Corwin v. KKR Financial Holdings LLC ( 2015 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
ROBERT A. CORWIN, MARGARET §
DEMAURO, ERIC §
GREENE, PIPEFITTERS LOCAL §
UNION NO. 120 PENSION FUND, §
and POMPANO BEACH POLICE & §
FIREFIGHTERS‘ RETIREMENT §
SYSTEM, §
§
Plaintiffs Below-Appellants, § No. 629, 2014
§
v. § Court Below: Court of Chancery
§ of the State of Delaware,
KKR FINANCIAL HOLDINGS LLC, § in and for New Castle County
TRACY COLLINS, ROBERT § Consol. C.A. No. 9210-CB
L. EDWARDS, CRAIG J. FARR, §
VINCENT PAUL FINIGAN, JR., PAUL §
M. HAZEN, R. GLENN HUBBARD, §
ROSS J. KARI, ELY L. LICHT, §
DEBORAH H. MCANENY, SCOTT C. §
NUTTALL, SCOTT RYLES, WILLY §
STROTHOTTE, KKR & CO. L.P., KKR §
FUND HOLDINGS L.P., and COPAL §
MERGER SUB LLC, §
§
Defendants Below-Appellees. §
§
§
Submitted: September 16, 2015
Decided: October 2, 2015
Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, Justices; and
RENNIE, Judge,* constituting the Court en Banc.
Upon appeal from the Court of Chancery. AFFIRMED.
*
Sitting by designation under Del. Const. art. IV, § 12.
Stuart M. Grant, Esquire (Argued), Mary S. Thomas, Esquire, Bernard C. Devieux,
Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware; Mark Lebovitch, Esquire,
Jeroen van Kwawegen, Esquire, Adam Hollander, Esquire, Bernstein Litowitz Berger &
Grossmann LLP, New York, New York, for Appellants.
Garrett B. Moritz, Esquire, Eric D. Selden, Esquire, Ross Aronstam & Moritz LLP,
Wilmington, Delaware; Gregory P. Williams, Esquire, Richards Layton & Finger, P.A.,
Wilmington, Delaware; William Savitt (Argued), Esquire, Ryan A. McLeod, Esquire,
Nicholas Walter, Esquire, Wachtell, Lipton, Rosen & Katz, New York, New York, for
Appellees.
STRINE, Chief Justice:
In a well-reasoned opinion, the Court of Chancery held that the business judgment
rule is invoked as the appropriate standard of review for a post-closing damages action
when a merger that is not subject to the entire fairness standard of review has been
approved by a fully informed, uncoerced majority of the disinterested stockholders. 1 For
that and other reasons, the Court of Chancery dismissed the plaintiffs‘ complaint. 2 In this
decision, we find that the Chancellor was correct in finding that the voluntary judgment
of the disinterested stockholders to approve the merger invoked the business judgment
rule standard of review and that the plaintiffs‘ complaint should be dismissed. For sound
policy reasons, Delaware corporate law has long been reluctant to second-guess the
judgment of a disinterested stockholder majority that determines that a transaction with a
party other than a controlling stockholder is in their best interests.
I. The Court Of Chancery Properly Held That The Complaint Did Not
Plead Facts Supporting An Inference That KKR Was
A Controlling Stockholder of Financial Holdings
The plaintiffs filed a challenge in the Court of Chancery to a stock-for-stock
merger between KKR & Co. L.P. (―KKR‖) and KKR Financial Holdings LLC
(―Financial Holdings‖) in which KKR acquired each share of Financial Holdings‘s stock
for 0.51 of a share of KKR stock, a 35% premium to the unaffected market price. Below,
the plaintiffs‘ primary argument was that the transaction was presumptively subject to the
entire fairness standard of review because Financial Holdings‘s primary business was
financing KKR‘s leveraged buyout activities, and instead of having employees manage
1
In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014).
2
Id.
