Newman v. KKR: Suit dismissed by Delaware Chancery Court for failure to plead demand futility

In Newman v. KKR, the Delaware Court of Chancery dismissed a shareholder suit against Transphorm, Inc.’s Board and KKR, the largest shareholder, for failure to plead demand futility. The plaintiff alleged that the Board breached its fiduciary duties by approving an equity financing transaction (the Private Placement) in which KKR participated. The Court held that the plaintiff failed to plead demand futility because the plaintiff did not allege with particularity that Transphorm’s Audit Committee lacked independence from KKR. The plaintiff also failed to adequately allege that the Audit Committee faced a substantial likelihood of liability on the claims asserted, which distinguished this case from the recent decision in Ontario Provincial Council of Carpenters’ Pension Tr. Fund v. Walton (Del. Ch. Apr. 26, 2023). Plaintiff’s “disagreement” with the Audit Committee over the Private Placement did not amount to the allegations necessary to support a bad faith claim.

Transphorm Inc. (the Company) is a semiconductor company. The Company’s largest shareholder was KKR Phorm Investors, L.P. (KKR), holding up to 47.3% of the Company’s shares. KKR was entitled to reseat a majority of the Board at any time.

In November 2021, the Board of Directors, including the Audit Committee, met to consider an equity issuance in which KKR would invest US$5 million and third parties would invest $15 million (the Private Placement). The Board concluded that this transaction would be in the best interests of its shareholders and gave its written consent. At the same meeting, acknowledging that KKR would be considered a “related party” under the Company’s related party transaction policy, the Audit Committee reviewed and approved KKR’s participation in the transaction. Third parties, not KKR, led the negotiation of the terms governing KKR’s participation in the Private Placement. Also, those terms required KKR to participate at arm’s-length.

Individual shareholder Joel Newman (Plaintiff) filed a derivative suit against the Board and KKR, without first making a demand on the Company. Plaintiff alleged that (1) KKR breached its fiduciary duties by participating in the equity issuance, and (2) the Company’s seven directors (including its four Audit Committee members) breached their fiduciary duties by approving the Private Placement. The defendants moved to dismiss the complaint for failure to plead demand futility.

The court agreed that Plaintiff had failed to allege demand futility and granted the defendants’ motion to dismiss.

First, the court held that Plaintiff had not sufficiently pleaded that the Audit Committee lacked independence from KKR. The court noted that directors are presumed to be independent and here, the plaintiff did not allege  that the directors were personally interested in KKR’s participation in the Private Placement. Plaintiff also did not allege any particularized facts showing that KKR exerted pressure on the Audit Committee. Although KKR owned almost 50% of the Company’s stock and allegedly had enough voting power to remove the Audit Committee directors from the Board, KKR was not a “controller” unless it exercised “actual control” over the corporation’s affairs generally, or with respect to the Private Placement at issue. Plaintiff made no such allegations, and the court found that the “potential” ability to exercise control was not sufficient to excuse demand.

Second, the Court found that Plaintiff failed to adequately allege that defendants acted in bad faith. Plaintiff offered various theories on how defendants acted in bad faith, including that the Audit Committee “disregarded” the Company’s related party transaction policy.  Plaintiff tried to analogize the facts of this case to Ontario Provincial Council of Carpenters’ Pension Tr. Fund v. Walton, 2023 WL 3093500 (Del. Ch. Apr. 26, 2023) (“Walmart”), by arguing that the Board’s “failure to record a mechanical progression” through each part of the related party transaction policy meant that the Audit Committee did not actually consider “any” factor. The Court concluded that the case was “nothing like Walmart,” which involved a “well-pleaded” Caremark claim based on an “alleged decision to ignore clear red flags surrounding the company’s non-compliance” that suggested “no discussion occurred at the board level” about such non-compliance. In contrast, in the KKR case, there were clear records of the Audit Committee’s review and approval of the transaction pursuant to the related party policy.

Without particularized allegations showing lack of independence, demand is not excused under 2021’s Zuckerberg test.



Authored by Allison Wuertz, Jon M. Talotta, Jordan Teti, and Shannon Zhang.

Allison Wuertz
New York
David Michaeli
New York
Jon Talotta
Global Co-Lead
Northern Virginia
William Regan
New York
Ann Kim
Los Angeles
Jordan Teti
Los Angeles
Shannon Zhang
Summer Associate


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