UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): May 6, 1998
KENETECH CORPORATION
(Exact Name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
33-53132 94-3009803
(Commission File Number) (I.R.S. Employer
Identification No.)
500 Sansome Street, Suite 300
San Francisco, California 94111 94111
(Address of principal executive offices) (Zip Code)
(415) 398-3825
(Registrant's telephone number, including area code)
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Item 5. Other Events.
Pursuant to the terms and conditions of the Restated Certificate
of Incorporation, as amended (the "Restated Certificate"), of the
Registrant and the Deposit Agreement, dated as of May 5, 1994 (the
"Deposit Agreement"), among the Registrant, Chemical Trust Company of
California, a California trust company (predecessor of ChaseMellon
Shareholder Services, L.L.C.), and the holders from time to time of
the depositary receipts described in the Deposit Agreement (the
"Depositary Receipts") in respect of the Preferred Redeemable
Increased Dividend Equity Securities, 8-1/4% PRIDES, Convertible
Preferred Stock, par value $0.01 per share (the "Preferred Stock") of
the Registrant, each outstanding share of the Preferred Stock will, on
May 14, 1998 (the "Mandatory Conversion Date"), mandatorily convert
into (i) 50 shares of the Registrant's authorized common stock, par
value $0.0001 per share ("Common Stock"), and (ii) the right to
receive, from and after the Mandatory Conversion Date, cash in an
amount equal to all accrued and unpaid dividends on such share of
Preferred Stock to and including the Mandatory Conversion Date,
whether or not declared, out of funds legally available for the
payment of dividends on the Preferred Stock.
Ownership of the Preferred Stock is held in the form of
depositary shares (the "Depositary Shares") with each Depositary Share
representing one-fiftieth of a share of the Preferred Stock. In
accordance with the Restated Certificate and the Deposit Agreement,
the Depositary Shares will be exchanged for shares of Common Stock
(and the right to receive cash for any accrued and unpaid dividends
payable on such shares) at a rate per Depositary Share equal to
one-fiftieth of the number of shares of Common Stock (and the right to
receive one-fiftieth of any accrued and unpaid dividends) exchanged
for each share of the Preferred Stock.
Dividends on the Preferred Stock and Depositary Shares will cease
to accrue from and after the Mandatory Conversion Date. The Preferred
Stock and Depositary Shares will cease to be outstanding from and
after the Mandatory Conversion Date, and all rights with respect
thereto will cease and terminate, except the right of holders of
record of Depositary Receipts to receive shares of Common Stock and
evidence of the right to receive cash in an amount equal to all
accrued and unpaid dividends on the Preferred Stock, to and including
the Mandatory Conversion Date, without interest, if and when declared
by the Board of Directors of the Registrant out of funds legally
available therefor.
Annexed hereto as Exhibits 99.1 and 99.2, respectively, and
incorporated herein by reference, are a Motion for a Temporary
Restraining Order (the "Motion") and Verified Complaint for
Declaratory Judgment and Injunctive Relief (the "Complaint") that were
filed on May 6, 1998, in the Court of Chancery of the State of
Delaware In and For New Castle County, as Civil Action No. 16362-NC,
by Quadrangle Offshore (Cayman) LLC, and Cerberus Partners, L.P.
("Plaintiffs").
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Plaintiffs allege in the Motion and the Complaint that they are
beneficial owners of Preferred Stock. Pursuant to the terms and
conditions of the Restated Certificate, in the event of any voluntary
or involuntary liquidation, dissolution, or winding up of the
Registrant, the holders of outstanding shares of the Preferred Stock
are entitled to receive the sum of $1,012.50 per share (the
"Liquidation Preference"), plus an amount equal to any accrued and
unpaid dividends thereon, out of the assets of the Registrant
available for distribution to stockholders, before any distribution of
assets is made to holders of Common Stock.
For the reasons set forth in the Motion and the Compliant,
Plaintiffs allege, among other things, that the Registrant is
currently in liquidation, that Plaintiffs' rights to the Liquidation
Preference are now fixed and attached, and may not be eliminated,
altered or otherwise adversely affected and that if the conversion
occurs, the Plaintiffs would be deprived of their fixed rights to the
Liquidation Preference because any available funds that would
otherwise have been distributed to the holders of the Preferred Stock
would be distributed to the owners of Common Stock instead.
Plaintiffs are seeking a temporary restraining order, pending the
filing of a motion for a preliminary injunction, enjoining the
Registrant from, among other things, mandatorily converting the
Preferred Stock into Common Stock on the Mandatory Conversion Date and
from taking any action to interfere with or otherwise impair
Plaintiffs' alleged rights to receive the Liquidation Preference.
The Company intends to oppose the Motion and to contest the
action vigorously.
Item 7. Financial Statements and Exhibits.