1
the company‘s day-to-day operations, Financial Holdings was managed by KKR
Financial Advisors, an affiliate of KKR, under a contractual management agreement that
could only be terminated by Financial Holdings if it paid a termination fee. As a result,
the plaintiffs alleged that KKR was a controlling stockholder of Financial Holdings,
which was an LLC, not a corporation.3
The defendants filed a motion to dismiss, taking issue with that argument. In a
thoughtful and thorough decision, the Chancellor found that the defendants were correct
that the plaintiffs‘ complaint did not plead facts supporting an inference that KKR was
Financial Holdings‘s controlling stockholder.4 Among other things, the Chancellor noted
that KKR owned less than 1% of Financial Holdings‘s stock, had no right to appoint any
directors, and had no contractual right to veto any board action.5 Although the
Chancellor acknowledged the unusual existential circumstances the plaintiffs cited, he
noted that those were known at all relevant times by investors, and that Financial
Holdings had real assets its independent board controlled and had the option of pursuing
any path its directors chose.6
3
We wish to make a point. We are keenly aware that this case involves a merger between a
limited partnership and a limited liability company, albeit both ones whose ownership interests
trade on public exchanges. But, it appears that both before the Chancellor, and now before us on
appeal, the parties have acted as if this case was no different from one between two corporations
whose internal affairs are governed by the Delaware General Corporation Law and related case
law. We have respected the parties‘ approach to arguing this complex case, but felt obliged to
note that we recognize that this case involved alternative entities, and that in cases involving
those entities, distinctive arguments often arise due to the greater contractual flexibility given to
those entities under our statutory law.
4
In re KKR Fin. Holdings, 101 A.3d at 995.
5
Id. at 994.
6
Id. at 994–95.
2
In addressing whether KKR was a controlling stockholder, the Chancellor was
focused on the reality that in cases where a party that did not have majority control of the
entity‘s voting stock was found to be a controlling stockholder, the Court of Chancery,
consistent with the instructions of this Court, looked for a combination of potent voting
power7 and management control such that the stockholder could be deemed to have
effective control of the board without actually owning a majority of stock. 8 Not finding
that combination here, the Chancellor noted:
Plaintiffs‘ real grievance, as I see it, is that [Financial Holdings] was
structured from its inception in a way that limited its value-maximizing
options. According to plaintiffs, [Financial Holdings] serves as little more
than a public vehicle for financing KKR-sponsored transactions and the
terms of the Management Agreement make [Financial Holdings]
unattractive as an acquisition target to anyone other than KKR because of
[Financial Holdings]‘s operational dependence on KKR and because of the
significant cost that would be incurred to terminate the Management
Agreement. I assume all that is true. But, every contractual obligation of a
corporation constrains the corporation‘s freedom to operate to some degree
and, in this particular case, the stockholders cannot claim to be surprised.
Every stockholder of [Financial Holdings] knew about the limitations the
Management Agreement imposed on [Financial Holdings]‘s business when
he, she or it acquired shares in [Financial Holdings]. They also knew that
7
For example, the Chancellor noted the importance of examining whether an insurgent could
win a proxy contest or whether the company could take action without the stockholder‘s consent.
Id. at 991–95.
8
Id. (citing Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994) (quoting
Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987)); In re Morton’s
Rest. Grp., Inc. S’holders Litig., 74 A.3d 656, 664–65 (Del. Ch. 2013); Williamson v. Cox
Commc’ns, Inc., 2006 WL 1586375, at *4, *5 (Del. Ch. June 5, 2006); In re Cysive, Inc.
S’holders Litig., 836 A.2d 531, 551–52, 552 n.30 (Del. Ch. 2003); In re PBN Holding Co.
S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006) (noting that the test for
actual control ―is not an easy one to satisfy‖ and can only be met where ―stockholders who,
although lacking a clear majority, have such formidable voting and managerial power that they,
as a practical matter, are no differently situated than if they had majority voting control‖);
Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *4 (Del. Ch. Aug.
