[LOGO OF KENETECH] KENETECH CORPORATION
500 Sansome Street
San Francisco, CA 94111
TEL: 415-398-3825
FAX: 415-391-7710
Energy That Makes A Difference
November 6, 2000
Dear Stockholder:
We are pleased to inform you that on October 25, 2000, KENETECH Corporation
entered into an Agreement and Plan of Merger (the "Merger Agreement") with KC
Holding Corporation ("Parent"), a Delaware corporation and a wholly-owned
subsidiary of ValueAct Capital Partners, L.P., and KC Merger Corp.
("Purchaser"), a Delaware corporation and a wholly-owned subsidiary of Parent.
The Merger Agreement provides for the acquisition of KENETECH by Parent.
Under the terms of the Merger Agreement, Purchaser is commencing a tender
offer to purchase all outstanding shares of KENETECH common stock at a price
of $1.04 per share, net to tendering stockholders in cash. The tender offer is
currently scheduled to expire at 12:00 o'clock midnight, New York time, on
December 7, 2000. Mark D. Lerdal, the Chairman of the Board, Chief Executive
Officer and President of KENETECH, has agreed with Parent not to tender his
shares of KENETECH common stock in the tender offer and to contribute his
shares to Parent in exchange for shares of capital stock of Parent. Following
the successful completion of the tender offer, Purchaser will be merged into
KENETECH and all shares of KENETECH common stock not purchased in the tender
offer will be converted into the right to receive in cash the same price per
share as paid in the tender offer.
Upon the recommendation of a special committee of independent,
disinterested directors not affiliated with Purchaser or Mr. Lerdal, the
KENETECH board of directors (with the exception of Mr. Lerdal, who did not
vote with respect to the proposed acquisition) has unanimously approved the
Merger Agreement, the tender offer and the merger and has determined that the
Merger Agreement, the tender offer and the merger are fair to and in the best
interests of holders of KENETECH common stock. Accordingly, the board of
directors recommends that you accept the tender offer and tender your KENETECH
common stock to Purchaser pursuant to the tender offer.
In arriving at their recommendations, the special committee and the board
of directors gave careful consideration to a number of factors that are
described in the enclosed Schedule 14D-9, including, among other things, the
opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc. to the
effect that, and based upon and subject to the assumptions made, procedures
followed, matters considered, and limitations on the review set forth therein
and described to the special committee, the consideration to be received in
the tender offer and the merger is fair to holders of KENETECH common stock
(other than Mr. Lerdal) from a financial point of view, as of the date of such
opinion.
Also accompanying this letter is a copy of Purchaser's Offer to Purchase
and related materials, including a letter of transmittal for use in tendering
your shares. These documents set forth the terms and conditions of Purchaser's
tender offer and provide instructions as to how to tender your shares. We urge
you to read each of the enclosed materials carefully.
Very truly yours,
/s/ Dianne P. Urhausen
Dianne P. Urhausen
Vice President and Corporate
Secretary
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
SCHEDULE 14D-9
(RULE 14d-101)
SOLICITATION/RECOMMENDATION STATEMENT
UNDER SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
KENETECH CORPORATION
(Name of Subject Company)
KENETECH CORPORATION
(Name of Person(s) Filing Statement)
Common Stock, par value $.000l per share
(Title of Class of Securities)
488878109
(CUSIP Number of Class of Securities)
Dianne P. Urhausen
Vice President and Corporate Secretary
500 Sansome Street, Suite 410
San Francisco, California 94111
(415) 398-3825
(Name, address and telephone number of person authorized to receive
notice and communications on behalf of the person(s) filing statement)
With a Copy to:
Michael G. O'Bryan, Esq. Mark A. Morton, Esq.
Morrison & Foerster LLP Potter Anderson & Corroon LLP
425 Market Street Hercules Plaza, P.O. Box 951
San Francisco, California 94105 Wilmington, Delaware 19899
(415) 268-7000 (302) 984-6000
[_] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
===============================================================================
INTRODUCTION
This Solicitation/Recommendation Statement on Schedule 14D-9 (this
"Schedule 14D-9") relates to an offer by KC Merger Corp. ("Purchaser"), a
Delaware corporation which is wholly owned by KC Holding Corporation
("Parent"), a Delaware corporation which in turn is wholly owned by ValueAct
Capital Partners, L.P. ("VAC"), a Delaware limited partnership, to purchase
all of the outstanding shares of common stock of KENETECH Corporation, a
Delaware corporation ("KENETECH" or the "Company").
Item 1. Subject Company Information.
(a) Name and Address. The name of the subject company is KENETECH
Corporation. The principal executive offices of the subject company are
located at 500 Sansome Street, Suite 410, San Francisco, California 94111, and
its telephone number is (415) 398-3825.
(b) Securities. This Schedule 14D-9 relates to the Company's common stock,
par value $.0001 per share (the "Common Stock" or "Shares"). Unless the
context otherwise requires, references to Common Stock or Shares include the
associated preferred stock purchase rights issued pursuant to a rights
agreement dated as of May 4, 1999, between KENETECH and ChaseMellon
Shareholder Services, L.L.C., as amended as of October 25, 2000 (the "Rights
Agreement"). As of the close of business on October 20, 2000, there were
31,970,164 shares of Common Stock outstanding.
Item 2. Identity and Background of Filing Person.
(a) Name and Address. The name, business address and business telephone
number of the Company filing this statement are set forth in Item 1(a) above,
which information is incorporated herein by reference.
(b) Tender Offer. This Schedule 14D-9 relates to the tender offer made by
Purchaser disclosed in a Tender Offer Statement on Schedule TO dated November
6, 2000 (as amended or supplemented from time to time, the "Schedule TO"), to
purchase all outstanding shares of Common Stock at a price (the "Offer Price")
of $1.04 per share, net to the seller in cash, without interest, upon the
terms and subject to the conditions set forth in the Offer to Purchase dated
November 6, 2000 (as amended or supplemented from time to time, the "Offer to
Purchase"), and the related Letter of Transmittal (which, together with any
amendments or supplements thereto, collectively constitute the "Offer"), filed
as Exhibits (a)(1)(A) and (a)(1)(B) hereto, respectively, and incorporated
herein by reference.
The Offer is being made pursuant to an Agreement and Plan of Merger dated
as of October 25, 2000, among the Company, Purchaser and Parent (the "Merger
Agreement"). The Merger Agreement provides, among other things, that as soon
as practicable after the satisfaction or waiver of the conditions set forth in
the Merger Agreement, including the purchase of Shares by Purchaser in the
Offer, Purchaser will be merged with and into the Company (the "Merger"), and
each share of Common Stock then outstanding will be converted into the right
to receive $1.04 in cash, without interest. The Company will continue after
the Merger as a wholly-owned subsidiary of Parent. The Merger Agreement, a
copy of which is filed as Exhibit (e)(1) hereto, is summarized in the section
of Item 3, below, entitled "The Merger Agreement," and is incorporated herein
by reference.
As set forth in the Schedule TO, the principal executive offices of
Purchaser are located at the offices of VAC, One Maritime Plaza, Suite 1400,
San Francisco, California 94111. The principal executive offices of Parent are
located at the same address.
Pursuant to Section 21E(b)(2)(C) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the safe harbor for forward-looking statements
under the Private Litigation Securities Reform Act of 1995 is not applicable
to a forward-looking statement made in connection with a tender offer.
Item 3. Past Contacts, Transactions, Negotiations and Agreements.
The Merger Agreement.
The following is a summary of the material provisions of the Merger
Agreement, which summary is qualified in its entirety by reference to the
complete text of the Merger Agreement.
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The Offer. The Merger Agreement provides that Purchaser will commence the
Offer and that, upon the terms and subject to prior satisfaction or waiver of
the conditions set forth in the Merger Agreement (including, if the Offer is
extended or amended, the terms and conditions of any extension or amendment),
Purchaser will accept for payment, and pay for, all Shares validly tendered
pursuant to the Offer and not withdrawn on or prior to the expiration of the
Offer.
Directors. Pursuant to the Merger Agreement, promptly following Purchaser's
purchase of Shares pursuant to the Offer, Purchaser will be entitled, to the
fullest extent permitted by law, to designate at its option up to that number
of directors, rounded to the nearest whole number, of KENETECH's Board of
Directors (the "Board"), subject to compliance with Section 14(f) of the
Exchange Act, as will make the percentage of KENETECH's directors designated
by Purchaser equal to the percentage of the aggregate voting power of the
Shares held by Parent or any of its subsidiaries; provided, however, that if
Purchaser's designees are elected to the Board, until the consummation of the
Merger such Board will have at least three directors (excluding Mr. Lerdal)
who were directors of KENETECH on the date of the execution of the Merger
Agreement. Following the election or appointment of Purchaser's designees
pursuant to the Merger Agreement and prior to the consummation of the Merger,
Parent and Purchaser will not cause KENETECH to take any action with respect
to any amendment, or waiver of any term or condition, of the Merger Agreement,
KENETECH's restated certificate of incorporation, as amended (the "Restated
Certificate"), or KENETECH's restated bylaws, as amended (the "Restated
Bylaws"), or certain other actions, without the concurrence of a majority of
the directors who were directors of KENETECH on the date of the execution of
the Merger Agreement (excluding Mr. Lerdal) or their replacements pursuant to
the Merger Agreement.
The Merger. The Merger Agreement provides that, after the completion of the
Offer and the satisfaction or waiver of certain conditions, Purchaser will be
merged with and into KENETECH and KENETECH will be the surviving corporation
(the "Surviving Corporation"). At the effective time of the Merger (the
"Effective Time"), (i) each issued and outstanding share of common stock, par
value $.01 per share, of Purchaser will be converted into one share of common
stock of the Surviving Corporation, (ii) all Shares that are held in treasury
of KENETECH or by any wholly-owned subsidiary of KENETECH and any Shares owned
by Parent or by any wholly-owned subsidiary of Parent will be canceled, (iii)
each Share issued and outstanding immediately prior to the Effective Time
(other than Shares described in (ii) above and Shares held by dissenting
stockholders) will be converted into the right to receive the Offer Price, and
(iv) Shares held by holders who properly exercise appraisal rights under
applicable state law will not be converted, and holders of such Shares will be
entitled to receive payment of the appraised value of such Shares in
accordance with applicable state law unless and until such holders fail to
perfect or effectively withdraw or lose their rights to appraisal under
applicable state law.
The Board, at a meeting duly called and held on October 25, 2000, at which
all of the directors were present, and acting on the unanimous recommendation
of a special committee of independent, disinterested members of the Board not
affiliated with Purchaser or Mr. Lerdal (other than by being members of the
Board) (the "Special Committee") duly and unanimously (with Mr. Lerdal
abstaining): (i) approved and declared the advisability of the Merger
Agreement and the transactions contemplated thereby, including the Offer and
the Merger; (ii) recommended that you accept the Offer, tender your Shares
pursuant to the Offer and, if applicable, approve and adopt the Merger
Agreement and the transactions contemplated thereby, including the Merger; and
(iii) determined that the Merger Agreement and the transactions contemplated
thereby, including the Offer and the Merger, are fair to you and in your best
interests.
Parent and Purchaser will use their reasonable best efforts to cause Mr.
Lerdal to transfer to Parent all Shares owned by him in accordance with a
subscription and contribution agreement among Parent, VAC and Mr. Lerdal,
dated October 24, 2000 (the "Subscription Agreement"). If, following such
transfer by Mr. Lerdal and the purchase of Shares pursuant to the Offer,
Parent, Purchaser, VAC, and any other entity controlled by VAC collectively
own at least ninety percent of the outstanding Shares, Parent and Purchaser
will take all necessary and appropriate action to cause the Merger to become
effective as soon as is reasonably practicable after the expiration of the
Offer without a meeting of stockholders of KENETECH, in accordance with
applicable law.
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Charter, Bylaws, Directors and Officers. At the Effective Time, the
Restated Certificate, as in effect immediately prior to the Effective Time,
will be amended in accordance with the terms of the Merger Agreement. At the
Effective Time, the Restated Bylaws, as in effect immediately prior to the
Effective Time, will be amended in accordance with the terms of the Merger
Agreement.
The directors of Purchaser at the Effective Time will be the directors of
the Surviving Corporation, and the officers of KENETECH at the Effective Time
will be the officers of the Surviving Corporation.
Conversion of Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of Purchaser, KENETECH or the holder of any of
the following securities:
(a) Each issued and outstanding share of common stock, par value $.01 per
share, of Purchaser will be converted into one validly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation.
(b) All Shares that are held in the treasury of KENETECH or by any wholly-
owned subsidiary of KENETECH and any Shares owned by Parent or by any wholly-
owned subsidiary of Parent will be canceled and no consideration will be
delivered in exchange therefor.
(c) Each share issued and outstanding immediately prior to the Effective
Time (other than Shares to be canceled in accordance with (b) above and other
than Shares which are issued and outstanding immediately prior to the
Effective Time and which are held by holders who properly exercise appraisal
rights with respect thereto) will be converted into the right to receive from
the Surviving Corporation the Offer Price.
(d) Each KENETECH stock option that is outstanding immediately prior to the
Effective Time will be canceled. The holder of such stock option will receive
the right to receive from KENETECH an amount equal to (A) the product of (1)
the number of Shares subject to such option and (2) the excess, if any, of the
Offer Price over the exercise price per share for the Shares subject to such
option, minus (B) all applicable federal, state, and local taxes required to
be withheld in respect of such payment.
(e) Each KENETECH warrant that is outstanding immediately prior to the
Effective Time will be canceled. The holder of such warrant will receive the
right to receive an amount equal to (A) the product of (1) the number of
Shares subject to such warrant and (2) the excess, if any, of the Offer Price
over the exercise price per share for the Shares subject to the warrant, minus
(B) all applicable federal, state, and local taxes required to be withheld in
respect of such payment.
Representations And Warranties. In the Merger Agreement, KENETECH has made
customary representations and warranties to Parent and Purchaser with respect
to, among other matters, the absence of any event, occurrence, fact,
circumstances, change or effect that is or would reasonably be expected (as
far as can be foreseen at the time) to be materially adverse to its ability to
perform its obligations under the Merger Agreement or to consummate the
transactions contemplated thereby, or to its business, operations, properties
or results of operations or condition (financial or otherwise), assets or
liabilities (actual or contingent) or those of its subsidiaries, taken as a
whole (a "Material Adverse Change" or "Material Adverse Effect"), its
organization and qualification, capitalization, authority, consents and
approvals, public filings, financial statements, brokers, employee benefit
matters, litigation, tax matters, compliance with law, environmental matters,
intellectual property, real property, material contracts, and related party
transactions. Each of Parent and Purchaser has made customary representations
and warranties to KENETECH with respect to, among other matters, its
organization, qualifications, authority, consents and approvals, operations of
Parent and Purchaser, brokers, financial wherewithal and ownership of Shares.
Conduct of Business Pending The Merger. With certain specific exceptions,
the Merger Agreement obligates KENETECH and its subsidiaries, from the date of
the Merger Agreement through the Effective Time, to conduct their operations
only in the ordinary course of business as currently conducted, to use
commercially reasonable efforts to preserve intact their business
organizations, to keep available the services of their present officers and
employees and to preserve the present relationships with those persons and
entities having significant
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business relationships with KENETECH and its subsidiaries, and to maintain in
full force and effect all authorizations necessary for such business, except
to the extent such would not have a Material Adverse Effect on KENETECH or its
subsidiaries. The Merger Agreement also contains specific restrictive
covenants as to certain activities of KENETECH, which provide that KENETECH
will not (and will not permit any of its subsidiaries to) take certain actions
without the prior written consent of Parent, including, among other things and
subject to certain exceptions, issuing or selling its securities, redeeming or
repurchasing securities, changing its capital structure, making material
acquisitions or dispositions, entering into or amending material contracts,
incurring indebtedness, settling litigation or claims, increasing compensation
or adopting new benefit plans, and permitting certain other material events or
transactions.
No Solicitation. In the Merger Agreement, KENETECH has agreed that it will
not, and will not authorize any of its subsidiaries or any officer, director
or employee of or any financial advisor, attorney or other advisor or
representative of KENETECH or any of its subsidiaries to directly or
indirectly:
(a) solicit, initiate or encourage the submission of any Takeover Proposal,
(b) participate in any discussions or negotiations regarding, or furnish to
any person any information with respect to KENETECH or any of its subsidiaries
in connection with, or take any other action to facilitate any inquiries or
the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Takeover Proposal, or
(c) authorize, engage in, or enter into any agreement or understanding with
respect to any Takeover Proposal;
provided, that nothing contained in the Merger Agreement will prohibit
KENETECH or its directors or any special committee of the Board from complying
with Rule 14d-9 or Rule 14e-2 promulgated under the Exchange Act or making
such disclosure as is required under applicable law.
In addition, the Merger Agreement provides that, prior to the purchase of
Shares pursuant to the Offer, KENETECH may engage in the activities described
in (b) and (c) above with respect to any person who has submitted on an
unsolicited basis to KENETECH (A) a Takeover Proposal believed by KENETECH to
be bona fide or (B) an expression of interest believed by KENETECH to be bona
fide indicating such person's desire to pursue the possibility of making a
Takeover Proposal on terms believed by KENETECH to be financially superior to
the Offer and the Merger (a "Superior Proposal") and, in either case, the
Board or any committee thereof, determines that such action is appropriate for
the Board to comply with its fiduciary duties under applicable law, the Board
or any committee thereof, concludes in good faith that such Takeover Proposal
could lead to a Superior Proposal, and, prior to disclosing any of the
information referred to in (b) above, KENETECH obtains from such person an
executed confidentiality agreement.
KENETECH will use reasonable best efforts to advise Parent, in writing, no
later than one business day thereafter, of its receipt of any Takeover
Proposal. In addition, under the Merger Agreement, KENETECH has agreed to
refrain from entering into any agreement authorizing any Takeover Proposal
until two business days following delivery by KENETECH of such notice, and to
keep Parent reasonably informed of the status of any such Takeover Proposal.
As used herein and in the Merger Agreement, "Takeover Proposal" means any
proposal for (i) a merger, share exchange or other business combination
involving KENETECH or any of its subsidiaries, (ii) any proposal or offer to
acquire in any manner, directly or indirectly, an equity interest in or any
voting securities of KENETECH representing 15% or more of the Shares
outstanding, (iii) an offer to acquire in any manner, directly or indirectly,
any assets of KENETECH or any of its subsidiaries in excess of $100,000, or
(iv) any similar transaction or business combination involving KENETECH or its
business or capital stock or assets, other than the transactions contemplated
by the Merger Agreement.
4
Indemnification; Directors' and Officers' Insurance. In the Merger
Agreement, Parent agreed that, from and after the Effective Time, it will
cause the Surviving Corporation to indemnify, defend and hold harmless (and
make advances for expenses as incurred to) all past and present officers and
directors of KENETECH and its subsidiaries to the same extent and in the same
manner such persons are entitled to indemnification and advancement of
expenses as of the date of the Merger Agreement (to the extent consistent with
applicable law) by KENETECH pursuant to the DGCL, certain indemnification
agreements to which KENETECH is a party, the Restated Certificate or the
Restated Bylaws for acts or omissions occurring at or prior to the Effective
Time.
The Merger Agreement also provides that Parent will cause the Surviving
Corporation to perform, as of the Effective Time, all of the obligations set
forth in Article 9 of the Restated Certificate, Article V of the Restated
Bylaws and the indemnification agreements identified in the Merger Agreement.
In addition, for a period of not less than three years from the Effective
Time, Parent will cause the Surviving Corporation to provide, to or for those
persons covered as of the date of the Merger Agreement or as of the Effective
Time by KENETECH's directors' and officers' insurance and indemnification
policy, insurance that is substantially similar to KENETECH's existing policy,
provided that the Surviving Corporation will not be required to pay an annual
premium in excess of 175% of the last annual premium paid prior to the date of
the Merger Agreement.
Conditions to The Consummation of The Merger The respective obligations of
each party to effect the Merger are subject to the satisfaction on or prior to
the Effective Time of the following conditions: (i) Purchaser must have
previously accepted for payment and paid for Shares pursuant to the Offer;
(ii) the Merger Agreement must have been adopted by the affirmative vote of
the stockholders of KENETECH entitled to vote thereon (subject to the
provision of the Merger Agreement relating to the consummation of the Merger
without the vote of KENETECH stockholders, pursuant to applicable law); and
(iii) no court or other governmental entity having jurisdiction over KENETECH
or Parent, or any of their subsidiaries, shall have enacted, issued,
promulgated, enforced or entered any law, rule, regulation, executive order,
decree, injunction or other order (whether temporary, preliminary or
permanent) which is then in effect and has the effect of making illegal or
directly or indirectly restraining, prohibiting or restricting the
consummation of the Merger.
Termination. The Merger Agreement provides that it may be terminated at any
time prior to the Effective Time, whether before or after adoption of the
Merger Agreement by KENETECH's or Purchaser's stockholders:
(a) By the mutual written consent of Parent and KENETECH;
(b) By either of Parent or KENETECH, if:
(i) as a result of the failure of the conditions to the Offer, the Offer
has been terminated or has expired without Purchaser having accepted for
payment any Shares pursuant to the Offer, or Purchaser has not accepted for
payment any Shares pursuant to the Offer prior to December 27, 2000; provided
that, the right of either party to terminate as described in this sentence
will not be available if such party's failure to perform any of its
obligations under the Merger Agreement results in the failure of any such
condition or if the failure of such condition results from facts or
circumstances that constitute a breach of any representation or warranty under
the Merger Agreement by such party;
(ii) any governmental entity has issued a final and nonappealable order,
decree or ruling or taken any other action permanently enjoining, restraining
or otherwise prohibiting the acceptance for payment of, or payment for, the
Shares pursuant to the Offer or the Merger; or
(iii) if prior to the purchase of Shares pursuant to the Offer any of the
derivative claims currently pending against KENETECH and certain of its
present and former directors are resolved in favor of the plaintiffs in the
derivative action;
5
(c) By KENETECH:
(i) if its Board or any committee thereof determines that a Takeover
Proposal constitutes a Superior Proposal and the Board or any such committee
determines, in its good faith judgment, after consultation with independent
counsel, that failing to terminate the Merger Agreement would be inconsistent
with such Board's fiduciary duties under applicable law, provided that
KENETECH has, pursuant to the Merger Agreement, properly informed Parent of
the existence and status of any of such Takeover Proposal;
(ii) if, at any time prior to the purchase of Shares pursuant to the
Offer, (x) any of the representations or warranties of Parent or Purchaser set
forth in the Merger Agreement that are qualified as to materiality shall not
be true and correct in any respect or any such representations or warranties
that are not so qualified shall not be true and correct in any material
respect, or (y) Parent or Purchaser have failed to perform in any material
respect any material obligation or to comply in any material respect with any
material agreement or covenant of Parent or Purchaser to be performed or
complied with by it under the Merger Agreement and such untruth,
incorrectness, or failure cannot be or has not been cured within twenty
business days after the giving of written notice to Parent of Purchaser; or
(iii) if the Offer has not been commenced by Parent or Purchaser on or
prior to 15 business days following the date of the initial public
announcement of the Offer; provided that KENETECH may not terminate the Merger
Agreement pursuant to this provision if it is in material breach of the Merger
Agreement; or
(d) By Parent or Purchaser:
(i) if prior to the purchase of the Shares pursuant to the Offer,
KENETECH breaches any representation, warranty, covenant or other agreement
contained in the Merger Agreement which would cause the representations and
warranties made by KENETECH in the Merger Agreement to be untrue, unless such
inaccuracies do not result in a Material Adverse Effect on KENETECH, or would
cause KENETECH to fail to perform any obligation or to comply with any
agreement or covenant to be performed or complied by it under the Merger
Agreement, which breach continues for more than twenty business days after
KENETECH's receipt of notice of such failure; or
(ii) if the Board of KENETECH or any committee thereof has withdrawn or
modified in a manner adverse to Parent or Purchaser its approval or
recommendation of the Offer, the Merger or the Merger Agreement, or approved
or recommended any Takeover Proposal, or resolved to take any of such actions.
