KKR Judge Throws Out Investor Lawsuits Over KFN Unit's Buyout

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By Jef Feeley

Oct. 15— Investors in a unit of KKR & Co. can't challenge the private-equity firm's $2.6 billion buyout of the publicly traded credit business KKR Financial Holdings LLC as an insider deal, a judge concluded.

KKR's acquisition of KKR Financial, commonly known as KFN, in an all-stock deal, didn't amount to a controlling-shareholder buyout that shortchanged investors, Delaware Chancery Court Chancellor Andre Bouchard ruled Oct. 14. KKR officials said in April that 98 percent of KFN investors approved the deal in a shareholder vote.

The ruling comes less than two weeks after KKR and other buyout firms such as Blackstone Group LP won initial approval of a settlement of investor suits claiming the companies colluded to hold down the value of acquisitions. A federal judge in Boston gave preliminary authorization for the $590.5 million settlement on Sept. 30 and set a hearing on the accord's final approval for Feb. 11.

“It is not reasonably inferable from the complaint that KKR was a controlling stockholder of KFN,” Bouchard said in his 42-page ruling. Investors argued the buyout amounted to an insider deal that shortchanged shareholders.

Kristi Huller, a spokeswoman for KKR, didn't immediately respond to a call seeking comment on Bouchard's decision to throw out the suits over the deal.

Control Issue

Lawyers for KFN investors said in court filings that under the unit's management agreement with KKR, the buyout firm handles all operations and KFN has no employees.

The company was set up in 2004 as a mortgage and real estate-investment trust and sold its shares to the public the following June, raising more than $800 million.

KFN directors acknowledged they are “totally reliant” on KKR for information about the value of the holding company's investments, Stuart Grant, an attorney for some KKR shareholders, argued at a hearing in July before Bouchard.

KKR's attorneys countered that the private-equity firm owns less than 1 percent of KFN's stock and has no power over KFN's directors.

Bouchard found investors weren't able to properly challenge the deal on the grounds that KKR controlled KFN's board and the unit's directors were beholden to the private-equity firm.

‘No Concern.'

“KKR's less than 1 percent position in KFN obviously would create no concern in the mind of KFN's directors that KKR possessed sufficient voting power to remove them from their positions if they rejected the merger proposal or took any other action KKR did not like,” Bouchard said.

The judge also found the deal wasn't tainted by conflicting interests among a majority of KFN board members and the acquisition was approved in shareholder vote.

The buyout “was approved by a majority of the shares held by disinterested stockholders of KFN in a vote that was fully informed,” Bouchard said.

To contact the reporter on this story: Jef Feeley in Wilmington, Del. at jfeeley@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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