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Kahn v. Lynch Communication Sys., Inc. (Lynch I)
Delaware Supreme Court
638 A.2d 1110 (Del. 1994)
Alcatel U.S.A. Corp. (Alcatel) (defendant) owed 43.3 percent of Lynch Communication Systems, Inc. (Lynch) (defendant) stock. Lynch's charter required a supermajority vote to approve any business combination. The Lynch board had 11 directors, five of which were Alcatel designees. Lynch's management recommended that Lynch acquire Telco Systems, Inc. (Telco). Alcatel rejected this and proposed that Lynch acquire Celwave Systems, Inc. (Celwave), one of Alcatel's affiliates. The Lynch board established an independent committee to consider the Celwave proposal. Alcatel's investment banker suggested a stock-for-stock merger. The committee rejected the proposal, because its own investment banker said Celwave was overvalued. Instead of further negotiating with the Lynch board about its Celwave proposal, Alcatel responded by offering to buy the rest of Lynch's stock for $14 cash per share. The committee determined that $14 was inadequate. After a few rounds of negotiations, the committee accepted Alcatel's offer of $15.50 per share. Although some committee members considered $15.50 inadequate, they accepted the offer under the pressure that there were no alternatives for Lynch, because Alcatel could block any alternative transaction and would proceed with a hostile tender offer if this one got rejected. The Lynch board approved the cash-out merger based on the committee's recommendation. Alcatel's nominees did not participate in the approval. Alan Kahn (plaintiff), a minority shareholder of Lynch, sued to challenge the cash-out merger. The court of chancery found that Alcatel owed the fiduciary duties of a controlling shareholder to other Lynch shareholders, because Alcatel exercised actual control over Lynch by dominating its corporate affairs. However, the court held that the independent committed effectively negotiated the transactions at arm's length, and therefore, the burden of proof shifted to the challenging shareholder, Kahn. Kahn appealed.
Rule of Law
Holding and Reasoning (Holland, J.)
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