CorporationsMergers and acquisitionsStandard of reviewStockholder votingbusiness judgment ruleentire fairnesscontrolling stockholderfully informed vote
Facts
KKR acquired Financial Holdings in a stock-for-stock merger in which each share of Financial Holdings stock was exchanged for 0.51 of a share of KKR stock, a 35% premium to the unaffected market price. Plaintiffs alleged that KKR was Financial Holdings's controlling stockholder because Financial Holdings's business financed KKR's leveraged buyout activities and was managed by a KKR affiliate under a management agreement that could be terminated only upon payment of a fee. But KKR owned less than 1% of Financial Holdings's stock, had no right to appoint directors, and had no contractual right to veto board action. The merger was approved by an independent board majority and by a fully informed, uncoerced vote of a disinterested stockholder majority.
Issue
Whether the merger was subject to entire fairness because KKR was a controlling stockholder, and if not, whether a fully informed, uncoerced vote of the disinterested stockholders invoked the business judgment rule in this post-closing damages action even if Revlon otherwise might have applied.
Rule
When a merger is not subject to the entire fairness standard of review, approval by a fully informed, uncoerced majority of disinterested stockholders invokes the business judgment rule in a post-closing damages action. A stockholder that lacks majority voting power is not a controlling stockholder absent a combination of potent voting power and management control sufficient to give it effective control of the board.
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Lakeview Robotics, Inc., a Delaware corporation based in Chicago, agreed to merge with North Harbor Systems, Inc., an unaffiliated public company based in Seattle. After a proxy statement accurately disclosed the board’s process and the directors’ interests, 68% of Lakeview’s disinterested stockholders approved the merger in a noncoercive vote, and the deal closed. Stockholders then sued for damages, alleging the directors accepted too low a price and failed to maximize value.
What standard of review should a Delaware court apply to this post-closing damages action?
Explanation. The governing rule is that when a merger is not subject to entire fairness review, a fully informed, uncoerced vote of a majority of disinterested stockholders invokes the business judgment rule in a post-closing damages case. The opinion makes clear that this effect is outcome-determinative even if Revlon might otherwise have applied. Because the vote here was fully informed, uncoerced, and by disinterested stockholders, business judgment review applies. (Derived from Corwin v. KKR Financial Holdings LLC (2015).)