Effect of Termination. Except as described below, in the event that the
Merger Agreement is terminated by any of KENETECH or Parent or Purchaser as
provided above, the Merger Agreement will forthwith become void and there will
be no liability on the part of Parent, Purchaser or KENETECH, or their
respective officers or directors. However, the provisions of the Merger
Agreement regarding confidentiality and termination fees will survive
termination, and termination will not relieve any party from liability for
breaches of its representations, warranties or covenants contained in the
Merger Agreement, or for fraud.
KENETECH will pay to Parent the following amounts, as applicable: (i) if
Parent or Purchaser terminates the Merger Agreement under (d)(ii) above,
KENETECH will pay $750,000 (the "Termination Fee"); (ii) if KENETECH
terminates the Merger Agreement under (c)(i) above, KENETECH will pay the
Termination Fee; or (iii) if Parent or Purchaser terminates the Merger
Agreement under (d)(i) above as a result of the breach by KENETECH of any
covenant or agreement contained in the Merger Agreement resulting in a failure
of KENETECH to perform any obligation or to comply with any agreement or
covenant of KENETECH to be performed or complied with by it under the Merger
Agreement and at the time of any such termination a Takeover Proposal shall
have been made, and if concurrently therewith, or within twelve months
thereafter, KENETECH enters into a definitive merger agreement, acquisition
agreement or similar agreement with respect to a Takeover Proposal, or a
Takeover Proposal is consummated, involving any party with which KENETECH was
in contact prior to such termination, KENETECH will pay the Termination Fee.
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KENETECH also will pay the following amounts if applicable: (A) if Parent
or Purchaser terminates the Merger Agreement because the Offer has terminated
or expired (without Purchaser accepting for payment any Shares) as a result of
KENETECH incurring certain Material Adverse Changes or KENETECH's failure to
perform its material obligations under the Merger Agreement, or (B) if
KENETECH terminates the Merger Agreement prior to January 31, 2001, then
KENETECH will pay to Purchaser all reasonably incurred out-of-pocket expenses
incurred by or on behalf of Purchaser or its stockholders (including expenses
incurred by or on behalf of Mr. Lerdal) in connection with the transactions
contemplated by the Merger Agreement, not to exceed $250,000.
Amendment. Subject to certain restrictions, the Merger Agreement may be
amended by the parties at any time before or after the approval of the matters
presented in connection with the Merger by the stockholders of KENETECH, but
after any such approval, no amendment may be made which by law requires
further approval by such stockholders without such further approval.
Amendments must be in writing signed by each of the parties.
Appraisal Rights. No appraisal rights are available in connection with the
Offer; however, stockholders not tendering in the Offer and who otherwise
comply with the requirements of applicable law, will have the right under such
law to demand appraisal of, and to receive payment in cash of the fair value
of, their Shares in connection with the Merger.
Confidentiality Agreement.
On June 29, 2000, the Company and VAC entered into a confidentiality
agreement (the "Confidentiality Agreement"). The Confidentiality Agreement
provides that VAC will not, and will cause its directors, officers, employees,
representatives and other agents to not, disclose to any third party any
information relating to the Company or to any potential transaction involving
the Company furnished at any time by the Company or its representatives to VAC
or its representatives or any analyses, compilations, forecasts, studies or
other documents prepared by VAC or its representatives in connection with such
a transaction that contain or reflect any such information, subject to
customary exceptions described in the Confidentiality Agreement. VAC further
agreed to use such information and materials solely for the purpose of
evaluating a possible transaction with KENETECH.
Additionally, VAC, among other things, agreed that, without the consent of
the Company, for a period of three years from June 29, 2000, it would not
acquire, enter into any option to acquire, offer or agree to acquire or become
the beneficial owner of any securities of the Company and would not
participate in any proxy solicitation or become a member of any "group" within
the meaning of Section 13(d)(3) of the Exchange Act with respect to the
Company.
The above summary is qualified in its entirety by reference to the complete
text of the Confidentiality Agreement, a copy of which is filed as Exhibit
(e)(2) hereto and is incorporated by this reference.
VAC Guaranty.
In connection with the Merger Agreement, on October 25, 2000, the Company
obtained a written guaranty from VAC (the "VAC Guaranty"). Pursuant to the VAC
Guaranty, VAC guaranteed Purchaser's and Parent's performance of their
respective covenants, duties and obligations under the Merger Agreement,
including Purchaser's and Parent's payment obligations under the Merger
Agreement.
The VAC Guaranty terminates upon the earlier of the termination of the
Merger Agreement and the payment by Parent and Purchaser of all payments
pursuant to the Offer and the Merger. However, VAC's liability for payments
with respect to a breach of a representation or warranty or other obligation
of Parent or Purchaser under the Merger Agreement survives any termination of
the VAC Guaranty.
The above summary is qualified in its entirety by reference to the complete
text of the VAC Guaranty, a copy of which is filed as Exhibit (e)(3) hereto
and is incorporated by this reference.
7
Agreements with Mr. Lerdal.
Subscription Agreement.
On October 24, 2000, Parent entered into the Subscription Agreement with
VAC and Mr. Lerdal. Pursuant to the Subscription Agreement, VAC has agreed to
purchase an aggregate of 865,214 shares of Parent common stock for a purchase
price of $25.00 per share in cash, or an aggregate purchase price of
approximately $21.6 million, on the terms set forth in the Subscription
Agreement.
Also pursuant to the Subscription Agreement, Mr. Lerdal has agreed to
contribute his Shares to Parent for an aggregate of 472,803 shares of Parent
common stock, on the terms set forth in the Subscription Agreement. The
Subscription Agreement valued Mr. Lerdal's Shares at $1.04 per Share. Based on
the 31,970,164 shares of Common Stock outstanding, Mr. Lerdal's Shares
represent approximately 36% of the outstanding Common Stock.
The closing of the purchase by VAC of Parent common stock will take place
one business day after the date on which Purchaser accepts for payment the
Shares tendered in the Offer, and the closing of the exchange by Mr. Lerdal of
his Shares for Parent common stock will take place at such time mutually
agreed upon by Parent and Mr. Lerdal, but in no event later than December 28,
2000. The obligation of Mr. Lerdal to contribute his Shares is not conditioned
upon or subject to the completion of the Offer.
Stockholders Agreement.
The Subscription Agreement contemplates that Mr. Lerdal also will enter
into a stockholders agreement with Parent and the persons listed on Schedule A
thereto (the "Stockholders Agreement") in connection with the two closings
contemplated by the Subscription Agreement.
The Stockholders Agreement will contain various rights and restrictions,
including tag-along rights, buy/sell rights, rights of first refusal and other
restrictions on transfer, in connection with such parties' ownership of equity
securities of Parent following the Merger. In addition, the Stockholders
Agreement will contain provisions regarding the constitution of the Parent
Board of Directors, including provisions permitting VAC to designate two
directors to Parent's three member Board of Directors and permitting Mr.
Lerdal to designate one director.
Voting Agreement.
On October 25, 2000, Mr. Lerdal entered into a voting agreement with
Purchaser and Parent (the "Voting Agreement"). Pursuant to the Voting
Agreement, among other things, Mr. Lerdal agreed (i) to vote all Shares
beneficially owned by him in favor of the Merger Agreement and the Merger and
against any Takeover Proposal (as defined above) and any other proposal for
action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of KENETECH
under the Merger Agreement, (ii) to waive any appraisal rights he may have in
connection with the Merger, (iii) not to solicit or initiate, or encourage,
directly or indirectly, any inquiries regarding the submission of any Takeover
Proposal, (iv) not to participate in any discussions or negotiations
regarding, or furnish to any person any information or data with respect to,
or take any other action to knowingly facilitate the making of any proposal
that constitutes, or may reasonably be expected to lead to, any Takeover
Proposal, (v) not to enter into any agreement with respect to any Takeover
Proposal or approve or resolve to approve any Takeover Proposal, (vi) not to
transfer his Shares, (vii) to constitute and appoint Parent and Purchaser as
his true and lawful proxies in connection with the Merger and the Merger
Agreement and (viii) not to tender his Shares pursuant to the Offer. Based on
31,970,164 shares of Common Stock outstanding on October 20, 2000, Mr.
Lerdal's Shares in the aggregate represent approximately 36% of the total
outstanding Common Stock.
The Voting Agreement will terminate and be of no further force and effect
(i) by the written mutual consent of the parties to the Voting Agreement, (ii)
automatically upon the Effective Time, or (iii) upon the termination of the
Merger Agreement in accordance with the terms of the Merger Agreement.
8
Employment Agreement.
On October 25, 2000, Mr. Lerdal entered into an employment agreement with
Purchaser (the "Employment Agreement") pursuant to which Mr. Lerdal will serve
as the President and Chief Executive Officer of the Surviving Corporation,
effective upon the Effective Time. During his employment term, which term is
to commence upon the Effective Time and terminate as of December 31, 2001
(with automatic one-year renewal, unless either party delivers written notice
to the other of a desire to not renew at least ninety (90) days prior to the
commencement of any such renewal period), Mr. Lerdal is to receive a base
salary equal to $250,000 per annum and will also be eligible for annual cash
bonuses and employee benefit programs.
The above summaries are qualified in their entireties by reference to the
complete texts of the Subscription Agreement, the Stockholders Agreement, the
Voting Agreement and the Employment Agreement, copies of which are filed as
Exhibits (e)(4), (e)(5), (e)(6) and (e)(7) hereto and are incorporated by this
reference.
Litigation.
Two of KENETECH's current directors, Mark D. Lerdal and Charles Christenson
(who is a member of the Special Committee), are defendants in a derivative
action brought by Robert L. Kohls and Louise A. Kohls in the Court of Chancery
of the State of Delaware. For a more detailed description of this litigation,
see "Certain Litigation Matters" in Item 8 of this Schedule 14D-9.
Director Indemnification.
The Merger Agreement requires Parent to cause KENETECH, as the corporation
surviving the Merger, following the consummation of the Merger, to indemnify,
defend and hold harmless (and make advances for expenses as incurred by) all
past and present officers and directors of KENETECH and its subsidiaries to
the same extent and in the same manner such persons are entitled to
indemnification and advancement of expenses as of the date of the Merger
Agreement (to the extent consistent with applicable law). In addition, Parent
will cause KENETECH to provide, for a period not less than three years
following the consummation of the Merger, to or for those persons covered by
KENETECH's directors and officers' insurance and indemnification policy as of
the date of the Merger Agreement or the consummation of the Merger, insurance
that is substantially similar to KENETECH's existing policy, provided that
KENETECH will not be required to pay an annual premium for such insurance in
excess of 175% of the last annual premium paid prior to the date of the Merger
Agreement. For a more detailed discussion of the indemnification and insurance
provisions of the Merger Agreement, see the discussion above in "The Merger
Agreement" section of this Item 3.
Other.
Mark D. Lerdal currently holds options to purchase 500,000 Shares, at an
exercise price of $0.8125 per Share. Pursuant to the Merger Agreement, at the
Effective Time, such stock options will be converted into the right to receive
the difference between the Offer Price and the exercise price, multiplied by
the number of Shares subject to the stock options, minus all applicable
federal, state and local taxes.
Michael D. Winn, a member of the Board, is the president, sole director and
sole stockholder of Terrasearch, Inc. Terrasearch entered into a Consulting
Agreement with the Company on January 1, 2000. Pursuant to the terms of the
Consulting Agreement, Terrasearch will be paid a yearly consulting fee of
$225,000, plus expenses, through December 31, 2000. The Consulting Agreement
will automatically renew for a one-year period after such date unless either
party gives notice of its intent not to renew. In connection with the
Consulting Agreement, KENETECH also issued Terrasearch warrants to purchase up
to 500,000 shares of Common Stock, at an exercise price of $1.00 per share.
The warrants provide that they may not be exercised until January 1, 2002.
However, pursuant to the Merger Agreement, at the Effective Time, the warrants
will be converted into the right to receive the difference between the Offer
Price and the exercise price, multiplied by the number of Shares subject to
the warrants, minus all applicable federal, state and local taxes.
9
Certain agreements, arrangements or understandings between the Company or
its affiliates and certain of its directors, executive officers and affiliates
are described in the Information Statement of the Company attached to this
Schedule 14D-9 as Schedule I (the "Information Statement"). The Information
Statement is being furnished to the Company's stockholders pursuant to Section
14(f) of the Exchange Act and Rule 14f-1 issued under the Exchange Act in
connection with Purchaser's right under the Merger Agreement, after purchasing
shares of Common Stock pursuant to the Offer, to designate persons to the
Board other than at a meeting of KENETECH's stockholders. The Information
Statement is incorporated herein by reference.
Except as set forth in the response to this Item 3, or in Schedule I
attached hereto or as incorporated by reference herein, to the knowledge of
the Company, there are no material agreements, arrangements or understandings
and no actual or potential conflicts of interest between the Company or its
affiliates, on the one hand, and Purchaser or its affiliates or the Company's
executive officers, directors or affiliates, on the other hand.
Item 4. The Solicitation or Recommendation.
(a) Recommendation. At a meeting held on October 25, 2000, the Special
Committee, consisting of independent directors not affiliated with Purchaser
and its affiliates or Mr. Lerdal (other than by being members of the Board)
and not employed by the Company or its affiliates, by unanimous vote of all
Special Committee members, determined that the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger, are
fair to, and in the best interests of, the Company and its stockholders (other
than Mr. Lerdal) and recommended that the Board approve and declare advisable
the Merger Agreement and the transactions contemplated thereby, including the
Offer and the Merger.
Based on the Special Committee's recommendation and by unanimous vote of
all directors (with the exception of Mr. Lerdal, who abstained from such
vote), the Board thereafter:
. determined that the Merger Agreement and the transactions contemplated
thereby, including the Offer and the Merger, are fair to and in the best
interests of the Company and its stockholders;
. approved and declared advisable the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger;
and
. recommended that holders of Shares tender their Shares in the Offer and,
if applicable, approve and adopt the Merger Agreement in all respects.
In considering the recommendation of the Special Committee and the Board
with respect to the Offer and the Merger, you should be aware that some
members of the Board and management have interests in the Offer and the Merger
that are in addition to the interests of the Company's stockholders generally.
The Special Committee was aware of these interests and considered them, among
other matters, in recommending that the Board approve the Merger Agreement,
the Offer and the Merger.
A press release announcing the execution of the Merger Agreement and a
letter to the stockholders communicating the Board's recommendation are filed
as Exhibits (a)(1)(G) and (a)(2), respectively, and are incorporated by this
reference.
(b) Reasons.
Background of the Offer.
From 1995 through the end of 1998, KENETECH experienced severe liquidity
constraints. In an effort to relieve such constraints, KENETECH undertook to
sell its assets. By the end of March 1999, KENETECH had disposed of
substantially all its operating assets and, by the end of April 1999, KENETECH
had repaid substantially all its indebtedness.
10
In addition, as early as March 1999, KENETECH started to evaluate the
various strategic alternatives available to it. Initially, throughout early
1999, KENETECH sought to identify and evaluate various business and investment
opportunities. Later, in mid to late 1999, KENETECH began to consider various
other strategic alternatives, including the possibility of acquiring or
merging with another company, and announced its considerations in its
securities filings. Beginning in November 1999, KENETECH's Board instituted a
stock repurchase program, and KENETECH also later repurchased Shares directly
from stockholders, that eventually resulted in the repurchase and retirement
of almost 10,000,000 shares of Common Stock.
Throughout 1999 and 2000, contact with KENETECH was initiated by (and in
some instances, KENETECH itself initiated contact with) various companies
regarding possible mergers, joint ventures, investment opportunities and other
strategic alternatives. KENETECH also considered strategic opportunities that
would maximize the potential benefits to be derived from its existing tax-
related characteristics. Although several companies expressed an initial
interest in considering an acquisition of KENETECH, none of these discussions
proceeded beyond preliminary stages. KENETECH also contacted or was contacted
by various investment banks, capital funds and other investment groups. While
KENETECH was rebuffed by most of the larger investment banks, several contacts
with smaller investment banks resulted in some additional investment
opportunities for KENETECH. KENETECH considered a number of these
opportunities, but none involved the acquisition of KENETECH or were large
enough to result in a material change in KENETECH's operations or structure.
One of these previously considered strategic investment alternatives
indirectly resulted in VAC's initial expression of interest in potentially
acquiring KENETECH. Jeffrey Ubben, a founding member of VAC, previously worked
for one of the capital funds that KENETECH had approached in mid-1999
regarding possible joint venture opportunities. Now representing VAC, Mr.
Ubben, in mid-June 2000, expressed to Mr. Lerdal VAC's potential interest in
considering an acquisition of KENETECH. Mr. Lerdal reported VAC's potential
interest to KENETECH's Board during a meeting held on June 21, 2000.
Shortly thereafter, on June 29, 2000, KENETECH and VAC entered into the
Confidentiality Agreement to allow VAC to review information regarding
KENETECH. Following the execution of the Confidentiality Agreement, VAC began
its due diligence review of KENETECH.
At a meeting of KENETECH's Board on July 5, 2000, Mr. Lerdal advised the
Board that VAC had informed him that it might consider a transaction that
could require his participation. Mr. Lerdal then left the meeting. KENETECH's
outside legal counsel advised the Board of its fiduciary duties in connection
with any acquisition of KENETECH by a group that could potentially include Mr.
Lerdal and discussed with the Board the advisability of the creation of a
special committee of independent directors. The Board then established the
Special Committee with the authority to review and evaluate the terms of, and
determine the advisability of, any potential transaction with VAC, and
appointed Messrs. Winn and Christenson and Gerald R. Morgan, Jr., to the
Special Committee. The Board resolved that, without a favorable recommendation
by the Special Committee of any transaction that might be proposed by VAC, the
Board would not recommend to KENETECH's stockholders or otherwise approve such
a transaction. The Board also gave the Special Committee the power to retain
independent legal counsel, investment bankers and other advisors to assist it
in connection with its duties.
On July 5, 2000, the Special Committee held its initial meeting. The
Special Committee authorized Mr. Winn to meet with VAC and to provide
additional information regarding KENETECH as necessary. The Special Committee
also resolved to retain an independent financial advisor and independent
counsel if consideration of a potential transaction proceeded. Throughout the
next six weeks, Mr. Winn and employees at KENETECH provided information to VAC
in the course of VAC's diligence investigation of KENETECH.
On August 17, 2000, the Special Committee met and resolved to retain Potter
Anderson & Corroon LLP as its independent legal counsel. The Special Committee
also resolved to solicit proposals from and to retain an independent
investment banking firm to act as its financial advisor. The Special Committee
discussed with its counsel the scope of its duties and the status of the
Special Committee. At the end of the meeting, Mr. Winn resigned from the
Special Committee, and Dr. Christenson and Mr. Morgan continued as the members
of the Special Committee.
11
On August 23, 2000, KENETECH received a letter of intent from VAC with
respect to a potential acquisition of KENETECH pursuant to a tender offer at a
price of $0.95 per Share, followed by a merger in which the Shares not
tendered would be converted into the right to receive the consideration paid
in the tender offer. The letter contemplated that Mr. Lerdal would not tender
his Shares in the offer and would contribute his Shares to a subsidiary of
VAC. The letter contemplated that, at the time of execution of any definitive
agreement with respect to the acquisition, KENETECH would grant to VAC an
option to purchase up to 19.9% of KENETECH's outstanding Common Stock at a
purchase price of $0.95 per Share, exercisable in the event KENETECH engaged
in an acquisition transaction with a third party rather than the transaction
proposed by VAC. The letter also contemplated that KENETECH would pay VAC a
$1,000,000 termination fee in the event such an alternative transaction was
entered into prior to the first anniversary of the execution of the letter.
The letter provided that any obligation to consummate an acquisition would be
subject to several conditions, including the negotiation of a definitive
merger agreement, VAC's satisfaction with its due diligence review of
KENETECH, the absence of any material adverse change in KENETECH's operations
or financial condition and VAC reaching agreement with Mr. Lerdal as to his
participation in the transaction. The letter also contemplated that, if
executed by KENETECH, KENETECH would agree not to solicit alternative
proposals from any other party for the lesser of a period of 120 days or until
a definitive agreement was reached.
The Special Committee met with its legal counsel on August 24, 2000 to
conduct a preliminary review of VAC's letter. The Special Committee's legal
counsel discussed the structure of the potential transaction as outlined in
VAC's letter. At the meeting, the Special Committee also received
presentations from several investment banks and financial consultants. After
hearing the presentations, the Special Committee resolved to retain Houlihan
Lokey Howard & Zukin Financial Advisors, Inc. (referred to herein as "Houlihan
Lokey") as its financial advisor to assist it in evaluating the terms of the
Offer and the Merger and to render an opinion as to whether the consideration
to be received by KENETECH's stockholders, except Mr. Lerdal, in connection
with the Offer and the Merger is fair to such stockholders from a financial
point of view. Subsequent to the meeting, the Special Committee entered into
an engagement letter with Houlihan Lokey, and directed Houlihan Lokey to begin
its analysis of VAC's letter.
The Special Committee met with its legal counsel on August 30, 2000. At the
meeting, the Special Committee further discussed the terms of VAC's August 23,
2000 letter. The Special Committee also discussed the retention of additional
counsel to advise it in connection with California and federal securities
matters. On September 1, 2000, the Special Committee met with its legal
counsel and resolved to retain Morrison & Foerster LLP as its independent
legal counsel with respect to California and federal securities law matters in
connection with the potential acquisition. A representative of Houlihan Lokey
also discussed with the Special Committee the results of its due diligence
undertaken to that date. The Special Committee also discussed with legal
counsel and representatives of Houlihan Lokey the possibility of enhancing the
valuation of KENETECH by insuring certain of its contingent liabilities.
The Special Committee met with its legal counsel on September 6, 2000. At
the meeting, a representative of Houlihan Lokey discussed with the Special
Committee its preliminary evaluation of KENETECH. The Houlihan Lokey
representative also discussed with the Special Committee, in the context of
preparing for issuing an opinion, the strategic alternatives that might be
pursued by KENETECH. The alternatives included remaining independent, pursuing
the potential acquisition by VAC, pursuing a sale to a strategic buyer, making
strategic acquisitions, pursuing a financial buyer or liquidating. The
assessment of strategic alternatives included a qualitative assessment of the
valuation impact of the Offer and the Merger relative to the alternatives
considered by Houlihan Lokey. The analysis did not quantify the valuation
impact because, in the opinion of Houlihan Lokey, it was not feasible to so
quantify this impact (due to the significant number of non-quantifiable
variables). Following the discussions with Houlihan Lokey, the Special
Committee discussed with its legal counsel potential responses to VAC's August
23, 2000 letter, including changes to the structure of the potential
transaction that would give KENETECH a greater right to respond to unsolicited
acquisition proposals. The Special Committee determined to respond generally
to VAC's August 23, 2000 letter by proposing a purchase price of $1.17 per
share; proposing a decrease in the termination fee potentially payable by
KENETECH in the event VAC's proposed acquisition was not consummated;
proposing to eliminate VAC's option to purchase Common Stock;
12
proposing that the period during which a termination fee might be payable be
shortened; and proposing that the offer not be closed until at least 30
business days had passed after the announcement of the offer (in order to
allow greater time for other parties to make alternative proposals). The
Special Committee further determined to include as a condition to KENETECH's
obligation to consummate the potential acquisition that at least a majority of
the outstanding Shares, other than the Shares held by Mr. Lerdal, be tendered
in the tender offer.
