DealLawyers.com Blog

October 27, 2014

KKR Financial: Preference for Business Judgment Review Whenever Possible

In our “Minority Holders” Practice Area, we have posted a bunch of memos on the new KKR Financial opinion, including this one from Fried Frank, summarized below:

In KKR Financial Holdings LLC Stockholder Litigation, the Delaware Chancery Court has continued its march to the drumbeat of business judgment deference. In a putative class action by shareholders of KKR Financial (KFN), who were claiming breach of fiduciary duty by KFN’s board in having approved a $2.6 billion merger with private equity firm KKR, Chancellor Bouchard found that KKR had not been a controlling stockholder of KFN — because KKR held less than 1% of KFN’s voting power and had no right to appoint or remove directors or block board actions (even though KKR had “total managerial control” of KFN).

Thus, the Chancellor found, the KFN board had been free to exercise its judgment in determining whether to approve the merger. The Chancellor also found that KFN’s directors had been independent of KKR (even though they had been nominated by and had various ties to KKR); and that KFN’s merger proxy statement had provided for a fully informed stockholder vote. The court applied business judgment review and dismissed the case at the pleading stage. Moreover, the court indicated that, in a non-controller transaction, it will apply business judgment review if the transaction has been approved by disinterested, non-coerced stockholders in a fully informed vote, even if the directors approving the transaction had not been independent. The court can be expected to apply business judgment deference to board decisions whenever possible, apparently in an ongoing effort to combat the prevalence of stockholder litigation challenging M&A deals.