Katz v. Oak Indus., Inc.

508 A.2d 873 (Del. Ch. 1986)

PROCEDURAL POSTURE: Plaintiff securities holders filed an application for a preliminary injunction in their action, alleging that an exchange offer and consent solicitation made by defendant company to holders of various classes of its long-term debt was coercive and constituted a breach of contract.

FACTS: Oak (D) was a company in deep financial trouble. From 1982 until 1985 the company experienced unremitting losses from operations. Unless D could be made profitable in a short period of time, it would cease to remain in business. To that end the board offered to convert some debentures to a combination of notes, common stock and warrants. Approximately $180 million of the $230 million in debt was exchanged. This reduced the cash drain on the company. D also announced the discontinuance of some of its operations. D negotiated a sale to Allied Signal of its materials segment of the business for $160 million D also got a negotiated deal with Allied to purchase for $15 million in cash 10 million shares of D common stock with warrants to purchase additional shares. The stock purchase agreement required mat at least 85% of the aggregate principal amount of all of D's debt securities were to have been tendered for exchange making the option mandatory but if less than that was tendered, the option would be optional. There were six classes of debt mat had to pass on the measures. D them made a payment certificate exchange offer to the classes of debt mat is detailed out on page 864 Klein 4th. The condition of the offer mat tendering security holders must consent to amendments in the indentures governing the securities gave rise to Katz's (P) claim of breach of contract. The amendments removed significant negotiated protections to holders of D's long term debt including deletion of all financial covenants. D was caught in a catch 22 as Allied would not move unless the debt was reduced and D could not reduce the debt so long as any of its long term notes were outstanding because the current covenants in the notes prohibit the issuing of any obligation in exchange for any of the debentures. P claimed mat mere was no free choice involved as a rational bondholder was forced to tender and consent. Failure to do so would mean the bondholder would be holding a security stripped of its protections. P moved for a preliminary injunction.

ISSUEDoes a voluntary proposed bond exchange constitute a violation of the issuer's duty of good faith and fair dealing by presenting unlawful coercion, provide the bond issuer with an impermissible method to vote its debt or violate the indenture's redemption obligations?

HOLDINGThe Court of Chancery, New Castle County, Allen, Chancellor, held that: (1) exchange offer was not so impermissibly coercive as to constitute a breach of express contractual duty or implied duty of good faith and fair dealings; (2) corporation's offer to exchange long-term debt securities at less than redemption price, but greater than market value of debts was not equivalent to unilateral election of redemption; and (3) risk of irreparable harm to corporation in case of injunction exceeded risk of irreparable harm to plaintiff. Application for preliminary injunction denied.

RULE: An offer to exchange debentures does not violate an offeror's duty of good faith and fair dealing if it is not coercive and does not violate the indenture's obligations regarding redemption.

ANALYSIS:Where an implied contractual obligation to act in good faith and to deal fairly is asserted as basis for relief, it must be considered whether it was clear from what was expressly agreed upon that the parties who negotiated express terms of contract would have agreed to proscribe the acts later complained of as a breach of implied covenant of good faith had they thought to negotiate with respect to that matter.