Corporations Keyed to Klein
Katz v. Oak Industries, Inc
Facts
Defendant was performing poorly and at its current rate of losses would not be able to continue without drastic changes. Share prices dropped from $30 per share in 1981 to only $2 in 1985. Defendant therefore arranged to sell off certain assets to another company, Allied-Signal, Inc. (“Allied”). Allied was to purchase portions of the business and take on Defendant’s debt, but only if the holders of Defendants debt would agree to an exchange offer for the debt. The offer would pay out between $655 to $918 per $1000 note accepted. Although the offer meant a loss to debt holders, it still offered an opportunity to receive some value for the notes instead of watching the value sink along with Defendant’s business. Allied was required to move ahead with the purchase only if at least 85% of the debt holders agreed to the exchange. Plaintiffs brought this action, arguing that the offer was coercion because any reasonable debt holder had to take the offer, but the arrangement b enefited shareholders at Plaintiff’s expense. The agreement therefore violated an implied covenant of good faith and fair dealing.
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