In the past several months, two cases have been dismissed by the Delaware Court of Chancery that serve as helpful examples of when a shareholder does not constitute a controlling shareholder under Delaware law in the context of a challenged merger transaction.
In In re Crimson Exploration Inc. Stockholder Litigation, 2014 WL 5449419 (Del. Ch. Oct. 24, 2014), the Court held that Oaktree Capital Management (Oaktree), the minority shareholder of Crimson Exploration Inc. (Crimson), could not be considered a controlling shareholder under Delaware law because Oaktree did not actually control the board of director’s decision regarding the merger at issue. Oaktree chose a majority of the senior managers and board members of Crimson, was a significant creditor of Crimson and held 33.7% of Crimson’s voting stock. Despite these facts, the Court pointed out that the complaint failed to specifically allege that Crimson’s board of directors was controlled by Oaktree during the merger negotiations. Moreover, no adequate reason was given as to why Oaktree would undersell their millions of shares. Thus, the Court did not apply the entire fairness standard because Oaktree was not a engaged in a conflicted transaction, and the Court dismissed the complaint.
In In re KKR Financial Holdings LLC Shareholder Litigation, 101 A.3d 980 (Del. Ch. 2014), the Court held that a shareholder, KKR & Co. L.P. (KKR), which held less than 1% of KKR Financial Holdings LLC’s (KFN) stock, was not a controlling shareholder because KKR did not have the ability to control the board of directors of KFN. The plaintiff argued first that an affiliate of KKR was in charge of the day-to- day operations of KFN, and second that KFN was essentially used to finance KKR’s transactions. However, the Court noted that the complaint failed to allege that KKR prevented the board from exercising its judgment in approving the merger at issue, dictated any specific course of action to the board, or had a right to appoint any members of the board. Thus, the Court dismissed the complaint. For a lengthier discussion of this case, please see the December 2014 edition of the Jenner & Block Report.
In sum, these two cases serve as helpful examples for considering whether a shareholder exercises enough influence on the board of directors to be considered a controlling shareholder. As these cases show, a shareholder being in charge of the day-to- day operations of a company, serving as a vehicle to finance a company’s transactions, and even selecting board members of a company - without facts that specifically identify how the board was controlled - do not make a shareholder a controlling shareholder.