Exhibit
Number Description
99.1 Motion For A Temporary Restraining Order
99.2 Verified Complaint For Declaratory Judgment
and Injunctive Relief
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Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
KENETECH Corporation
(Registrant)
Date: May 8, 1998 By: ________________________________
Mark D. Lerdal
President and Chief Executive Officer
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Exhibit Index
The following Exhibits are hereby filed as a part of this Current Report on
Form 8-K:
Exhibit Page
Number Description Number
99.1 Motion For A Temporary Restraining Order 6
99.2 Verified Complaint For Declaratory Judgment and Injunctive Relief 15
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EXHIBIT 99.1
MOTION FOR A TEMPORPARY RESTRAINING ORDER
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
QUADRANGLE OFFSHORE (CAYMAN) LLC }
and CERBERUS PARTNERS, L.P., ) C.A. No. 16362 - NC
)
Plaintiffs, )
)
- against - )
)
KENETECH CORPORATION, )
)
Defendant. }
)
MOTION FOR A TEMPORARY RESTRAINING ORDER
Upon the accompanying Verified Complaint for Declaratory Judgment
and Injunctive Relief of this date ("Verified Complaint") and all
other accompanying papers submitted herewith, Plaintiffs Quadrangle
Offshore (Cayman) LLC and Cerberus Partners, L.P., hereby move this
Court, pursuant to Court of Chancery Rule 65, for a temporary
restraining order, pending the Court's determination of a motion for a
preliminary injunction soon to be filed by plaintiffs, enjoining any
conversion of preferred stock of defendant Kenetech Corporation
("Kenetech") into common stock of Kenetech and enjoining Kenetech from
taking any steps in connection with such a conversion. The grounds for
this motion are as follows:
1. The facts concerning this motion are set forth in full in the
Verified Complaint. In brief summary:
2. Plaintiffs are the beneficial owners of shares of the
preferred stock of KENETECH Corporation ("Kenetech"). The Certificate
of Designations, Preferences, Rights and Limitations pursuant to which
the preferred stock was issued (the "Certificate of Designations")
provides that "in the event" Kenetech is in liquidation, plaintiffs
are entitled to receive the sum of $1,025 per share (the "Liquidation
Preference") and any accrued and unpaid dividends with respect to
those shares, out of the assets of the corporation available for
distribution, before any distribution is made to the holders of
Kenetech common stock.
3. Kenetech patently is in liquidation. It has lost more than
$350 million over the last three years. It is in default on its
obligations to its senior secured noteholders. It has not paid
dividends that have accrued on its preferred stock. It has stopped
seeking any new business. It has sold and continues to sell off lines
of business and other assets. Its principal subsidiary filed for
bankruptcy in 1996 and has been selling its assets under the
supervision of the bankruptcy court. Kenetech has pre-paid its
severance obligation to its Chief Executive Officer. By the end of
1997, Kenetech had few revenue generating activities.
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4. This year, Kenetech plans to dispose of its construction
subsidiary and to sell its interest in its last remaining active
project. Kenetech's primary remaining asset is a 50 percent interest
held by one of its subsidiaries in a joint venture that owns an energy
project in Puerto Rico. This is the only project that Kenetech has in
process. Kenetech is now attempting to sell its interest in the
project. Indeed, it has recently retained an investment banker to help
it sell its interest. It intends to use the proceeds of these sales to
repay creditors. Kenetech has announced that, as part of or after the
disposal of the Puerto Rico project interest, it (or its subsidiaries)
will then likely file for bankruptcy protection.
5. It is likely that the sale of these remaining assets will
generate sufficient funds, after satisfying the creditors, to provide
for the payment of all or part of the Liquidation Preference.
6. Because Kenetech is in liquidation, plaintiffs' rights to the
Liquidation Preference, which arise from their rights as preferred
stockholders, are now fixed and attached, and may not be eliminated,
altered or otherwise adversely affected.
7. The Certificate of Designations, however, provides thaton May
14, 1998, the preferred stock is to be converted into shares of
Kenetech common stock. If given effect, this conversion would deprive
plaintiffs of their fixed rights to the Liquidation Preference,
because any available funds that would otherwise have been distributed
to the holders of preferred stock would be distributed to the owners
of common stock instead.1/
8. Plaintiffs have thus commenced this action to, among other
things, obtain a declaration that Kenetech is liquidating and that
plaintiffs' rights to the Liquidation Preference are now fixed.
Because the conversion threatens to deprive plaintiffs of their rights
to the Liquidation Preference, plaintiffs seek a temporary restraining
order, pending the Court's determination of a preliminary injunction
motion soon to be filed by plaintiffs, enjoining the conversion and
enjoining Kenetech from taking any action to interfere with or
otherwise impair plaintiffs' rights to receive the Liquidation
Preference.
9. To obtain a temporary restraining order, a plaintiff must
demonstrate that: (1) it is threatened with irreparable harm if relief
is not granted; (2) it has a colorable claim on the merits -- that is,
a claim that is not frivolous or not truly litigable; and (3) the
balance of the hardships favor the plaintiff. Stirling Investment
Holdings, Inc. v. Glenoit Universal, Ltd., Del. Ch., C.A. No. 15529,
slip op. at 3-4 Jacobs, V.C. (Feb. 12, 1997). All three of these
elements are satisfied here.
A. PLAINTIFFS WILL BE IRREPARABLY HARMED IN THE ABSENCE OF A
TEMPORARY RESTRAINING ORDER.
10. Because Kenetech is in liquidation, plaintiffs' rights to
receive the Liquidation Preference, which arise from their ownership
of preferred stock, is now fixed. However, the Certificate of
Designations provides that on May 14, 1998 (the "Conversion Date"),
the preferred stock is to be converted into shares of Kenetech common
stock and the right to receive cash in an amount equal to all accrued
and unpaid dividends on the preferred stock (the "Conversion"). Ex. A
at Section 3(a). It further provides that, from and after the
Conversion Date, shares of preferred stock shall cease to be
outstanding.
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11. If the Conversion is not enjoined, plaintiffs will be
irreparably injured. Because Kenetech is now in liquidation and
plaintiffs' rights to receive the Liquidation Preference have fixed
and attached, plaintiffs cannot be deprived of those rights, and the
rights and attributes of the preferred stock cannot be altered.
However, if before the actual payment of the Liquidation Preference
takes place, the preferred stock is considered to have been converted
into common stock, plaintiffs are at risk, notwithstanding their
vested rights, that they may be deemed to have permanently forfeited
their rights to receive the Liquidation Preference. Were that to
occur, plaintiffs would forever be divested of approximately
seven-eighths of the value of their Liquidation Preference, or up to
approximately $14.4 million.