25, 2006) (examining Kahn v. Lynch, 638 A.2d at 1114; Cox Commc’ns, Inc., 2006 WL 1586375
at *5; In re W. Nat’l Corp. S’holders Litig., 2000 WL 710192, at *20 (Del. Ch. May 22, 2000))).
3
the business and affairs of [Financial Holdings] would be managed by a
board of directors that would be subject to annual stockholder elections.
At bottom, plaintiffs ask the Court to impose fiduciary obligations on a
relatively nominal stockholder, not because of any coercive power that
stockholder could wield over the board‘s ability to independently decide
whether or not to approve the merger, but because of pre-existing
contractual obligations with that stockholder that constrain the business or
strategic options available to the corporation. Plaintiffs have cited no legal
authority for that novel proposition, and I decline to create such a rule.9
After carefully analyzing the pled facts and the relevant precedent, the Chancellor
held:
[T]here are no well-pled facts from which it is reasonable to infer that KKR
could prevent the [Financial Holdings] board from freely exercising its
independent judgment in considering the proposed merger or, put
differently, that KKR had the power to exact retribution by removing the
[Financial Holdings] directors from their offices if they did not bend to
KKR‘s will in their consideration of the proposed merger.10
Although the plaintiffs reiterate their position on appeal, the Chancellor correctly applied
the law and we see no reason to repeat his lucid analysis of this question.
II. The Court of Chancery Correctly Held That The Fully Informed, Uncoerced
Vote Of The Disinterested Stockholders Invoked The
Business Judgment Rule Standard Of Review
On appeal, the plaintiffs further contend that, even if the Chancellor was correct in
determining that KKR was not a controlling stockholder, he was wrong to dismiss the
complaint because they contend that if the entire fairness standard did not apply, Revlon11
did, and the plaintiffs argue that they pled a Revlon claim against the defendant directors.
But, as the defendants point out, the plaintiffs did not fairly argue below that Revlon
9
In re KKR Fin. Holdings, 101 A.3d at 994.
10
Id. at 995.
11
Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
4
applied and even if they did, they ignore the reality that Financial Holdings had in place
an exculpatory charter provision, and that the transaction was approved by an
independent board majority and by a fully informed, uncoerced stockholder vote.12
Therefore, the defendants argue, the plaintiffs failed to state a non-exculpated claim for
breach of fiduciary duty.
But we need not delve into whether the Court of Chancery‘s determination that
Revlon did not apply to the merger is correct for a single reason: it does not matter.
Because the Chancellor was correct in determining that the entire fairness standard did
not apply to the merger, the Chancellor‘s analysis of the effect of the uncoerced,
informed stockholder vote is outcome-determinative, even if Revlon applied to the
merger.
As to this point, the Court of Chancery noted, and the defendants point out on
appeal, that the plaintiffs did not contest the defendants‘ argument below that if the
merger was not subject to the entire fairness standard, the business judgment standard of
review was invoked because the merger was approved by a disinterested stockholder
12
The Court of Chancery indicated that the merger was not subject to review under Revlon
because KKR was a widely held, public company and that Financial Holdings‘s stockholders
would therefore own stock after the merger in a company without a controlling stockholder. In
re KKR Fin. Holdings, 101 A.3d at 989. On appeal, the plaintiffs argue that that observation was
incorrect and that ownership in KKR was not dispersed after the merger because ―KKR is a
limited partnership that is controlled by its managing partner, which is in turn controlled by
KKR‘s founders.‖ Opening Br. at 20 (emphasis in original). The defendants, for their part,
stress that the plaintiffs‘ focus on Revlon is a novel one in the course of this case, and that claims
such as this should be made in the trial court initially, and not on appeal. Although we do not
reach this issue, we note that the defendants are correct in their argument that the plaintiffs
should have fairly raised their Revlon argument below and did not. Consistent with their failure
to argue the point fairly below, the plaintiffs press this argument on appeal without citation to
supporting facts pled in the complaint.
