Re-affirming the significance of stockholder approval in corporate governance, the Delaware Supreme Court recently held that transactions approved by a fully informed, uncoerced stockholder vote will be reviewed under the business judgment rule when not subject to the entire fairness standard of review.  Corwin v. KKR Fin. Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015).  Last Friday, the Court unanimously affirmed Chancellor Bouchard’s dismissal of a post-closing damages action in In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014).  The opinion by Chief Justice Strine canvassed Delaware authority from as far back as 1928 to find extensive support for the proposition that “the approval of the disinterested stockholders in a fully informed, uncoerced vote that was required to consummate a transaction has the effect of invoking the business judgment rule.”  Op. at 7-8 n.19.

To begin, the Court rejected plaintiffs’ argument that the transaction was subject to the entire fairness standard of review, finding that acquirer KKR & Co. L.P. (“KKR”) was not a controlling stockholder of the target, KKR Financial Holdings LLC (“Financial Holdings”).  Plaintiffs alleged that KKR controlled Financial Holdings, including because a KKR affiliate managed the company’s day-to-day operations and because Financial Holdings’s primary business was financing KKR’s leveraged buyout activities.  The Court rejected this argument, noting that KKR “owned less than 1% of [Financial Holdings], had no right to appoint any directors, and had no contractual right to veto any board action.”  The Court reiterated that a controlling stockholder’s fiduciary obligations arise from their “coercive power . . . over the board’s ability to independently decide whether or not to approve the merger,” not mere operational control of a company’s business.

After addressing the issue of control, the decision turned to resolving a topic of much debate in the Chancery Court and in academia since the Delaware Supreme Court’s decision in Gantler v. Stephens, 965 A.2d 695 (Del. 2009):  the effect of stockholder approval on the standard of review in breach of fiduciary duty cases.  In Gantler, the Court reversed the dismissal of a breach of fiduciary duty claim, despite approval by a majority of stockholders, because the proxy disclosures were materially misleading.  The Gantler Court then went on to explain that shareholder ratification “must be limited to its so-called ‘classic’ form; that is, to circumstances where a fully informed shareholder vote approves director action that does not legally require shareholder approval in order to become legally effective.”  Gantler, 965 A.2d at 713.  Under the KKR plaintiffs’ interpretation of Gantler, a fully informed stockholder vote required by statute – as was the case in the instant matter – does not invoke the business judgment rule.

The KKR Court disagreed.  Finding not only that the Gantler Court’s ratification discussion was dicta because the misleading disclosures there were dispositive, the KKR Court also noted the Gantler Court’s conspicuous silence regarding the numerous cases in which shareholder approval of a transaction invoked the business judgment rule:  “[h]ad Gantler been intended to unsettle a long-standing body of case law, the decision would likely have said so.”  Op. at 9.  The KKR Court’s desire to clarify the effect of stockholder approval on the standard of review is particularly notable:  despite finding that plaintiffs had failed to preserve their argument about the effect of Gantler below, the Court went on to specifically “embrac[e]” the Chancellor’s “well-reasoned decision” regarding the standard of review in order “[t]o erase any doubt on the part of practitioners.”  Op. at 10.

While the Court’s decision on the effect of stockholder approval may not affect pre-closing merger injunction litigation, it is likely to have a significant impact on the post-closing damages actions now more frequently pursued after the successful closing of transactions.  As the Court cautioned, however, the safe harbor of stockholder approval applies only when the vote is fully informed.  Going forward, practitioners should expect disclosure claims to become an even more important issue in post-closing litigation, as it affects the crucial question of the applicable standard of review.  The decision will also likely impact the evaluation of aiding and abetting breach of fiduciary duty claims, which require a predicate breach.