After the meeting, counsel to the Special Committee contacted a
representative of VAC and VAC's counsel to relay the Special Committee's
proposals. Mr. Morgan also contacted a representative of VAC to discuss the
potential transaction and the Special Committee's views with respect to the
proposed adjusted purchase price. After some discussion, the representative of
VAC told Mr. Morgan that VAC potentially would be willing to offer to pay
$1.00 per Share.
The Special Committee met with its legal counsel on September 8, 2000. At
the meeting, Mr. Morgan described his conversations with VAC. The Special
Committee resolved to request that VAC respond in writing to the proposals
made on behalf of the Special Committee after its September 6 meeting. On
September 11, 2000, VAC delivered a revised letter of intent to the Special
Committee. The revised letter provided for, among other things, a purchase
price of $1.00 per share and the elimination of the option to purchase
KENETECH Common Stock that was included in the initial letter. The revised
letter also incorporated the Special Committee's proposed reduction in the
termination fee and the period during which it might be applicable and the
Special Committee's proposal that the offer not be closed until at least 30
business days had passed after the announcement of the offer.
On September 12, 2000, the Special Committee met with its legal counsel and
a representative of Houlihan Lokey to discuss the revised letter. At the
meeting, the Special Committee's counsel discussed KENETECH's right to receive
and consider third party proposals during the pendency of any offer that might
be made by VAC. The discussion included the provision of the revised letter
that would allow KENETECH to publicly announce, upon the signing of any
definitive agreement with respect to a transaction, that Houlihan Lokey was
prepared to accept other offers relating to the acquisition of KENETECH. The
Special Committee also discussed making a counter-proposal with respect to the
price per share to be paid in the potential transaction and other terms.
The Special Committee met with its legal counsel on September 13, 2000, to
discuss the status of the discussions with VAC. The Special Committee then met
with its legal counsel and representatives from Houlihan Lokey on September
14, 2000. At the meeting, representatives of Houlihan Lokey discussed with the
Special Committee the potential range of valuations of KENETECH and some of
KENETECH's larger investments. The Special Committee requested that Houlihan
Lokey meet with VAC to discuss the parties' respective views relating to the
valuation of KENETECH.
Representatives of Houlihan Lokey met with representatives of VAC on
September 15, 2000, to discuss the potential valuation of KENETECH. Later that
day, the Special Committee met with its legal counsel to receive Houlihan
Lokey's report on those discussions. After discussing valuation issues with
Houlihan Lokey, the Special Committee authorized Houlihan Lokey to make a
counterproposal at $1.08 per Share. Counsel to the Special Committee contacted
VAC's counsel to relay the proposal and to discuss other terms of the
potential transaction.
The Special Committee, its legal counsel and representatives of Houlihan
Lokey met on September 19, 2000, with representatives of VAC and its counsel
to discuss the potential transaction. After further negotiations, VAC's
representatives stated that they might be willing to offer to pay $1.02 per
Share. The representatives of VAC then left the meeting and the Special
Committee continued to discuss pricing issues with its advisors. Later that
day, counsel for the Special Committee contacted counsel for VAC to discuss
the terms and status of the potential transaction.
On September 20, 2000, the Special Committee met with its legal counsel and
Houlihan Lokey to discuss the status of the discussions with VAC. After
counsel reviewed with the Special Committee the terms and conditions of VAC's
letter, the Special Committee directed its counsel to contact VAC's counsel to
request a
13
letter indicating a willingness to pay more than $1.02 per Share. After the
Special Committee's counsel communicated such to VAC's counsel, VAC responded
that it might be willing to pay $1.04 per Share. The Special Committee, its
legal counsel and Houlihan Lokey met thereafter to consider the revised share
price. The Special Committee instructed its counsel to request $1.05 per
Share. On September 25, 2000, counsel to VAC stated that VAC was not willing
to consider paying more than $1.04 per Share.
On September 26, 2000, VAC delivered to the Special Committee a revised
letter of intent, providing for, among other things, a potential purchase
price of $1.04 per Share. The letter also contemplated that KENETECH would pay
VAC a termination fee of as much as $750,000 in the event an alternative
transaction was entered into during the term of the letter and in other
circumstances. The letter further contemplated that KENETECH would not solicit
alternative proposals from any other parties for the lesser of a period of 30
days or until a definitive agreement was reached. The revised letter also
provided that the potential price was subject to renegotiation in the event
KENETECH was able to insure on reasonable terms certain contingent
liabilities.
On September 27, 2000, the Special Committee met with its legal counsel and
representatives of Houlihan Lokey. At the meeting, the Special Committee's
counsel described the terms of the revised letter and the history of the
negotiations of the letter. The Special Committee noted that the letter
required each party to use reasonable best efforts to enter into a definitive
agreement with respect to the potential transaction. Following discussion, the
Special Committee resolved to approve the revised letter of intent and to
recommend that the Board authorize KENETECH to execute the letter.
Later that same day, the Board met (with all members present, other than
Mr. Lerdal, who was traveling) to consider the revised letter of intent. At
the request of the Special Committee, the legal counsel to the Special
Committee described the terms of the revised letter of intent and the history
of the negotiations of the letter. Following discussion, the Board, by the
unanimous vote of all members present, approved execution of the letter.
After the Board meeting, a representative of KENETECH executed a
counterpart of the revised letter of intent. Over the next several weeks, VAC
continued its due diligence review of KENETECH and commenced negotiations
regarding the principal terms of a definitive agreement with respect to the
potential transaction. In addition, during this period, VAC and Mr. Lerdal
held several discussions regarding the terms and conditions upon which Mr.
Lerdal would participate in the potential transaction.
On October 7, 2000, the Special Committee met with its legal counsel. At
the meeting the Special Committee discussed the possible timing of a potential
transaction. Over the next several weeks, the Special Committee met a number
of times with its legal counsel and Houlihan Lokey to, among other things,
review the status of the negotiations with VAC with respect to the terms and
conditions of the Merger Agreement. Several drafts of the Merger Agreement
were exchanged with VAC.
During the week of October 16, 2000, VAC's counsel prepared and distributed
preliminary drafts of the various agreements to be entered into between VAC,
Purchaser or Parent and Mr. Lerdal in connection with the proposed
transactions, including the Subscription Agreement, the Voting Agreement, the
Employment Agreement and the Stockholders Agreement. Revised drafts of such
agreements were prepared based on subsequent discussions between VAC and Mr.
Lerdal and their respective counsel.
On October 24, 2000, Mr. Lerdal, Purchaser and VAC entered into the
Subscription Agreement, pursuant to which Mr. Lerdal agreed, subject to the
terms and conditions of the Subscription Agreement, to contribute his
11,365,458 Shares to Parent in exchange for capital stock in Parent.
Also on October 24, 2000, the Special Committee met with its legal counsel
to review a revised draft of the Merger Agreement. At the meeting, the Special
Committee's counsel discussed the terms of the Merger Agreement and the
history and status of the negotiations, and noted the Special Committee
members' earlier analysis and ultimate conclusion that certain of KENETECH's
contingent liabilities for which insurance had been considered could not be
insured on reasonable terms. Counsel also discussed with the Special
Committee, among
14
other things, the duties of the Special Committee in considering the Merger
Agreement. The meeting was then recessed to be reconvened the next day.
On October 25, 2000, at the continued meeting, Houlihan Lokey presented its
financial analyses as they related to the proposed transaction and its oral
opinion, subsequently confirmed in writing, that, as of that date, and based
upon and subject to the assumptions made, procedures followed, matters
considered, and limitations on the review set forth therein and described to
the Special Committee, the consideration to be received by KENETECH's
stockholders (other than by Mr. Lerdal) in the Offer and the Merger was fair
to such stockholders, from a financial point of view. A copy of Houlihan
Lokey's opinion is attached hereto as Schedule II, and is incorporated herein
by this reference. A copy of Houlihan Lokey's presentation is attached as an
exhibit to the Schedule TO. After discussion, the Special Committee, by
unanimous vote, determined that the proposed Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger, were
fair to, and in the best interests of, KENETECH and its stockholders, and
recommended that the Board approve and declare advisable the Merger Agreement
and the transactions contemplated thereby, including the Offer and the Merger.
The Board met immediately after the adjournment of the Special Committee's
meeting. At the meeting, the Special Committee made its report and delivered
its recommendation. At the request of the Special Committee, its counsel
described to the Board the terms of the Merger Agreement, including Mr.
Lerdal's participation in the proposed transaction, and the history and status
of the negotiations and discussed with the Board its fiduciary duties in
considering the Merger Agreement. Houlihan Lokey presented its financial
analyses as they related to the proposed transaction and its oral opinion,
subsequently confirmed in writing, that, as of that date, and based upon and
subject to the assumptions made, procedures followed, matters considered, and
limitations on the review set forth therein and described to the Board, the
consideration to be received by KENETECH's stockholders (other than by Mr.
Lerdal) in the Offer and the Merger was fair to such stockholders, from a
financial point of view. After discussion, the Board determined, by unanimous
vote (with the exception of Mr. Lerdal, who abstained from the vote), that the
proposed Merger Agreement was fair to, and in the best interests of, KENETECH
and its stockholders, approved and declared advisable the Merger Agreement and
the transactions contemplated thereby, including the Offer and the Merger, and
recommended that stockholders tender their Shares in the Offer and, if
applicable, approve and adopt the Merger Agreement.
During the evening of October 25, 2000, the Merger Agreement was executed
by Parent, Purchaser and KENETECH, and the Guaranty was executed by VAC and
KENETECH. KENETECH also entered into an amendment to its Rights Agreement with
ChaseMellon Shareholder Services, L.L.C. The amendment to the Rights Agreement
is filed as Exhibit (e)(9) hereto and is incorporated by this reference.
Shortly after the execution of those agreements, KENETECH issued a press
release announcing the transaction. Concurrently with the execution of the
Merger Agreement, Mr. Lerdal entered into the Voting Agreement with Parent and
Purchaser and the Employment Agreement with Purchaser.
Fairness of the Offer and the Merger.
In making the determinations and recommendations set forth in Item 4(a)
above, the Special Committee and the Board each considered a number of
factors, including the following:
. The Company's financial performance and outlook, and the Company's
assets, business, financial condition, business strategy, results of
operations and prospects, including the risk that if it remained
independent KENETECH would not have the means to enable it to obtain
sufficient strategic resources to reach critical mass.
. Possible alternatives to the Offer and the Merger (including the
possibility of continuing to operate the Company as an independent
entity, pursuing a sale to a strategic buyer or to another financial
buyer, making strategic acquisitions or liquidating) and the range of
possible benefits to the Company's stockholders of such alternatives and
the timing and likelihood of accomplishing the goal of any of such
alternatives.
15
. Since KENETECH began stating in November of 1999 that it was considering
all strategic alternatives, no person or entity, other than Purchaser
and its affiliates, had been willing to enter into a letter of intent or
make a definitive offer to acquire the Company.
. The Merger Agreement permits the Company to furnish information to, and
enter into discussions or negotiations with, any person that makes an
unsolicited bona fide expression of interest to acquire the Company
pursuant to a merger, consolidation, share exchange, business
combination, tender or exchange offer or other similar transaction,
subject to the terms of the Merger Agreement.
. The Merger Agreement permitted KENETECH to issue a press release upon
signing the Merger Agreement, stating that the Special Committee had
requested that Houlihan Lokey be available to receive unsolicited
inquiries from any third party interested in a possible acquisition of
KENETECH.
. Purchaser is not allowed to purchase Shares pursuant to the Offer for at
least 30 business days following announcement of the execution of the
Merger Agreement, allowing greater time for third parties potentially to
make alternative offers for the Company.
. The Merger Agreement permits the Board or the Special Committee to
withdraw or modify its approval or recommendation of the Offer and the
Merger if the Board or the Special Committee determines in good faith,
after consultation with independent counsel, that the failure to take
such action would be inconsistent with its fiduciary duties under
applicable law.
. The historical and recent trading activity and market prices of Shares,
and the fact that the Offer and the Merger will enable the holders of
Shares to realize a premium of 46.5% over the last sale price of Shares
reported on the OTC Bulletin Board on October 24, 2000, the trading day
prior to the date of execution of the Merger Agreement, and 42.5%,
44.4%, 96.2% and 60.0%, over the last sale price of Shares reported on
the OTC Bulletin Board 20, 60, 90 and 180 days, respectively, prior to
the date of execution of the Merger Agreement.
. The purchase price in the Offer and the Merger would be payable in cash,
thus eliminating any uncertainties in valuing the consideration to be
received by the Company's stockholders.
. The Offer provides stockholders who are considering selling their Shares
with the opportunity to sell their Shares at the Offer Price without
incurring the transaction costs typically associated with market sales.
. The Offer and the Merger provide for a prompt cash tender offer for all
Shares to be followed by a merger for the same consideration, thereby
enabling the Company's stockholders to obtain cash in exchange for their
Shares at the earliest possible time.
. KENETECH's liquidity situation, which limits opportunities to grow
KENETECH through acquisitions.
. The absence of analyst coverage for the Company and the low trading
volume in Common Stock, which makes it difficult for any stockholder to
acquire or dispose of any substantial block of shares.
. The presentation of Houlihan Lokey to the Special Committee and the
Board on October 25, 2000, and the oral opinion of Houlihan Lokey on
October 25, 2000 (subsequently confirmed in writing) to the effect that,
as of such date, and based upon and subject to the assumptions made,
procedures followed, matters considered, and limitations on the review
set forth therein and described to the Special Committee and the Board,
the $1.04 per Share cash consideration to be received by holders of
Shares, other than Mr. Lerdal, was fair, from a financial point of view,
to such holders. The full text of Houlihan Lokey's written opinion is
attached hereto as Schedule II and is incorporated herein by reference.
A copy of Houlihan Lokey's presentation is attached as an exhibit to the
Schedule TO.
. The judgments of the Special Committee and the Board, based on the
extended arm's-length negotiations with Purchaser and Parent, that the
Offer Price represented the highest price that Purchaser and Parent
would be willing to pay in acquiring the Shares.
16
. The Special Committee was able to negotiate a lower termination fee and
more restrictive conditions for payment of the termination fee than
Purchaser and Parent had initially proposed, and, based on similar
transactions, the Special Committee's and the Board's judgments that the
termination fee would not materially impair the ability of a third party
to make a competing proposal.
. The Merger Agreement requires that there have been tendered and not
withdrawn Shares which represent more than 85% of the outstanding Shares
on a fully-diluted basis, excluding Shares held by Mr. Lerdal, as a
condition to the Offer.
. The Shares to be contributed by Mr. Lerdal to Parent pursuant to the
Subscription Agreement, for purposes of determining the number of shares
of Parent capital stock to be issued to Mr. Lerdal, will be valued by
Parent at the Offer Price to be paid by Purchaser to KENETECH's other
stockholders.
. The Merger Agreement does not condition Purchaser's obligations to
consummate the Merger on Purchaser's or Parent's ability to obtain
financing for the Merger, Parent's representations in the Merger
Agreement that it will have available to it funds sufficient to satisfy
its and Purchaser's obligation to consummate the Offer and the Merger,
and the guaranty of Parent's and Purchaser's obligations by VAC.
. The stockholders who may not support the Merger have the ability to
obtain "fair value" for their Shares if they do not tender their shares
in the Offer and properly perfect and exercise their appraisal rights
under applicable law.
The Special Committee and the Board each also considered a number of
uncertainties and risks in their deliberations concerning the Offer and the
Merger, including the following:
. The possibility that, although the Offer gives the Company's
stockholders the opportunity to realize a premium over the price at
which the Common Stock traded prior to the public announcement of the
Offer and the Merger, the price or value of the Common Stock may
increase in the future, and the Company's stockholders would not benefit
from such future increases.
. The circumstances under the Merger Agreement under which the termination
fee and expense reimbursement become payable by the Company.
. Pursuant to the Merger Agreement, between the execution of the Merger
Agreement and Effective Time, the Company is required to obtain Parent's
consent before it can take certain actions.
. Certain members of the Board and the Company's management may have
interests in the Offer and the Merger that are in addition to those of
the Company's other stockholders.
. The conditions to Purchaser's and Parent's obligations to purchase
Shares in the Offer, and the possibility that such conditions might not
be satisfied.
In view of the variety of factors considered in connection with its
evaluation of the Merger Agreement, the Special Committee and the Board each
found it impracticable to, and did not, quantify, rank or otherwise assign
relative weights to the factors considered or determine that any factor was of
particular importance in reaching its determination that the Merger Agreement
and the transactions contemplated thereby are fair to, and in the best
interests of, KENETECH's stockholders. Rather, the Special Committee and the
Board each viewed their respective recommendations as being based upon their
own judgment, in light of the totality of the information presented and
considered, of the overall effect of the Merger Agreement and the transactions
contemplated thereby, including the Offer and the Merger, on KENETECH's
stockholders compared to any alternative transaction.
The Special Committee was composed of independent directors, none of whom
had or have any interest in Purchaser. Furthermore, none of the members of the
Special Committee were employed by or affiliated with KENETECH, other than in
their capacities as directors.
17
Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
The Special Committee retained Houlihan Lokey to assist it in evaluating
the terms of the Offer and the Merger and to render an opinion as to whether
the consideration to be received by KENETECH's stockholders, except Mr.
Lerdal, in connection with the Offer and the Merger, is fair to such
stockholders from a financial point of view. At the October 25, 2000 meeting
of the Special Committee, Houlihan Lokey presented its analysis as hereinafter
described and delivered its oral opinion (subsequently confirmed in writing)
that, as of such date and based upon and subject to the assumptions made,
procedures followed, matters considered, and limitations on the review set
forth therein and described to the Special Committee, the consideration to be
received by KENETECH's stockholders (except Mr. Lerdal), in connection with
the Offer and the Merger, is fair to such stockholders from a financial point
of view.
The preparation of a fairness opinion is a complex process and is not
necessarily conducive to partial analysis or summary description. The
following is a brief summary and general description of the valuation
methodologies and approaches utilized by Houlihan Lokey in its evaluation of
KENETECH in connection with the Offer and the Merger, but does not purport to
be a complete statement of the analyses and procedures applied, the judgments
made or the conclusions reached by Houlihan Lokey, nor does it purport to be a
complete description of its presentation. Houlihan Lokey believes, and so
advised the Special Committee and the Board, that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it (without considering all factors and analyses) could
create an incomplete view of the process underlying Houlihan Lokey's analyses
and opinions.
The complete text of Houlihan Lokey's written opinion as presented to the
Special Committee and the Board is attached hereto as Schedule II. The summary
of the opinion set forth below is qualified in its entirety by reference to
the full text of such opinion. Stockholders are urged to read such opinion
carefully in its entirety for a description of the procedures followed, the
factors considered, the assumptions made, and the limitations on the analysis
undertaken by Houlihan Lokey. Houlihan Lokey's written opinion is for the
information and assistance of the Special Committee and the Board, and does
not constitute a recommendation as to whether any holder of Common Stock
should accept the Offer or as to how any holder of Common Stock should vote
with respect to the Merger. A copy of the presentation Houlihan Lokey gave to
the Special Committee and the Board is attached as an exhibit to the Schedule
TO.
Houlihan Lokey's opinion does not address the Special Committee's, the
Board's or KENETECH's underlying business decision to proceed with the Offer
and the Merger. Houlihan Lokey has not been requested to, and did not,
participate in the process to explore strategic alternatives for KENETECH nor
did it actively solicit third party indications of interest in acquiring all
or any part of KENETECH.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as its representatives deemed necessary and
appropriate under the circumstances. Among other things, Houlihan Lokey:
1. reviewed KENETECH's annual reports on Form 10-K for the fiscal years
ended 1995 through 1999, the quarterly reports on Form 10-Q for the two
quarters ended June 30, 2000 and KENETECH's financial statements for the
period ended September 30, 2000, which KENETECH's management has
identified as being the most current financial statements available;
2. met with certain members of KENETECH's management, auditors and tax
advisors, and Astoria Energy, LLC to discuss the operations, financial
condition, future prospects and projected operations and performance of
KENETECH;
3. discussed the operations, financial condition, future prospects and
projected operations and performance of certain companies in which
KENETECH has invested (the "Company Investments") with KENETECH's
management and certain members of the senior management of various
Company Investments;
18
4. reviewed the Merger Agreement and the letter from KENETECH dated October
25, 2000 (the "Company Letter");
5. reviewed financial statements and forecasts and projections for certain
of the Company Investments;
6. reviewed the historical market prices and trading volume for KENETECH's
publicly traded securities;
7. reviewed certain other publicly available financial data for certain
companies that Houlihan Lokey deemed comparable to KENETECH and the
Company Investments;
8. reviewed various documents relating to KENETECH and the Company
Investments;
9. reviewed various documents provided by counsel to the Special Committee
relating to the cause of action filed in the Delaware Court of Chancery
styled Kohls v. Duthie, et al., and relied on the views expressed by
counsel to the Special Committee with respect to it; and
10. conducted such other studies, analyses and inquiries as Houlihan Lokey
deemed appropriate.
In assessing the fairness of the consideration to KENETECH's stockholders
(other than Mr. Lerdal) in the Offer and the Merger, Houlihan Lokey
independently valued KENETECH and the Company Investments using widely
accepted valuation methodologies. The consideration to be paid by Purchaser in
the Offer and the Merger was determined through negotiations between the
Special Committee and Purchaser. Houlihan Lokey assisted the Special Committee
in evaluating the terms of the Offer and the Merger.
Assessment of KENETECH's Stock Price.
Houlihan Lokey analyzed the trading volume and the trading prices of the
Common Stock over the past twelve months. Based on these analyses, Houlihan
Lokey observed that: (i) KENETECH's market capitalization is small; (ii) the
Common Stock is thinly traded; and (iii) KENETECH has no analyst coverage.
Analysis of Control Premiums.
The analysis of control premiums involved the application of control
premium evidence using a comparable transactions approach to KENETECH's
unaffected stock price. The unaffected stock price for KENETECH is considered
to be the closing trading price for the five days prior to the initial public
announcement of the Merger Agreement. The control premium comparables for the
latest twelve-month period included:
. 22 transactions in the energy services industry;
. one transaction in the electrical, gas, water and sanitary industry; and
. 823 U.S. acquisitions overall,
and such control premiums were 23.0%, 33.3% and 40.5%, respectively. Applying
this range of control premiums to the unaffected stock price of KENETECH
yielded an implied value range for the Common Stock of $0.87 to $1.00 per
share. Based on the unaffected stock price of KENETECH and the Offer Price of
$1.04 per Share, the implied control premium is 46.5%.
Adjusted Net Asset Value Approach.
