A friend recently emailed, raising a question about the new Delaware Chancery Court decision in In re KKR Financial Holdings LLC Shareholder Litigation, --- A.3d ----, 2014 WL 5151285 (Del.Ch.2014). He writes:
I am confused by the relationship of [KKR Financial Holdings to] Kahn v. M&F Worldwide. As I understand Kahn, in a merger with a controlling shareholder you need both approval of a disinterested independent committee and a vote of a majority of the minority. In the KKR case the court concludes that KKR is not a "controlling" shareholder, but that even if the majority of the board is not disinterested (that is, a majority is somehow beholden to the acquirer) the BJR applies if there is approval by a majority of the minority. That seems to me to be inconsistent with Kahn. I don't see the difference between a company that is controlled by the acquirer and one whose board is not independent of the acquirer. What am I missing?
I'm puzzled also. I first note that the court found that a majority of the BOD was disinterested and independent, so the part that is puzzling us is dicta:
For the foregoing reasons, I conclude that plaintiffs have failed to allege facts that support a reasonable inference that eight of the twelve KFN directors, constituting eight of the ten who voted on the transaction, were not independent from KKR. Thus, plaintiffs have failed to rebut the presumption that the business judgment rule applies to the KFN board’s decision to approve the merger.
But that's not the interesting question. Instead, it is the court's statement that, "even if plaintiffs had alleged sufficient facts to reasonably support such an inference, business judgment review still would apply because the merger was approved by a majority of disinterested stockholders in a fully-informed vote."
I note that, oddly, plaintiffs did not challenge the defense position on the effect of approval by the shareholders:
Relying on Chancellor Strine’s decision last year in Morton’s ... and his earlier decision in Harbor Finance Partners v. Huizenga, defendants argue that, because the merger did not involve a controlling stockholder and was approved by a fully informed vote of KFN’s stockholders, the business judgment rule applies and insulates the merger from all attacks other than on the grounds of waste. Put differently, defendants argue that, even if a majority of the KFN’s directors were not independent, the business judgment presumption still would apply because of the effect of untainted stockholder approval of the merger.
Plaintiffs do not take issue with defendants’ position concerning the legal effect of a fully informed vote where a controlling stockholder is not involved.
But that would not excuse the court from considering the issue sua sponte, would it? In any case, the court nowhere discusses the Delaware Supreme Court decision in Kahn.
Obviously, if a majority of the board were disinterested and independent, shareholder approval would invoke the business judgment rule. But if a majority of the board were interested by virtue of a link to major (albeit non-controlling) shareholder, shouldn't that trigger Kahn? After all, you have a conflict of interest on the part of the board that arises out a relationship with a shareholder?