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Corwin v. KKR Financial Holdings LLC: Delaware Supreme Court Clarifies that Approval by Fully Informed Vote of Disinterested Stockholders Invokes Business Judgment Rule for Review of Merger

October 2, 2015

In Corwin v. KKR Financial Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015), the Delaware Supreme Court affirmed the Court of Chancery’s grant of defendants’ motions to dismiss with prejudice a suit challenging the acquisition of KKR Financial Holdings LLC ("KFN") by KKR & Co. L.P. ("KKR").

In December 2013, KKR and KFN executed a stock-for-stock merger agreement, which was subject to approval by a majority of KFN shares held by persons other than KKR and its affiliates. The merger was approved on April 30, 2014, by the requisite majority vote.

Nine lawsuits challenging the merger were brought in the Court of Chancery and consolidated. The operative complaint alleged, among other claims, 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 ground 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 shares held by disinterested stockholders of KFN in a vote that was fully informed." The Delaware Supreme Court affirmed, clarifying that, under Delaware law, a fully informed, uncoerced vote of the disinterested stockholders invokes the business judgment rule standard of review, even if that vote is required by statute.