5
majority.13 The Chancellor agreed with that argument below, and adhered to precedent
supporting the proposition that when a transaction not subject to the entire fairness
standard is approved by a fully informed, uncoerced vote of the disinterested
stockholders, the business judgment rule applies.14 Although the Chancellor took note of
the possible conflict between his ruling and this Court‘s decision in Gantler v. Stephens,15
he reached the conclusion that Gantler did not alter the effect of legally required
stockholder votes on the appropriate standard of review.16 Instead, the Chancellor read
Gantler as a decision solely intended to clarify the meaning of the precise term
―ratification.‖17 He had two primary reasons for so finding. First, he noted that any
statement about the effect a statutorily required vote had on the appropriate standard of
review would have been dictum because in Gantler the Court held that the disclosures
regarding the vote in question—a vote on an amendment to the company‘s charter—were
13
In re KKR Fin. Holdings, 101 A.3d at 1001 (―[P]laintiffs do not disagree with defendants‘
position that the legal effect of a fully informed stockholder vote of a transaction with a
non-controlling stockholder is that the business judgment rule applies and insulates the
transaction from all attacks other than on the grounds of waste, even if a majority of the board
approving the transaction was not disinterested or independent.‖); Answering Br. at 28–29.
14
In re KKR Fin. Holdings, 101 A.3d at 1001 (―This position is supported by numerous
decisions, including [the Court of Chancery‘s] 1995 decision in In re Wheelabrator
Technologies, Inc. Shareholder Litigation, and [its] later decision in Harbor Finance, which, in
turn, recited numerous supporting authorities.‖ (citing In re Wheelabrator Techs., Inc. S’holders
Litig., 663 A.2d 1194, 1200 (Del. Ch. 1995); Harbor Fin. Partners v. Huizenga, 751 A.2d 879,
890 (Del. Ch. 1999) (citing Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987); In re Gen.
Motors Class H S’holders Litig., 734 A.2d 611, 616 (Del. Ch. 1999); Solomon v. Armstrong, 747
A.2d 1098, 1113–17 (Del. Ch. 1999), aff’d, 746 A.2d 277 (Del. 2000))).
15
965 A.2d 695 (Del. 2009).
16
In re KKR Fin. Holdings, 101 A.3d at 1001–02.
17
Id. at 1002.
6
materially misleading.18 Second, the Chancellor doubted that the Supreme Court would
have ―overrule[d] extensive Delaware precedent, including Justice Jacobs‘s own earlier
decision in Wheelabrator, which involved a statutorily required stockholder vote to
consummate a merger‖ without ―expressly stat[ing] such an intention.‖19
18
Id. (―The Supreme Court in Gantler did not expressly address the legal effect of a fully
informed stockholder vote when the vote is statutorily required. Having determined that the
proxy disclosures were materially misleading, the Supreme Court did not need to reach that
question.‖); Gantler, 965 A.2d at 710.
19
In re KKR Fin. Holdings, 101 A.3d at 1002.
Aside from the substantial authority cited by the Chancellor, there is additional precedent
under Delaware law for the proposition that the approval of the disinterested stockholders in a
fully informed, uncoerced vote that was required to consummate a transaction has the effect of
invoking the business judgment rule. In citing to these authorities, we note that many of them
used the term ―ratification‖ in a looser sense than the clarified and narrow description that was
given to that term in the scholarly Gantler opinion. Although the nomenclature was less precise,
the critical reasoning of these opinions was centered on giving standard of review-invoking
effect to a fully informed vote of the disinterested stockholders.
In many of the cases, that effect was given to a statutorily required vote or one required
by the certificate of incorporation. See Stroud v. Grace, 606 A.2d 75, 83 (Del. 1992) (―Inherent
in [enhanced scrutiny] is a presumption that a board acted in the absence of an informed
shareholder vote ratifying the challenged action.‖); Solomon, 747 A.2d at 1127, 1133, aff’d, 746
A.2d 277 (dismissing a challenge to a spin-off of a subsidiary because a fully informed,
uncoerced vote of the stockholders that was required under the corporation‘s charter invoked the
business judgment rule); In re Lukens Inc. S’holders Litig., 757 A.2d 720, 736–38 (Del. Ch.