12. In addition, a temporary restraining order is necessary to
avoid the confusion and harm in the market that will arise if the
preferred stock is converted and several million shares of new
Kenetech common stock are issued. In the event that it is later
determined herein that the Conversion was improper or that the common
stock which resulted from the Conversion is entitled to the
Liquidation Preference, the market will be unable to distinguish
between shares of common stock with the rights to the Liquidation
Preference and those without such rights. Trading in the common stock
will thus be adversely affected. The only way to avoid the irreparable
harm that will be caused by this market confusion is to grant the
motion for a temporary restraining order.
B. PLAINTIFFS' CLAIM THAT KENETECH IS IN LIQUIDATION AND
THAT PLAINTIFFS' RIGHTS TO THE LIQUIDATION PREFERENCE HAVE
THEREFORE FIXED AND ATTACHED IS, AT A MINIMUM, COLORABLE.
13. "The preferences and conversion rights of [preferred stock]
are governed by the Certificate [of Designations]." Kaiser Aluminum
Corporation v. Matheson, Del. Supr., 681 A.2d 392, 395 (1996). The
Certificate of Designations at issue here provides, in relevant part,
that "[i]n the event of any voluntary or involuntary liquidation," a
holder of preferred stock is entitled to receive for each share, among
other things, $1,025, out of the assets of Kenetech available for
distribution to stockholders. Complaint, Ex. B at Section 9.2/
14. The Delaware Supreme Court has held that:
[t]he term "liquidation" as applied to a corporation, means
the "winding up of the affairs of the corporation by getting
in its assets, settling with creditors and debtors and
apportioning the amount of profit and loss".
Rothschild International Corporation v. Liggett Group, Inc., Del.
Supr., 474 A.2d 133, 136 (1984) (citation omitted).
15. As this definition indicates, "liquidation" is not an event
which occurs at an instant in time, immediately before which there is
no liquidation and immediately after which the liquidation is
complete. Rather, it is a process that takes place over time. Compare
Rendina v. Commissioner, 72 T.C.M. (CCH) 474 (1996) (that corporation
continued some activities did not preclude finding under the Internal
Revenue Code that company was already in liquidation, because
liquidation may take place over "protracted time frames"). That
Kenetech has not yet reached the final step of that process, i.e., the
actual distribution of assets that have been collected during the
process, does not vitiate the fact that it is currently in
liquidation.
Clearly, Kenetech is liquidating. It is no longer seeking
business. It has sold most of its assets and is in the process of
selling what remains. It plans to distribute the proceeds of its asset
sales to meet its obligations, including satisfying its creditors. And
it (or its subsidiaries) then plan to file for bankruptcy. Complaint
Paragraphs 13-26. Thus plaintiffs have a strong claim that a
"liquidation" of Kenetech is occurring and that plaintiffs' rights to
the Liquidation Preference are now fixed.3/ These rights cannot be
taken from them simply because the process has not yet reached the
point at which Kenetech is in a position to make a distribution to its
preferred stockholders.
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16. Further, a conversion of the preferred stock into common
stock during a liquidation would be inconsistent with the essential
and defining term of the contract establishing the preferred stock, as
it would deprive preferred stockholders of the Liquidation Preference
exactly when Kenetech is liquidating. The quintessential nature of a
preferred stock is precisely that, should the company in fact fail,
the preferred stock interest will hold a preferential position
vis-a-vis the common stock interest. To convert preferred stock to
common stock during a liquidation would eradicate the distinction
between preferred and common stock just when it has its greatest
significance, and would contravene the very nature of preferred stock.
C. THE BALANCE OF THE HARDSHIP WEIGHS IN
PLAINTIFFS' FAVOR.
17. As explained above in Point A, plaintiffs and the market are
threatened with irreparable harm if the Conversion takes place. On the
other hand, a temporary restraining order would not cause injury to
any party. No distribution on account of Kenetech's liquidation is
likely to be made in the immediate future. Thus, a temporary
postponement of the Conversion will have no impact on the interests of
anyone other than the owners of the preferred stock.
18. For the foregoing reasons, plaintiffs' motion should be
granted, and a temporary restraining order, pending the Court's
determination of plaintiffs' soon to be filed motion for a preliminary
injunction, should be granted:
(A) enjoining the Conversion;
(B) postponing the Conversion Date;
(C) enjoining Kenetech from reflecting on its records that the
preferred stock is no longer outstanding;
(D) enjoining Kenetech from accepting for surrender any
certificates representing shares of the preferred stock and from
issuing any certificates representing shares of common stock in
connection with the Conversion;
(E) enjoining Kenetech from taking any other steps in connection
with the Conversion; and
(F) enjoining Kenetech from taking any other steps that
eliminate, alter or otherwise adversely affect the rights of holders
of the preferred stock to receive the Liquidation Preference, as and
when assets of Kenetech are distributed to its stockholders.
MORRIS, NICHOLS, ARSHT & TUNNELL
________________________________
Alan J. Stone
David J. Teklits
1201 N. Market Street
Wilmington, DE 19899
(302) 658-9200
Attorneys for Plaintiffs
OF COUNSEL:
KRONISH, LIEB, WEINER & HELLMAN LLP
1114 Avenue of the Americas
New York, New York 10036
(212) 479-6000
May 6, 1998
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
QUADRANGLE OFFSHORE(CAYMAN)LLC }
and )
CERBERUS PARTNERS, L.P., ) Civil Action
) No. ____________
)
Plaintiffs, )
)
)
- )
against )
- )
)
)
)
KENETECH )
CORPORATION, )
)
)
)
Defendant. )
ORDER
Plaintiffs having filed a motion for a temporary restraining order,
and the Court having found good cause therefore;
IT IS HEREBY ORDERED this ____ day of May, 1998, that:
1. Plaintiffs' motion for a temporary restraining order is
granted.
