Katz v. Oak Industries (Allen, 1986)
(good faith narrowly construed, test for good faith, coercion)
FACTS
Oak (D), financially troubled, sells materials segment to Allied-Signal. Agreement components:
i. Stock Purch. Ag.: A purchases 10M O sh. for $15M plus shares.
ii. Common Stock Exchange Offer. 9 5/8% holders get .407 shares up to $38.7M
iii. Pmt. Certif. Exch. Off. $655 to 918 cash for debt conditioned on:
(1) Comm. St. Exch. Offer succeed.
(2) Minimum tenders for each of 6 classes of outstanding debt.
(3) Removal of rest. cov. preventing issuance of pmt. certs.
ANALYSIS
Plan constitutes a coercive measure to force tender of debt (since assets securing it would be gone) and thus violates implied duty of good faith.
Holding: Parties could not have wanted to give debtholders veto rt. over transaction.
RULES
Good faith: If the parties had thought to negotiate the term complained of, would the action in question have violated it?
Coercion: Nothing wrong with allowing co. to induce debtholders to take a certain action.
Notes: (1) Case of wealth transfer (S/H forced D/H to accept lower grade security even though if company had been allowed to fail, D/H would’ve gotten fully taken care of. S/H would’ve gotten close to nothing in bk, but got something through sales. LRA.
(2) It’s also about Allen using efficiency to determine good faith. This probably works were, but won’t always.
(good faith narrowly construed, test for good faith, coercion)
FACTS
Oak (D), financially troubled, sells materials segment to Allied-Signal. Agreement components:
i. Stock Purch. Ag.: A purchases 10M O sh. for $15M plus shares.
ii. Common Stock Exchange Offer. 9 5/8% holders get .407 shares up to $38.7M
iii. Pmt. Certif. Exch. Off. $655 to 918 cash for debt conditioned on:
(1) Comm. St. Exch. Offer succeed.
(2) Minimum tenders for each of 6 classes of outstanding debt.
(3) Removal of rest. cov. preventing issuance of pmt. certs.
ANALYSIS
Plan constitutes a coercive measure to force tender of debt (since assets securing it would be gone) and thus violates implied duty of good faith.
Holding: Parties could not have wanted to give debtholders veto rt. over transaction.
RULES
Good faith: If the parties had thought to negotiate the term complained of, would the action in question have violated it?
Coercion: Nothing wrong with allowing co. to induce debtholders to take a certain action.
Notes: (1) Case of wealth transfer (S/H forced D/H to accept lower grade security even though if company had been allowed to fail, D/H would’ve gotten fully taken care of. S/H would’ve gotten close to nothing in bk, but got something through sales. LRA.
(2) It’s also about Allen using efficiency to determine good faith. This probably works were, but won’t always.
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