Law School Case Brief
Kahn v. Tremont Corp. - 694 A.2d 422 (Del. 1997)
The controlling or dominant shareholder is initially allocated the burden of proving that the transaction was entirely fair. However, approval of a transaction by an informed vote of a majority of the minority shareholders, while not a legal prerequisite, shifts the burden of proving the unfairness of the transaction entirely to the plaintiffs. To obtain the benefit of burden shifting, the controlling shareholder must do more than establish a perfunctory special committee of outside directors. Rather, the committee must function in a manner which indicates that the controlling shareholder did not dictate the terms of the transaction and that the committee exercised real bargaining power "at an arms-length."
Defendants Tremont Corporation and its board of directors purchased shares of stock from NL Industries, Inc. These shares, constituting 15 percent of NL's outstanding stock, were purchased from Valhi, Inc.. Valhi, Inc. was a corporation which was 90 percent owned by a trust for the family of Harold C. Simmons. Plaintiff-shareholder Alan R. Kah, alleged that Simmons effectively controlled the three related companies and, through his influence, structured the purchase in a manner which benefited himself. The Court of Chancery of the State of Delaware in and for New Castle County approved the purchase holding that the special committee which was established to negotiate the purchase of stock functioned independently. Kahn appealed.
Did the special committee function independently?
The Supreme Court of Delaware rejected the Court of Chancery's determination that Tremont Corporation’s special committee, which was established to negotiate the purchase of stock, functioned independently. The Court stated that all three members of the committee had previous affiliations with Simmons and, as a result, received significant financial compensation or influential positions on company boards. The Court concluded that the special committee did not operate in a manner that entitled defendants to shift from themselves the burden that encumbers a controlled transaction. Thus, the Court reversed the Court of Chancery's decision and remanded the case for an entire fairness determination with the burden of persuasion on defendants.
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