Kahn v. Lynch Communications Systems.

638 A.2d 1110 (1994)

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Nature of the Case

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Facts

Lynch designed and manufactured electronic equipment, for sale to telephone operating companies. Alcatel is a subsidiary of Alcatel (S.A) who is, in turn, a subsidiary of Compaigne Generale d'Electricite (CGE). In 1981, Alcatel acquired 30.6% of Lynch's common stock pursuant to a stock purchase agreement. As part of that agreement, Lynch amended its certificate of incorporation to require an 80% affirmative vote of its shareholders for approval of any business combination. In addition, Alcatel obtained proportional representation on the Lynch board of directors and the right to purchase 40% of any equity securities offered by Lynch to third parties. The agreement also precluded Alcatel from holding more than 45% of Lynch stock prior to October 1, 1986. By the time of merger, Alcatel owned 43.3% of outstanding stocks; designated five of the eleven members of the board of directors; two of three members of the executive committee; and two of four members of the compensation committee. Lynch determined that it needed to obtain fiber optics technology to complement its existing digital electronics capabilities. They identified Telco as a potential candidate. Because of the agreement provision, Lynch needed Alcatel's votes on this matter. Alcatel opposed this matter and instead it proposed Celwave, an indirect subsidiary of CGE. The proposed combination was presented at the regular board meeting on August 1, 1986. The Lynch board unanimously adopted a resolution establishing an Independent Committee to negotiate with Celwave and to make recommendations concerning the appropriate terms and conditions of a combination. After an investigation, the committee unanimously expressed opposition to the merger. Alcatel responded to the action by withdrawing the Celwave proposal. Simultaneously it made an offer to acquire the entire equity interest in Lynch, constituting the approximately 57% of Lynch shares at $14 per share. On November 7, 1986, the Lynch board authorized the Committee to negotiate the cash merger offer with Alcatel. The chairman of the Committee made a counteroffer of $17 per share. Alcatel's representative responded with $15. When chairman of the committee informed Alcate's representative that that price was inadequate, Alcate raised its offer to $15.25 per share. The final offer was raised to $15.50. At the November 24, 1986 meeting of the Independent Committee, its chairman advised its other two members that Alcate was ready to proceed with an unfriendly tender at a lower price if the $15.50 per share price. After a meeting with its financial and legal advisors, the Independent Committee voted unanimously to recommend that the Lynch board of directors approve $15.50 per share. With Alcatel's nominees abstaining, the Lynch board approved the merger. P alleged that Alcatel was a controlling shareholder of Lynch and breached its fiduciary duties to Lynch and shareholders. The lower court concluded that even though Alcatel owned a fiduciary duty to Lynch and the shareholders it had not breached those duties. Accordingly, the Court of Chancery entered a judgment for Ds.