As part of its analysis, Houlihan Lokey completed an independent valuation
of KENETECH using the adjusted net asset value approach. This was the primary
methodology used by Houlihan Lokey to value KENETECH. The adjusted net asset
value approach focuses on individual asset and liability values, as reported
on KENETECH's balance sheet, and as adjusted to fair market value. This going-
concern approach is appropriate in instances where the subject company invests
heavily in tangible assets, identifiable assets and investments, or where
operating earnings are insignificant relative to the value of the underlying
assets.
19
KENETECH's assets consisted primarily of cash, trading debt securities,
advances and various investments (which are principally minority interest
investments in privately-held companies and investments in venture funds).
Cash and trading debt securities were adjusted to reflect cash outflows
subsequent to the September 30, 2000 balance sheet date and were otherwise
valued at book value. Advances and the Company Investments were valued using
the prior transactions and discounted cash flow approaches (which approaches
are described in more detail below).
KENETECH's liabilities consisted primarily of accounts payable, accrued
liabilities and other long-term liabilities. The accounts payable and accrued
liabilities were adjusted to reflect post-balance sheet transactions and were
otherwise valued at book value. The Deferred Benefit for Deconsolidated
Subsidiary Losses liability (reported in the long-term liabilities section)
was adjusted to market value based on discussions with KENETECH's advisors and
by using the discounted cash flow approach.
Houlihan Lokey examined the assets and liabilities on the most current
balance sheet available and adjusted the reported value, where appropriate, to
reflect a range of the fair market values of such assets or liabilities. The
aggregate market value of the liabilities was subtracted from the aggregate
fair market value of the assets to arrive at the adjusted net asset value.
Further adjustments were made to net asset value to deduct the present value
of the costs of managing the assets and to deduct the associated taxes on
appreciated assets, as determined in Houlihan Lokey's valuation.
One or both of the following two approaches (the prior transactions
approach and the discounted cash flow approach) were used to arrive at
indications of fair market value for each of the Company Investments. From
these two approaches, a range of indicated fair market values was determined
for each of the Company Investments. The reported book value for such Company
Investments was then adjusted to reflect the concluded range of fair market
values for each of the Company Investments. In this manner, Houlihan Lokey
adjusted the reported book value of the Company Investments and other assets
to fair market value and then aggregated the overall adjusted market value of
KENETECH's assets (as discussed above). A discussion of these valuation
approaches follows.
Prior Transactions Approach.
The prior transactions approach examines prior stock transactions for the
companies or securities being valued. This approach was highly relevant to
most of the Company Investments for which no public market existed and because
most of KENETECH's investments were made in the nine months prior to the date
of Houlihan Lokey's opinion. The prior transactions approach demonstrates what
a third party might be willing to pay for the securities of a company in an
arms-length transaction. Based on discussions with KENETECH's management and
the management of several of the Company Investments, Houlihan Lokey
calculated implied equity values for select Company Investments based on prior
rounds of financing or capital raised, and third party indications of interest
in such Company Investments. In valuing each of the Company Investments, the
prior transactions approach was considered.
Discounted Cash Flow Approach.
The discounted cash flow approach utilizes projections prepared by the
respective managements of certain of the Company's Investments, and discounts
such projections of future earnings to the present. The projected cash flows
were analyzed on a "leveraged" basis (after cash payments to interest-bearing
debt investors) in order to develop a valuation for such investments. A
provision for the value of these Company Investments at the end of the
forecast period, or terminal value, based on after-tax earnings was also made.
The present value of the interim cash flows and the terminal value were
determined using a risk-adjusted rate of return or "discount rate." This
discount rate, in turn, was developed through an analysis of rates of return
on alternative investment opportunities in companies with similar risk
characteristics as the Company Investments being valued. In determining the
value of certain Company Investments using the discounted cash flow approach,
Houlihan Lokey utilized the exit multiple method by capitalizing the earnings
for the final projection period at an appropriate price-to-earnings multiple
to determine the terminal value. Houlihan Lokey used the discounted cash flow
approach for certain of the Company Investments for which forecasts were
obtained from management.
20
Summary.
Based on the approaches described above, the per Share equity value of
KENETECH was in the range of $0.96 to $1.13.
Fairness Analysis.
To determine the fairness of the consideration to KENETECH's stockholders
(other than Mr. Lerdal) from a financial point of view, Houlihan Lokey
reviewed the Offer Price to be paid in the Offer and the Merger. Houlihan
Lokey concluded that the Offer Price of $1.04 per share was within the
concluded per Share equity value range of $0.96 to $1.13.
Assessment of KENETECH's Strategic Alternatives to the Offer and the
Merger.
In evaluating the fairness of the consideration to KENETECH's stockholders
(other than Mr. Lerdal), from a financial point of view, Houlihan Lokey
qualitatively considered the expected value to the stockholders of completing
the Offer and the Merger and certain alternatives to the Offer and the Merger.
In the course of working for the Special Committee, Houlihan Lokey held
discussions with KENETECH's representatives and reviewed the materials and
information provided by KENETECH with respect to KENETECH's strategic
alternatives and, for purposes of issuing an opinion, considered the following
strategic alternatives:
. maintaining the status quo;
. sale of KENETECH to a strategic buyer;
. strategic acquisitions by KENETECH;
. sale of KENETECH to a financial buyer; and
. liquidation.
The assessment of strategic alternatives included a qualitative assessment
of the valuation impact of the Offer and the Merger relative to the
alternatives considered by Houlihan Lokey. The analysis did not quantify the
valuation impact because, in the opinion of Houlihan Lokey, it was not
feasible to so quantify this impact (due to the significant number of non-
quantifiable variables).
In connection with the preparation and delivery of its opinion to the
Special Committee and the Board, Houlihan Lokey performed a variety of
financial and comparative analyses, as described above. The preparation of a
fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial and comparative analysis, and the
application of those methods to the particular circumstances. Furthermore, in
arriving at its opinion, Houlihan Lokey did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Houlihan Lokey believes that its analyses must be considered as a
whole and that considering any portion of such analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying its opinion. In its analyses, Houlihan Lokey
made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond
the control of KENETECH.
In arriving at its opinion, Houlihan Lokey relied upon and assumed, without
independent verification, that the financial forecasts and projections
provided to it were reasonably prepared and reflected the best currently
available estimates of the future financial results and condition of KENETECH
and the Company Investments, where applicable. Houlihan Lokey also assumed
that, except to the extent provided for in the Company Letter, there had been
no material change in the assets, financial condition, business or prospects
of KENETECH and the Company Investments, where applicable, since the date of
the most recent financial statements made available
21
to Houlihan Lokey. Houlihan Lokey did not independently verify the accuracy
and completeness of the information supplied to it with respect to KENETECH
and the Company Investments, and did not assume any responsibility with
respect to such information. Houlihan Lokey did not make any physical
inspection or independent appraisal of any of the properties, assets or
liabilities of KENETECH and the Company Investments. Houlihan Lokey's opinion
was necessarily based on business, economic, market and other conditions as
they existed and could be evaluated by it at the date of its opinion letter.
Accordingly, although subsequent developments may affect its opinion, Houlihan
Lokey has not assumed the obligation to update, revise or reaffirm its written
opinion dated as of October 25, 2000.
Houlihan Lokey's opinion and presentation are directed to the Special
Committee and the Board, address only the fairness of the consideration to be
received by KENETECH's stockholders (other than Mr. Lerdal) in the Offer and
the Merger and do not address the relative merits of the Offer and the Merger,
any other matter provided for or contemplated by the Merger Agreement or any
other transaction that may have been available as an alternative to the Offer
and the Merger, whether or not any such alternative could be or could have
been achieved, or the terms upon which any such alternative transaction could
be or could have been achieved. Further, Houlihan Lokey's opinion addresses
only issues related to the fairness, from a financial point of view to
KENETECH's stockholders (except Mr. Lerdal), of the consideration to be
received, and Houlihan Lokey does not express any views on any other terms of
the Merger Agreement, or any other agreement. In addition, Houlihan Lokey has
assumed that in the course of obtaining the necessary regulatory and third
party consents for the Offer and the Merger, no delay or restrictions will be
imposed that will have a material adverse effect on the contemplated benefits
of the Offer and the Merger.
The opinion of Houlihan Lokey and its presentation to KENETECH's Special
Committee and the Board constituted only one of a number of factors taken into
consideration by the Special Committee and the Board in making their
respective recommendations and determinations to approve the Merger Agreement
and the transactions contemplated thereby, including the Offer and the Merger.
Houlihan Lokey's opinion and presentation do not constitute a recommendation
to the Special Committee, the Board or any stockholder of KENETECH as to
whether the stockholders should tender their shares in the Offer or how the
Special Committee, the Board or the stockholders should vote with respect to
any matter relating to the Offer and the Merger, and do not address the
underlying business decisions of the Special Committee and the Board to enter
into the Merger Agreement and to consummate the transactions contemplated
thereby, including the Offer and the Merger.
Houlihan Lokey is a nationally recognized investment banking firm with
special expertise in, among other things, valuing businesses and securities
and rendering fairness opinions. Houlihan Lokey is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes. The Special Committee selected Houlihan Lokey because of its
industry experience and expertise in performing valuation and fairness
analyses. Houlihan Lokey does not beneficially own, nor has it ever
beneficially owned, any interest in KENETECH.
Materials summarizing Houlihan Lokey's analyses were presented to the
Special Committee and the Board on October 25, 2000. Parent has filed these
materials with the Securities and Exchange Commission (the "SEC') as an
exhibit to the Schedule TO. Copies of these materials are available for
inspection and copying at KENETECH's principal executive offices, during
regular business hours, by any interested KENETECH stockholder or
representative who has been so designated in writing. You may also obtain
these materials from the SEC in the same manner as set forth for KENETECH's
SEC filings in "Certain Information Concerning KENETECH" included in the Offer
to Purchase.
Fees and Expenses.
The Special Committee retained Houlihan Lokey pursuant to a letter
agreement, dated August 24, 2000. The Special Committee retained Houlihan
Lokey to assist it in evaluating the terms of the Offer and the Merger
22
and to render an opinion as to the fairness of the consideration to be
received by KENETECH's stockholders (except for Mr. Lerdal) in connection with
the proposed transaction and additionally to assist the Special Committee in
reviewing and negotiating the financial structure and terms of the Offer and
the Merger and to provide assistance in connection with defining, from a
financial point of view, strategic and financial objectives. Pursuant to the
engagement letter, KENETECH agreed to pay Houlihan Lokey $350,000 for its
services. KENETECH made a partial payment of $150,000 when it signed the
engagement letter, and the remaining $200,000 became due and payable when
Houlihan Lokey issued its opinion on October 25, 2000. KENETECH also agreed in
the letter agreement to reimburse Houlihan Lokey for all reasonable travel and
out-of-pocket expenses (including reasonable fees and expenses of legal
counsel) and to indemnify Houlihan Lokey and its employees, agents, officers,
shareholders and persons who control Houlihan Lokey against certain
liabilities, including liabilities under the federal securities laws, relating
to or arising out of Houlihan Lokey's engagement. In June 1996, Houlihan Lokey
was retained by an unofficial committee of KENETECH's 12 3/4% senior secured
noteholders (such notes were satisfied and discharged in 1998) to provide
financial advisory services for the benefit of such committee, and Houlihan
Lokey received compensation for such services. Although KENETECH was a party
to the agreement between the unofficial committee and Houlihan Lokey, this
past engagement is unrelated to the Offer and the Merger.
(c) Intent to Tender. To KENETECH's knowledge after reasonable inquiry, all
of KENETECH's executive officers, directors, affiliates and subsidiaries
currently intend to tender all Shares held of record or beneficially (other
than Shares held directly or indirectly by other public companies, as to which
KENETECH has no knowledge) by them pursuant to the Offer, other than Mr.
Lerdal, who has agreed with Purchaser and Parent pursuant to the Subscription
Agreement not to tender his Shares pursuant to the Offer and to contribute his
Shares to Parent in exchange for shares of Parent capital stock. The foregoing
does not include any Shares over which, or with respect to which, any such
executive officer, director, affiliate or subsidiary acts in a fiduciary or
representative capacity or is subject to the instructions of a third party
with respect to such tender.
Item 5. Persons/Assets Retained, Employed, Compensated or Used.
The Special Committee retained Houlihan Lokey pursuant to a letter
agreement, dated August 24, 2000. This letter agreement is summarized in the
section of Item 4(b), above, entitled "Opinion of Houlihan Lokey Howard &
Zukin Financial Advisors, Inc. -- Fees and Expenses," and is incorporated
herein by reference.
Neither the Company nor any person acting on its behalf currently intends
to employ, retain or compensate any person to make solicitations or
recommendations to stockholders on its behalf concerning the Offer.
Item 6. Interest in Securities of the Subject Company.
Except as contemplated by the Subscription Agreement and the Voting
Agreement executed by Mr. Lerdal, during the past 60 days, neither the Company
nor any subsidiary of the Company nor, to the best of the Company's knowledge,
any executive officer, director or affiliate of the Company, has effected a
transaction in Shares.
Item 7. Purposes of the Transaction and Plans or Proposals.
Other than as set forth in this Schedule 14D-9, no negotiation is being
undertaken or is underway by the Company in response to the Offer that relates
to (1) a tender offer for or other acquisition of the Company's securities by
the Company, any subsidiary of the Company or any other person; (2) an
extraordinary transaction, such as a merger, reorganization or liquidation,
involving the Company or any subsidiary of the Company; (3) a purchase, sale
or transfer of a material amount of assets by the Company or any subsidiary of
the Company; (4) any material change in the present dividend rate or policy of
the Company; or (5) indebtedness or capitalization of the Company.
Other than as set forth in this Schedule 14D-9, there are no transactions,
board resolutions, agreements in principle or signed contracts in response to
the Offer which relate to, or would result in, one or more of the matters
referred to in this Item 7.
23
Item 8. Additional Information.
Information Statement.
The Information Statement attached as Schedule I hereto is being furnished
in connection with the possible designation by Purchaser, pursuant to the
Merger Agreement, of certain persons to be appointed to the Board other than
at a meeting of the Company's stockholders as described in Item 3 above, and
is incorporated herein by reference.
State Takeover Laws.
The Company is incorporated under the laws of the State of Delaware. In
general, Section 203 ("Section 203") of the DGCL prevents an "interested
stockholder" (including a person who owns or has the right to acquire 15% or
more of a corporation's outstanding voting stock) from engaging in a "business
combination" (defined to include mergers and certain other actions) with a
Delaware corporation for a period of three years following the time such
person becomes an interested stockholder unless, among other exceptions, the
"business combination" is approved by the board of directors of such
corporation prior to such time. However, on March 10, 1988, the Board adopted
an amendment to the Company's bylaws pursuant to which the Company elected not
to be governed by Section 203. Accordingly, Section 203 is inapplicable to the
Offer and the Merger.
Section 253 of the DGCL.
Under Section 253 of the DGCL, if Purchaser acquires, pursuant to the Offer
or otherwise, at least 90% of the outstanding Shares, Purchaser will be able
to effect the Merger after consummation of the Offer without a vote by
KENETECH's stockholders. However, if Purchaser does not acquire at least 90%
of the outstanding Shares pursuant to the Offer or otherwise, a vote by
KENETECH's stockholders will be required under the DGCL to effect the Merger.
Regulatory Approvals.
None of KENETECH, Parent, Purchaser, or VAC is aware of any license or
regulatory permit that appears to be material to the business of KENETECH and
its subsidiaries, taken as a whole, that might be adversely affected by the
acquisition of the Shares by Purchaser pursuant to the Offer, the Merger or
otherwise, or, except as set forth herein, of any approval or other action by
any governmental entity that would be required prior to the acquisition of the
Shares by Purchaser pursuant to the Offer, the Merger or otherwise.
Should any such approval or other action be required, KENETECH presently
contemplates that such approval or other action will be sought. While KENETECH
has been informed that, except as otherwise described in the Offer to
Purchase, Purchaser does not presently intend to delay the acceptance for
payment of, or payment for, the Shares tendered pursuant to the Offer pending
the outcome of any such matter, there can be no assurance that any such
approval or other action, if needed, would be obtained or would be obtained
without substantial conditions or that failure to obtain any such approval or
other action might not result in consequences adverse to KENETECH's business
or that certain parts of KENETECH's business might not have to be disposed of,
or other substantial conditions complied with, in the event that such
approvals were not obtained or such other actions were not taken or in order
to obtain any such approval or other action. If certain types of adverse
action are taken with respect to the matters discussed herein, Purchaser could
decline to accept for payment, or pay for, any Shares tendered.
Antitrust Compliance. Under the Hart-Scott-Rodino Improvements Act of 1996
(the "HSR Act") and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), certain acquisition transactions may not be completed
until notifications have been given and certain information has been furnished
to the FTC and the Antitrust Division of the Department of Justice and
specified waiting period requirements have been satisfied. KENETECH and
Purchaser have concluded that the consummation of the transactions set forth
in the Merger Agreement are not subject to the notification and reporting
requirements of the HSR Act. Therefore,
24
based on the information available to them, KENETECH and Purchaser believe
that the Merger can be effected in compliance with federal and state antitrust
laws.
Appraisal Rights.
General
Holders of record of Shares who do not vote in favor of the adoption of the
Merger Agreement may, under certain circumstances and by following the
procedure prescribed by Section 262 of the DGCL, exercise appraisal rights and
receive cash for their Shares. Additionally, although KENETECH is incorporated
in the State of Delaware, due to the residence of some of its stockholders and
KENETECH's other contacts with the State of California, the provisions of the
CGCL relating to the rights of dissenting stockholders in a merger may apply
to the Merger. If California law so applies, pursuant to Chapter 13 of the
General Corporation Law of the State of California ("CGCL"), KENETECH
stockholders of record who do not vote in favor of the adoption of the Merger
Agreement and who comply with the requirements of Chapter 13 will have a right
to demand payment for and appraisal of the "fair market value" of their
Shares. In either case, a dissenting stockholder must follow the appropriate
procedures under the DGCL or the CGCL or suffer the termination or waiver of
such rights.
Any demand for appraisal or that KENETECH purchase your Shares or
certificates for endorsement as dissenting Shares should be submitted, within
the time periods described herein, to Secretary, KENETECH Corporation, 500
Sansome Street, Suite 410, San Francisco, CA 94111, telephone number (415)
398-3825.
Copies of the relevant provisions of the DGCL and the CGCL are attached as
Schedule C to the Offer to Purchase. Any failure to comply strictly with the
requirements of the Delaware or California provisions will result in the
termination of your appraisal or dissenters' rights. The summaries provided
below do not purport to be complete and are qualified by reference to the
applicable statutory provisions.
Appraisal Rights under Delaware Law.
If the Merger is completed, record holders of Shares who:
. do not vote to adopt the Merger Agreement or consent to it in writing,
and
. do not tender their shares in the Offer and continuously hold their
Shares through the Effective Time, and
. make a timely demand for appraisal, and
. otherwise comply with Section 262 of the DGCL,
will have the right to be paid the fair value of their Shares, as determined
by the Delaware Court of Chancery. "Fair value" excludes any value arising
from the accomplishment or expectation of the Merger, and includes a fair rate
of interest, if any, as determined by the Court of Chancery.
If KENETECH stockholders wish to exercise appraisal rights, such persons
must deliver to KENETECH a timely written demand for appraisal of their
Shares. A demand for appraisal will be sufficient if it reasonably informs
KENETECH of the stockholder's identity and that the stockholder intends to
demand appraisal of such stockholder's Shares. Each stockholder demanding
appraisal must be the record holder of the Shares on the date the written
demand for appraisal is made and, if the demand is submitted prior to the
Effective Time, must continue to hold such Shares through the Effective Time.
Within 60 days after the Effective Time, a stockholder may withdraw the
demand for appraisal and accept the Offer Price, provided that any such
attempt to withdraw made more than 60 days after the Effective Time will
require the written approval of KENETECH and, once a petition for appraisal is
filed, the appraisal proceeding may not be dismissed as to any holder absent
court approval.
25
Within 120 days after the Effective Time, KENETECH, or any holder of Shares
who complied with the requirements for perfecting appraisal rights, as
summarized above, may file a petition with the Court of Chancery demanding a
determination of the fair value of the Shares held by all dissenting
stockholders who have perfected their appraisal rights. KENETECH is under no
obligation to and has no present intention to file such a petition.
Accordingly, it is the obligation of the holders of Common Stock to initiate
all necessary action to perfect their appraisal rights in respect of such
Shares within the time prescribed in Section 262 of the DGCL. Within 120 days
after the Effective Time, any stockholder who has perfected appraisal rights
may, by written request, require that KENETECH mail a statement setting forth
the total number of holders of Shares that have perfected appraisal rights and
the total number of Shares held by them.
After determining which dissenting stockholders are entitled to appraisal,
the Chancery Court will appraise the fair value of their Shares, exclusive of
any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. Holders of Common Stock considering
seeking appraisal should be aware that the fair value of their Shares
determined by Section 262 of the DGCL could be more or less than or the same
as the consideration they would have received pursuant to the Merger if they
did not seek appraisal of their Shares and that investment banking opinions as
to fairness from a financial point of view are not necessarily opinions as to
fair value under Section 262 of the DGCL.
Section 262 of the DGCL requires that stockholders entitled to exercise
appraisal rights be notified that such rights are available. The foregoing
does not constitute such notice; rather such notice will be delivered at the
appropriate time to the holders of Shares entitled to receive such notice and
will set forth, among other things, the timing and other requirements for the
submission of a written demand for appraisal.
Dissenters' Rights under California Law.
If California law applies, Chapter 13 of the CGCL provides that
stockholders of KENETECH who comply with the procedures prescribed in Chapter
13 will have the right to exercise dissenters' rights and receive cash for the
"fair market value" of their Shares.
Dissenters' rights cannot be validly exercised by persons other than the
record holders of the Shares, regardless of the beneficial ownership thereof.
Persons who are beneficial owners of the Shares but whose Shares are held of
record by another person, such as a broker, a bank or a nominee, should
instruct the record holder to follow the procedure outlined below if they wish
to dissent from the Merger with respect to any or all of their Shares.
Under the CGCL, the stockholders eligible to dissent will be notified of
the Merger or, if applicable, the stockholder approval of the Merger Agreement
and KENETECH will offer all such stockholders a cash price for their Shares
that KENETECH considers to be the fair market value of the Shares on the day
before the terms of the Merger were first announced, excluding any
appreciation or depreciation because of the proposed Merger. The notice will
also contain a brief description of the procedures to exercise their rights to
have KENETECH purchase their Shares and will attach a copy of Chapter 13.
A dissenting stockholder must submit to KENETECH or its transfer agent,
within thirty (30) days after KENETECH mails to him or her the notice
described above, certificates representing the dissenting Shares which he or
she demands that KENETECH purchase, to be stamped or endorsed with a statement
that the Shares are dissenting Shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed.
Under the CGCL, a dissenting stockholder may not withdraw his or her demand
for payment of the fair market value of the stockholder's dissenting Shares in
cash unless the Company consents.
Under Chapter 13, if KENETECH and a dissenting stockholder agree that the
Shares are dissenting Shares and agree upon the price of such Shares,
KENETECH, upon surrender of the certificates evidencing such Shares,
26
will make payment of that amount (plus interest thereon from the date of such
agreement) within thirty (30) days after such agreement or within thirty (30)
days after the satisfaction of any statutory or contractual conditions,
whichever is later. Any agreement fixing the fair market value of any
dissenting Shares between a dissenting stockholder and KENETECH shall be filed
with the Secretary of KENETECH.
