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Delaware Chancery Court upholds allegations of self-dealing by KKR
December 24, 2011
Gardy & Notis, LLP has been appointed by the Court as lead counsel for shareholders of Primedia, Inc. (NYSE: PRM) seeking to recoup damages against Kolberg Kravis Roberts & Co. L.P., Henry R. Kravis, and the other directors of Primedia based on allegations that KKR controls Primedia and looted Primedia’s assets to fund an early 100% redemption of preferred stock that KKR and its investment vehicles had bought for just pennies on the dollar.
Gardy & Notis, LLP partner James S. Notis was the lead attorney for plaintiffs on the amended complaint and opposition to defendants' motions to dismiss, and presented oral argument to the Court on September 25, 2006, in opposition to the motions to dismiss.
On November 15, 2006, the Court issued a 27-page decision denying the motions to dismiss in all respects. Among the Court's findings:
• Breach of duty of loyalty by the directors of Primedia:

"KKR is adequately alleged to have exerted control over Primedia’s board of directors, all of whom were beholden to KKR in some fashion, and to have caused the company to redeem the outstanding preferred stock at full redemption prices, both years before such action was contractually mandated and without the intermediation of any independent bargaining agent or decision maker to assure fairness to Primedia. Because two entities controlled and managed by KKR (ABRA and KKR 1996 Fund) owned substantial amounts of the preferred stock, KKR stood on both sides of the challenged transactions. Thus, according to the complaint, KKR caused Primedia to undertake a corporate action that conferred an exclusive benefit upon KKR–namely, a sizable profit from the allegedly unfair preferred stock redemptions–and that simultaneously damaged the financial interests of Primedia and its other common stockholders. These allegations, if ultimately proven true, would constitute a breach of the fiduciary duty of loyalty that KKR and the director defendants owed to Primedia’s minority stockholders[.]" 2006 WL 3365544, at *6 (Del. Ch. Nov. 15, 2006).
• KKR's actual control of Primedia and the preferred stock redemptions:
"[T]he course of dealing present here suggests that KKR enjoyed actual control over the stock redemptions. Even though KKR had a financial stake in the preferred stock through ABRA and KKR 1996 Fund, the complaint alleges that no independent committee of the board was formed to consider the early redemption of the preferred stock. Even though the Series D, Series F, and Series H stocks were allegedly all trading at significant discounts, the proceeds from the asset sales were not used to repurchase the publicly traded stocks at a discount on the open market. The particular course of dealing alleged in the complaint supports an inference that KKR exerted its power over Primedia’s directors in connection with the challenged transactions." 2006 WL 3365544, at *7.
• Defendants' conduct is not protected by the business judgment rule:
"[O]n the facts alleged in the complaint, the court can reasonably infer that KKR exercised actual control over Primedia and used that control to cause Primedia to enter into an unfair self-dealing transaction without any procedural safeguards to protect the minority stockholders. These allegations of fact, if proven at trial, suffice to remove the protection of the business judgment rule." 2006 WL 3365544, at *8.
The case is In Re Primedia Inc. Derivative Litigation, C.A. No. 1808-N, Delaware Court of Chancery.

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