To satisfy the control test, a plaintiff must show either that the controlling stockholder owned more than 50% of the voting power of the corporation or exercised control over the business affairs of the corporation in spite of owning less than 50% of its voting power (Ivanhoe P’rs v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987)). Because KKR owned far less than 50% of the outstanding stock, and in fact, owned less than 1% at the time of the merger, the plaintiffs here had to rely on the control test.

The Court cited a series of 2006 decisions that explained and applied that test. To begin, the plaintiffs must demonstrate that the stockholder (KKR) not only exercised control over the corporation (KFN), but that it had actual control regarding the challenged transaction itself (Williamson v. Cox Commc’ns Inc., , at *4 (Del. Ch. June 5, 2006)). The "actual control" test is only met if the stockholder had such power that practically, it was "no differently situated than if [it] had majority voting control" (In re PNB Hldg. Co. S’holders Litig., , at *9 (Del. Ch. Aug. 18, 2006)). In addition, the control must rise to the level of dominance over the board's decision-making process, beyond simply taking advantage of negotiated contractual rights (Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., , at *4 (Del. Ch. Aug. 25, 2006)).

The plaintiffs here argued that KKR exerted just this type of control due to the terms of the management agreement between its affiliate and KFN. The Court rejected this argument, noting that the agreement only addressed KFN's management by delegating control over the day-to-day operations of KFN to the KKR affiliate. However, the agreement did not delegate any control to KKR's affiliate to dictate or veto any action of KFN's board, nor to prevent KFN's board from hiring advisors and gathering information independently. The Court refused to extend the fiduciary duty obligation to nominal stockholders due to a pre-existing contractual obligation, beyond the decision in Superior Vision Services.

Coincidentally, the decision of the KKR court on the requirement for actual control finds support in the more recent Chancery decision in Crimson Exploration. In that ruling, the Court emphasized that a large blockholder will not be considered a controlling stockholder unless it actually controls the board's decisions about the challenged transaction. On that basis, the Court held that a private equity firm that owned 33.7% of the corporation's shares, was possibly the corporation's largest creditor, had designated a majority of the board and of senior management, had employed three of the seven directors while they were serving as directors, and with whom the corporation's CEO had a ten-year relationship, still did not qualify as a controlling stockholder of the corporation. More important to the Court was that the stockholder was an outside investor that did not instigate the merger negotiations nor even learn about them until informed of them by the CEO.

Along similar lines, the Crimson Exploration Court examined whether the private equity firm could be said to have received a special benefit in the merger that was not available to the other stockholders, which would trigger entire fairness review. The Court held that the firm's desire for liquidity by exiting its investment would not suffice to question the alignment of its interests with those of the other stockholders, absent a "compelling" or "idiosyncratic" liquidity problem that would cause it to sell its shares for less than full value (as was found in N.J. Carpenters Pension Fund v. infoGROUP, Inc., (Del. Ch. Oct. 6, 2011); see Legal Update, In re: OPENLANE and New Jersey Carpenters Pension Fund v. infoGROUP: Delaware Court of Chancery Upholds One Board Process, Finds Possible Breach in Another). Minor benefits such as obtaining registration rights and prepaying a small debt were also not enough to suspect that the private equity firm had different interests than the other stockholders.

Turning next to the second scenario that would rebut the business judgment presumption, the plaintiffs in KKR argued that a majority of the KFN directors were not independent and that entire fairness review should therefore apply. (They did not argue that any of the directors were interested in the merger.) The Court noted that Delaware law presumes the independence of the board's directors. However, that independence is rebutted if it is shown that the "director is beholden to a controlling person or 'so under their influence that their discretion would be sterilized.'" The Court allowed that two of KFN's directors, Hazen and Glenn Hubbard, could arguably be found to not be independent due to Hazen's long-standing ties to KKR and Hubbard's position as dean of the business school that had recently received a donation from KKR's co-founder. However, the Court held that none of the other directors could reasonably be conceived to lack independence. Therefore, the plaintiffs failed to show that the entire fairness review should be applied due to a majority of the board's lack of independence.

In dicta, the Court approved an alternative argument of the defendants, that even if a majority of KFN's directors were not independent of KKR, the effect of a fully informed vote of a majority of disinterested stockholders was to restore application of the business judgment rule. This position (which rarely arises due to the unlikely scenario that a majority of a board will not be independent of an acquiror who is not a controlling stockholder) is supported by previous Court of Chancery decisions such as In re Wheelabrator Tech., Inc. S'holders Litig., 663 A.2d 1194, 1200 (Del. Ch. 1995), and Harbor Finance P'rs v. Huizenga, 751 A.2d 879, 890 (Del. Ch. 1999).

The rationale for distinguishing between a transaction approved by a conflicted board, which can be reviewed under the business judgment rule by virtue of stockholder approval alone, and a transaction with a controlling stockholder, which requires satisfaction of the M & F Worldwide test to restore the business judgment rule, is discussed in an article authored by Vice Chancellor Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40 Wm. Mitchell L. Rev. 1443 (2014), cited by the Court in KKR. As the article explains, when there is no controlling stockholder present, the Court can defer to the stockholders, who are positioned well enough to decide for themselves to approve the board's actions, even though that endorsement is an imperfect substitute for a careful, deliberative investigation into the merits of the transaction by a disinterested and independent board. By contrast, in a controlling stockholder transaction, majority-of-the-minority stockholder approval alone cannot "sterilize the controller's influence." This is because the controller's influence "operates at both the board and stockholder levels," in that the minority stockholders are implicitly coerced to vote in favor of the transaction lest they risk retaliation.

Although this rationale is not considered controversial, the KKR court addressed a question concerning it that had arisen as a result of the decision of the Delaware Supreme Court in Gantler v. Stephens, 965 A.2d 695 (Del. 2009). Gantler can be read as limiting the decisions in Wheelabrator and Harbor Finance to when the conflicted board voluntarily puts the transaction to a vote of the stockholders. By this reading, a statutorily required stockholder vote, as in the case of a merger of the corporation, does not restore the business judgment rule to transactions approved by a conflicted board. However, the KKR court stated that Gantler should not be read as overruling or limiting Wheelabrator in that fashion, because:

Consequently, the traditional, broader understanding of Wheelabrator is still good law.