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 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 stock-for-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.