Kahn v. Lynch Communication Systems, Inc.
Supreme Court of Delaware
638 A.2d 1110 (Del. 1994)
Alcatel U.S.A. Corporation (defendant) owned 43.3% of Lynch Communication Systems, Inc. (defendant) and proposed a cash-out merger to acquire the rest. Lynch's board formed an independent special committee, which reviewed and rejected three successive Alcatel offers. But after a committee member was warned that Alcatel was ready to launch an unfriendly, lower-priced tender offer if the committee didn't recommend the third offer, the committee recommended accepting it, and the board approved the merger. Alan Kahn (plaintiff) sued in Chancery Court to enjoin the merger, was denied a preliminary injunction, and amended his complaint to seek damages instead. The trial court found the special committee had been legally independent, which under existing doctrine shifted the burden of proving entire fairness from Alcatel onto Kahn, and it then ruled for the defendants. Kahn appealed.
Whether the burden of proving the entire fairness of an interested cash-out merger shifts from the controlling shareholder to the challenging plaintiff when the independent committee that approved the deal did not actually have real bargaining power.