2. Pending a decision by the Court on plaintiffs' application for
preliminary injunctive relief, defendant Kenetech Corporation, and its
counsel, agents, employees and all persons acting under, in concert
with, or for them, are restrained from converting preferred shares of
Kenetech to common shares; from taking any steps in connection with
such a conversion; from reflecting on the records of Kenetech that the
preferred stock is no longer outstanding; from accepting for surrender
any certificates representing shares of preferred stock and from
issuing any certificates representing shares of common stock in
connection with such conversion; and from taking any other steps that
eliminate, alter, or otherwise adversely affect the rights of holders
of the preferred stock, including the right to the liquidation
preference.
3. Plaintiffs shall file a bond in the amount of $_____________,
in a form satisfactory to the Court, in cash or with surety on or
before __________________________.
__________________________
Chancellor
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- --------
1/ Notably, in December, 1977, the Chief Executive Officer of Kenetech
acquired 35 percent of the outstanding common stock of Kenetech, for
$1,000. Thus, an elimination of the preferred stock Liquidation Preference
would provide Kenetech's principal officer with a substantial windfall.
2/ Because Kenetech drafted the Certificate of Designations, any ambiguities
or doubts as to the construction of the Certificate, including the
provision governing the Liquidation Preference and the relationship of that
provision to the provision for the Conversion, must be construed against
Kenetech and in favor of plaintiffs. See Kaiser, 681 A.2d at 395.
3/ Kenetech cannot find support for a contrary conclusion in the last sentence
of Section 9 of the Certificate of Designations, which provides that "[a]
consolidation or merger of the Corporation. . . or a sale, lease or
exchange of all or substantially all of the assets of the Corporation shall
not be deemed to be a voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation." Complaint Ex. B at 15. This simply means
that the sale of assets -- by itself, where there are no other indicia of
liquidation, and where the company is not winding up its affairs but
instead looking to invest the sales proceeds in another business -- will
not trigger the Liquidation Preference. Compare Treves v. Menzies, Del.
Ch., 142 A.2d 520 (1958) (no Liquidation so as to trigger preference rights
where assets were sold to purchase another business). Here, however,
Kenetech is not simply selling assets as a step to further business
activity but is settling up its affairs and going out of business.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
STIRLING INVESTMENT HOLDINGS, INC.,
Plaintiff,
CASE NO. 15529
v.
GLENOIT UNIVERSAL, LTD., a Delaware Corporation
Defendant.
- -------------------------------------------------------------------
MEMORANDUM OPINION AND ORDER
The plaintiff filed this action and concurrently therewith a motion for a
temporary restraining order, together with supporting documents, at
approximately 4:00 p.m. on Monday, February 10, 1997. The defendants submitted a
responsive brief and supporting documents in opposition to the motion at
approximately 9:30 p.m. that same evening. The motion was heard at 9:30 a.m. on
the following day, Tuesday, February 11, 1997. This is the Opinion of the Court
on the motion for a temporary restraining order. Because of the confidential
nature of the subject matter at issue, the briefs and supporting documents have
been filed under seal, and because of the constraints of time, the Court's
discussion of the facts and issues is abbreviated.
I.
Stirling Investment Holdings, Inc. ("Stirling") seeks an order temporarily
restraining the defendant, Glenoit Universal, Ltd. ("Glenoit"), from disclosing
any terms of a certain agreement (the "Agreement") between Stirling and Glenoit.
The dispute arises in the following context: Glenoit currently plans to issue
$100 million of bonds in a private placement offering, and then to register the
bonds with the United States Securities and Exchange Commission for public
resale. It is undisputed that those bond transactions, if consummated, would
require the disclosure of certain terms of the Agreement. If the pending motion
is granted, those transactions would be temporarily halted.
Stirling's motion rests upon its claim that the Agreement contractually
requires Glenoit to obtain Stirling's written permission before it may make any
disclosures of its terms -- permission that Stirling thus far has refused to
grant. Stirling contends that unless this Court grants temporary relief
protecting its contractual right to "veto" any action by Glenoit that otherwise
would result in those prohibited disclosures, it will suffer irreparable harm.
Stirling's claimed veto right is based upon Section 8.7 of the Agreement, which
provides:
8.7 Confidentiality. The parties hereto agree to keep
confidential this Agreement, the terms hereof and the
transactions contemplated herein, except that the Company may (i)
make this Agreement available to any of its financing sources and
their prospective syndicate members in connection with the
Recapitalization and (ii) make public announcements, including
press releases, related to this Agreement or the transactions
contemplated herein, or other related announcements to the
employees, customers or suppliers of the Company and its
Subsidiaries with the prior written approval of the Stockholder.
Nothing in this Section 8.7 shall prevent any person from
complying with any applicable laws or regulations or with the
requirements of any legal or regulatory proceedings or
Governmental Body. (emphasis added)
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Glenoit concedes that except for the final (underscored) sentence of
Section 8.7, it would be contractually obligated to obtain Stirling's
permission before it could make the proposed disclosures in the bond
offering. Glenoit's position, however, is that Section 8.7 unambiguously
entitles it to make those disclosures without first obtaining Stirling's
written permission, because those disclosures are necessary to "[comply]
with applicable [securities] laws or regulations." That is, Glenoit claims
that the final (underscored) sentence of Section 8.7 confirms its right,
free of any contractual restraint, to disclose whatever terms of the
Agreement are legally required to consummate transactions in the course of
its normal business -- including refinancing. Stirling further argues that
the parties clearly contemplated such disclosures when they entered into
the Agreement, and that any other interpretation would lead to absurd
results.
In response, Stirling argues that Section 8.7 unambiguously requires
its prior approval of disclosure of any of the terms of the Agreement and
that therefore it has the right to "veto" any transaction Glenoit
undertakes that would require disclosure of the Agreement or its terms.
Under Stirling's reading, the last sentence of Section 8.7 entitles Glenoit
to make the otherwise contractually prohibited disclosures only in response
to actions independently initiated by a governmental agency (such as a
subpoena) that require such disclosures. Nor, according to Stirling, may
Glenoit avail itself of that exception to the confidentiality requirement
where (as here) it voluntarily creates the situation where the prohibited
disclosures become legally required. To hold otherwise, Stirling says,
would enable Glenoit to deny Stirling the very confidentiality right for
which it specifically bargained.
