In this opinion affirming the Court of Chancery’s dismissal of a stockholder challenge to a merger, the Delaware Supreme Court held that the approval of the merger by a fully informed, disinterested stockholder majority invoked the business judgment rule standard of review.
The appeal arose out of a purported class action by stockholders of KKR Financial Holdings LLC (the “Company”) challenging a stock-for-stock acquisition of the Company by KKR & Co. L.P. (“KKR”). The stockholder plaintiffs asserted that the entire fairness standard of review applied to the transaction. In support of this contention, the plaintiffs argued that KKR was a controlling stockholder of the Company because the Company’s primary business was financing KKR’s leveraged buyout activities and the Company was managed by an affiliate of KKR under a management agreement.
In granting the defendants’ motion to dismiss pursuant to Rule 12(b)(6), the Court of Chancery held that plaintiffs’ allegations did not support a reasonable inference that KKR was a controlling stockholder of the Company. The Court of Chancery reasoned that KKR did not control the Company’s board of directors such that those directors could not freely exercise their judgment in determining whether to approve and recommend to the stockholders a merger with KKR. The Court also found that KKR owned less than one percent of the shares of the Company, had no right to appoint any directors, and had no contractual right to veto any board action. The Court of Chancery also held that, even if the majority of the Company’s board was not disinterested or independent, business judgment review still applied because the merger was approved by a majority of disinterested Company stockholders in a fully informed vote.
On appeal, the plaintiffs contended that the Court of Chancery erred in holding that KKR was not a controlling stockholder of the Company. The plaintiffs also contended that, even if the Court of Chancery were correct in determining that KKR was not a controlling stockholder, the Court should not have dismissed the complaint because they had adequately pled a claim under Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). In response, the defendants argued, among others, that plaintiffs’ Revlon argument had not been fairly raised in the Court of Chancery and that, in any event, the transaction was subject to the business judgment rule because it had been approved by a fully informed, uncoerced stockholder vote. The Supreme Court agreed with the defendants and affirmed the Court of Chancery’s dismissal of the complaint in its entirety.
First, the Supreme Court explained that the Unocal and Revlon standards were not designed for application in post-closing money damages cases and instead were designed to be used as tools for injunctive relief to address important deal decisions in real time, before closing. Second, and “most important” in the Court’s view, the doctrine articulated by the Court of Chancery is limited to situations involving fully informed, uncoerced stockholder votes, and it will not apply if material, troubling facts regarding director behavior are not disclosed to stockholders. Third, when a transaction is not subject to the entire fairness standard of review, the “long-standing policy” of Delaware law “has been to avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves.”
In addition, the Court rejected the plaintiffs’ contention that Gantler v. Stephens, 965 A.2d 695 (Del. 2009), required the Court of Chancery to give the informed stockholder vote no effect in determining the standard of review. The Court instead agreed with the Court of Chancery’s narrow interpretation of Gantler as a decision solely intended to clarify the meaning of the term “ratification” and not, as plaintiffs argued, on the question of what standard of review applies if a transaction not subject to the entire fairness standard is approved by a fully informed and voluntary vote of disinterested stockholders.
The full opinion is available here