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ANNUAL DEVELOPMENTS:
DO RECENT DELAWARE DECISIONS
SPELL THE DEATH OF STOCKHOLDER
LITIGATION?
Moderator
Kurt Heyman; Heyman Enerio Gattuso & Hirzel LLP; Wilmington, DE
Speakers
Hon. Joseph R. Slights; Vice Chancellor; Delaware Court of Chancery
Emily Burton; Young Conaway Stargatt & Taylor LLP; Wilmington, DE
Melissa Donimirski; Heyman Enerio Gattuso & Hirzel LLP; Wilmington, DE
Jessica Zeldin; Rosenthal, Monhait & Goddess, P.A., Wilmington, DE
Challenging Board Action
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Business Judgment Rule
Enhanced Scrutiny
Entire Fairness
The choice of the applicable test is often
outcome determinative
• Most Board actions reviewed under Business
Judgment Rule – court must dismiss any challenge
to a transaction unless the terms effectively amount
to waste. See Cede v. Technicolor, 634 A.2d 345 (Del.
1993).
• Transactions with a controlling or dominating
shareholder, however, generally considered under
highest standard – Entire Fairness, which requires
controlling shareholder to demonstrate Fair Dealing
and Fair Price. Weinberger v. UOP, 457 A.2d 701
(Del. 1983).
Kahn v. M & F Worldwide Corp., 88 A.3d 635
(Del. 2014)
• Challenge to M&F Worldwide’s going-private
transaction with its controlling shareholder,
MacAndrews & Forbes, Ronald Perelman’s holding
company.
• From the start, MacAndrews & Forbes agreed that
it would only proceed if the transaction were
approved by both an independent Special Committee
of directors and a majority of the minority vote.
• Special Committee able to negotiate for an increase
in bid by $1 per share to $25 per share.
Kahn v. M & F Worldwide Corp., 88 A.3d 635
(Del. 2014)
Where the controlling shareholder has conditioned the
transaction on both approval by an independent special
committee of the board and a majority of the minority
vote, the transaction will be reviewed under the Business
Judgment Rule.
Clear blueprint for avoiding stockholder challenges
In re Books-A-Million, Inc. S’holders
Litig., 2016 WL 5874974 (Del. Ch.)
“The Merger followed the framework approved by the
Delaware Supreme Court in Kahn v. M & F Worldwide Corp.,
88 A.3d 635 (Del. 2014). Consequently, unless the plaintiffs
can plead facts supporting a reasonable inference that one
of the elements of the framework was not met, the business
judgment rule provides the operative standard of review.
Under that standard of review, the court will defer to the
judgments made by the corporation's fiduciaries unless the
Merger is so extreme as to suggest waste.”
• The Court applied MFW and dismissed the Complaint.
Corwin v. KKR Fin. Holdings, 125 A.3d 304
(Del. 2015)
• Class action by stockholders of KKR Financial
Holdings LLC (the “Company”) challenging a stockfor-stock acquisition of the Company by KKR & Co.
L.P. (“KKR”).
• The plaintiffs asserted that the entire fairness standard
of review applied to the transaction because KKR was
a controlling stockholder of the Company since the
Company’s primary business was financing KKR’s
leveraged buyout activities and the Company was
managed by an affiliate of KKR under a management
agreement.
Corwin v. KKR Fin. Holdings, 125 A.3d 304
(Del. 2015)
• The Court of Chancery held that plaintiffs’ allegations
did not support a reasonable inference that KKR was a
controlling stockholder of the Company.
• The Supreme Court affirmed that holding and further
held that the uncoerced majority of the minority vote
“is outcome-determinative, even if Revlon applied to the
merger.”
Corwin v. KKR Fin. Holdings, 125 A.3d 304
(Del. 2015)
Thus, the business judgment rule applies to any
merger not subject to entire fairness review that has
been approved by a fully informed, uncoerced vote
of disinterested stockholders.
This means that the business judgment rule is the
standard of review even in transactions that would
otherwise be subject to Revlon review, as long as the
transaction has been approved by a fully-informed,
un-coerced majority of the minority.
The vast majority of substantive post-KKR
opinions are opinions granting defendants’ motion
to dismiss
• In re Merge Healthcare Inc., 2017 WL 395981 (Del.
Ch.)
• In re Solera Hldgs., Inc. S’holder Litig.,
2017 WL 57839 (Del. Ch.)
• In re Om Group, Inc. S’holder Litig.,
2016 WL 5929951 (Del. Ch.)
• Larkin v. Shah, 2016 WL 4485447 (Del. Ch.)
• In re Volcano, 143 A.3d 727 (Del. Ch. 2016)
In re Volcano, 143 A.3d 727 (Del. Ch. 2016)
KKR automatically applies to short form mergers, where
no majority of the minority vote actually takes place.
The stockholder’s decision to tender shares in the first
step tender offer was the equivalent of a vote in favor of
adoption of a merger agreement.