II.
To prevail on its motion, Stirling must demonstrate that: (i) it has a
colorable claim on the merits; (ii) it will suffer irreparable harm if
relief is not granted; and (iii) the balance of hardships favors the moving
party. Cottle v. Carr, Del. Ch., C.A. No. 9612, Allen, C. (Feb. 9, 1988),
Mem. Op. at 5-7; Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Price,
Del. Ch., C.A. No. 11097, Allen, C. (Sept. 13, 1989), Mem. Op. at 4-5.
Regarding the merits, the Court is unable to conclude that the
language of the last sentence of Section 8.7 is so clear that it prompts
accepting either side's contract interpretation as a matter of law. In this
particular context, the Court finds that language to be ambiguous. Nor,
based on the limited extrinsic evidence submitted to date, is the Court
able to conclude as a matter of law that the parties intended for Section
8.7 to be interpreted as Glenoit advocates. Further proceedings based on a
more developed record are needed to resolve that issue. Accordingly, the
Court finds that Stirling has asserted at least a colorable (i.e.,
litigable) claim that Glenoit is contractually required to obtain
Stirling's written permission before disclosing the terms of the Agreement
in connection with the proposed bond offering.
Respecting the element of irreparable harm, Stirling contends that
disclosure of the terms of the Agreement will lead to the following
consequences: 1) publicity in the foreign press that could lead to
political (and possibly physical) attacks on the family of Stirling's
principals, some of whom are foreign citizens; 2) the elimination of any
possibility of settling certain pending litigation between foreign
governmental authorities and Stirling's principals; and 3) loss of the
contract right of confidentiality for which Stirling bargained, and for
which it paid by accepting a lower sales price for its stock than it would
otherwise have received had Glenoit been sold publicly to the highest
bidder.
13
<PAGE>
The plaintiff's first claim of irreparable harm appears to be vague
and speculative. Moreover, the claimed irreparable harm would be inflicted
not upon Stirling, but upon its principals. The plaintiff's second claim
raises the concern of whether this Court's processes are being used to
interfere with a foreign government's efforts to acquire information
material to the claims it is asserting against Stirling's principals. The
third claim of irreparable harm, however, is clearly valid. This Court has
found that Stirling has asserted a colorable claim of a contractual right
to maintain the confidentiality of the terms of the Agreement. If that
right it is ultimately validated, it would be irretrievably lost if the
prohibited information were publicly disclosed, and that loss could not be
adequately remedied by an award of damages. On that basis, Stirling has
demonstrated that it would be irreparably harmed by the disclosure of the
contractually prohibited information.
Finally, in balancing the equities, the Court finds that any risk of
harm to Glenoit from being temporarily restrained does not outweigh the
risk of harm to Stirling were relief to be denied. The Court is informed
that the current bond market is highly favorable for the private placement,
and that if a temporary restraining order is granted, Glenoit will be
forced to endure the risk that the market could change to its detriment.
That risk, however, will be mitigated because (i) the Court intends to
expedite the preliminary injunction proceeding, and (ii) the plaintiff is
willing to post a bond to protect Glenoit against the risk of adverse
fluctuations in the bond market. Other than that market risk, the
defendants have shown no reason why a brief delay would jeopardize the
consummation of the proposed bond transaction. Accordingly, the Court
concludes that the equities favor granting the plaintiff's motion.
* * *
For the above reasons, the plaintiff's motion will be granted. Counsel
shall confer and promptly submit an appropriate form of temporary
restraining order, which shall be conditioned upon the plaintiff furnishing
an appropriate bond. Should counsel be unable to agree on the amount of the
bond, the parties shall promptly submit their respective positions to the
Court. Counsel shall also confer promptly among themselves and with the
Court to establish a discovery and briefing schedule, as well as a hearing
date with respect to the plaintiff's application for further injunctive
relief.
Dated: FEBRUARY 12, 1997 _________________________
Vice Chancellor
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<PAGE>
EXHIBIT 99.2
VERIFIED COMPLAINT FOR DECLARATORY JUDGEMENT
AND INJUNCITVE RELIEF
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
QUADRANGLE OFFSHORE (CAYMAN) LLC )
and CERBERUS PARTNERS, L. P., )
)
Plaintiffs, )
- - against - )
)
KENETECH CORPORATION, )
)
Defendant. )
VERIFIED COMPLAINT FOR DECLARATORY
JUDGMENT AND INJUNCTIVE RELIEF
Plaintiffs, Quadrangle Offshore (Cayman) LLC ("Quadrangle") and
Cerberus Partners, L.P. ("Cerberus"), by their undersigned attorneys,
as and for their complaint herein, allege, upon knowledge with respect
to themselves and their own actions, and upon information and belief
with respect to all other matters, as follows:
NATURE OF THE ACTION
1. Plaintiffs are the beneficial owners of shares of the only
outstanding class of preferred stock (the "Preferred Stock") of
KENETECH Corporation ("Kenetech"). The terms of the Preferred Stock
stipulate that if Kenetech is in voluntary or involuntary liquidation
or dissolution, or is winding up its affairs, plaintiffs are entitled
to receive a distribution of $1,025 per share (the "Liquidation
Preference"), and any accrued and unpaid dividends with respect to
those shares, out of the assets of the corporation available for
distribution, before any distribution is made on Kenetech's common
stock. Based on their current holdings, plaintiffs' (combined)
Liquidation Preference amounts to approximately $16.5 million. A copy
of the Rights and Limitations pursuant to which the Preferred Stock
was issued (the "Certificate of Designations") is Exhibit A hereto.
