Kahn v. Tremont Corp.

Facts

The Chancery court approved the purchase by Tremont (D) of 7.8 million shares of common stock of NL Industries, Inc. Those shares constituted 15% of NL's outstanding stock and were purchased by Valhi, Inc., a corporation that was 90% owned by a trust for the family of Harold C. Simmons. Valhi was the majority owner of NL's outstanding stock and controlled D through the ownership of 44% of its outstanding shares. Kahn (P) alleged that Simmons effectively controlled the three related companies and structured the purchase of the stock by D to benefit itself at the expense of D. P alleged that Ds willingly participated in a series of improper transactions which were orchestrated by Simmons for its own benefit. P alleged that a repurchase program and a Dutch auction were initiated in order to artificially inflate the price of NL shares and as such Simmons was able to divest itself of the stock in a failing company for above market prices. (The details of the repurchase program are listed on page 715-716 Eisenberg 8th). After the sale of almost 11 million shares at $16 per share in the Dutch Auction, and with the sale of another 7.8 million shares NL could reduce its ownership position below 50% and would receive tax savings of $11.8 million as well Valhi would be in a position to deconsolidate NL from its financial statements thus improving access to capital markets. To get these savings Valhi had to sell the shares before end of calendar year 1991. Private placements would incur an illiquidity discount of 20% or greater against NL's then market price in order to sell unregistered stock in a series of private transactions. Valhi then decided to approach D which had $100 million in excess liquidity and was in the process of searching for a product investment opportunity. The advantages were as follows: As a 44% owner of D, Valhi would be more likely to accept an appropriate discount from market because it would still own an indirect 44% interest in the shares and a lower discount from market might be acceptable to D in that D had management access to NL's business prospects. Valhi then proposed the sale to the president and CEO of D. The president then wrote to three outside directors to formulate an appropriate response. A special committee was formed with Stein, a lawyer, being one of the members who had previously worked closely with the president of D. The Committee chose a bank that Stein was affiliated with to act as financial advisor, on Stein's recommendation. That bank was a wholly owned sub of Continental Bank which had earned significant fee income from Simmons related companies. The president of D, Martin, who was not a committee member signed the deal with Continental. The legal advisor selected was also closely tied to prior business transactions between NL and Valhi. Meetings were held and Stein was the only committee member that attended all meetings and the only one who attended the review sessions with the Committee's advisors. The price of Ti02 was a key to NL's success and as the price fell so did the prospects of NL. Valhi proposed a price of $14.50 per share with no registration rights or other provisions to enhance liquidity; on the previous day, the stock had a market close of $13.50 per share. The final deal reached was $11.75 per share with D to receive the registration and co-sale rights as protection for the limited liquidity of the investment. That day the stock closed at $12.75. The chancery court ruled that transaction was to be reviewed under the fairness standard of review and found that D's utilization of a Special Committee of disinterested directors was sufficient to shift the burden on the fairness issue to P. The court then concluded that both the price and the process were fair to D. P appealed; the trial court erred in its allocation of burden of proof and that the facts show that the process was tainted and unfair to D. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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