1999), aff’d sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000) (holding that the fully
informed stockholder approval of a merger invoked the business judgment rule); In re Gen.
Motors Class H S’holders Litig., 734 A.2d 611, 616 (Del. Ch. 1999) (―Because the shareholders
were afforded the opportunity to decide for themselves [whether to approve charter amendments
in connection with a series of transactions] on accurate disclosures and in a non-coercive
atmosphere, the business judgment rule applies . . . .‖); Weiss v. Rockwell Int’l. Corp., 1989 WL
80345, at *3, *7 (Del. Ch. July 19, 1989), aff’d, 574 A.2d 264 (Del. 1990) (dismissing a
challenge to a charter amendment because it was approved by a fully informed vote of the
disinterested stockholders); Schiff v. RKO Pictures Corp., 104 A.2d 267, 271–72 (Del. Ch. 1954)
(finding that the principles established in Gottlieb v. Heyden Chemical Corp., 91 A.2d 57, 58
(Del. 1952), which held that voluntary stockholder approval of a stock option plan invoked the
business judgment standard of review, were ―equally applicable‖ to statutorily required
stockholder approval of an asset sale to the company‘s chairman and 30% stockholder, requiring
the plaintiffs to show ―that the disparity between the money received and the value of the assets
sold is so great that the court will infer that those passing judgment are guilty of improper
motives or are recklessly indifferent to or intentionally disregarding the interest of the whole
body of stockholders‖); Cole v. Nat’l Cash Credit Ass’n, 156 A. 183, 188 (Del. Ch. 1931) (―The
7
same presumption of fairness that supports the discretionary judgment of the managing directors
must also be accorded to the majority of stockholders whenever they are called upon to speak for
the corporation in matters assigned to them for decision, as is the case at one stage of the
proceedings leading up to a sale of assets or a merger. No rational ground of distinction can be
drawn in this respect between the directors on the one hand and the majority of stockholders on
the other.‖); MacFarlane v. N. Am. Cement Corp., 157 A. 396, 398 (Del. Ch. 1928) (―When,
therefore, the law provided that a merger might be effected if approved by the votes of
stockholders of each corporation representing two-thirds of its total capital stock, it was no doubt
believed that the interests of all the stockholders in the merging companies would be sufficiently
safeguarded. Such being the case, it is manifest that the court should not, by its injunctive
process, prevent a merger so approved unless it is clear that it would be so injurious and unfair to
some minority complaining stockholders as to be shocking, and the court is convinced that it is
so grossly unfair to such stockholders as to be fraudulent.‖); see also In re Morton’s, 74 A.3d at
663 n.34 (―[W]hen disinterested approval of a sale to an arm‘s-length buyer is given by a
majority of stockholders who have had the chance to consider whether or not to approve the
transaction for themselves, there is a long line and sensible tradition of giving deference to the
stockholders‘ voluntary decision, invoking the business judgment rule standard of review . . . .‖);
In re S. Peru Copper Corp. S’holder Derivative Litig., 52 A.3d 761, 793 n.113 (Del. Ch. 2011)
(―[I]t has long been my understanding of Delaware law, that the approval of an uncoerced,
disinterested electorate of a merger (including a sale) would have the effect of invoking the
business judgment rule standard of review.‖); Sample v. Morgan, 914 A.2d 647, 663 (Del. Ch.
2007) (footnote omitted) (―When uncoerced, fully informed, and disinterested stockholders
approve a specific corporate action, the doctrine of ratification, in most situations, precludes
claims for breach of duty attacking that action.‖); In re PBN Holding Co., 2006 WL 2403999, at
*14 (―[O]utside the [controlling stockholder] context, proof that an informed, non-coerced
majority of the disinterested stockholders approved an interested transaction has the effect of
invoking business judgment rule protection for the transaction and, as a practical matter,
insulating the transaction from revocation and its proponents from liability.‖); Apple Comput.,
Inc. v. Exponential Tech., Inc., 1999 WL 39547, at *7 (Del. Ch. Jan. 21, 1999) (noting that if an
informed vote of the stockholders approved an asset sale potentially subject to § 271, that would
moot any statutory claim and invoke the business judgment rule); William T. Allen et al.,
Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56
BUS. LAW. 1287, 1317–18 (2001) [hereinafter Function Over Form] (―Under present Delaware
law, a fully informed majority vote of the disinterested stockholders that approves a transaction
(other than a merger with a controlling stockholder) has the effect of insulating the directors
from all claims except waste.‖).
