Kahn v. Lynch Communication Systems
Citation: 638 A.2d 1110 (Del. 1994)
Facts
Alcatel (a French company) owned approximately 43% of Lynch Communications and proposed a merger at 15.50, but Alcatel threatened to proceed with a hostile tender offer if the committee rejected its offer. The committee ultimately recommended acceptance. Minority shareholders challenged the transaction under entire fairness.
Issue
When a controlling shareholder proposes a merger and a special committee negotiates on behalf of minority shareholders, does the existence of the special committee shift the burden of proof on entire fairness from the defendant to the plaintiff?
Holding
The existence of a special committee of independent directors in a controlling-shareholder transaction does not shift the burden of proof on entire fairness from the defendant to the plaintiff. The defendant must still prove the transaction was entirely fair. However, a well-functioning special committee may be relevant in showing fair dealing, potentially shifting the burden if it had real negotiating power.
Rule
Special committee in controlling-shareholder mergers: The appointment of a special committee does not, by itself, shift the entire fairness burden. The controller still bears the burden of proving entire fairness unless: (1) the committee was truly independent, (2) was empowered to freely reject the proposal, and (3) actually functioned as an arm’s-length negotiator. Coercion (here, the hostile tender offer threat) undermines the committee’s independence.
Significance
- Precursor to the MFW framework (Kahn v. M&F Worldwide Corp.)
- Establishes that a tainted special committee process does not shift the entire fairness burden
- Coercion by the controlling shareholder is fatal to claiming burden shift
- Led to the development of the MFW framework, which provides a cleaner path to BJR by requiring majority-of-minority vote in addition to SPC