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2. Kenetech is in liquidation. It has lost more than $350 million
over the last three years. It has sold and continues to sell off its
lines of business and other assets. It is not seeking new business.
Its then-principal subsidiary filed for bankruptcy in 1996 and has
been selling its assets under the supervision of the bankruptcy court.
It has few revenue generating activities. This year, to repay
creditors, Kenetech plans to dispose of its construction subsidiary
and to sell its interest in its last remaining active project.
Kenetech has announced that it (or its subsidiaries) will then likely
file for bankruptcy protection.
3. That Kenetech is in liquidation is confirmed by its Report on
Form 10-K for the year ended December 31, 1997 as filed with the
United States Securities and Exchange Commission on or about March 30,
1998 (the "Form 10-K"), a copy of which is Exhibit B hereto. The Form
10-K states:
Certain lenders and other creditors are seeking repayment and/or
restructuring of the amounts due them. The Company is unable to
borrow money and is delaying all payments, except for essential
services while it attempts to raise cash through additional asset
sales.
There can be no assurances that asset sales can be consummated or
that substantial proceeds can be received. If the Company is
unable to sell assets its liquidity will be further constrained.
Management believes that such sales, even if consummated, will
not generate sufficient proceeds to ultimately provide any return
of invested capital to the holders of the Company's common stock
and that proceeds received from asset sales will be used in
operations or paid to creditors. Consequently, after, or as part
of a sale of the Company's subsidiaries' interests in the Puerto
Rico project (the only project in process), the Company believes
that it is likely that it, or certain of its subsidiaries, will
seek protection under the Federal Bankruptcy Code.
Exhibit B at 15 (emphasis added).
4. Because Kenetech is in liquidation, plaintiffs' right to the
Liquidation Preference, which arises from their rights as preferred
stockholders, has now fixed and attached, and it may not be
eliminated, altered or otherwise adversely affected.
5. The Certificate of Designations, however, provides that on May 14,
1998 the shares of Preferred Stock are to be converted into shares of
Kenetech common stock. If given effect, this conversion would deprive
plaintiffs of their vested right to the Liquidation Preference,
because any funds available to satisfy the Liquidation Preference
would instead be distributed to the owners of common stock.
6. Accordingly, plaintiffs bring this action to, among other
things, (a) obtain a declaration that Kenetech is in liquidation and
that plaintiffs' right to receive the Liquidation Preference has fixed
and attached, and to (b) enjoin the automatic conversion of the
Preferred Stock into common stock.
THE PARTIES
7. Plaintiff Quadrangle is an investment fund incorporated in the
Cayman Islands.
8. Plaintiff Cerberus is an investment fund organized as a
Delaware limited partnership.
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9. Defendant Kenetech is a Delaware corporation with its
principal place of business in San Francisco, California. Kenetech is
a holding company which, through its subsidiaries, formerly
participated in various aspects of the electric power generation
business.
FACTUAL BACKGROUND
A. The Preferred Stock.
10. Plaintiffs own 803,000 Depositary Shares of Kenetech.
Each Depositary Share represents a one-fiftieth interest in one
share of Preferred Redeemable Increased Dividend Equity
Securities, 8 1/4% PRIDES, Convertible Preferred Stock of
Kenetech (the securities referred to herein as the Preferred
Stock). Quadrangle owns 652,000 Depositary Shares and Cerberus
owns 151,000 Depositary Shares. Thus, collectively, plaintiffs
beneficially own 16,060 shares of Preferred Stock.
11. The Certificate of Designations pursuant to which
Kenetech issued the Preferred Stock provides, in relevant part,
that:
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation . . . the
holders of outstanding shares of [Preferred Stock] are
entitled to receive the sum of $1,012.50 per share [the
Liquidation Preference], plus an amount equal to any accrued
and unpaid Preferred Dividends thereon, out of the assets of
the Corporation available for distribution to stockholders,
before any distribution of assets is made to holders of
Junior Stock.
Exhibit A at Section 9 (emphasis added).
12. As set forth below, Kenetech is currently in
liquidation.
B. Kenetech Is In Liquidation.
13. In the last three years, Kenetech has lost more than
$350 million. Its common stock, which traded at over $20 per
share in early 1994, was delisted from the Nasdaq National Market
in July 1996, and fell to 30 to 40 cents per share by late 1996.
Kenetech's common stock is currently trading at about 5 cents per
share. Exhibit B at 7.
14. In response to its losses; Kenetech has sold a
significant portion of its assets, including at least one of its
subsidiaries, various ongoing business projects, real estate
holdings, and investments. Since 1995, it has not paid interest
on its senior secured notes, and it has not paid dividends on the
Preferred Stock. Its principal subsidiary filed for bankruptcy in
1996. Kenetech is no longer pursuing new business, and is in the
process of selling its remaining assets. It intends to use the
proceeds of these creditors and has announced that, after it
sells it primary remaining asset, it (or its subsidiaries) will
likely file for bankruptcy.
15. The fact that Kenetech no longer views itself as
actively in business and is not proposing to continue its affairs
is confirmed by Kenetech's description of its activities in the
past tense. Thus, in the first two paragraphs of its Form 10-K,
Kenetech describes itself as a "holding company which
participated through its subsidiaries in the electric utility
market . . ." and which "[h]istorically. . . developed,
constructed, financed, sold and operated and managed independent
power projects.
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16. In May 1996, KENETECH Windpower, Inc. ("KWI"), a
Kenetech subsidiary which manufactured wind turbines and designed
and operated utility-scale wind powered electric power plants,
filed for protection under Chapter 11 of the Federal Bankruptcy
Code. Exhibit B at 2.
17. On information and belief, KWI was Kenetech's principal
subsidiary and the source of most of its revenues. Kenetech
believes that after the KWI bankruptcy proceeding is completed,
its ownership interest in KWI will not exist. Exhibit B at 2.
