Katz v. Oak Industries, Inc.,

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

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 that 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 that had to pass on the measures. D them made a payment certificate exchange offer to the classes of debt. The condition of the offer that 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 that there 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.