## Facts

- A minority stockholder challenged a cash-out acquisition of Lynch Communication Systems, Inc. by Alcatel, which owned about 43.3% of Lynch.
- Alcatel also had contractual power to designate a majority of Lynch’s board, giving it effective control.
- Lynch formed a special committee of outside directors to evaluate and negotiate Alcatel’s proposal.
- The committee reviewed multiple proposals and rejected several as inadequate.
- During negotiations, Alcatel conveyed that if the committee did not support its offer, Alcatel was prepared to proceed with an unfriendly tender at a lower price.
- The special committee ultimately recommended the transaction, and the board approved the tender offer/merger.
- The plaintiff sued to enjoin the deal, alleging Alcatel was a controlling stockholder that dictated terms, made misleading disclosures in the offer materials, and paid an unfair price; after denial of preliminary relief, the case proceeded as a class action for damages.

## Issues

1. Whether Alcatel, despite owning less than 50% of Lynch, was a controlling stockholder owing fiduciary duties to minority stockholders.
2. In a controller freeze-out, whether the use of a special committee shifted the burden of proving entire fairness from the defendants to the plaintiff.
3. Whether alleged disclosure omissions and the merger price were to be evaluated under entire fairness on remand with the correctly allocated burden of proof.

## Decision

- The Delaware Supreme Court affirmed the finding that Alcatel was a controlling stockholder.
- The court reversed the Court of Chancery’s burden allocation, holding the burden of persuasion on entire fairness did not shift to the plaintiff.
- The court remanded for a new entire fairness determination with the burden placed on Alcatel.

## Legal Principles

- A stockholder can be a controlling stockholder with less than 50% ownership if it exercises actual control over corporate conduct, including through board control rights.
- A freeze-out by a controlling stockholder is reviewed for entire fairness, encompassing fair dealing and fair price.
- The controlling stockholder ordinarily bears the burden of proving entire fairness.
- Use of an independent special committee or informed approval by a majority of the minority may shift the burden of persuasion, but only if the protective device is effective in practice.
- A special committee shifts the burden only when it is truly independent and has real bargaining power to negotiate at arm’s length, including the ability to refuse the transaction.
- Coercive threats by the controller—such as indicating it will proceed with a worse alternative if the committee does not recommend the deal—can negate the committee’s ability to function as an arm’s-length negotiator, preventing burden shifting.

## Conclusion

The court held that Alcatel’s effective control made it a controlling stockholder and that the challenged freeze-out remained subject to entire fairness with the burden on Alcatel, because the special committee’s approval occurred under a controller threat that impaired arm’s-length bargaining; the case was remanded for a renewed entire fairness analysis under the correct burden allocation.


Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994)