Under Chapter 13, if KENETECH denies that the Shares are dissenting Shares,
or KENETECH and the dissenting stockholder fail to agree on the fair market
value of the Shares, the dissenting stockholder may, within six (6) months
after the date on which the notice described above was mailed to the
stockholder, but not thereafter, file a complaint in the California Superior
Court, requesting that such Court determine whether the Shares are dissenting
Shares and the fair market value of such dissenting Shares. Under Chapter 13,
the costs of the action will be assessed or apportioned as the Court considers
equitable, but, if the appraised fair market value is determined to exceed the
price offered to the stockholder by KENETECH, KENETECH will be required to pay
the costs of the action and may be required to pay counsel fees.
If any holder of Shares who demands appraisal under Chapter 13 fails to
perfect, or effectively withdraws or loses his right to appraisal, as provided
in Chapter 13, the Shares of such holder will be converted into the Merger
consideration in accordance with the Merger Agreement. Stockholders of
KENETECH considering whether to seek appraisal should also bear in mind that
the fair market value of their Shares determined under Chapter 13 could be
more than, the same as or less than the Offer Price.
The Company reserves its rights to challenge the validity or applicability
of any dissenters' proceeding commenced under Chapter 13.
Certain Litigation Matters.
Delaware Derivative Litigation.
On February 2, 2000, Robert L. Kohls and Louise A. Kohls filed an action in
the Court of Chancery of the State of Delaware in and for New Castle County
(the "Chancery Court") styled Kohls v. Duthie, et al., against Gerald R.
Alderson, Charles Christenson, Angus M. Duthie, Mark D. Lerdal and, nominally,
the Company. Plaintiffs filed an amended complaint on February 23, 2000. The
action is purportedly brought as a derivative action on behalf of the Company.
The amended complaint alleges in substance the following:
. that in October 1997, a representative of The Hillman Company
("Hillman") approached Mr. Lerdal concerning the sale of approximately
13 million shares of Common Stock owned by Hillman (the "Hillman
Shares");
. that the Hillman representative informed Mr. Lerdal that Hillman was
"shopping the stock and was going to sell the stock in 1997" and asked
Mr. Lerdal if he would be interested in purchasing the Hillman Shares if
Hillman could not locate another buyer;
. that Mr. Lerdal indicated that he would be interested in purchasing the
Hillman Shares;
. that at approximately the same time, another representative of Hillman
contacted Mr. Duthie regarding the purchase of the Hillman Shares;
. that Mr. Duthie discussed the possibility of all four of the Company's
directors purchasing the Hillman Shares;
. that Mr. Lerdal informed Mr. Duthie of his discussion with Hillman and
expressed his view that Hillman would not sell to Mr. Alderson because
of the less than cordial relationship between Mr. Alderson and Hillman;
. that in December 1997, Hillman contacted Mr. Lerdal and informed him
that Hillman had not found a buyer;
27
. that Mr. Lerdal agreed to purchase the Hillman Shares for $1,000 at a
time when their value was approximately $800,000 based on a nominal
trading value of $.065 per share;
. that the transaction was consummated on December 29, 1997; and
. that the reasons given by Mr. Lerdal as to why the Company could not
purchase the Hillman Shares were false, to wit: that the Company was
insolvent; that the terms of the Company's senior notes prevented the
Company from purchasing the Hillman Shares; and that the Restated
Certificate precluded it from purchasing the Hillman Shares because
dividends on the Company's preferred stock were in arrears.
The amended complaint alleges that by purchasing the Hillman Shares, Mr.
Lerdal (aided and abetted by the other defendants) usurped an opportunity
which belonged to the Company. The plaintiffs seek, among other things, (i) a
declaration that the purchase of the Hillman Shares by Mr. Lerdal constituted
the taking of a corporate opportunity and is null and void, (ii) an order
requiring Mr. Lerdal to transfer the Hillman Shares to the Company for the
consideration he paid and (iii) to the extent the Hillman Shares may not be
transferred to the Company, that the defendants be held jointly and severally
liable for the fair value of the Hillman Shares.
In an opinion dated July 26, 2000 (the "Opinion"), the Court denied the
defendants' motion to dismiss the action for failure to state a claim on which
relief can be granted and for failure to make demand on the Board. The parties
are proceeding with discovery, and trial is scheduled to commence in April
2001. The Company intends, and has been informed that the individual
defendants intend, to continue to defend this action vigorously.
If the Merger is consummated, then the plaintiffs may lose standing to
pursue the action. However, stockholders would still be entitled to have the
cause of action evaluated in an appraisal action to determine the fair value
of their Shares. Moreover, the cause of action itself would not be
extinguished.
The above summaries are qualified in their entireties by reference to the
complete terms of the amended complaint and the Opinion, copies of which are
attached hereto as Schedules III and IV, respectively, and incorporated by
this reference.
Delaware Stockholders' Class Action Litigation.
On February 2, 2000, Robert L. Kohls and Louise A. Kohls filed an
additional action in the Chancery Court styled Kohls v. Kenetech, et al.,
against the Company, Angus M. Duthie, Mark D. Lerdal, Gerald R. Alderson and
Charles Christenson. Plaintiffs filed an amended complaint on February 23,
2000.
Plaintiffs allege that they were beneficial owners of Preferred Redeemable
Increased Dividend Equity SeecuritiesSM, 8 1/4% PRIDESSM, Convertible
Preferred Stock, par value $0.01 per share (the "PRIDES") of the Company, that
mandatorily converted on May 14, 1998, into Shares. The action was purportedly
brought as a class action on behalf of the named plaintiffs and all other
persons who owned the PRIDES as of May 13, 1998.
The amended complaint alleges in substance the following:
. that defendants breached the terms of the Company's Certificate of
Designations, Preferences, Rights and Limitations under which the PRIDES
were issued; and
. that defendants breached their fiduciary duty to protect the interests
of the holders of the PRIDES prior to the PRIDES mandatory conversion.
Plaintiffs sought, among other things:
. certification of the action as a class action;
. a declaration that the holders of PRIDES were entitled to be paid a
liquidation preference of up to $1,012.50 per share of PRIDES; and
. a judgment that the defendants were liable to the PRIDES holders in an
amount up to $1,012.50 per share.
28
The Chancery Court dismissed the class action by an opinion dated July 26,
2000 and an order dated August 4, 2000. The plaintiffs filed a notice of
appeal in the Delaware Supreme Court on August 31, 2000. The Company intends,
and has been informed that the individual defendants intend, to continue to
defend this action vigorously.
The above summary is qualified in its entirety by reference to the complete
terms of the amended complaint and to the opinion dismissing the action,
copies of which are filed as Exhibits (a)(5)(C) and (a)(5)(D) hereto,
respectively, and are incorporated by this reference.
Federal Stockholders' Class Action.
On September 28, 1995, a class action complaint was filed against the
Company and certain of its officers and directors (namely, Stanley Charren,
Maurice E. Miller, Joel M. Canino and Gerald R. Alderson) in the United States
District Court for the Northern District of California, alleging federal
securities laws violations. On November 2, 1995, a First Amended Complaint was
filed naming additional defendants, including underwriters of the Company's
securities and other officers and directors of the Company (namely, Charles
Christenson, Angus M. Duthie, Steven N. Hutchinson, Howard W. Pifer III and
Mervin E. Werth). Subsequent to the Court's partial grant of the Company's and
the underwriter defendants' motions to dismiss, a Second Amended Complaint was
filed on March 29, 1996. The amended complaint alleged claims under sections
11 and 15 of the Securities Act of 1933, and sections 10(b) and 20(b) of the
Exchange Act and Rule 10b-5 thereunder, based on alleged misrepresentations
and omissions in the Company's public statements, on behalf of a class
consisting of persons who purchased the Common Stock during the period from
September 21, 1993 (the date of the Company's initial public offering) through
August 8, 1995 and persons who purchased the Company's PRIDES (depository
shares) during the period from April 28, 1994 (the public offering date of the
PRIDES) through August 8, 1995. The amended complaint alleged that the
defendants misrepresented the Company's progress on the development of its
latest generation of wind turbines and the Company's future prospects. The
amended complaint sought unspecified damages and other relief.
The Court certified a plaintiff class consisting of all persons or entities
who purchased Common Stock between September 21, 1993 and August 8, 1995 or
depository shares between April 28, 1994 and August 8, 1995, appointed
representatives of the certified plaintiff class, appointed counsel for the
certified class and certified a plaintiff and defendant underwriter class as
to the section 11 claim.
On August 9, 1999, the Court granted defendants' motion for summary
judgment and ordered that plaintiffs take nothing and that the action be
dismissed on its merits. The plaintiffs have appealed the Court's order, and
both parties have filed briefs and are waiting for oral argument to be
scheduled by the Ninth Circuit of the United States Court of Appeals. The
Company intends, and has been informed that the individual defendants intend,
to continue to defend this action vigorously.
29
Item 9. Material to be Filed as Exhibits.
Exhibit No. Description
----------- -----------
(a)(1)(A) Offer to Purchase dated November 6, 2000*+
(a)(1)(B) Letter of Transmittal*+
(a)(1)(C) Notice of Guaranteed Delivery*+
(a)(1)(D) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Nominees*+
(a)(1)(E) Letter to clients for use by Brokers, Dealers, Commercial Banks,
Trust Companies and Nominees*+
(a)(1)(F) Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9*+
(a)(1)(G) Press Release of the Company, dated October 25, 2000**
(a)(2) Letter to Stockholders, dated November 6, 2000+
(a)(5)(A) First Amended Complaint of Robert L. Kohls and Louise A. Kohls
against Gerald R. Alderson, Charles Christenson, Angus M. Duthie,
Mark D. Lerdal and the Company (incorporated by reference to
Schedule III attached to this Schedule 14D-9)+
(a)(5)(B) Opinion by the Court denying the Motion to Dismiss, dated July 26,
2000 (incorporated by reference to Schedule IV attached to this
Schedule 14D-9)+
(a)(5)(C) First Amended Complaint of Robert L. Kohls and Louise A. Kohls
against the Company, Angus M. Duthie, Mark D. Lerdal, Gerald R.
Alderson and Charles Christenson
(a)(5)(D) Opinion by the Court dismissing Class Action, dated July 26, 2000
(a)(5)(E) Pages 15 through 35 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (incorporated by reference to
the Company's Form 10-K filed with the Securities and Exchange
Commission on March 28, 2000)
(a)(5)(F) Pages 2 through 23 of the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000 (incorporated by
reference to the Company's Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2000)
(a)(6) Opinion of Houlihan Lokey to the Special Committee and the Board
of Directors of KENETECH, dated October 25, 2000 (incorporated by
reference to Schedule II attached to this Schedule 14D-9)+
(e)(1) Agreement and Plan of Merger, dated as of October 25, 2000, among
the Company, Purchaser and Parent**
(e)(2) Confidentiality Agreement, dated June 29, 2000, between the
Company and VAC*
(e)(3) Guaranty, dated October 25, 2000, by VAC for the benefit of the
Company*
(e)(4) Subscription and Contribution Agreement, dated October 24, 2000,
among VAC, Parent and Mark D. Lerdal*
(e)(5) Form of Stockholders Agreement, undated, among Parent, Mark D.
Lerdal and certain investing stockholders*
(e)(6) Voting Agreement, dated October 25, 2000, among Parent, Purchaser
and Mark D. Lerdal*
(e)(7) Employment Agreement, dated October 25, 2000, between Purchaser
and Mark D. Lerdal*
(e)(8) Information Statement Pursuant to Section 14(f) of the Securities
Exchange Act of 1934 and Rule 14f-1 thereunder (incorporated by
reference to Schedule I attached to this Schedule 14D-9)+
(e)(9) Amendment to Rights Agreement, dated October 25, 2000, between the
Company and ChaseMellon Shareholder Services, L.L.C.
(g) None
- --------
* Incorporated by reference to the Schedule TO filed by Purchaser, Parent and
VAC on the date of this Schedule 14D-9.
** Incorporated by reference to Form 8-K filed by the Company on October 26,
2000.
+ Included in copies mailed to the Company's stockholders.
30
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and
correct.
Dated: November 6, 2000.
By: /s/ Dianne P. Urhausen
----------------------------------
Dianne P. Urhausen
Vice President and Corporate
Secretary
31
SCHEDULE I
KENETECH CORPORATION
500 SANSOME STREET, SUITE 410
SAN FRANCISCO, CALIFORNIA 94111
INFORMATION STATEMENT PURSUANT TO
SECTION 14(f) OF
THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14f-1 THEREUNDER
This Information Statement is being mailed on or about November 6, 2000, as
a part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") of KENETECH Corporation ("KENETECH" or the "Company"), a
Delaware corporation, with respect to the tender offer by KC Merger Corp.
("Purchaser"), a Delaware corporation and a subsidiary of KC Holding
Corporation ("Parent"), a Delaware corporation, to purchase all of the
outstanding shares of common stock, par value $.0001 per share (the "Common
Stock"), of the Company, together with the associated rights attached thereto
issued pursuant to that certain Rights Agreement, dated May 4, 1999, as
amended (together, the "Shares"), at a purchase price of $1.04 per Share, net
to the seller in cash, upon the terms and subject to the conditions set forth
in Purchaser's Offer to Purchase and related Letter of Transmittal (which,
together with any amendments or supplements thereto, collectively constitute
the "Offer"). Parent is a wholly owned subsidiary of ValueAct Capital
Partners, L.P., a Delaware limited partnership ("VAC"). Capitalized terms used
and not otherwise defined herein shall have the meaning set forth in the
Schedule 14D-9.
You are receiving this Information Statement in connection with the
possible election of persons designated by Purchaser to a majority of the
seats on the Board of Directors of the Company (the "Board").
The Merger Agreement provides that, promptly after such time as Purchaser
acquires Shares pursuant to the Offer, Purchaser will be entitled, to the
fullest extent permitted by law, to designate up to that number of directors
(rounded to the nearest whole number), subject to compliance with Section
14(f) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as will make the percentage of KENETECH's directors designated by Purchaser
equal to the percentage of the aggregate voting power of the Shares held by
Parent or any of its subsidiaries. However, the Merger Agreement also provides
that in the event that Purchaser's designees are elected to the Board, until
the effective time of the Merger (the "Effective Time"), the Board will have
at least three directors (excluding Mark D. Lerdal) who were directors of
KENETECH on the date of the Merger Agreement ("Continuing Directors"). Under
the Merger Agreement, if the number of Continuing Directors is reduced below
three for any reason, the remaining Continuing Directors or Continuing
Director will designate a person or persons to fill such vacancy or vacancies,
each of whom will be deemed to be a Continuing Director for purposes of the
Merger Agreement, or, if no Continuing Directors then remain, the other
directors of KENETECH will designate three persons (excluding Mr. Lerdal) to
fill such vacancies, who will not be officers of affiliates of KENETECH or any
of its subsidiaries or officers of affiliates of Parent or any of its
subsidiaries and such persons shall be deemed to be Continuing Directors for
purposes of the Merger Agreement and, in either case, Purchaser shall cause
such person or persons to be elected to fill such vacancy or vacancies.
The Merger Agreement requires KENETECH, to the fullest extent permitted by
applicable law, to take all action requested by Parent that is reasonably
necessary to effect such election. In connection with the foregoing, the
Merger Agreement provides that KENETECH will promptly, at the option of
Parent, to the fullest extent permitted by law, KENETECH's Restated
Certificate of Incorporation, as amended, and KENETECH's Restated Bylaws, as
amended, either increase the size of the Board and/or obtain the resignation
of such number of its current directors (excluding the Continuing Directors)
as is necessary to enable Purchaser's designees to be elected or appointed to
the Board as provided above.
Following the election or appointment of Purchaser's designees to the Board
and prior to the Effective Time, under the Merger Agreement, Purchaser and
Parent will not cause KENETECH to take any action with respect to any
amendment, or waiver of any term or condition, of the Merger Agreement or
KENETECH's Restated
1
Certificate of Incorporation, as amended, or KENETECH's Restated Bylaws, as
amended, any termination of the Merger Agreement by KENETECH, any extension by
KENETECH of the time for the performance of any of the obligations or other
acts of Purchaser or Parent or waiver or assertion of any of KENETECH's rights
under the Merger Agreement, and any other consent or action by the Board with
respect to the Merger Agreement or the Offer, without the concurrence of a
majority of the Continuing Directors.
This Information Statement is required by Section 14(f) of the Exchange Act
and Rule 14f-1 thereunder in connection with the appointment of Purchaser's
designees to the Board.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action.
Pursuant to the Merger Agreement, Purchaser commenced the Offer on November
6, 2000. The Offer is scheduled to expire at midnight, New York City time, on
December 7, 2000, unless the Offer is extended, at which time, if all
conditions to the Offer have been satisfied or waived, Purchaser will purchase
all of the Shares validly tendered pursuant to the Offer and not properly
withdrawn.
The information contained in this Information Statement (including
information incorporated by reference) concerning VAC, Parent, Purchaser and
Purchaser's designees has been furnished to the Company by Parent, and the
Company assumes no responsibility for the accuracy or completeness of such
information.
PURCHASER'S DESIGNEES
Parent has informed the Company that it will choose Purchaser's designees
from the founding members of VA Partners, L.L.C., the sole general partner of
VAC, listed in Schedule A of the Offer to Purchase, a copy of which is being
mailed to stockholders of the Company. The information with respect to such
officers in Schedule A is hereby incorporated by reference. Parent has
informed the Company that each of the founding members listed in Schedule A of
the Offer to Purchase has consented to act as a director of the Company, if so
designated.
Based solely on the information set forth in Schedule A of the Offer to
Purchase filed by Purchaser, none of the executive officers and directors of
Parent or Purchaser and none of the founding members of VA Partners, L.L.C.
(i) is currently a director of, or holds any position with, the Company, or
(ii) has a familial relationship with any directors or executive officers of
the Company. The Company has been advised that, except for 11,365,458 Shares
which may be deemed to be beneficially owned by VAC by virtue of a
Subscription Agreement and Contribution Agreement, dated as of October 24,
2000, among Mark D. Lerdal, VAC and Parent and a Voting Agreement, dated as of
October 25, 2000, by and among Mark D. Lerdal, Purchaser and Parent, none of
Parent or Purchaser and, to the best knowledge of Parent and Purchaser, none
of VAC or the persons listed in Schedule A (except as indicated on Schedule A)
beneficially owns any equity securities (or rights to acquire such equity
securities) of the Company. Moreover, except as set forth in the Offer to
Purchase, none of Parent or Purchaser and, to the best knowledge of Parent and
Purchaser, none of VAC or the persons listed in Schedule A has been involved
in any transactions with the Company or any of its directors, executive
officers, affiliates or associates which are required to be disclosed pursuant
to the rules and regulations of the Securities and Exchange Commission.
Parent has informed the Company that, to the best of its knowledge, during
the past five years none of the executive officers and directors of Parent or
Purchaser and none of the founding members of VA Partners, L.L.C. has been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors) or has been a party to any judicial or administrative proceeding
(except for matters that were dismissed without sanction or settlement) that
resulted in a judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws.
It is expected that Purchaser's designees may assume office at any time
following the purchase by Purchaser of a specified minimum number of Shares
pursuant to the Offer, which purchase cannot be earlier than December 7, 2000,
and that, upon assuming office, Purchaser's designees will thereafter
constitute at least a majority of the Board. This step will be accomplished at
a meeting or by written consent of the Board providing that the size of the
Board will be increased such that, immediately following such action, the
number of vacancies to be filled by Purchaser's designees will constitute at
least a majority of the available positions on the Board.
2
INFORMATION CONCERNING KENETECH
General
The authorized capital stock of the Company consists of 110,000,000 shares
of Common Stock, par value $.0001 per share, and 10,000,000 shares of
Preferred Stock, par value $.01 per share, of which 84,000 shares have been
designated Series A Junior Participating Preferred Stock. As of the close of
business on October 20, 2000, there were 31,970,164 shares of Common Stock and
no shares of Preferred Stock issued and outstanding. The Company's Restated
Bylaws, as amended, authorize the number of directors to be not less than one
(1) nor more than nine (9). The Board currently consists of four members.
Each share of Common Stock entitles the record holder to one vote. The
Restated Certificate of Incorporation, as amended, and the Restated Bylaws, as
amended, provide for a classified Board. The Board is separated into three
classes, and the Directors in each class are elected to serve for three-year
terms, and until their respective successors are duly elected and qualified.
The Board currently consists of two Class I Directors (Charles Christenson and
Michael D. Winn), one Class II Director (Gerald R. Morgan, Jr.) and one Class
III Director (Mark D. Lerdal). The terms of the Class I Directors expire at
the annual meeting of stockholders to be held in 2003, the term of the Class
II Director expires at the annual meeting of stockholders to be held in 2001
and the term of the Class III Director expires at the annual meeting of
stockholders to be held in 2002.
Current Members of the Board of Directors
Set forth below are the names and ages of the Company's current directors.
Name Age Position(s) with Company
---- --- ------------------------
Charles Christenson..... 70 Director
Mark D. Lerdal.......... 41 President, Chief Executive Officer and Director
Gerald R. Morgan, Jr. .. 37 Director
Michael D. Winn......... 37 Director
The following are brief biographies of each director of the Company
(including present principal occupation or employment, and material
occupations, positions, offices or employments for the past five years). To
the knowledge of the Company, during the past five years no director of the
Company has been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors) and no director of the Company was a party
to any judicial or administrative proceeding (except for any matters that were
dismissed without sanction or settlement) that resulted in a judgment, decree
or final order enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws. Unless otherwise indicated,
each such person is a citizen of the United States and each individual's
business address is 500 Sansome Street, San Francisco, California 94111.
Charles Christenson. Dr. Christenson is the Royal Little Professor of
Business Administration, Emeritus, at the Harvard University Graduate School
of Business Administration and has served as a director of the Company since
January 1980. He is also a director of Profile Technologies, Inc., a public
company. In the past, he was Deputy for Management Systems in the Office of
the Assistant Secretary of the Air Force, and held a variety of teaching and
administrative positions at the Harvard University Graduate School of Business
Administration. He received his B.S. from Cornell University and his M.B.A.
and D.B.A. from Harvard University. He is a Class I Director.
Mark D. Lerdal. Mr. Lerdal has served as a director of the Company since
March 1996 and as Chief Executive Officer and President since April 1996. He
was elected as Chairman of the Board of Directors in August 1999. He served as
Vice President and General Counsel of the Company from April 1992 until March
1996. He received his A.B. from Stanford University and his J.D. from
Northwestern University School of Law. He is a Class III Director.
3
Gerald R. Morgan, Jr. Mr. Morgan has served as a director of the Company
since August 1999. He is the Chief Operating Officer of Francisco Partners,
L.P., a private partnership focused on technology buyouts. Previously, Mr.
Morgan served in various capacities for Security Capital Group and affiliates,
including Senior Vice President, Corporate Finance, and Chief Financial
Officer for Security Capital European Realty. He received his B.S. from
Stanford University and his M.B.A. from Stanford University Graduate School of
Business. He is a Class II Director.
Michael D. Winn. Mr. Winn has served as a director of the Company since
November 1999. He is the President and a Director of Terrasearch Inc., a
financial consulting company. He is also a Director and Officer of Sanu
Resources Inc., a mineral exploration company, and a Manager of MDW
Associates, LLC, a private investment partnership. Prior to forming
Terrasearch Inc., he was a financial analyst for a Southern California based
brokerage firm covering the oil and gas sector. He received his B.S. from the
University of Southern California. He is a Class I Director.
