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Kahn v. Lynch Communication Sys., Inc. (Lynch II)

Delaware Supreme Court
669 A.2d 79 (Del. 1995)


Facts

In Lynch I, Alan Kahn (plaintiff), a minority shareholder of Lynch Communication Systems, Inc. (Lynch) (defendant), challenged a cash-out merger dominated by Lynch's controlling shareholder, Alcatel U.S.A. Corp. (Alcatel) (defendant). The case was remanded to the court of chancery to reexamine the merger with the burden of proof on Alcatel. The court held that the defendants met the burden of proving that the merger was entirely fair to Lynch shareholders. The court found that the transaction was conducted with fair dealing. Lynch faced a development hurdle due to a lack of technology. The merger with Celwave Systems, Inc. (Celwave) would remedy this weakness. Alcatel offered to buy Lynch as an alternative to the Celwave proposal, after Lynch's chief executive officer (CEO) told Alcatel that a cash-out merger with Alcatel would be better. Alcatel vetoed the acquisition of Telco Systems, Inc. (Telco), because Telco was not profitable, and its technology was limited. Although being coerced, the independent committee did negotiate an increase in price from $14 to $15.50 per share. Alcatel paid cash for all shares tendered. In finding the price fair, the court accepted on the valuation by Alcatel's investment banker, which was $15.50 to $16.00 per share. The valuation was based on the market stock price, plus a merger premium. The court also considered the valuations by the independent committee's two investment bankers, which were $16.50 to $17.50 per share. The court rejected the valuation by Kahn's expert, which was $18.25 per share, because it found the valuation methodology flawed. Therefore, the court of chancery held that the defendants had proven the entire fairness of the transaction. Kahn appealed.

Rule of Law

Issue

Holding and Reasoning (Walsh, J.)

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