In other cases, the vote may not have been statutorily required, but there was no
suggestion that that factor was necessary for the vote to be given effect in determining the
judicial standard of review. See Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987)
(―[A]pproval by fully-informed disinterested stockholders . . . permits invocation of the business
judgment rule . . . .‖); Michelson v. Duncan, 407 A.2d 211, 224 (Del. 1979) (―‗Where there has
been independent stockholder ratification of interested director action, the objecting stockholder
has the burden of showing that no person of ordinary sound business judgment would say that
the consideration received for the options was a fair exchange for the options granted.‘‖ (internal
citation omitted)).
8
On appeal, the plaintiffs make Gantler a central part of their argument, even
though they did not fairly present this point below. They now argue that Gantler bound
the Court of Chancery to give the informed stockholder vote no effect in determining the
standard of review. They contend that the Chancellor‘s reading of Gantler as a decision
focused on the precise term ―ratification‖ and not a decision intended to overturn a deep
strain of precedent it never bothered to cite, was incorrect.20 The plaintiffs also argue that
they should be relieved of their failure to argue this point fairly below in the interests of
justice.21
Although we disagree with the plaintiffs that this sort of case provides a sound
basis for relieving a sophisticated party of its failure to present its position properly to the
trial court, even if we agreed it would not aid the plaintiffs. No doubt Gantler can be
read in more than one way, but we agree with the Chancellor‘s interpretation of that
decision and do not accept the plaintiffs‘ contrary one. Had Gantler been intended to
unsettle a long-standing body of case law, the decision would likely have said so.22
Moreover, as the Chancellor noted, the issue presented in this case was not even squarely
20
Related to their arguments over the proper interpretation of Gantler, the parties have engaged
in an interesting debate about whether this Court‘s decision in In re Santa Fe Pacific
Corporation Shareholder Litigation supports their respective positions. 669 A.2d 59 (Del. Ch.
1995). There are colorable arguments on both sides, and a learned article has a thoughtful
consideration of that point. J. Travis Laster, The Effect of Stockholder Approval on Enhanced
Scrutiny, 40 WM. MITCHELL L. REV. 1443, 1471–77 (2014) [hereinafter Effect of Stockholder
Approval]. For present purposes, however, we think it unnecessary to engage in that debate,
when the overwhelming weight of our state‘s case law supports the Chancellor‘s decision below.
21
Supr. Ct. R. 8 (―Only questions fairly presented to the trial court may be presented for review;
provided, however, that when the interests of justice so require, the Court may consider and
determine any question not so presented.‖).
22
See In re KKR Fin. Holdings, 101 A.3d at 1002; see also Effect of Stockholder Approval,
supra note 20, at 1482.
9
before the Court in Gantler because it found the relevant proxy statement to be materially
misleading.23 To erase any doubt on the part of practitioners, we embrace the
Chancellor‘s well-reasoned decision and the precedent it cites to support an interpretation
of Gantler as a narrow decision focused on defining a specific legal term, ―ratification,‖
and not on the question of what standard of review applies if a transaction not subject to
the entire fairness standard is approved by an informed, voluntary vote of disinterested
stockholders. This view is consistent with well-reasoned Delaware precedent.24
Furthermore, although the plaintiffs argue that adhering to the proposition that a
fully informed, uncoerced stockholder vote invokes the business judgment rule would
23
In re KKR Fin. Holdings, 101 A.3d at 1002; Gantler, 965 A.2d at 710.
