Kahn v. Tremont Corp.

The Harold C. Simmons family trust (Simmons) owned 90 percent of the stock in Valhi, Inc. (Valhi). Valhi was a majority owner of NL Industries, Inc. (NL) and owned a controlling share of Tremont Corporation (Tremont) (defendant). Tremont’s individual board members (defendants) served in high-ranking positions of Simmons’ other entities. NL’s board authorized a repurchase program and a Dutch auction self-tender to buy back outstanding stock, including nearly 11 million shares owned by Valhi. Valhi realized it could gain tax and other benefits if it sold another 7.8 million shares. Valhi began negotiations to sell the shares to Tremont. Tremont director Michael A. Snetzer believed that Valhi could sell the shares at a higher price, and Tremont would subject itself to less risk than an outside buyer. Tremont President and CEO Landis Martin asked three outside directors to form a Special Committee to evaluate the offer. All three members had numerous prior dealings with Simmons. Avy Stein, the de facto leader of the committee, had engaged in many lucrative dealings with Martin and Simmons. The committee appointed a financial advisor that Stein was involved with and a legal advisor recommended by general counsel to Tremont and NL. Not all members attended meetings, and the committee negotiated and recommended the purchase before receiving an outside report. Tremont’s board approved the purchase negotiated by the committee. Tremont shareholder Alan R. Kahn (plaintiff) sued Tremont in the Court of Chancery arguing that Simmons used the repurchase program and Dutch auction to inflate NL share prices so that Simmons could then sell his NL stock to Tremont at an unfair price. The court determined that the entire fairness standard applied to the deal because of Simmons’ controlling interest in the entities, but that the use of the Special Committee shifted the burden of proof back to Kahn. The court found that Kahn did not meet the burden of showing the transaction was unfair. Kahn appealed to the Delaware Supreme Court.