18. In 1996, Kenetech sold numerous assets, including: (1)
its demand side management business, (2) its wood-fuel business,
(3) one of its manufacturing facilities, (4) several investments
accounted for on the equity basis, (5) a subordinated note
receivable, and (6) various fixed assets. Exhibit B at 11.
19. In 1996, Kenetech stopped pursuing all new business
projects (except for one energy joint venture in Puerto Rico).
Exhibit B at 13. Kenetech did not pursue any new business in
1997. Exhibit B at 11.
20. In 1997, Kenetech sold (1) fixed assets, (2) some
projects in the initial stages of development, and (3) its
construction subsidiary's interest in the construction contracts
for the Puerto Rico project. Exhibit B at 11.
21. By the end of 1997, Kenetech had "few revenue generating
activities. . ." Exhibit B at 10.
22. In 1997, Kenetech pre-paid its severance obligation to
its President and Chief Executive Officer, payable upon his
involuntary termination, in the amount of $1,163,919. Exhibit B
at 41, note (3).
23. Kenetech's plan for 1998 is to complete the disposal of
its assets and to file for bankruptcy. Exhibit B at 15.
Kenetech's construction subsidiary is completing its projects in
progress, and, earlier this year, sold its two buildings. Exhibit
B at 2. Kenetech "intends to dispose of its construction
subsidiary in 1998." Exhibit B at 2 and 10.
24. The primary remaining asset of Kenetech is a 50 percent
interest held by one of its wholly-owned subsidiaries (KENETECH
Energy Systems, Inc.) in a joint venture for an energy project
under construction in Puerto Rico. As stated in the Form 10-K,
Kenetech is now attempting to sell its interest in the project:
This is the only project the Company . . . has in process.
The Company's wholly-owned development subsidiary intends to
sell its interest in this project in 1998.
25. On information and belief, Kenetech recently retained an
investment bank (Fieldstone Private Capital) to assist it in
locating a buyer for its interest in the Puerto Rico project.
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26. Kenetech's plan to sell its assets, distribute the sales
proceeds, and then wind up its affairs is summarized and
confirmed on page 15 of the Form 10-K:
Certain lenders and other creditors are seeking repayment
and/or restructuring of the amounts due them. The Company is
unable to borrow money and is delaying all payments, except
for essential services while it attempts to raise cash
through additional asset sales.
There can be no assurances that asset sales can be
consummated or that substantial proceeds can be received. If
the Company is unable to sell its assets its liquidity will
be further constrained. Management believes that such sales,
even if consummated, will not generate sufficient proceeds
to ultimately provide any return of invested capital to the
holders of the Company's common stock and that proceeds
received from asset sales will be used in operations or paid
to creditors. Consequently, after, or as part of a sale of
the Company's subsidiaries' interests in the Puerto Rico
project (the only project in process), the Company believes
that it is likely that it, or certain of_ its subsidiaries,
will seek protection under the Federal Bankruptcy Code.
Exhibit B at 15 (emphasis added).
C. The Conversion Provision of
The Certificate of Designations.
27. Because Kenetech is in liquidation, plaintiffs'
contractual rights to their Liquidation Preference of $1,025 per
share of Preferred Stock have now fixed and attached. Plaintiffs
cannot be deprived of these rights, and the rights and attributes
of the Preferred Stock cannot be eliminated, altered or otherwise
adversely affected.
28. Plaintiffs' Liquidation Preference entitles them
(assuming sufficient funds are available upon distribution) to a
payment of approximately $16.5 million. Upon information and
belief, after Kenetech completes its sale of assets and repays
its creditors, funds will be available to satisfy all or part of
the Liquidation Preference.
29. The Certificate of Designations, however, also provides
that on May 14, 1998 (the "Conversion Date"), each share of
Preferred Stock is to be converted (the "Conversion") into (i)
shares of Kenetech common stock, at a ratio of approximately 50
shares of common per share of Preferred, and (ii) the right to
receive all accrued and unpaid dividends with respect to the
Preferred, and that the shares of Preferred Stock shall then
cease to be outstanding. Exhibit A at Section 3(a) (the
"Conversion Provision").
30. Upon the Conversion at the specified conversion rate,
owners of Preferred Stock would instead own approximately
one-eighth of the common stock of Kenetech.
31. If the Conversion is given effect, any funds available
to satisfy the Liquidation Preference would instead be
distributed to the owners of the common stock.
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32. In December 1997, the Chief Executive Officer of
Kenetech purchased 35% of the common stock of Kenetech then
outstanding, for $1,000.
COUNT ONE
(Declaratory Relief)
--------------------
33. Plaintiffs repeat and reallege each and every
allegations set forth above in paragraphs 1-32.
34. The Certificate of Designations provides the beneficial
owners of Preferred Stock the right to receive the Liquidation
Preference in the event that Kenetech engages in a voluntary or
involuntary liquidation.
35. Kenetech is in liquidation.
36. Plaintiffs are now thus entitled to receive the
Liquidation Preference in any distribution to stockholders of
assets of Kenetech before any distribution is made to holders of
common stock.
37. Plaintiffs' rights to the Liquidation Preference have
fixed and attached. Plaintiffs cannot be deprived of their
rights, and the rights and attributes of the Preferred Stock
cannot be eliminated, altered or otherwise adversely affected,
including by virtue of the Conversion.
38. A conversion of the Preferred Stock into common stock
during a liquidation would be inconsistent with the essential and
defining term of the contract establishing the Preferred Stock,
as it would deprive Preferred Stock holders of the Liquidation
Preference exactly when Kenetech is liquidating. The
quintessential nature of a preferred stock is precisely that,
should the company in fact fail, the preferred stock interest
will hold a preferential position vis-a-vis the common stock
interest. To convert preferred stock to common stock during a
liquidation would eradicate the distinction between preferred and
common stock just when it has its greatest significance, and
would contravene the very nature of preferred stock.