Mark D. Lerdal was a director and executive officer of KENETECH Windpower,
Inc. (a wholly-owned subsidiary of the Company) within the two-year period
prior to KENETECH Windpower, Inc.'s chapter 11 filing on May 29, 1996 in the
United States Bankruptcy Court.
Charles Christenson is a named defendant in a class action filed September
28, 1995, against the Company, certain of its former officers and directors
and Dr. Christenson, in the United States District Court for the Northern
District of California, alleging federal securities laws violations.
Charles Christenson and Mark D. Lerdal are named defendants in an action
filed on February 2, 2000 as a purported class action against the Company,
certain of its former directors, Dr. Christenson and Mr. Lerdal in the
Delaware Chancery Court, alleging, among other things, breach of fiduciary
duty in connection with the conversion of the Company's former Preferred
Redeemable Increased Dividend Equity SecuritiesSM, 8 1/4% PRIDESSM,
Convertible Preferred Stock, par value $.01.
Charles Christenson and Mark D. Lerdal are named defendants in an action
filed on February 2, 2000 as a purported derivative action against the
Company, certain of its former directors, Dr. Christenson and Mr. Lerdal in
the Delaware Chancery Court, alleging, among other things, the taking of a
corporate opportunity in connection with the purchase of Common Stock by Mr.
Lerdal in December 1997.
For a more detailed description of this litigation, see "Certain Litigation
Matters" in Item 8 of KENETECH's Schedule 14D-9.
Board Meetings and Committees
During 1999, the Board held six meetings and acted once by unanimous
written consent. During 1999, each Director then in office attended 75% or
more of the aggregate of (i) the total number of meetings of the Board, and
(ii) the total number of meetings held by all committees of the Board on which
he served.
The Board has a standing Audit Committee and Compensation Committee.
During 1999, the Audit Committee was comprised of Charles Christenson and
Angus M. Duthie from January 1, 1999 until August 18, 1999. Mr. Duthie did not
stand for re-election to the Board of Directors at the 1999 Annual Meeting of
Stockholders. Gerald R. Morgan was elected to the Audit Committee on August
18, 1999 and Michael D. Winn was elected to the Audit Committee on November
23, 1999 and each served on the Committee, together with Charles Christenson,
for the remainder of the fiscal year ending December 31, 1999. The functions
performed by the Audit Committee include annually recommending to the Board
the appointment of the independent auditors of the Company; reviewing the
purpose, scope and general extent of the services of the independent auditors,
their procedures and their fees; reviewing with the independent auditors the
results of their annual audit, including any matters that the independent
auditors bring to the attention of the Audit
4
Committee; and reviewing with those responsible for managing the internal
audit function of the Company the scope of their procedures, reports and
recommendations, and other significant aspects of their functioning, including
any matters that the personnel responsible for managing the internal audit
function bring to the attention of the Audit Committee. The Audit Committee
met twice during the fiscal year ending December 31, 1999.
The Compensation Committee was comprised of Messrs. Christenson and Duthie
from January 1, 1999 until August 18, 1999. Mr. Duthie did not stand for re-
election to the Board of Directors at the 1999 Annual Meeting of Stockholders.
Gerald R. Morgan was elected to the Compensation Committee on August 18, 1999
and Michael D. Winn was elected to the Compensation Committee on November 23,
1999 and each served on the Committee, together with Charles Christenson, for
the remainder of the fiscal year ending December 31, 1999. The Compensation
Committee is responsible for determining the compensation for the Company's
management and establishing compensation policies for the Company's employees
generally. The Compensation Committee also administers the Company's stock
option plan. The Compensation Committee did not meet during the fiscal year
ending December 31, 1999. The Compensation Committee met in January 2000 and
approved certain bonuses for the 1998 and 1999 fiscal years.
Executive Officers
Set forth below are the names, ages, and titles of the current executive
officers of the Company. Officers are selected by the Board from time to time
and hold office until a successor is duly elected and qualified or until his
or her earlier death, resignation or removal.
Name Age Position(s) with Company
---- --- ------------------------
Mark D. Lerdal.......... 41 President, Chief Executive Officer and director
Andrew M. Langtry....... 38 Corporate Controller and Chief Accounting Officer
Dianne P. Urhausen...... 42 Vice President, General Counsel and Corporate Secretary
The following are brief biographies of each executive officer of the
Company (including present principal occupation or employment, and material
occupations, positions, offices or employments for the past five years). To
the knowledge of the Company, no executive officer of the Company has been
convicted in a criminal proceeding during the last five years (excluding
traffic violations or similar misdemeanors), and no executive officer of the
Company was a party to any judicial or administrative proceeding during the
last five years (except for any matters that were dismissed without sanction
or settlement) that resulted in a judgment, decree or final order enjoining
the person from future violations of, or prohibiting activities subject to,
federal or state securities laws, or a finding of any violation of federal or
state securities laws. Unless otherwise indicated, each such person is a
citizen of the United States and each individual's business address is 500
Sansome Street, San Francisco, California 94111.
Mark D. Lerdal. Mr. Lerdal has served as a director of the Company since
March 1996 and as Chief Executive Officer and President since April 1996. He
was elected as Chairman of the Board of Directors in August 1999. He served as
Vice President and General Counsel of the Company from April 1992 until March
1996. He received his A.B. from Stanford University and his J.D. from
Northwestern University School of Law. He is a Class III director.
Andrew M. Langtry. Mr. Langtry has served as Corporate Controller and Chief
Accounting Officer of the Company since March 2000. He served as Tax Director
of the Company from April 1996 to March 2000. Prior to that, he served as Tax
Manager of the Company from July 1993 to April 1996. He received his B.S. from
California State University at Hayward. Mr. Langtry is a CPA licensed in
California.
Dianne P. Urhausen. Ms. Urhausen has served as Vice President, Corporate
Secretary, and General Counsel of the Company since August 1998. She served as
Administrative Counsel and Corporate Secretary from August 1995 to August
1998. Prior to that, she was an Associate at the law firm of Thelen, Marrin,
Johnson & Bridges. She received her B.A. from St. Mary's College of California
and her J.D. from the University of San Francisco.
5
Director and Executive Compensation
Directors
Each director of the Company receives a quarterly retainer of $6,000 (see
also footnote 1 to the Summary Compensation Table).
The Company reimburses directors for their reasonable expenses associated
with attending Board meetings and provides the directors with liability
insurance with respect to their activities as directors of the Company.
The Company will pay each member of the Special Committee $10,000 for his
participation on the Special Committee plus an additional $1,000 per meeting
up to a total of ten (10) meetings, for a maximum compensation of $20,000.
Executive Officers
The following table sets forth, for the fiscal years ended December 31,
1999, 1998, and 1997, all compensation, for services rendered in all
capacities to the Company, awarded to, earned by or paid to (i) the Chief
Executive Officer during 1999, (ii) the most highly compensated executive
officers of the Company in addition to the Chief Executive Officer who were
serving as executive officers at the end of 1999, and (iii) the two former
executive officers of the Company for whom disclosure would have been provided
but for the fact such individuals were not serving as executive officers of
the Company at December 31, 1999.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------ --------------
Other Annual Securities All Other
Compensation Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($)(1) Options (#)(2) ($)(3)(4)
--------------------------- ---- ---------- ---------- ------------ -------------- ------------
Mark D. Lerdal....................... 1999 $423,861 $ 350,000(5) $24,000 -- $ 1,152
Chairman of the Board, President 1998 $443,189 $ 250,000(5) $23,500 -- $ 1,152
and Chief Executive Officer 1997 $401,295 $ 250,000 $21,500 -- $1,165,071
Michael U. Alvarez (6)............... 1999 $214,377 $ 191,360 -- -- --
Vice President, Chief Financial 1998 $382,005 $2,887,980 -- -- $ 1,388
Officer and Assistant Secretary 1997 $351,134 $ 364,920 -- -- $ 1,388
Andrew M. Langtry.................... 1999 $106,226 $ 49,750 -- -- --
Corporate Controller and Chief 1998 $ 88,125 $ 22,263 -- -- --
Accounting Officer 1997 $103,275 $ 10,000 -- -- --
Dianne P. Urhausen................... 1999 $129,249 $ 160,000 -- -- --
Corporate Secretary and General 1998 $132,548 $ 40,000 -- -- --
Counsel 1997 $ 75,243 $ 37,901 -- -- --
Mervin E. Werth (6).................. 1999 $ 38,522 $ 331,250 -- -- $ 31,250
Controller, Chief Accounting Officer 1998 $139,645 $ 100,000 -- -- --
and Asst. Treasurer 1997 $125,405 $ -- -- -- --
- --------
(1) Includes $24,000 in 1999, $23,500 in 1998, and $21,500 in 1997 for
director's fees for Mark D. Lerdal.
(2) Shares of Common Stock subject to stock options granted during the fiscal
year. No stock appreciation rights were granted during 1999, 1998 or 1997.
(3) Includes $1,152 for 1999, 1998, and 1997 for insurance premiums paid by
the Company with respect to term life insurance for the benefit of Mark D.
Lerdal and $1,388 in 1998 and 1997 for the benefit of Michael U. Alvarez,
respectively, and a pre-paid severance payment in 1997 of $1,163,919 for
Mark D. Lerdal. Also includes a severance payment of $31,250 for Mr. Werth
in 1999.
6
(4) Mr. Werth, the other defendants (including Dr. Christenson) and the
Company are jointly represented in a class action filed against the
Company, certain of its former officers and directors and Dr. Christenson,
in the United States District Court for the Northern District of
California, alleging federal securities laws violations, as more fully
described in Item 8, "Certain Litigation Matters," of the Schedule 14D-9.
Mr. Lerdal, Dr. Christenson and the Company are jointly represented in
Kohls v. Kenetech, et al., as more fully described in Item 8, "Certain
Litigation Matters," of the Schedule 14D-9. Mr. Lerdal and
Dr. Christenson are jointly represented in Kohls v. Duthie, et al., as
more fully described in Item 8, "Certain Litigation Matters," of the
Schedule 14D-9. A portion of such counsel's legal fees have been paid by
the Company, however, such fees have not been apportioned among the
individual defendants.
(5) Includes a bonus of $350,000 earned for 1999 and $250,000 earned for 1998
for Mr. Lerdal. Such bonuses were approved by the Board of Directors and
paid in 2000.
(6) Mr. Alvarez's employment agreement expired March 23, 1999 and Mr. Werth
entered into a separation agreement effective March 31, 1999.
No options or stock appreciation rights were awarded to the Chief Executive
Officer or the named executive officers of the Company during the fiscal year
ended December 31, 1999.
The following table sets forth information concerning option exercises and
option holdings for the fiscal year ending December 31, 1999, with respect to
the Chief Executive Officer and the named executive officers of the Company.
No stock appreciation rights were outstanding during such fiscal year.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options at
Acquired on Value Options at Fiscal Year-End Fiscal Year-End
Name Exercise (#) Realized ($) Exercisable/Unexercisable (1) Exercisable/Unexercisable (2)
---- ------------ ------------ ----------------------------- -----------------------------
Mark D. Lerdal.......... -- -- -- / 500,000 -- / --
Michael U. Alvarez...... -- -- -- / -- -- / --
Andrew M. Langtry....... -- -- -- / -- -- / --
Dianne P. Urhausen...... -- -- -- / -- -- / --
Mervin E. Werth......... -- -- -- / -- -- / --
- --------
(1) Mr. Alvarez's employment agreement expired March 23, 1999 and Mr. Werth
entered into a separation agreement effective March 31, 1999. All options
held by such persons had expired as of December 31, 1999.
(2) The exercise price of all options exceeds the market price of $0.58 of the
underlying shares at December 31, 1999.
Stock Plans
The 1993 Option Plan (described below) and the 1993 Employee Stock Purchase
Plan (the "Purchase Plan") were implemented in September 1993. The Purchase
Plan was discontinued following the August 1996 semi-annual purchase date. No
Options have been granted under the 1993 Option Plan since 1996.
The Company has registered shares of Common Stock reserved for issuance
under the 1993 Option Plan thus permitting the resale of such shares by non-
affiliates in the public market without restriction under the Securities Act
of 1933.
Under the 1993 Option Plan, key employees (including officers), consultants
to the Company and directors are provided an opportunity to acquire equity
interests in the Company. The 1993 Option Plan contains three separate
components: (i) a Discretionary Option Grant Program, under which key
employees (including officers) and consultants may be granted options to
purchase shares of Common Stock at an exercise price not less than 85% of the
fair market value of such shares on the grant date; (ii) an Automatic Option
Grant Program, under
7
which option grants were automatically made at periodic intervals to directors
to purchase shares of Common Stock at an exercise price equal to 100% of the
fair market value of the option shares on the grant date (this part of the
plan has been discontinued); and (iii) a Stock Issuance Program, under which
eligible individuals may be issued shares of Common Stock directly, either
through the immediate purchase of the shares (at fair market value or at
discounts of up to 15%) or as a bonus tied to the performance of services or
the Company's attainment of prescribed milestones.
The options granted under the Discretionary Option Grant Program may be
either incentive stock options designed to meet the requirements of Section
422 of the Internal Revenue Code of 1986, as amended, or non-statutory options
not intended to satisfy such requirements. All grants under the Automatic
Option Grant Program were non-statutory options. Options may be granted or
shares issued in the Discretionary Option Grant and Stock Issuance Programs to
eligible individuals in the employ or service of the Company or any parent or
subsidiary corporation now or subsequently existing.
Under the Automatic Option Grant Program, each person who was a director at
the time of the Company's initial public offering, received at the
commencement of such offering, and each new director thereafter was, at the
time he or she became a director, to receive an automatic option grant for
5,000 shares of Common Stock. In addition, at each annual stockholders'
meeting, beginning with the 1994 annual meeting, each person who had been a
director for at least six months was to be granted an option to purchase 1,000
shares of Common Stock. No grants under the Automatic Option Grant Program
have been made since 1995, the program has been discontinued and all grants
previously awarded have terminated.
A total of 6,688,020 shares of Common Stock were originally reserved for
issuance over the ten-year term of the 1993 Option Plan. As of September 30,
2000, there were 845,600 Shares subject to issuance upon the exercise of
outstanding stock options (without regard to vesting or exercise price).
Options have maximum terms of ten years measured from the grant date.
Options are not assignable or transferable other than by will or by the laws
of inheritance following the optionee's death, and only the optionee may
during the optionee's lifetime, exercise the option. The optionee does not
have any stockholder rights with respect to the option shares until the option
is exercised and the option price is paid for the purchased shares.
Individuals holding shares under the Stock Issuance Program will, however,
have full stockholder rights with respect to those shares, whether the shares
are vested or unvested. The Plan Administrator under the 1993 Option Plan has
the authority to cancel outstanding options under the Discretionary Option
Grant Program (including options incorporated from the predecessor plan) in
return for the grant of new options for the same or a different number of
shares with an exercise price based on the lower fair market value of the
Common Stock on the new grant date. The Board may terminate the 1993 Option
Plan at any time, and the 1993 Option Plan will in all events terminate on
June 20, 2003.
All of the Company's employees are eligible to participate in the
Discretionary Option Grant Program. Non-employee directors are not eligible to
participate in the Discretionary Option Grant and Stock Issuance Programs.
If the Company is acquired by merger, consolidation or asset sale, or there
is a hostile change in control of the Company, each option granted under the
Discretionary Option Grant Program will automatically accelerate in full, and
all unvested shares under the Stock Issuance Program will immediately vest.
Employment Contracts, Termination of Employment and Change-In-Control
Arrangements
The Company's 1993 Option Plan contains provisions pursuant to which all
outstanding options granted under that plan will become fully vested and
immediately exercisable upon certain changes of control and related events
(see discussion above).
The Company and certain direct or indirect wholly-owned subsidiaries
entered into an Employment Agreement with Mr. Alvarez that became effective
December 1, 1997 (such agreement superseded Mr. Alvarez's
8
prior employment agreement). The Employment Agreement provided that Mr.
Alvarez was to be employed (unless terminated for cause) at his annual base
salary of $350,000 until the later of (i) December 31, 1998, (ii) 90 days
following the sale of the Company's indirectly owned 50% equity interest in a
partnership that owns a gas-fired cogeneration facility of approximately 540
MW located in Penuelas, Puerto Rico and other associated contract rights
(collectively, the "EcoElectrica Project"), or (iii) the date on which all
payments under the Agreement had been made. Accordingly, Mr. Alvarez's
Employment Agreement expired March 23, 1999. Under the terms of the Employment
Agreement, Mr. Alvarez was paid a bonus in 1997 upon the closing of the
construction financing for the EcoElectrica Project, and a bonus in 1998 from
the proceeds of the sale of the Company's indirectly owned 50% equity interest
in the EcoElectrica Project (see Summary Compensation Table). Mr. Alvarez also
received a bonus in 1999 from the proceeds of the sale of the Company's
indirect interest in a wood-fired project located in Chateaugay, New York (the
"Chateaugay Project") and other bonuses in 1997 and 1998 from the proceeds of
the sale of certain other assets of KENETECH Energy Systems, Inc, a wholly-
owned subsidiary of the Company (see Summary Compensation Table).
The Company entered into an Employment Agreement with Mr. Lerdal on April
1, 1996. Mr. Lerdal's initial employment period ran for a period of three
years ending March 31, 1999 and the agreement was then automatically renewed
for a one-year period. Pursuant to the terms and conditions of the agreement,
Mr. Lerdal (i) received a bonus of $100,000 upon execution of the agreement,
(ii) received an annual base salary of $400,000, (iii) was eligible to receive
an annual bonus of up to 25% of his base salary, and (iv) earned additional
bonuses of $450,000 upon the occurrence of certain stated objectives. All of
the objective payments have been earned including the $250,000 paid as a bonus
in 1997. In the event of Mr. Lerdal's involuntary termination (other than for
cause) including non-renewal of the employment period, he would receive a
severance payment equal to two years base salary plus health care and life
insurance coverage for an additional two years. In the event of Mr. Lerdal's
involuntary termination or resignation within six months of a change in
control, Mr. Lerdal would receive a lump sum payment equal to one year's
salary in addition to the payments set forth in the immediately preceding
sentence. The severance provisions of the agreement were paid in March 1997.
Mr. Lerdal gave the Company notice of his intent not to renew the agreement
and the agreement expired by its terms on March 31, 2000. Effective April 1,
2000, Mr. Lerdal became an at-will employee of the Company with an annual base
salary of $250,000.
The Company and Mr. Langtry entered into a Retention Agreement on April 1,
1999 that provided that Mr. Langtry would be paid his annual base salary of
$95,000 until the agreement expired on September 30, 1999. Under the terms of
the agreement, after September 30, 1999, Mr. Langtry continued to be employed
by the Company as an at will employee, his annual base salary was raised to
$120,000 and he was paid a bonus in the amount of $36,250 on December 31,1999
(see also Summary Compensation Table). If Mr. Langtry is discharged (other
than as a result of a termination for cause) he will receive a lump sum
severance payment in the amount of $72,500.
Ms. Urhausen and the Company entered into an Employment Agreement on
December 22, 1998 that provided that Ms. Urhausen was to be employed (unless
terminated for cause) at her annual base salary of $160,000 for the one-year
period beginning January 1, 1999. Under the terms of the Employment Agreement,
if Ms. Urhausen's employment with the Company ceased for any reason during the
term of the agreement she was to receive a lump sum severance payment equal to
$160,000 and if Ms. Urhausen's employment did not cease she was to receive a
quarterly payment. Since Ms. Urhausen remained employed by the Company, on
each of March 31, June 30, September 30 and December 31, 1999, she received a
quarterly payment of $40,000 and the severance payment was reduced by each
such payment (see Summary Compensation Table).
Mr. Werth and the Company entered into a retention incentive agreement in
1998 pursuant to which Mr. Werth received a quarterly bonus (see Summary
Compensation Table). Pursuant to the terms of a Separation Agreement and
Mutual Release entered into by the Company and Mr. Werth as of March 31, 1999,
upon mutual agreement of Mr. Werth and the Company, Mr. Werth's employment
with the Company terminated effective March 31, 1999 and he received a lump
sum payment of $281,250 consisting of a bonus payment, severance and accrued
vacation.
9
Compensation Committee Interlocks and Insider Participation
The Compensation Committee was comprised of Messrs. Christenson and Duthie
from January 1, 1999 until August 18, 1999. Gerald R. Morgan was elected to
the Compensation Committee on August 18, 1999 and Michael D. Winn was elected
to the Compensation Committee on November 23, 1999 and each served on the
Committee for the remainder of the fiscal year ending December 31, 1999. No
member of the Compensation Committee has ever been an officer or employee of
the Company. Mr. Lerdal and Ms. Urhausen may have attended meetings of the
Compensation Committee, but were not present during deliberations or
discussions regarding his or her own compensation.
No interlocking relationship exists between the members of the Company's
Board of Directors or Compensation Committee and the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
Certain Relationships and Related Transactions
Mr. Winn is the president, sole director and sole stockholder of
Terrasearch, Inc. Terrasearch entered into a Consulting Agreement with the
Company on January 1, 2000. Pursuant to the terms of the Consulting Agreement,
Terrasearch will be paid a yearly fee of $225,000, plus expenses, through
December 31, 2000 for providing consulting or financial services in connection
with the identification of a merger partner or company or business for the
Company to acquire. The agreement will automatically renew for a one-year
period unless either party gives notice of its intent not to renew. In
connection with the Consulting Agreement, the Company also issued Terrasearch
warrants to purchase up to 500,000 shares of Common Stock of the Company at an
exercise price of $1.00 per share. The warrants become exercisable on January
1, 2002 and expire December 31, 2005.
Mr. Morgan is the Chief Operating Officer of Francisco Partners, L.P., a
partnership formed to make private information technology buy-out investments.
In April 2000, the Company agreed to invest $5 million over the next six years
in Francisco Partners, L.P., a partnership formed to make private information
technology buy-out investments which is expected to raise up to $2.5 billion
from investors. The Company received limited partnership interests for its
investment. Assuming that Francisco Partners, L.P. raises the total
anticipated capital of $2.5 billion, the Company's investment will aggregate
to a less than 0.2% ownership interest in the partnership. The Company had
invested a total amount of $840,000 as of September 30, 2000.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board reviews, recommends and approves
the compensation arrangements for management of the Company with respect to
salaries, bonuses and grants of options to purchase shares of Common Stock
under the Company's 1993 Option Plan.
Cash Based Compensation
All of the executives listed in the Summary Compensation Table except Mr.
Werth had employment contracts with the Company for all or a portion of 1999.
The contracts were negotiated by the Chief Executive Officer of the Company
and approved by the Compensation Committee. The Company had survey information
from previous years that it used to determine the base salary of the
executives. Some of the bonus awards for 1998 and 1999 were payable by formula
included in the contracts. The contracts enumerated certain payments when
certain events occurred. The most significant event in 1998 was the sale of
the Company's indirect interest in the EcoElectrica Project and in 1999 the
sale of the Company's indirect interest in the Chateaugay Project. The bonus
payments were based on a percentage of the proceeds received from the sale of
such projects.