24
See supra notes 14 & 19. In addition to the cases previously cited for the proposition that an
uncoerced, fully informed vote of the disinterested stockholders invokes the business judgment
rule standard of review, the tradition of giving burden-shifting effect to a
majority-of-the-minority vote in a controlling stockholder going-private merger also supports our
view that a statutorily required vote has historically been taken into account in determining the
standard of review. In fact, in the case of Greene v. Dunhill International, Inc., the Court of
Chancery refused to invoke the business judgment rule because the merger in question involved
a controlling stockholder as the buyer, the court cited to a case invoking the business judgment
based on a stockholder vote, and indicating that it stood for the proposition that ―[i]n the absence
of divided interests, the judgment of the majority stockholders . . . is presumed made in good
faith and inspired by a bona fides of purpose.‖ 249 A.2d 427, 430 (Del. Ch. 1968) (citing Cole,
156 A. at 188). The entire strand of our entire controlling stockholder law, running from
Dunhill, to Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), to Kahn v. Lynch, to Kahn v.
M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), has focused on what effect of fully informed,
uncoerced approval of the disinterested stockholders should have, and has never focused on
whether the vote was statutorily required. Furthermore, although there has been the requirement
that the disinterested vote be determinative in giving standard of review influencing effect to a
stockholder vote in a controlling stockholder merger, e.g., by having the merger subject to a
majority of the minority condition, this Court has never held that the stockholders had to be
asked separately to ―ratify‖ the board‘s actions for that effect to be given. Rather, it has been the
ability of an uncoerced group of informed stockholders to freely accept for themselves whether a
transaction was good for them that gave rise to the effect on the standard of review applied in
any post-closing challenge.
10
impair the operation of Unocal25 and Revlon, or expose stockholders to unfair action by
directors without protection, the plaintiffs ignore several factors. First, Unocal and
Revlon are 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. They
were not tools designed with post-closing money damages claims in mind, the standards
they articulate do not match the gross negligence standard for director due care liability
under Van Gorkom,26 and with the prevalence of exculpatory charter provisions, due care
liability is rarely even available.
Second and most important, the doctrine applies only to fully informed, uncoerced
stockholder votes, and if troubling facts regarding director behavior were not disclosed
that would have been material to a voting stockholder, then the business judgment rule is
not invoked.27 Here, however, all of the objective facts regarding the board‘s interests,
KKR‘s interests, and the negotiation process, were fully disclosed.
Finally, when a transaction is not subject to the entire fairness standard, the
long-standing policy of our law has been to avoid the uncertainties and costs of judicial
25
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
26
Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).
27
See Williams v. Geier, 671 A.2d 1368, 1380–83 (Del. 1996) (noting that ―[a]n otherwise valid
stockholder vote may be nullified by a showing that the structure or circumstances of the vote
were impermissibly coercive‖); In re Rural Metro Corp., 88 A.3d 54, 84 n.10 (Del. Ch. 2014)
(―Because the Proxy Statement contained materially misleading disclosures and omissions, this
case does not provide any opportunity to consider whether a fully informed stockholder vote
would lower the standard of review from enhanced scrutiny to the business judgment rule.‖);
Huizenga, 751 A.2d at 898–99 (―If the corporate board failed to provide the voters with material
information undermining the integrity or financial fairness of the transaction subject to the vote,
no ratification effect will be accorded to the vote and the plaintiffs may press all of their
claims. . . . In this regard, it is noteworthy that Delaware law does not make it easy for a board
of directors to obtain ‗ratification effect‘ from a stockholder vote. The burden to prove that the
vote was fair, uncoerced, and fully informed falls squarely on the board.‖).
