## Facts

- A minority Tremont shareholder challenged Tremont’s purchase of 7.8 million shares of NL Industries common stock from Valhi, Inc.
- Harold C. Simmons, through a family trust, effectively controlled Valhi; Valhi held a controlling stake in NL and owned 44% of Tremont, giving Simmons effective control over all three companies.
- NL initiated a repurchase program and Dutch auction self-tender that included a large block of Valhi-owned NL shares; Valhi sought additional benefits by selling an extra block of NL shares to Tremont.
- Tremont’s CEO caused Tremont’s board to consider buying the NL block from Valhi; the deal was approved after review by a three-director “Special Committee.”
- The Special Committee members had substantial prior dealings with Simmons and management; one member, viewed as the committee’s leader, had multiple profitable business relationships with Simmons and Tremont’s CEO.
- The committee retained advisors with ties to committee leadership or management, had inconsistent member participation, and recommended approval before receiving its financial advisor’s completed analysis.
- The transaction was approved by the full Tremont board; the plaintiff alleged the controller structured the deal to benefit himself at Tremont’s expense and that the committee was neither independent nor sufficiently informed.

## Issues

1. In a controlling-shareholder self-dealing transaction reviewed for entire fairness, what must defendants show about a special committee to shift the burden of proving entire fairness from defendants to the plaintiff?
2. Did Tremont’s Special Committee operate with sufficient independence, information, and bargaining power to justify burden-shifting?

## Decision

- The Delaware Supreme Court held that the transaction was subject to entire fairness review because a controlling stockholder stood on both sides of the deal.
- The court reversed the judgment for defendants because the burden of proof was improperly shifted to the plaintiff at trial.
- The court held defendants failed to prove the Special Committee was independent and effective; therefore, the burden to prove entire fairness remained on defendants.
- The case was remanded for further proceedings under the correct burden allocation, without a final appellate determination that the transaction was or was not entirely fair.

## Legal Principles

- A controlling stockholder self-dealing transaction is reviewed under the entire fairness standard, which includes fair dealing and fair price.
- Under entire fairness, defendants ordinarily bear the burden of proving the transaction was entirely fair.
- Use of a special committee may shift the burden of proof (but not the standard of review) only if the committee is independent in fact, fully empowered, adequately informed, and functions with real bargaining power.
- Committee independence is assessed substantively; significant personal or financial ties to the controller or management, weak participation, reliance on management-influenced advisors, or approval before receiving critical financial analysis can defeat burden-shifting.

## Conclusion

Because defendants did not establish that the Special Committee was truly independent and effective, the burden of proving entire fairness did not shift to the plaintiff; the Supreme Court reversed and remanded for reevaluation with defendants bearing the burden.


Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997)