Law School Case Brief
Kahn v. Lynch Commc'n Sys. - 669 A.2d 79 (Del. 1995)
A controlling or dominating shareholder standing on both sides of a transaction, as in a parent-subsidiary context, bears the burden of proving its entire fairness. The standard for demonstrating entire fairness is fair dealing and fair price. Fair dealing addresses the timing and structure of negotiations as well as the method of approval of the transaction, while fair price relates to all the factors which affect the value of the stock of the merged company. However, the test is not bifurcated or compartmentalized but is one requiring an examination of all aspects of the transaction to gain a sense of whether the deal in its entirety is fair. A board of directors will have to demonstrate entire fairness by presenting evidence of the cumulative manner by which it discharged all of its fiduciary duties.
Lynch, a Delaware corporation, designed and manufactured electronic telecommunications equipment, primarily for sale to telephone operating companies. Alcatel, a holding company, is a subsidiary of Alcatel (S.A.), a French company involved in public telecommumcations, business communications, electronics, and optronics. In 1981, Alcatel acquired 30.6% of Lynch's common stock pursuant to a stock purchase agreement. As part of that agreement, Lynch amended its certificate of incorporation to require an 80% affirmative vote to approve any business combination.
Alcatel's proposed a stock-for-stock merger with Lynch. The Lynch board approved the merger with Alcatel with an offer of $15.50 per share. At the time of the merger, Alcatel owned 43.3% of Lynch's outstanding stock and designated five of the eleven directors on Lynch's board of directors. Kahn, a Lynch minority shareholder, brought suit, later certified as a class action, challenging Alcatel's acquisition of Lynch through a tender offer and cash-out merger. Kahn alleged the merger to be unfair in that Alcatel, as a controlling shareholder, breached its fiduciary duties to Lynch's minority shareholders. Specifically, Kahn charged that Alcatel dictated the terms of the merger, made false, misleading, and inadequate disclosures, and paid an unfair price. The Court of Chancery of the State of Delaware in and for New Castle County determined that a cash-out merger was entirely fair and rejected Kahn’s claim. It was determined that the controlling shareholder dominated the merger negotiations despite the fact that the directors had appointed an independent negotiating committee.
Kahn sought further appellate review.
Did the trial court err in rejecting Kahn’s claim?
The Supreme Court of Delaware affirmed the judgment in favor of the acquired corporation, its directors, the controlling shareholder, and its parent corporation. The Court found that the trial court properly considered how the directors discharged their fiduciary duties with regard to each aspect of the non-bifurcated components of entire fairness: fair dealing and fair price. Mere initiation by the acquirer was not reprehensible because the controlling shareholder did not gain a financial advantage at the minority's expense. Unanimity regarding fair price was not required. The controlling shareholder made a sufficient showing of fair value, but the minority shareholders failed to establish sufficient credible evidence to persuade the finder of fact of the merit of a greater figure. There was proper disclosure such that a reasonable minority shareholder was under no illusions concerning the leverage available.
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