Kahn v. Lynch Communications Systems, Inc.
Delaware Supreme Court
638 A.2d 1110 (Del. 1994)
Compagnie Generale d’Electricite’s (CGE) (defendant) indirect subsidiary, Alcatel U.S.A. Corporation (Alcatel) (defendant) held 43.3 percent of Lynch Communication Systems, Inc. (Lynch) (defendant). Alcatel selected five of Lynch’s directors. Lynch wanted to acquire Telco Systems, Inc. (Telco). Alcatel pushed Lynch to acquire Celwave Systems, Inc. (Celwave), another CGE subsidiary, instead. Lynch’s directors wanted the Telco deal, but Alcatel’s designated directors on Lynch’s board refused, saying, “We are 43 percent owner. You have to do what we tell you.” Lynch’s board created an independent committee to negotiate with Celwave. The committee balked after Alcatel’s investment bank suggested an unacceptable ratio for a stock-for-stock merger. Alcatel then offered to acquire the rest of Lynch for $14 a share. The same committee was charged with negotiating the cash-out merger. The committee countered and got Alcatel up to $15.50, but Alcatel threatened to make a tender offer. The committee felt it had no choice but to approve, though it believed the price unfair. Lynch’s board approved, with Alcatel’s designated directors abstaining. Kahn and other minority shareholders (plaintiffs) challenged the merger in the Delaware Court of Chancery. The chancery court concluded that Alcatel had dominated the Lynch board’s business decisions. The court further found that the independent directors “deferred” to Alcatel and the committee accepted the $15.50 offer under Alcatel’s threat of a tender offer. Nevertheless, the chancery court found for the defendants, holding that the committee negotiated at arm’s length and without compulsion. The plaintiffs appealed to the Delaware Supreme Court.
Rule of Law
Holding and Reasoning (Holland, J.)
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