a merger by a fully informed, uncoerced majority of disinterested stockholders invoke the business judgment rule standard of review for a post-closing damages claim when the acquirer is not a controlling stockholder?
Opinions:
Majority - Strine, Chief Justice
Yes. The approval of a merger by a fully informed, uncoerced majority of disinterested stockholders invokes the business judgment rule when the transaction does not involve a controlling stockholder. The court first affirmed the lower court's finding that KKR was not a controlling stockholder, as it lacked the combination of potent voting power and management control necessary to exercise effective control over the board. The court then clarified that its prior decision in Gantler v. Stephens was a narrow holding about the specific legal term 'ratification' and did not overturn the longstanding precedent that an informed, disinterested stockholder vote cleanses a transaction. This doctrine is grounded in the policy of deferring to the economic decisions of the 'real parties in interest'—the disinterested stockholders—who can protect themselves at the ballot box, thereby avoiding the costs and uncertainties of judicial second-guessing of business decisions.
Analysis:
This decision, often referred to as 'Corwin,' established a powerful defensive mechanism for corporate directors in post-closing merger litigation not involving a controller. It creates a clear path for boards to 'cleanse' a transaction and secure the highly deferential business judgment rule standard of review by obtaining a fully informed, uncoerced stockholder vote. This significantly raises the pleading standard for plaintiffs, shifting the focus of litigation from the substantive fairness of the deal to the adequacy of disclosures or the existence of coercion in the stockholder vote. The ruling effectively cabins enhanced scrutiny standards like Revlon to the pre-closing context and clarifies that a proper stockholder vote is outcome-determinative on the standard of review.
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