Compensation of the Chief Executive Officer
Mr. Lerdal and the Company were parties to an employment agreement that
expired March 31, 2000. The initial term was for a period of three years and
was subject to renewal periods of one year. The agreement was
10
renewed once and was in effect for the 1999 fiscal year. Mr. Lerdal's base
salary of $400,000 per year and bonus opportunities were set forth in such
employment agreement. The Compensation Committee is the sole determinant of
whether, and in what amount, any bonuses are to be paid to Mr. Lerdal. In
January 2000, the Compensation Committee approved a bonus of $350,000 earned
for 1999 and $250,000 earned for 1998. Such bonuses were paid based on a
report prepared by Arthur Andersen LLP which analyzed the compensation paid to
Mr. Lerdal in 1999 and the payment of a bonus to Mr. Lerdal for 1998 and 1999
in light of the nature of the services provided by Mr. Lerdal and market
competitive pay practices.
The rational and criteria for paying bonuses to Mr. Lerdal for 1998 and
1999 included, among other things: the successful disposition of several
assets, including the sale of the Company's indirectly held 50% interest in
the EcoElectrica Project in December 1998; the substantial reduction of the
Company's debt, including the satisfaction and discharge of the Company's
Senior Secured Notes and all accrued interest in December 1998 and the payment
in full of the accrued and unpaid dividends in April 1999 on the Company's
formerly outstanding Preferred Redeemable Increased Dividend Equity
Securitiessm, 8 1/4% PRIDESsm, Convertible Preferred Stock; the successful
outcome in several litigation matters involving the Company and its
subsidiaries; the increase in the intrinsic value of the Company over the last
two years; the identification and investment by the Company in new development
projects; and the substantial completion of the KENETECH Windpower, Inc.
bankruptcy.
Stock Option Grants
Historically, stock option grants were the principal vehicle for the
payment of long term compensation to the Company's employees. No grants have
been made to any of the Company's employees since 1996 because the value of
the Company's stock has been too uncertain to either retain employees or
reward them for their efforts.
Charles Christenson
Gerald R. Morgan, Jr.
Michael D. Winn
Notwithstanding anything to the contrary set forth in the Company's
previous or future filings under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, that might incorporate other
filings, including this Information Statement, in whole or in part, the
foregoing Compensation Committee Report, and the performance graph immediately
following, shall not be incorporated by reference into any such filings.
11
Performance Graph
The following performance graph reflects the cumulative total stockholders'
return on the Common Stock as compared with the cumulative total return of the
Nasdaq Stock Market (U.S.) Index, the Russell 2000 Index, the Nasdaq Financial
Index, the S&P Midcap 400 Index and the S&P Energy Sector Index. The graph
assumes a $100 investment in Common Stock of the Company and a $100 investment
in each of the indices beginning on December 31, 1994 and ending December 31,
1999. The graph also assumes that any dividends were reinvested. The Company
chose the indices included in the performance graph because it does not believe
it can reasonably identify a peer group. In addition, there are no public
companies known to the Company with a similar scope of business as the Company.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
[PERFORMANCE GRAPH APPEARS HERE]
END OF FISCAL YEAR
12/94 12/95 12/96 12/97 12/98 12/99
------- ------- ------- ------- ------- -------
KENETECH Corporation 100.00 11.30 0.35 0.45 1.81 4.03
Nasdaq Stock Market (U.S.) 100.00 141.33 173.90 213.07 300.43 557.58
Russell 2000 100.00 127.49 154.73 203.91 190.76 187.92
Nasdaq Financial 100.00 145.68 187.03 286.10 277.70 277.35
S&P Midcap 400 100.00 130.94 156.08 206.43 236.21 270.99
S&P Energy Sector 100.00 130.77 164.48 206.00 207.11 254.16
12
Beneficial Ownership of Shares
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of October 20, 2000 for (i) each
person known to the Company beneficially to own 5% or more of the outstanding
shares of its Common Stock, (ii) each of the Company's directors, the Chief
Executive Officer and the named executive officers, and (iii) all directors
and executive officers as a group. The table is based upon information
supplied to the Company by its officers, directors and principal stockholders.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
Name of Number of Shares
Beneficial Of Common Stock Percentage of
Owners (1) Beneficially Owned (2) Shares Outstanding (3)
---------- ---------------------- ----------------------
Mark D. Lerdal (4).................... 11,365,458 35.5%
500 Sansome Street, San Francisco, CA
Charles Christenson (5)............... 67,000 *(6)
Gerald R. Morgan, Jr. ................ 170,000 *
Michael D. Winn....................... 50,000 *
Andrew M. Langtry..................... 0 *
Dianne P. Urhausen.................... 35,000 *
Michael U. Alvarez (7)................ 1,441 *
Mervin E. Werth (7)................... 0 *
All directors and executive officers
as a group (including former
executive officers who are named
executive officers) (8 persons)...... 11,688,899 36.5%
- --------
(1) Information for beneficial owners of 5% or more of the Company's Common
Stock is reported from and as of the date of such owner's latest Schedule
13D or 13G (as amended) provided to the Company.
(2) Except as otherwise specifically noted, the number of shares stated as
being beneficially owned by a specified person includes (a) all options,
warrants and other rights under which such person could acquire Common
Stock currently and within 60 days following October 20, 2000, and (b)
shares believed by the Company to be held beneficially by spouses. The
inclusion of shares herein, however, does not constitute an admission that
the persons named as stockholders are direct or indirect beneficial owners
of such shares.
(3) The percentages are calculated based on 31,970,164 shares of Common Stock
outstanding on October 20, 2000.
(4) On October 24, 2000, Mr. Lerdal entered into the Subscription and
Contribution Agreement with Parent and VAC, pursuant to which Mr. Lerdal
agreed to contribute his 11,365,458 Shares to Parent in exchange for
capital stock in Parent. Mr. Lerdal also entered into a Voting Agreement
with Parent and Purchaser on October 25, 2000 whereby Mr. Lerdal agreed to
vote his 11,365,458 Shares in favor of the Merger and the Merger
Agreement.
(5) Includes 47,000 shares issuable upon the exercise of options outstanding
as of October 20, 2000.
(6) * Does not exceed one percent of the class so owned.
(7) Mr. Alvarez's employment agreement expired March 23, 1999. Mr. Werth and
KENETECH entered into a separation agreement effective March 31, 1999.
13
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Exchange Act and regulations of the Securities and
Exchange Commission thereunder require the Company's executive officers and
directors and persons who own more than ten percent of the Company's stock, as
well as certain affiliates of such persons, to file initial reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Executive officers, directors and persons owning more than ten
percent of the Company's stock are required by the SEC's regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on its review of the copies of Forms 3, 4 and 5 and amendments thereto
received by the Company and written representations that no other reports were
required for those persons, the Company believes that, during the fiscal year
ended December 31, 1999, all filing requirements applicable to its executive
officers, directors and owners of more than ten percent of the Company's stock
were complied with on a timely basis.
14
SCHEDULE II
October 25, 2000
Special Committee of the Board of Directors
Kenetech Corporation
500 Sansome Street
San Francisco, CA 94111
Dear Special Committee Members:
We understand that KC Holding Corporation ("KCH" hereinafter) proposes to
cause KC Merger Corp. ("KCM" hereinafter), a direct wholly-owned subsidiary of
KCH, to make a tender offer (the "Offer") to purchase any and all of the
shares of common stock of Kenetech Corporation (the "Company" or "Kenetech"
hereinafter), together with its associated rights attached thereto issued
pursuant to the Rights Agreement (collectively, the "Shares"), at a purchase
price of $1.04 per Share, (the "Offer Price"), net to the seller in cash,
without interest thereon. Pursuant to the draft Agreement and Plan of Merger
dated October 25, 2000 (the "Merger Agreement" hereinafter) among KCH, KCM and
Kenetech, KCM will merge with and into Kenetech. Following the merger, the
separate corporate existence of KCM will cease and Kenetech shall continue as
the surviving corporation. Mark Lerdal, the President, Chief Executive Officer
and Director of Kenetech ("Nonvoting Director"), has entered into a
subscription and contribution agreement with KCH and KCM pursuant to which the
Nonvoting Director agreed to contribute his shares of the Company to KCH in
exchange for capital stock of KCH. Such transaction and all related
transactions are referred to collectively herein as the "Transaction".
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the
Company.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders on Form 10-K for
the fiscal years ended 1995 through 1999, the quarterly reports on Form
10-Q for the two quarters ended June 30, 2000 and the Company financial
statements for the period ended September 30, 2000, which Company's
management has identified as being the most current financial
statements available;
2. met with certain members of the Company management, auditors and tax
advisors, and Astoria Energy, LLC to discuss the operations, financial
condition, future prospects and projected operations and performance of
the Company;
3. discussed the operations, financial condition, future prospects and
projected operations and performance of the companies in which Kenetech
has invested ("Company Investments") with Company management and
certain members of the senior management of the Company Investments;
4. reviewed the Merger Agreement and the letter from the Company dated
October 25, 2000 ("Company Letter");
5. reviewed financial statements and forecasts and projections for certain
of the Company Investments;
6. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
7. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company and the Company
Investments;
8. reviewed various documents relating to the Company and the Company's
Investments;
Page 2
Special Committee of the Board of Directors
Kenetech Corporation
October 25, 2000
9. reviewed various documents provided by counsel to the Special Committee
relating to the cause of action filed in the Delaware Court of Chancery
styled Kohls v. Duthie et al. and relied on the views expressed by
counsel to the Special Committee with respect to it; and
10. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the Company and the Company Investments,
where applicable, and that, except to the extent provided for in the Company
Letter, there has been no material change in the assets, financial condition,
business or prospects of the Company and Company Investments, where
applicable, since the date of the most recent financial statements made
available to us. We have not independently verified the accuracy and
completeness of the information supplied to us with respect to the Company and
the Company Investments and do not assume any responsibility with respect to
it. We have not made any physical inspection or independent appraisal of any
of the properties, assets or liabilities of the Company and the Company
Investments. Our opinion is necessarily based on business, economic, market
and other conditions as they exist and can be evaluated by us at the date of
this letter.
Houlihan Lokey's conclusions stated herein are directed to the Special
Committee and the Board of Directors, address only the fairness of the
consideration to be received by the stockholders (except Mr. Mark D. Lerdal)
in the Transaction and do not address the relative merits of the Transaction,
any other matter provided for or contemplated by the Merger Agreement or any
other transaction that may have been available as an alternative to the
Transaction whether or not any such alternative could be or could have been
achieved, or the terms upon which any such alternative transaction could be or
could have been achieved. Further, this opinion addresses only issues related
to the fairness, from a financial point of view to the stockholders (except
Mr. Mark D. Lerdal), of the price for the sale of common stock, and we do not
express any views on any other terms of the Merger Agreement, or any other
agreement. In addition, we have assumed that in the course of obtaining the
necessary regulatory and third party consents for the Transaction, no delay or
restrictions will be imposed that will have a material adverse effect on the
contemplated benefits of the Transaction.
Our conclusions stated herein do not constitute a recommendation to the
Special Committee, the Board of Directors or stockholders as to whether the
stockholders should tender their shares of common stock in the Offer or how
the Special Committee, the Board of Directors or the stockholders should vote
with respect to any matter relating to the Transaction, and do not address the
underlying business decisions of the Board and the Special Committee to enter
into the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the
Company.
All valuation methodologies that estimate the net worth of an enterprise on
a going-concern basis are predicated on numerous assumptions pertaining to
prospective economic and operating conditions. Unanticipated events and
circumstances may occur and actual results may vary from those assumed. The
variations may be material.
We examined the valuation of the Company on a going-concern basis, meaning
that the underlying assets of a business entity are presumed to attain their
highest values in continued operation and that liquidation of said assets
would likely diminish the value of the whole to the shareholders and
creditors.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the consideration to be received by the stockholders (except Mr. Mark D.
Lerdal) of the Company in connection with the Transaction is fair to them from
a financial point of view.
Page 3
Special Committee of the Board of Directors
Kenetech Corporation
October 25, 2000
The Opinion is furnished solely to the Special Committee, the Board of
Directors, and the Company. The Opinion may be relied upon only by the Special
Committee and the Board of Directors and may not be relied upon by any other
person, may not be quoted, referred to or reproduced at any time, in any
matter or for any other purpose without our express, prior, written consent,
which consent will not be unreasonably withheld (except that it may be filed
in total by the Company as required under applicable federal securities laws).
The Opinion is delivered to the Special Committee subject to the conditions,
scope of engagement, limitations and understandings set forth in this Opinion
and in our engagement letter dated August 24, 2000, and subject to the
understanding that the obligations of Houlihan Lokey in the Transaction are
solely corporate obligations, and no officer, director, employee, agent,
shareholder or controlling person of Houlihan Lokey shall be subjected to any
personal liability whatsoever to any person, nor will any such claim be
asserted by or on behalf of you or your affiliates. Houlihan Lokey has been
retained on behalf of the Special Committee, and has delivered the Opinion to
the Special Committee and also to the other members of the Board of Directors.
Houlihan Lokey's Opinion will not be used for any other purpose other than in
connection with the Transaction.
Houlihan Lokey Howard & Zukin
Financial Advisors, Inc.
SCHEDULE III
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
ROBERT L. KOHLS and LOUISE A. KOHLS
Plaintiffs,
v.
ANGUS M. DUTHIE, MARK D. LERDAL,
GERALD R. ALDERSON, and CHARLES Civil Action No. 17762-NC
CHRISTENSON,
Defendants, and
KENETECH CORPORATION,
Nominal Defendant.
FIRST AMENDED COMPLAINT
Plaintiffs, Robert L. Kohls and Louise A. Kohls (collectively
"Plaintiffs"), by and through their attorneys, allege as follows:
NATURE OF THE ACTION
1. KENETECH Corporation ("KENETECH" or the "Corporation") is a
corporation organized and existing under the laws of the State of Delaware.
Incorporated on February 25, 1986, under its original name, USW, Inc., the
Corporation was the parent holding company of KENETECH Windpower, Inc.
(formerly U.S. Windpower, Inc.). With its subsidiaries, the Corporation had
historically participated in developing, constructing, financing, operating,
managing and selling independent power projects and manufactured wind turbines.
As of October 30, 1999, the Corporation reported that it had 41,919,218 shares
of common stock issued and outstanding.
1
2. This action is brought derivatively or behalf of KENETECH to
enforce the rights of KENETECH to acquire 12,865,458 shares of KENETECH's
common stock for nominal consideration.
3. Plaintiffs are excused from making a demand under Rule 23.1. The
reasons that such a demand is excused include:
(1) This action arises out of the decision of the individual
defendants (the "Defendants"), who were then the sole members of the board of
directors (the "Board") of KENETECH, to cause KENETECH not to purchase
12,865,458 shares of its common stock (the "Stock") for a total purchase price
of $1,000 when at the time the Stock was available for KENETECH's purchase in
December 1997. That Stock was trading for approximately $.065 per share and
thus had a market value of approximately $800,000. (The Stock now trades for
over $.60 a share and has a market value of over $8.2 million). The Defendants
were aware the Stock would be sold and that the price would be nominal. No
valid exercise of business judgment supported the Defendants' decision not to
have KENETECH acquire that Stock at that time for $1,000.
(2) The Stock was instead acquired by defendant Lerdal who, as
a result, has an interest in preserving that transaction from attack and is
therefore disqualified from considering a demand that KENETECH bring this
action in its own behalf.
(3) Defendant Christenson is also disqualified from considering
a demand that he bring this action because he is liable for breaching his
fiduciary duty to KENETECH in connection with the purchase of the Stock.
Neither the business judgment rule nor the director exculpation provisions in
the KENETECH certificate of incorporation protect Christenson from this
liability because he did not act in good faith in this matter and in doing so
favored Lerdal over KENETECH in breach of Christenson's duty of loyalty.
2
Christenson did not act in good faith because:
(1) He failed to obtain competent legal, financial or accounting
advice that KENETECH should not buy the stock; and
(2) The reasons offered by Lerdal to justify his taking the Stock
from KENETECH were false on their face and could not have been believed by
Christenson. Thus:
(1) Lerdal claimed that KENETECH was insolvent, but
Christenson knew at the time the Stock was purchased on December 29, 1997 that,
because the EcoElectrica project had obtained construction financing on
December 15, 1997, KENETECH's interest in EcoElectrica was worth much more than
the $19.5 million book value at September 27, 1997, that was reported on the
Form 10Q filed on November 7, 1997 with the Securities and Exchange Commission
("SEC"). Indeed, Defendant Alderson has testified under oath that he informed
the Board at a meeting in June 1997 that values of $150 million and $200
million for KENETECH's interest in EcoElectrica, expressed in an analysis
presented to the Board, "were still low" and that Defendant Duthie agreed with
that comment. (An offer to purchase KENETECH's interest in EcoElectrica was
received in July 1998 for an amount in excess of $237 million and its interest
was ultimately sold in December 1998 for $252 million). As a result, all of the
Defendants, including specifically Christenson and Lerdal, knew that the fair
value of KENETECH's interest in EcoElectrica n December 1997 exceeded $200
million. The Defendants also were aware that if the reported book value of
EcoElectrica was adjusted to reflect its fair value, the $180.5 million
difference ($200 million minus $19.5 million) was sufficient to make KENETECH
solvent by more than $48 million at the time of Lerdal's purchase of the Stock
in December 1997, based on the Form 10Q filed in November 1997 (as confirmed by
the subsequent filing on
3
Form 10K for December 31, 1997).
(2) Lerdal claimed that the terms of the Senior Notes
prevented KENETECH from purchasing the Stock, but Christenson knew that the
Senior Notes were already in default for failure to pay millions of dollars in
interest and the Senior Notes holders had permitted KENETECH to pay over $1
million in bonuses to KENETECH's officers because they knew that they would be
paid in full when EcoElectrica was sold and therefore would not have objected
to paying $1,000 to buy the Stock; and
(3) Lerdal claimed the PRIDES Certificate of Designations
precluded it from purchasing the Stock, but Christenson knew that the PRIDES,
as a contingent defensive measure, would have favored KENETECH purchasing the
Stock had KENETECH disclosed to them that the Company intended to involuntarily
convert the PRIDES into common stock in less than five months, rather than meet
its obligations to the PRIDES under the Certificate of Designations, consistent
with the winding up that was then underway.
(4) Furthermore, the failure of the Board to cause KENETECH
to take advantage of a corporate opportunity to acquire one-third of KENETECH's
common stock for $1,000, merely because such a purchase might violate technical
covenants in the instruments governing the Senior Notes and the PRIDES, would
have been a breach of its fiduciary duty under well-established case law in
Delaware.
(4) As a result of the foregoing, there is not a majority of
the Board of Directors of KENETECH qualified to consider a demand to bring this
action.
4. Plaintiffs seek relief to protect the Corporation and its
stockholders from the unlawful and inequitable conduct of the Defendants, and
to enforce the right of KENETECH to acquire its Stock.
4
5. The Plaintiffs lack an adequate remedy at law.
THE PARTIES
6. Plaintiffs, Robert L. Kohls and Louise A. Kohls, are, and at all
times relevant to the actions complained of here were, stockholders of
KENETECH.
7. Defendant Mark D. Lerdal ("Lerdal") has been a director, as well
as President and Chief Executive officer of the Corporation from 1996. For the
years 1996, 1997 and 1998, he received aggregate cash compensation in excess of
$3 million, including a cash severance payment in 1997 of $1,163,919, even
though he had not been terminated by the Board.
8. Defendant Gerald R. Alderson ("Alderson") was a director of the
Corporation. He also is a former Chairman of the Board of Directors and former
President and Chief Executive Officer. In 1996, Mr. Alderson received over $1.1
million of cash compensation, including a $965,000 severance payment upon his
resignation as Chief Executive Officer.
9. Defendant Angus M. Duthie ("Duthie") was the Chairman of the
Board of Directors and a member of the Board when the actions complained of
occurred.
10.Defendant Charles Christenson ("Christenson") is a director of
the Corporation and was a member of the Board when the actions complained of
occurred.
11.Together the Defendants constituted the entire Board of Directors
of the Corporation in December 1997. Each of the Defendants had been a director
of the Corporation continuously since at least August 1996.
5
FACTUAL ALLEGATIONS
12.On or about October of 1997, Lerdal was advised that a
stockholder of KENETECH, Hillman Company, was shopping the Stock and was going
to sell the Stock in 1997. Thereafter, the other individual Defendants were
also advised that the Stock was for sale and considered jointly purchasing it.
Duthie was persuaded by Lerdal to permit Lerdal to buy the Stock alone and the
other Defendants agreed.
13.Lerdal acquired thereafter the 12,865,458 shares of the
Corporation at a bargain price. The transaction closed on December 29, 1997,
after which 1,500,000 shares were placed in an irrevocable trust for his
children. The remaining 11,365,458 shares owned by Lerdal as a result of the
December 29, 1997 purchase and options to acquire 46,000 shares, represent 27%
of the Corporation's outstanding common stock. Together with his children, Mr.
Lerdal controls approximately 31% of the Corporation's stock whose stock market
value at the close of trading February 18, 2000 was over $8.2 million and for
which Lerdal paid only $1,000 on December 29, 1997.
14.The purchase of the Stock was an opportunity that KENETECH was
able to undertake. KENETECH had a capital surplus from which to purchase the
Stock, taking into account the fair value of its assets.
15.The purchase of the Stock by Lerdal constituted the taking of a
corporate opportunity that belonged to KENETECH. The Defendants were aware that
Lerdal was acquiring the Stock. By acquiescing in that breach of fiduciary duty
by Lerdal, Defendants other than Lerdal aided and abetted his breach.
WHEREFORE, Plaintiffs respectfully request that this Court grant
relief and enter judgment in their favor and against the Defendants, and enter
orders:
6
A. Declaring and adjudging that the purchase of the Stock
constituted the taking of a corporate opportunity and is null and void;
B. Requiring Lerdal to transfer the Stock to KENETECH for the
nominal consideration he paid;
C. To the extent that the Stock may not be transferred to KENETECH,
awarding KENETECH damages for the fair value of the Stock and holding
Defendants jointly and severally liable for those damages; and,
D. Awarding Plaintiffs legal fees, costs of suit and such other
relief as the Court may deem to be equitable and just.
MORRIS, JAMES, HITCHENS & WILLIAMS LLP
s/ Stephanie M. Tarabicos
--------------------------------------------------
Edward M. McNally (#614)
Stephanie M. Tarabicos (#3442)
222 Delaware Avenue--10th Fl.
P.O. Box 2306
Wilmington, Delaware 19899
(302) 888-6800
Attorneys for Plaintiffs
Dated: February 23, 2000
7
SCHEDULE IV
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
ROBERT L. KOHLS and LOUISE A. KOHLS
Plaintiffs,
v.
ANGUS M. DUTHIE, MARK D. LERDAL,
GERALD R. ALDERSON, and CHARLES Civil Action No. 17762-NC
CHRISTENSON,
Defendants, and
KENETECH CORPORATION,
Nominal Defendant.
MEMORANDUM OPINION
Submitted: April 20, 2000
Decided: July 26, 2000
Edward M. McNally, Esquire and John T. Meli, Jr., Esquire, of MORRIS, JAMES,
HITCHENS & WILLIAMS LLP, Wilmington, Delaware, Attorneys for Plaintiffs.
Charles F. Richards, Jr., Esquire, Raymond J. DiCamillo, Esquire and Thad J.
Bracegirdle, Esquire, of RICHARDS, LAYTON & FINGER, Wilmington, Delaware,
Attorneys for Defendants.
