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Corporations Committee: Top E-Bulletins



Delaware Supreme Court Clarifies That Business Judgment Rule Applies to Merger Approved by Informed, Disinterested Stockholders

In Corwin v. KKR Financial Holdings LLC, the Delaware Supreme Court held that, in cases where the “entire fairness” analysis does not apply, a fully-informed, uncoerced vote of the target’s disinterested stockholders will invoke the business judgment rule, rather than the enhanced scrutiny of Revlon or Unocal.

In December 2013, KKR & Co. L.P. (“KKR”) and KKR Financial Holdings LLC (“KFN”) executed a stock-for-stock merger agreement, which was subject to approval by a “majority of the minority” (i.e., the holders of KFN shares other than KKR and its affiliates).  Plaintiffs argued that the members of the KFN board breached their fiduciary duties by agreeing to the merger and that KKR breached its fiduciary duty as a controlling stockholder by causing KFN to enter into the merger agreement. \

The Court of Chancery ruled that KKR, which owned less than 1% of KFN’s stock, was not a controlling stockholder.  The Delaware Supreme Court affirmed on the grounds that plaintiffs did not plead facts sufficient to support an inference that KKR could prevent the KFN board from “freely exercising its independent judgment in considering the proposed merger.”

The Court of Chancery also ruled that the business judgment standard of review would apply to the merger because it was approved by a “majority of the minority” vote and the stockholders were fully informed.  The Delaware Supreme Court affirmed, noting that Delaware’s long-standing policy has been to avoid “judicial second-guessing” where stockholders have had a free and informed chance to decide for themselves.  The Court noted that Unocal and Revlon were primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M&A decisions in real time, before closing, and that they were not designed with post-closing money damages in mind.

The decision should affect stockholder litigation in public company mergers in the future.  Targets now have even more incentive to provide full and accurate disclosures in connection with stockholder approval of a merger.  Also it will be more difficult for plaintiffs to obtain money damages through Unocal or Revlon claims.  These claims will need to be brought for pre-closing injunctive relief or, after closing, the plaintiffs will need to prove that stockholder approval was coerced or uninformed.

This e-Bulletin was prepared by David A. Zaheer, a partner in the Corporate Department of Latham & Watkins LLP.

Thank you for your continued support of the Committee.

Best regards,
Corporations Committee

Deborah Gunny
Reed Smith LLP

Cathy Gawne
Montgomery & Hansen LLP

Vice-Chair – Legislation
Darren Freedman

Vice-Chair – Legislation
Doug Wade
Law Offices of Douglas M. Wade

Vice-Chair – Website
Patrick Monroe
Best Best & Krieger LLP

Vice-Chair – Website
Jesse Debban
Farella Braun + Martel LLP

Vice-Chair – Education
Michelle Jacko
Jacko Law Group, PC

William Ross
Hirschfeld Kraemer LLP