39. Upon information and belief, there is a present
controversy concerning the construction and application of the
terms of the Certificate of Designations regarding the
Liquidation Preference and the Conversion Provision.
40. Plaintiffs therefore seek a declaration from this Court
that:
a. Kenetech is in liquidation;
b. plaintiffs are now entitled to receive the Liquidation
Preference in any distribution to stockholders of assets of
Kenetech before any distribution is made to holders of common
stock;
c. plaintiffs' rights to the Liquidation Preference have now
fixed and attached;
d. the Conversion Provision does not operate to eliminate,
alter or otherwise adversely affect plaintiffs' rights to receive
the Liquidation Preference; and
e. if sufficient funds are available, plaintiffs are
entitled to receive the Liquidation Preference, notwithstanding
the Conversion Provision.
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COUNT TWO
(Declaratory and Injunctive Relief)
-----------------------------------
41. Plaintiffs repeat and reallege each and every
allegations set forth above in paragraphs 1-40.
42. The Certificate of Designations provides the beneficial
owners of Preferred Stock the right to receive the Liquidation
Preference in the event that Kenetech engages in a voluntary or
involuntary liquidation.
43. Kenetech is in liquidation.
44. Plaintiffs are now thus entitled to receive the
Liquidation Preference in any distribution to stockholders of
assets of Kenetech before any distribution is made to holders of
common stock.
45. Plaintiffs' rights to the Liquidation Preference have
fixed and attached. Plaintiffs cannot be deprived of their right,
and the rights and attributes of the Preferred cannot be
eliminated, altered or otherwise adversely affected.
46. A conversion of the Preferred Stock into common stock
during a liquidation would be inconsistent with the essential and
defining term of the contract establishing the Preferred Stock,
and would contravene the very nature of preferred stock.
47. Upon information and belief, there is a present
controversy concerning the construction and application of the
terms of the Certificate of Designations regarding the
Liquidation Preference and the Conversion Provision.
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48. If the Conversion is not enjoined, plaintiffs will be
irreparably injured. Because Kenetech is now in liquidation and
plaintiffs' rights to receive the Liquidation Preference have
fixed and attached, plaintiffs cannot be deprived of those
rights, and the rights and attributes of the Preferred Stock
cannot be altered. However, if before the actual payment of the
Liquidation Preference takes place, the Preferred Stock is
considered to have been converted into common stock, plaintiffs
are at risk, notwithstanding their vested rights, that they may
be deemed to have permanently forfeited their rights to the
Liquidation Preference. Were that to occur, plaintiffs would
forever be divested of approximately seven-eighths of the value
of their Liquidation Preference.
49. In addition, if the Conversion is not enjoined, the
conversion of the Preferred Stock and the issuance of several
million shares of new Kenetech common stock will cause serious
confusion and harm in the market. In the event that it is later
determined herein that the Conversion was improper or that the
common stock which resulted from the Conversion is entitled to
the Liquidation Preference, the market will be unable to
distinguish between shares of common stock with rights to the
Liquidation Preference and those without such rights.
50. Plaintiffs have no adequate remedy at law.
51. Plaintiffs therefore seek a declaration from this Court
that:
a. Kenetech is in liquidation;
b. plaintiffs' rights to the Liquidation Preference have now
fixed and attached; and
c. the Conversion would improperly deprive plaintiffs of
their rights.
52. Plaintiffs also seek injunctive relief:
a. enjoining the Conversion;
b. enjoining Kenetech from reflecting on its records that
the Preferred Stock is no longer outstanding;
c. enjoining Kenetech from accepting for surrender any
certificate representing shares of Preferred Stock and from
issuing any certificates representing shares of common stock in
connection with the Conversion;
d. enjoining Kenetech from taking any other steps in
connection with the Conversion; and
e. enjoining Kenetech from taking any other steps that
eliminate, alter or otherwise adversely affect the rights of
holders of Preferred Stock to receive the Liquidation Preference
as and when assets of Kenetech are distributed to its
stockholders.
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WHEREFORE, plaintiffs respectfully request that this Court enter
judgment against the defendant, and all persons in active concert or
participation with it, as follows:
(A) On Count One, declaring that (i) Kenetech is in liquidation;
(ii) plaintiffs are now entitled to receive the Liquidation Preference
in any distribution of assets of Kenetech before any distribution is
made to holders of common stock; (iii) plaintiffs' rights to the
Liquidation Preference have now fixed and attached; (iv) the
Conversion Provision does not operate to eliminate, alter or otherwise
adversely affect plaintiffs' rights to receive the Liquidation
Preference; and (v) if sufficient funds are available, plaintiffs are
entitled to receive the Liquidation Preference, notwithstanding the
Conversion.
(B) On Count Two, declaring that (i) Kenetech is in liquidation;
(ii) plaintiffs' rights to the Liquidation Preference have now fixed
and attached; and (iii) the Conversion would improperly deprive
plaintiffs of their rights; and enjoining (i) the Conversion; (ii)
Kenetech from reflecting on its records that the Preferred Stock is no
longer outstanding; (iii) Kenetech from accepting for surrender any
certificate representing shares of Preferred Stock and from issuing
any certificates representing shares of common stock in connection
with Conversion; (iv) Kenetech from caking any other steps in
connection with the Conversion; and (v) Kenetech from taking any other
steps that eliminate, alter or otherwise adversely affect the rights
of holders of Preferred Stock to receive the Liquidation Preference as
and when assets of Kenetech are distributed to its stockholders.
(C) awarding plaintiffs the costs and disbursements of this
action, including attorneys' fees; and
(D) granting plaintiffs such other and further relief as the
Court deems just and proper.
MORRIS, NICHOLS, ARSHT & TUNNELL
_____________________________
Alan J. Stone
David J. Teklits
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899
(302) 658-9200
Attorneys for Plaintiffs
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