Kahn v. Lynch Communication Sys., Inc.
638 A.2d 1110 (Del. 1994)
669 A.2d 79 (Del. 1995)

  • Alcatel owned about 43% of Lynch, which gave them a significant interest, but not majority control.
    • Alcatel was a subsidiary of Alcatel SA who was in turn a subsidiary of CGE.
  • Lynch’s management (led by their CEO Dertinger) recommended that they buy a company called Telco. Alcatel opposed the purchase and suggested that Lynch acquire a similar company called Celwave (that just happened to be another CGE subsidiary).
  • Dertinger put together an independent committee to evaluate a possible purchase of Celwave.
    • The independent committee recommended not buying Celwave.
  • Alcatel responded by proposing to buy up the rest of Lynch’s stock in a cash-out merger. They suggested $14 a share. The independent committee found that to be too low and suggest $17.
  • Alcatel told the independent committee that if they didn’t take an offer of $15.50, Alcatel would proceed with an unfriendly takeover at a much lower price.
    • The independent committee recommended that Lynch take the $15.50 offer.
  • Lynch shareholders, led by Kahn, sued.
    • The shareholders argued that Alcatel owed a fiduciary duty to the other shareholders and violated their duty by vetoing Lynch’s acquisition of Telco and forcing the cash-out merger.
    • Alcatel argued that they owned less than 50% of Lynch’s stock, so they were not a majority owner and therefore owed no fiduciary duty.
  • The Trial Court found for Alcatel. Kahn appealed.
    • The Trial Court found that Lynch’s ‘non-Alcatel’ directors deferred to Alcatel because of its position as a significant stockholder and not because their business judgment told them Alcatel’s position was correct.
    • However, the Court found that the independent committee’s actions were “sufficiently well informed and aggressive to simulate an arms-length transaction.”
  • The Appellate Court reversed and remanded.
    • The Appellate Court found that there are two aspects to entire fairnessfair dealing, and fair price.
      • Fair dealing includes considerations of when the transaction was times, how it was initiated, structured, and negotiated, disclosed to the directors, and how the approvals of the directors and the shareholders were obtained.
      • Fair price includes economic and financial considerations of the merger, including assts, market value, earnings, future prospects, and other things that could affect the stock price.
      • See Weinberger v. UOP, Inc. (457 A.2d 701 (1983)).
    • The Court found that the existence of an independent committee is evidence of fair dealing. However, if the majority shareholder dictates the terms of the merger, or the independent committee does not have real bargaining power, then that is evidence that there was not fair dealing.
      • The Court found that the facts in this case strongly implied that there was no fair dealing.
    • The Court remanded to the Trial Court, placing the burden on Alcatel to show that the transaction met the test of entire fairness.
      • The Court found that the controlling stockholder has “the initial burden of establishing entire fairness … However, an approval of the transaction by an independent committee of directors or an informed majority of minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder-plaintiff.”
  • On remand, the Trial Court again found for Alcatel. Kahn appealed.
    • The Trial Court looked to Weinberger and found that the transaction met the relevant factors – timing, initiation, structure, and negotiation, to be considered fair dealing.
  • The Appellate Court affirmed.
    • The Appellate Court found that there was fair dealing because all the Lynch shareholders were treated equally, and the independent committee did have at least some power to negotiate price ($14 to $15.50).
    • The Court found that there was fair price. Both Alcatel and Kahn had presented evidence of what the price should be, and the Trial Court thought that Alcatel’s accounting method was more persuasive.