Opinion ID: 1952521
Heading Depth: 1
Heading Rank: 2

Heading: Alcatel Dominated Lynch Controlling Shareholder Status

Text: This Court has held that a shareholder owes a fiduciary duty only if it owns a majority interest in or exercises control over the business affairs of the corporation. Ivanhoe Partners v. Newmont Mining Corp., Del.Supr., 535 A.2d 1334, 1344 (1987) (emphasis added). With regard to the exercise of control, this Court has stated: [A] shareholder who owns less than 50% of a corporation's outstanding stocks does not, without more, become a controlling shareholder of that corporation, with a concomitant fiduciary status. For a dominating relationship to exist in the absence of controlling stock ownership, a plaintiff must allege domination by a minority shareholder through actual control of corporation conduct. Citron v. Fairchild Camera & Instrument Corp., Del.Supr., 569 A.2d 53, 70 (1989) (quotations and citation omitted). Alcatel held a 43.3 percent minority share of stock in Lynch. Therefore, the threshold question to be answered by the Court of Chancery was whether, despite its minority ownership, Alcatel exercised control over Lynch's business affairs. Based upon the testimony and the minutes of the August 1, 1986 Lynch board meeting, the Court of Chancery concluded that Alcatel did exercise control over Lynch's business decisions. The standard of appellate review with regard to the Court of Chancery's factual findings is deferential. Cede & Co. v. Technicolor, Inc., Del.Supr., 634 A.2d 345, 360 (1993). Those findings will not be set aside by this Court unless they are clearly erroneous or not the product of a logical and orderly deductive reasoning process. Id. The record supports the Court of Chancery's factual finding that Alcatel dominated Lynch. At the August 1 meeting, Alcatel opposed the renewal of compensation contracts for Lynch's top five managers. According to Dertinger, Christian Fayard (Fayard), an Alcatel director, told the board members, [y]ou must listen to us. We are 43 percent owner. You have to do what we tell you. The minutes confirm Dertinger's testimony. They recite that Fayard declared, you are pushing us very much to take control of the company. Our opinion is not taken into consideration. Although Beringer and Kertz, two of the independent directors, favored renewal of the contracts, according to the minutes, the third independent director, Wineman, admonished the board as follows: Mr. Wineman pointed out that the vote on the contracts is a watershed vote and the motion, due to Alcatel's strong feelings, might not carry if taken now. Mr. Wineman clarified that you [management] might win the battle and lose the war. With Alcatel's opinion so clear, Mr. Wineman questioned if management wants the contracts renewed under these circumstances. He recommended that management think twice. Mr. Wineman declared: I want to keep the management. I can't think of a better management. Mr. Kertz agreed, again advising consideration of the critical period the company is entering. The minutes reflect that the management directors left the room after this statement. The remaining board members then voted not to renew the contracts. At the same meeting, Alcatel vetoed Lynch's acquisition of the target company, which, according to the minutes, Beringer considered an immediate fit for Lynch. Dertinger agreed with Beringer, stating that the target company is extremely important as they have the products that Lynch needs now. Nonetheless, Alcatel prevailed. The minutes reflect that Fayard advised the board: Alcatel, with its 44% equity position, would not approve such an acquisition as ... it does not wish to be diluted from being the main shareholder in Lynch. From the foregoing evidence, the Vice Chancellor concluded: ... Alcatel did control the Lynch board, at least with respect to the matters under consideration at its August 1, 1986 board meeting. The interplay between the directors was more than vigorous discussion, as suggested by defendants. The management and independent directors disagreed with Alcatel on several important issues. However, when Alcatel made its position clear, and reminded the other directors of its significant stockholdings, Alcatel prevailed. Dertinger testified that Fayard scared [the non-Alcatel directors] to death. While this statement undoubtedly is an exaggeration, it does represent a first-hand view of how the board operated. I conclude that the non-Alcatel directors deferred to Alcatel because of its position as a significant stockholder and not because they decided in the exercise of their own business judgment that Alcatel's position was correct [citation omitted]. The record supports the Court of Chancery's underlying factual finding that the non-Alcatel [independent] directors deferred to Alcatel because of its position as a significant stockholder and not because they decided in the exercise of their own business judgment that Alcatel's position was correct. The record also supports the subsequent factual finding that, notwithstanding its 43.3 percent minority shareholder interest, Alcatel did exercise actual control over Lynch by dominating its corporate affairs. The Court of Chancery's legal conclusion that Alcatel owed the fiduciary duties of a controlling shareholder to the other Lynch shareholders followed syllogistically as the logical result of its cogent analysis of the record.