Comparative Company Law
Readings 4: Shareholders Rights and Obligations
Case Law
Kahn v. Lynch Communications Systems, Inc.
Alcatel owned about 43% of Lynch, which gave them a signifcant
interest, but not majority control.
o Alcatel was a subsidiary of Alcatel SA who was in turn a
subsidiary of CGE.
Lynch's management (led by their CEO Dertinger) recommended
that they buy a company called Telco. Alcatel opposed the purchase
and suggested that Lynch acquire a similar company called
Celwave (that just happened to be another CGE subsidiary).
Dertinger put together an independent committee to evaluate a
possible purchase of Celwave.
o The independent committee recommended not buying
Celwave.
Alcatel responded by proposing to buy up the rest of Lynch's stock
in a cash-out merger. They suggested $14 a share. The independent
committee found that to be too low and suggest $17.
Alcatel told the independent committee that if they didn't take an
offer of $1...,, Alcatel would proceed with an unfriendly takeover
at a much lower price.
o The independent committee recommended that Lynch take
the $1..., offer.
Lynch shareholders, led by Kahn, sued.
o The shareholders argued that Alcatel owed a fiduciary duty to
the other shareholders and violated their duty by vetoing
Lynch's acquisition of Telco and forcing the cash-out merger.
o Alcatel argued that they owned less than .,% of Lynch's
stock, so they were not a majority owner and therefore owed
no fiduciary duty.
The Trial Court found for Alcatel. Kahn appealed.
, o The Trial Court found that Lynch's 'non-Alcatel' directors
deferred to Alcatel because of its position as a signifcant
stockholder and not because their business judgment told
them Alcatel's position was correct.
o However, the Court found that the independent
committee's actions were "sufficiently well informed and
aggressive to simulate an arms-length transaction."
The Appellate Court reversed and remanded.
o The Appellate Court found that there are two aspects
to entire fairness - fair dealing, and fair price.
Fair dealing includes considerations of when the
transaction was times, how it was initiated, structured,
and negotiated, disclosed to the directors, and how the
approvals of the directors and the shareholders were
obtained.
Fair price includes economic and fnancial
considerations of the merger, including assts, market
value, earnings, future prospects, and other things that
could affect the stock price.
See Weinberger v. UOP, Inc. (4.7 A.2d 7,1 (1983)).
o The Court found that the existence of an independent
committee is evidence of fair dealing. However, if the majority
shareholder dictates the terms of the merger, or
the independent committee does not have real bargaining
power, then that is evidence that there was not fair dealing.
The Court found that the facts in this case strongly
implied that there was no fair dealing.
o The Court remanded to the Trial Court, placing the burden on
Alcatel to show that the transaction met the test of entire
fairness.
The Court found that the controlling stockholder has
"the initial burden of establishing entire fairness ...
However, an approval of the transaction by an
Readings 4: Shareholders Rights and Obligations
Case Law
Kahn v. Lynch Communications Systems, Inc.
Alcatel owned about 43% of Lynch, which gave them a signifcant
interest, but not majority control.
o Alcatel was a subsidiary of Alcatel SA who was in turn a
subsidiary of CGE.
Lynch's management (led by their CEO Dertinger) recommended
that they buy a company called Telco. Alcatel opposed the purchase
and suggested that Lynch acquire a similar company called
Celwave (that just happened to be another CGE subsidiary).
Dertinger put together an independent committee to evaluate a
possible purchase of Celwave.
o The independent committee recommended not buying
Celwave.
Alcatel responded by proposing to buy up the rest of Lynch's stock
in a cash-out merger. They suggested $14 a share. The independent
committee found that to be too low and suggest $17.
Alcatel told the independent committee that if they didn't take an
offer of $1...,, Alcatel would proceed with an unfriendly takeover
at a much lower price.
o The independent committee recommended that Lynch take
the $1..., offer.
Lynch shareholders, led by Kahn, sued.
o The shareholders argued that Alcatel owed a fiduciary duty to
the other shareholders and violated their duty by vetoing
Lynch's acquisition of Telco and forcing the cash-out merger.
o Alcatel argued that they owned less than .,% of Lynch's
stock, so they were not a majority owner and therefore owed
no fiduciary duty.
The Trial Court found for Alcatel. Kahn appealed.
, o The Trial Court found that Lynch's 'non-Alcatel' directors
deferred to Alcatel because of its position as a signifcant
stockholder and not because their business judgment told
them Alcatel's position was correct.
o However, the Court found that the independent
committee's actions were "sufficiently well informed and
aggressive to simulate an arms-length transaction."
The Appellate Court reversed and remanded.
o The Appellate Court found that there are two aspects
to entire fairness - fair dealing, and fair price.
Fair dealing includes considerations of when the
transaction was times, how it was initiated, structured,
and negotiated, disclosed to the directors, and how the
approvals of the directors and the shareholders were
obtained.
Fair price includes economic and fnancial
considerations of the merger, including assts, market
value, earnings, future prospects, and other things that
could affect the stock price.
See Weinberger v. UOP, Inc. (4.7 A.2d 7,1 (1983)).
o The Court found that the existence of an independent
committee is evidence of fair dealing. However, if the majority
shareholder dictates the terms of the merger, or
the independent committee does not have real bargaining
power, then that is evidence that there was not fair dealing.
The Court found that the facts in this case strongly
implied that there was no fair dealing.
o The Court remanded to the Trial Court, placing the burden on
Alcatel to show that the transaction met the test of entire
fairness.
The Court found that the controlling stockholder has
"the initial burden of establishing entire fairness ...
However, an approval of the transaction by an