11
second-guessing when the disinterested stockholders have had the free and informed
chance to decide on the economic merits of a transaction for themselves. There are sound
reasons for this policy. When the real parties in interest—the disinterested equity
owners—can easily protect themselves at the ballot box by simply voting no, the utility
of a litigation-intrusive standard of review promises more costs to stockholders in the
form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits
to them. 28 The reason for that is tied to the core rationale of the business judgment rule,
28
See Williams, 671 A.2d at 1381 (where a stockholder vote is statutorily required such as for a
merger or a charter amendment, ―the stockholders control their own destiny through informed
voting,‖ and calling this ―the highest and best form of corporate democracy‖); In re Morton’s, 74
A.3d at 663 n.34 (―Traditionally, our equitable law of corporations has applied the business
judgment standard of review to sales to arms‘-length buyers when an informed, uncoerced vote
of the disinterested electorate has approved the transaction. This effect on the standard of review
is, of course, only available to disinterested stockholder approval for good reason—only
disinterested stockholder approval is a strong assurance of fairness.‖ (internal citations omitted));
In re Netsmart Techs. Inc. S’holders Litig., 924 A.2d 171, 207 (Del. Ch. 2007) (―Delaware
corporate law strives to give effect to business decisions approved by properly motivated
directors and by informed, disinterested stockholders. By this means, our law seeks to balance
the interest in promoting fair treatment of stockholders and the utility of avoiding judicial
inquiries into the wisdom of business decisions. Thus, doctrines . . . operate to keep the judiciary
from second-guessing transactions when disinterested stockholders have had a fair opportunity to
protect themselves by voting no.‖); In re Lear Corp. S’holder Litig., 926 A.2d 94, 114–15 (Del.
Ch. 2007) (―Delaware corporation law gives great weight to informed decisions made by an
uncoerced electorate. When disinterested stockholders make a mature decision about their
economic self-interest, judicial second-guessing is almost completely circumscribed by the
doctrine of ratification.‖); In re PBN Holding Co., 2006 WL 2403999, at *15 (―[W]hen most of
the affected minority affirmatively approves the transaction, their self-interested decision to
approve is sufficient proof of fairness to obviate a judicial examination of that question.‖);
Huizenga, 751 A.2d at 901 (―If fully informed, uncoerced, independent stockholders have
approved the transaction, they have . . . made the decision that the transaction is a fair exchange.
As such, it is difficult to see the utility of allowing litigation to proceed in which the plaintiffs are
permitted discovery and a possible trial . . . . In this day and age in which investors also have
access to an abundance of information about corporate transactions from sources other than
boards of directors, it seems presumptuous and paternalistic to assume that the court knows
better in a particular instance than a fully informed corporate electorate with real money riding
on the corporation‘s performance.‖ (internal citations omitted)); Effect of Stockholder Approval,
supra note 20, at 1457 n.50 (―There is a gut-level sense of fairness to [the result that the business
12
which is that judges are poorly positioned to evaluate the wisdom of business decisions
and there is little utility to having them second-guess the determination of impartial
decision-makers with more information (in the case of directors) or an actual economic
stake in the outcome (in the case of informed, disinterested stockholders). In
circumstances, therefore, where the stockholders have had the voluntary choice to accept
or reject a transaction, the business judgment rule standard of review is the presumptively
correct one and best facilitates wealth creation through the corporate form.
For these reasons, therefore, we affirm the Court of Chancery‘s judgment on the
basis of its well-reasoned decision.
judgment rule is invoked where there is an uncoerced and fully informed vote of the disinterested
stockholders to approve the action of a compromised board]. If the fully informed stockholders
conclude collectively that they want an outcome, why should self-appointed stockholder
plaintiffs be able to seek to hold directors liable for a decision that a majority of the stockholders
endorsed? Absent disclosure violations or coercion, there is something contradictory about
stockholders collectively saying, ‗Yes, I want this merger‘ and then for the stockholder plaintiffs
to seek damages from the directors for having approved the deal and recommended it to the
stockholders in the first place.‖); cf. Function Over Form, supra note 19, at 1307 (―If . . . the vote
is uncoerced and is fully informed, there is no reason why the shareholder vote should not be
given that effect, particularly given the [Delaware Supreme Court‘s] rightful emphasis on the
importance of the shareholder franchise and its exercise.‖).
13