Kahn v. Tremont Corp.
1997 WL 332976, 1997 Del. LEXIS 205, 694 A.2d 422 (1997)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
In a self-dealing transaction involving a controlling shareholder, the burden to prove the entire fairness of the transaction only shifts to the plaintiff if the transaction was approved by a special committee of independent directors that was truly independent, fully informed, and conducted an arm's-length negotiation process.
Facts:
- Harold C. Simmons, through various entities, was the controlling shareholder of Valhi, Inc., Tremont Corporation, and NL Industries, Inc.
- To obtain significant tax and financial reporting benefits, Valhi needed to sell a 7.8 million share block of NL stock to reduce its ownership below 50% before the end of the calendar year.
- After two outside firms declined to purchase the stock and an investment bank advised that a 20% or greater illiquidity discount would be required, Valhi proposed to sell the NL stock to its controlled subsidiary, Tremont.
- Tremont's board formed a three-member Special Committee to consider the offer, consisting of Avy Stein, Richard Boushka, and Thomas Stafford, all of whom had prior, financially beneficial relationships with Simmons or his companies.
- Stein, the member with the strongest ties to Simmons' entities, dominated the committee's work, conducting all key negotiations himself.
- Stafford did not attend any of the committee's meetings in person, participating only by telephone, and Boushka did not attend the afternoon review sessions with the committee's advisors.
- The committee's financial and legal advisors were selected based on recommendations from interested parties and had prior professional relationships with Simmons' controlled companies.
- Following Stein's negotiations, the Special Committee recommended that Tremont purchase the NL stock from Valhi for $11.75 per share, and the Tremont board approved the transaction.
Procedural Posture:
- Alan R. Kahn, a shareholder of Tremont Corporation, filed a lawsuit in the Delaware Court of Chancery against Tremont's directors.
- The suit alleged that the directors breached their fiduciary duties by causing Tremont to purchase a block of NL Industries, Inc. stock from a controlling shareholder, Valhi, Inc., at an unfair price through an unfair process.
- After a six-day trial, the Court of Chancery ruled that the transaction was subject to the 'entire fairness' standard of review.
- However, the Court of Chancery held that the formation and function of a Special Committee of independent directors was sufficient to shift the burden of proof to the plaintiff, Kahn, to show that the transaction was unfair.
- The Court of Chancery found that Kahn failed to meet this burden and entered judgment in favor of the defendant directors.
- Kahn, as the appellant, appealed the Court of Chancery's decision to the Delaware Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the use of a Special Committee of directors with significant prior business and financial relationships with the controlling shareholder, where one member dominates the process and others are passive, effectively shift the burden of proving the unfairness of an interested transaction to the plaintiff shareholder?
Opinions:
Majority - Walsh, Justice.
No. The use of a special committee does not shift the burden of proving unfairness to the plaintiff when the committee fails to function in a genuinely independent, informed, and active manner that simulates an arm's-length transaction. The court found that the members' prior affiliations with the controlling shareholder, the abdication of responsibility by two members, and the dominance of the most conflicted member (Stein) demonstrated that the committee was not truly independent. Furthermore, the selection of advisors with their own prior connections to the controlling shareholder and the failure of committee members to attend key meetings showed they were not fully informed. Because the committee did not function properly, the burden to prove the entire fairness of the transaction remains on the defendants.
Concurring - Quillen, Judge,
No. The burden of proof should not shift from the defendants to the plaintiff. The concurring opinion agrees with the majority's result but argues that the Chancellor's own basic factual findings—such as the existence of a parent-subsidiary transaction, the members' and advisors' prior connections to the controlling shareholder, and the questionable negotiations—are sufficient on their own to conclude that the committee's independence was not substantial enough to justify shifting the burden. The case 'cries for Missouri skepticism' and requires the control group to demonstrate entire fairness.
Dissenting - Berger, Justice,
Yes. The Special Committee's function was sufficient to shift the burden of proof. The dissent argues that the majority improperly substituted its own evaluation of the facts for that of the trial court. The trial court, after a six-day trial, found that the committee members were 'informed, active and loyal,' and this factual finding is supported by the record and should be accorded deference on appeal.
Analysis:
This case significantly clarifies the standards for a special committee to effectively shift the burden of proof in entire fairness review. It moves beyond a formalistic check for outside directors to a substantive, functional analysis of true independence, both in composition and in process. The ruling emphasizes that courts will closely scrutinize committee members' past relationships, their level of active engagement, and the independence of their advisors. This holding makes it more difficult for controlling shareholders to gain the procedural advantage of burden-shifting and serves as a strong guide for how special committees must operate to be deemed effective.
