On October 2, 2015, the Delaware Supreme Court affirmed the Court of Chancery's ruling in In re KKR Financial Holdings LLC, 101 A.3d 980 (Del. Ch. 2014), holding that the appropriate standard of review of a transaction approved by an informed vote of the majority of the disinterested stockholders is the business judgment rule (Corwin, et al. v. KKR Fin. Hldgs. LLC, et al., (Del. Oct. 2, 2015)).

The case arose out of the acquisition of KKR Financial Holdings LLC (KFN) by private equity firm KKR & Co. L.P. (KKR) via a stock-for-stock merger. The plaintiffs, who were stockholders of KFN, had filed suit, asserting that:

The defendants, including KKR, KFN and KFN's board of directors, filed a motion to dismiss. The Delaware Court of Chancery granted the motion to dismiss, finding that:

For a detailed discussion of the Court of Chancery's opinion, see Legal Update, KKR Financial and Crimson Exploration: Chancery Court Describes Degree of Control Required to Trigger Entire Fairness.

The Delaware Supreme Court affirmed the Court of Chancery's ruling in its entirety. The court agreed with the lower court's conclusion that the plaintiffs did not prove that KKR had both the voting power and the management control required to find that a non-majority stockholder effectively controlled the board. As the court noted, nothing in the evidence pointed to KKR's ability to "exact retribution" if the board did not act according to KKR's will.

The Supreme Court also affirmed the Court of Chancery's ruling that the business judgment rule, rather than entire fairness, was the appropriate standard to apply to the merger. On appeal, the plaintiffs argued that even if the Court of Chancery had correctly held that KKR was not a controlling stockholder and the entire fairness standard did not apply, it should still have applied enhanced scrutiny under Revlon. However, the Supreme Court dismissed this argument, finding that the vote by the fully informed and uncoerced stockholders of KFN was outcome-determinative, even though the merger was a change-of-control transaction to which Revlon ordinarily applies. Though the plaintiffs complained that the effect of this ruling would be to undermine Revlon, the court emphasized that Revlon's primary purpose is to give stockholders the ability to prevent injury before closing. However, in the post-closing stage after the stockholders have approved the transaction, Revlon is not designed for bringing suit for money damages.

In affirming the Court of Chancery's decision to apply business judgment, the Supreme Court also confirmed the lower court's understanding of the Supreme Court's decision in Gantler v. Stephens, 965 A.2d 695 (Del. 2009). The plaintiffs had read Gantler as changing Delaware law as it had previously been understood after decisions like In re Wheelabrator Tech., Inc., which had held that that the effect of a fully informed vote of a majority of disinterested stockholders was to restore application of the business judgment rule (663 A.2d 1194, 1200 (Del. Ch. 1995)). The plaintiffs argued that after Gantler, the change in standard of review only applied when the conflicted board voluntarily put the transaction to a vote of the stockholders. By this reading, a statutorily required stockholder vote, as in the case of a merger of a corporation, would not restore the business judgment rule to transactions approved by a conflicted board. However, the Court of Chancery did not agree with this reading, and neither did the Supreme Court, because:

The court emphasized that rather than marking a departure with existing precedent, its decision in KKR was philosophically consistent with Delaware policy that, assuming a transaction is not subject to entire fairness, courts should not second-guess the impartial business judgment of the directors or the decision of those who have an economic interest in the outcome (the stockholders).

The Supreme Court's decision in KKR never explicitly mentions the Delaware judiciary's recent decisions on M&A hot topics of settlement approval and appraisal actions. But like those rulings, KKR represents another strike by the Delaware courts against the practice of stockholder litigation that accompanies almost every public merger announcement.

Because director defendants virtually never lose a decision in which they are entitled to the presumptions of the business judgment rule, the KKR decision can be expected to heavily weigh against the value of bringing a post-closing claim for damages. Unless the plaintiffs can make a strong case for entire fairness or that seriously defective disclosures undermined the stockholder vote, the typical Revlon claim will become far less useful for anything other than pre-closing injunctions.

The decision also increases the value of making fulsome pre-vote disclosures. Because a fully informed vote of the disinterested stockholders restores the presumptions of the business judgment rule, the parties have a greater incentive to qualify the transaction for that standard of review, instead of enhanced scrutiny.