LAMB, Vice Chancellor
I. INTRODUCTION
In October 1997, the largest holder of Kenetech Corporation common
stock advised Kenetech's President and CEO, Mark D. Lerdal, who was also a
director, that it was "shopping" its 12.8 million share block (over 30% of the
common outstanding) and meant to sell those shares by year-end. The other
directors also learned of these facts and considered purchasing the shares
jointly. They and Lerdal also knew that the block could be acquired at a
nominal price. Without formally meeting to analyze Kenetech's options, the
directors failed to cause Kenetech to take advantage of the opportunity to buy
those shares. Rather, in December 1997, Lerdal purchased the shares for a mere
$1,000.
Plaintiffs Robert L. and Louise A. Kohls, who are Kenetech
stockholders, filed this derivative action on February 3, 2000, seeking to
enforce the company's right to purchase those shares. The Kohls assert that the
12.8 million Kenetech shares were worth far more than $1,000 when purchased
from Hillman and are now valued at over $8.2 million. The Kohls allege that the
opportunity to buy the shares belonged to Kenetech and that Lerdal breached his
duty of loyalty by appropriating it for himself. They also claim that the other
directors breached their fiduciary duties to Kenetech by their acquiescence in
Lerdal's action and their failure properly to pursue and protect Kenetech's
interests in exploiting the opportunity presented.
By the time the Kohls filed this action, two of the directors had
resigned from the Kenetech board and been replaced with new outside directors.
A third, Charles A. Christenson, remained on the Kenetech board.
2
The defendants in this action filed a motion to dismiss for failure
to state a claim and failure to comply with the demand requirement of Rule
23.1. For the reasons set forth below, I deny defendants' motions.
II. FACTUAL BACKGROUND /1/
A. The Parties
Plaintiffs Robert L. and Louise A. Kohls have purportedly been
Kenetech stockholders at all times relevant to this action.
Nominal Defendant Kenetech is a Delaware corporation with its
principal office in San Francisco, California. As of October 30, 1999, Kenetech
had 41,919,218 outstanding shares of common stock. The Hillman Company, which
is not a party to this action, held about 30% of those shares at the time of
the events described herein.
Defendant Mark D. Lerdal has been a Kenetech director and its
President and CEO, since 1996. In 1997, Lerdal received a substantial cash
severance payment from Kenetech. He was not, however, terminated. /2/
Defendant Charles A. Christenson is now and has since 1980 been a
Kenetech director. Defendants Angus M. Duthie and Gerald R. Alderson were the
other two board members at the time of the matters alleged, but terminated
their directorial roles as of August 18, 1999. Duthie and Alderson were
replaced on the Kenetech board by two outside independent directors.
- ---------------------
/1/ The facts recited herein are taken from the complaint. Solely for the
reader's convenience, I include and identify certain background facts found in
this court's Opinions in either Quadrangle Offshore (Cayman) LLC v. Kenetech
Corp., Del. Ch., C.A. No. 16362, Steele, V.C. (Oct. 13, 1999), aff'd, Del.
Supr., 751 A.2d 878 (2000) (ORDER), or KohIs v. Kenetech Corp., Del. Ch., C.A.
No. 17763, Lamb, V.C. (July 26, 2000).
/2/ As I noted during oral argument, such arrangements are not unheard of and,
if properly approved, are presumably valid.
3
B. The Hillman Offer
Kenetech historically operated in the electric utility market.
Beginning in 1995, Kenetech's business deteriorated significantly. Over time,
Kenetech sold off most of its assets and ceased most of its operations. In June
1996, Kenetech defaulted on $99 million worth of its Senior Notes. Thus,
Kenetech faced the threat of an involuntary bankruptcy.
In October 1997, a Hillman representative contacted Lerdal, stating
that it was prepared to sell its approximately 13 million Kenetech shares for a
nominal price. Lerdal expressed his personal interest in such a transaction.
Another Hillman representative contacted one or more of the other directors who
then discussed the possibility of all four Kenetech directors jointly
purchasing the shares. Lerdal discouraged these discussions. /3/
In December, Hillman again contacted Lerdal and told him that
Hillman had not found a buyer. Lerdal agreed to buy the shares for $1,000 and
the transaction closed before year-end. /4/ Plaintiffs allege that at the then-
trading price of $0.065, those shares were valued at over $800,000. It is
alleged that the board never met to consider whether Kenetech
- ---------------------
/3/ Vice Chancellor Steele found that when the other directors wanted to
participate in the opportunity, "Lerdal resisted on the grounds that director
Alderson and Hillman Co.'s representatives were on bad terms." Quadrangle at
14.
/4/ Vice Chancellor Steele quoted Lerdal's surprisingly blunt testimony about
how he closed the stock purchase with Hillman in December 1997:
"I got a call from Mark Laskow [Hillman's representative], who
said, 'We haven't been able to dump these things.'
I said, 'Well, I would be interested in buying them.'
He said, 'Okay.'
And I said, 'What do you want me to pay?'
He said, 'A thousand bucks, $5,000. It's sort of irrelevant.'
I said, 'I'll pay a thousand.'
And that is how the negotiation went."
Quadrangle at 15 (emphasis in original).
4
could or should take the opportunity to purchase the shares itself. It is
alleged, however, that Lerdal told the other directors, outside the context of
a board meeting, that Kenetech could not purchase the shares for a variety of
reasons, all relating to its poor financial condition. These reasons included:
the prohibition found in (S)160(a)(1) of the Delaware General Corporation Law
against a corporation repurchasing shares at a time when its capital is
impaired, restrictive covenants found in Kenetech's Senior Notes, and certain
protective provisions of Kenetech's charter relating to a series of preferred
stock denominated as PRIDES. /5/ The complaint alleges that since the board
never met to consider the question of repurchasing the block of shares, it
never obtained independent legal, financial or accounting advice on the
subject. Plaintiffs also allege that the reasons identified by Lerdal did not,
in fact, prevent Kenetech from purchasing the shares.
C. The Eco-Electrica Sale
By the time of Hillman's offer, Kenetech had sold-off a large part
of its assets but retained its one-half interest in an electric plant project
called Eco-Electrica. /6/ In December 1997, just prior to the challenged stock
purchase, Kenetech obtained construction financing for the project, thus
increasing its value significantly. In December 1998, Kenetech closed a sale of
its Eco-Electrica interest, realizing $252 million in the transaction.
Kenetech's market value has risen accordingly. Thus, Lerdal's shares purchased
from Hillman for $1,000 are now worth well over $8 million.
- ---------------------
/5/ "PRIDES" is an acronym referring to Kenetech's Preferred Redeemable
Increased Dividend Equity Securities.
/6/ Though not directly pertinent to this Opinion, the Notes holders agreed not
to force Kenetech into bankruptcy because of their understanding that by
allowing Kenetech to obtain certain financing and regulatory approval for this
project, the amount Kenetech could realize in any sale would increase
substantially, thus making more likely a full satisfaction of the debt.
5
III. THE PARTIES' CONTENTIONS
The defendants moved to dismiss the complaint on the ground that the
demand upon the board required by Court of Chancery Rule 23.1 was neither made
nor excused. Defendants concede Lerdal's interest in a demand but argue that
the other 3 members of the 4-man board of directors are disinterested and
independent and, therefore, demand was required. Defendants point out that half
of the Kenetech board at the time of Lerdal's stock purchase has been replaced
and argue that plaintiffs fail to show that Christenson is either interested in
that transaction or controlled by Lerdal.
Defendants also moved to dismiss the complaint for failure to state
a valid corporate opportunity claim, relying on the Delaware Supreme Court's
opinion in Broz v. Cellular Information Systems, Inc. /7/ First, they say,
Kenetech's capital was impaired, so it could not statutorily repurchase its own
shares. /8/ Second, the provisions of its debt instruments prevented a
repurchase. Third, the PRIDES Certificate of Designations prevented Kenetech
from repurchasing any of its common shares at a time the PRIDES dividends were
in arrears. Finally, defendants argue, Kenetech had no expectancy in the
opportunity. For each of those reasons, Lerdal could purchase the shares
without concern for Kenetech's interest therein.
Plaintiffs counter by arguing that Lerdal's usurpation of the
extraordinary opportunity for Kenetech to repurchase one-third of its shares
for nominal consideration (and the other directors' complicity in the same)
evidences faithless conduct. Plaintiffs argue that Kenetech's capital was
impaired only because it carried its Eco-Electrica investment at a
- ---------------------
/7/ Del. Supr., 673 A.2d 148 (1996).
/8/ See 8 Del. C. (S)160.
6
mere $19.5 million book value. The directors knew that Eco-Electrica's fair
value was at least $200 million and that a revaluation would produce over $48
million in surplus.
Plaintiffs also claim that no properly motivated director would
believe that either the preferred stockholders or the Senior Notes holders
would have prevented Kenetech from making a $1,000 purchase of one-third of its
stock. First, the PRIDES holders had an interest in seeing the purchase made
because they were imminently confronting a mandatory conversion into
common. /9/ Second, since the board had already obtained the Senior Notes
holders' consent to over $1 million in bonus payments to Kenetech's officers,
it stood to reason that they would allow a mere $1,000 payment to buy the
stock. In any event, since Kenetech was already in default, plaintiffs' contend
that those holders could attain no additional rights by virtue of an
unauthorized $1,000 share repurchase. Further, plaintiffs argue, even if the
PRIDES holders' and Senior Notes holders' respective cooperation could not be
presumed, the opportunity to buy one-third of the company for $1,000 provided
such a great benefit to Kenetech's stockholders that the board was required to
efficiently breach those contracts.
Plaintiffs then argue that demand was excused at the time they filed
their complaint because there was not a disinterested and independent majority
of directors on whom to make such a demand. Lerdal is concededly conflicted
because he actually bought the stock. Christenson is also conflicted,
plaintiffs argue, because of his knowledge of the operative facts and his
failure (and that of defendants Duthie and Alderson) to take steps to protect
the interests of Kenetech in making the purchase.
- ---------------------
/9/ As discussed in greater detail in the Companion Opinion and in Quadrangle,
the PRIDES holders faced a mandatory conversion of their preferred shares to
common stock on May 14, 1998. Thus, their interest was consonant with the
common stockholders' interest in consolidating their pro rata ownership of the
corporation.
7
IV. ANALYSIS
A. Standards
In order to survive a motion to dismiss under Court of Chancery Rule
12(b)(6), the complaint must allege facts that, if true, establish every
element of a claim upon which relief can be granted. /10/ For Rule 12(b)(6)
purposes, a complaint need only provide "a short and plain statement" of the
facts supporting relief. /11/
Plaintiffs sue derivatively but did not make a pre-suit demand on
the board. Rule 23.1 requires that the complaint allege "with particularity,"
the justification for not making a demand. /12/ This heightened pleading
standard exists because "the derivative suit impinges on the managerial freedom
of directors." /13/ In order to assert a claim on behalf of the corporation, a
plaintiff stockholder must show that "the directors are under an influence
which sterilizes their discretion" /14/ or "are incapable of making an
impartial decision regarding such litigation." /15/
In Aronson v. Lewis, the Delaware Supreme Court articulated a two-
part test for demand excusal: as a general rule, demand is excused where the
complaint alleges, with particularity, facts that establish a reasonable doubt
that either (a) the directors are disinterested and independent, or (b) the
challenged transaction is otherwise the product of a valid exercise of the
directors' business judgment. /16/
- ---------------------
/10/ In re Santa Fe Pac. Corp. Shareholders Litig., Del. Supr., 669 A.2d 59, 65
(1995).
/11/ Ct. Ch. R. 8(a).
/12/ Ct. Ch. R. 23. 1; see also Brehm v. Eisner, Del. Supr., 746 A.2d 244, 254
(2000).
/13/ Aronson v. Lewis, Del. Supr., 473 A.2d 805, 811 (1984).
/14/ Id. at 814.
/15/ Rales v. Blasband, Del. Supr., 634 A.2d 927, 932 (1993).
/16/ Aronson, 473 A.2d at 814.
8
Central to this analysis is the operation of the business judgment
rule. This is self-evident as to the second prong. But it is equally true of
the first. "As to the [first prong] inquiry, directorial independence and
disinterestedness, the court reviews the factual allegations to decide whether
they raise a reasonable doubt, as a threshold matter, that the protections of
the business judgment rule are available to the board." /17/ Relatedly the
Aronson court also pronounced that the mere fact that directors would be asked
to sue themselves is not a basis for excusing demand." /18/ Nor is it
sufficient to allege that the directors had voted to approve the transaction at
issue." /19/ Rather, the complaint must allege "specific facts establishing
that "the potential for liability is not "a mere threat' but instead may rise
to "a substantial likelihood."' /20/ These general statements may be seen as
flowing from the premise that, where business judgment protection is available,
a mere threat of personal liability resulting from one's participation as a
director in approving a transaction should not suffice to sterilize a
director's discretion.
The Aronson court ruled as follows:
In sum the entire review is factual in nature. The Court of Chancery
in the exercise of its sound discretion /21/ must be satisfied that a plaintiff
has alleged facts with particularity which, taken as true, support a reasonable
doubt that the challenged transaction was the product of a valid exercise of
business judgment. Only in that context is demand excused. /22/
- ---------------------
/17/ Id.
/18/ Id. at 815; see also Brehm, 746 A.2d at 257 n. 34.
/19/ Aronson, 473 A.2d at 817.
/20/ Donald J. Wolfe, Jr. and Michael A. Pittenger, Corporate and Commercial
Practice in the Delaware Court of Chancery (S)9-2(b)(3)(iii), 570 (1998)
(quoting Rales, 634 A.2d at 936 (quoting Aronson, 473 A.2d at 815))
(hereinafter "Wolfe & Pittenger").
/21/ In Brehm, the Supreme Court overruled this aspect of Aronson and its
progeny, holding that de novo review applies to a Rule 23.1 analysis. Brehm,
746 A.2d at ( ).
/22/ Aronson, Del. Supr., 473 A.2d at 815.
9
While Aronson's focus on the business judgment rule serves well in
most cases, the Delaware Supreme Court has recognized, most notably in Rales v.
Blasband, /23/ the existence of situations in which the Aronson analysis cannot
apply. This is so, for example, "where the absence of any action or decision on
the part of the board to which the demand would be addressed 'makes it
impossible to perform the essential inquiry contemplated by Aronson'" /24/ --
whether the presumption of the business judgment rule applies to the challenged
transaction. Pertinently, the Rales court concluded that the Aronson test
should not be applied "where the subject of the derivative suit is not a
business decision of the board." /25/
Of course, recognizing that the Aronson test cannot be applied in a
given situation does not lead the conclusion that demand is excused. Rather, as
the Supreme Court said in Rales:
Instead, it is appropriate in these situations to examine whether
the board that would be addressing the demand can impartially
consider its merits without being influenced by improper
considerations. Thus, a court must determine whether or not the
particularized factual allegations of a derivative stockholder
complaint create a reasonable doubt that as of the time the
complaint is filed, the board of directors could have properly
exercised its independent and disinterested business
- ---------------------
/23/ Del. Supr., 634 A.2d 927 (1993).
/24/ Wolfe & Pittenger, (S)9-2(b)(3)(iii), 578 (quoting Rales, 634 A.2d at
933).
/25/ Id. at 934. Rales also recognized that the Aronson test cannot be applied
"where a business decision was made by the board of a company, but a majority
of the directors making that decision have been replaced" by the time the
complaint is filed. Id. at 934. Here, only 2 of the 4 directors had been
replaced in the interim period. Thus, all other things being equal, the Aronson
test could still be applied in this case to assess whether the remaining
directors --Lerdal and Christenson -- are "conflicted" for purposes of
considering a demand. Finally, Rales recognized that the Aronson test should
not apply where "the decision being challenged was made by the board of
directors of a different corporation." Id.
10
judgment in responding to a demand. If the derivative plaintiff
satisfies this burden, then demand will be excused as futile. /26/
It has been observed that this "simple and straightforward inquiry
would seem to be the very issue that Aronson, in its more mechanical and
roundabout way, was intended to resolve." /27/ Moreover, because this
formulation is one of general application (and can as easily be applied in the
business judgment rule context addressed in Aronson), "it is arguable that the
current state of the law is conceptually inverted and that it would be both
simpler and more direct to regard the original Aronson analysis as a subpart of
the more generally applicable and flexible principle set forth in Rales." /28/
For present purposes, I need not wrestle with this last observation
because I am persuaded by my review of the amended complaint and the parties'
arguments that the Kenetech board of directors did not make a business decision
in 1997 regarding the purchase of the Hillman block of shares by either
Kenetech or Lerdal. Thus, the Aronson test is irrelevant and I will analyze the
demand issue under the standard articulated in Rales-- whether the board can
consider a demand "without being influenced by improper considerations." /29/
- ---------------------
/26/ Id. at 934 (emphasis added).
/27/ Wolfe & Pittenger, (S)9-2(b)(3)(iii), 580.
/28/ Id.
/29/ Rales, 634 A.2d at 924.
11
B. Can a Majority of the Kenetech Board Consider a Demand?
It is uncontested that half of the present board is presumed capable
of impartially considering a demand. It is equally clear that Lerdal is
conflicted from doing so. The question of demand futility thus turns on
Christenson. /30/
1. Is Christenson Beholden to Lerdal?
Plaintiffs acknowledge that Christenson was not financially
interested in Lerdal's stock purchase. Nevertheless, arguing by analogy to the
first prong of Aronson, plaintiffs say that Christenson is "beholden" /31/ to
Lerdal and, thus, not independent. "Independence means that a director's
decision is based on the corporate merits of the subject before the board
rather than extraneous considerations or influences." /32/ Thus, plaintiffs
must show facts tending to suggest that Christenson is so dependent on Lerdal
(ordinarily by virtue of financial, familial or other relationships /33/) as to
"sterilize" /34/ his ability to consider a demand in this case.
Plaintiffs present two reasons that allegedly prove Lerdal's
domination of Christenson. First, they point to Christenson's vote in favor of
Lerdal's generous severance agreement that was paid to Lerdal despite the fact
that he did not leave or change his job with the company, and that provided for
Kenetech to pay his taxes with respect to that benefit. I cannot conclude that
Christenson's vote on this matter shows his domination by Lerdal. First,
agreements of this nature are not entirely uncommon and there is nothing
inherently improper about them. More importantly, Christenson, an outside
director, was simply one of a
- ---------------------
/30/ See Beneville v. York, Del. Ch., C.A. No. 17638, Strine, V.C, (Jul. 10,
2000) (holding that where half the board is conflicted, demand is excused).
/31/ Rales, 634 A.2d at 936.
/32/ Aronson, 473 A.2d at 816.
/33/ See generally White v. Panic, Del. Ch., C.A. No. 16800, mem. op. at 16-20,
Lamb, V.C. (Jan. 19, 2000).
/34/ Levine v. Smith, Del. Supr., 591 A.2d 194, 205 (1991).
12
unanimous board (other than Lerdal) to approve the transaction. Finally,
Christenson's ability to control or influence control over Lerdal's
compensation would ordinarily be more suggestive of his domination and control
over Lerdal, not the opposite inference suggested by plaintiffs here." /35/
Plaintiffs' second argument is that Christenson's conduct with
respect to the challenged transaction is so inexplicable that it supports an
inference that Lerdal controls him. I agree that the unusual nature of the
corporate opportunity described in the complaint is properly considered in
weighing whether or not Christenson is "conflicted" for purposes of considering
a demand. However, this argument will be considered as part of the second part
of my Rales inquiry, discussed below.
2. Is Christenson "Interested" in the Demand Itself?
Although Christenson is neither interested in the challenged
transaction nor beholden to Lerdal, the demand futility analysis is not
complete. Is Christenson, by virtue of a "substantial threat" of personal
liability, interested in the decision to bring the litigation, so as to leave
him conflicted from impartially evaluating a demand? /36/ On the basis of the
matters properly alleged in the complaint, I conclude that he is.
- ---------------------
/35/ See Rales, 634 A.2d at 937 (holding that director whose substantial
compensation from his position with a different corporation may be controlled
by an interested defendant is considered beholden, and conflicted from
considering a demand).
/36/ In a way, this inquiry is related to the second prong of the Aronson test.
Under Aronson, the court determines whether the defendant will enjoy the
protection from liability that exists when the business judgment rule stands
unrebutted. If those protections will not apply, the court will infer that the
director will be unable to consider impartially the corporation's interest in
bringing the litigation because of his own interest in avoiding that
litigation. Relatedly, when there is no challenge to a business judgment, as is
the case here, the question becomes whether the director faces a substantial
threat of personal liability due to his alleged conduct or lack thereof.
13
This case presents a highly unusual set of facts that color my
decision on this motion. The complaint does not allege merely the opportunity
to repurchase shares of stock at market price. Rather, the complaint alleges
the forfeiture or usurpation of an opportunity for the corporation to realize a
substantial windfall for the benefit of its stockholders.
. The company's CEO learned that its 30% shareholder was anxious
to sell its position and was willing to do so for next to
nothing. The CEO wanted to buy the shares himself. The other
members of the board of directors also learned of this
opportunity and jointly considered purchasing it, in their
personal capacities.
. The CEO consulted with counsel and gave the other directors a
series of reasons why the company could not buy the shares. The
complaint alleges (in a conclusory fashion) that these reasons
were false on their face and could not have been believed by the
others, including Christenson. /37/ Moreover, it is alleged that
Christenson (and, I infer, the board as a whole) "failed to
obtain competent legal, financial or accounting advice." The CEO
then convinced the others to let him take the deal alone. Those
shares were allegedly worth many times the price paid for them,
and are now worth over 8,000 times their cost to the CEO.
Plaintiffs argue that Christenson faces a substantial threat of
personal liability because his "inexplicable indifference to the interests of
the Company in this matter . . . implicate[s] his duty of loyalty to Kenetech
and . . . amounts to bad faith . . . ." Plaintiffs also argue that a
"director's duty of loyalty may also be implicated where directors who do
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/37/ The fact that the complaint is not particularly pleaded in this regard
does not require dismissal. Rather, I consider only the particularly pleaded
facts in the complaint, and analyze whether, as a matter of law, the hurdles
identified by Lerdal are valid.
14
not benefit from a transaction nevertheless act with 'indifference to their
duty to protect the interests of the corporation and its minority
shareholders.'" /38/ Put simply, plaintiffs assert that no properly motivated
director could have perceived this corporate opportunity and not thoroughly
inquired into the company's ability to exploit it.
Later in this opinion, I deny defendants' motion to dismiss the
complaint for failure to state a claim for usurpation of a corporate
opportunity. Suffice it to say for now that I am satisfied that the complaint
does state a claim against all of the defendants relating to Lerdal's alleged
usurpation of a corporate opportunity. Even applying Rule 23.1's heightened
pleading standard, I conclude that the allegations of the complaint, if true,
would establish that Christenson faces a "substantial likelihood" /39/ of
personal liability for breach of fiduciary duty and aiding and abetting
Lerdal's breach of duty. /40/
In Broz v. Cellular Information Systems, Inc., the Supreme Court
made clear that the failure to formally present an opportunity to the corporate
board cannot be the sole basis for imposing liability. /41/ I take this to mean
that, by analogy, a board's failure formally to consider an opportunity does
not, alone, amount to a breach of duty on the directors' part. Nevertheless,
the Kenetech board's apparent acceptance of Lerdal's assertions at face value,
without conducting any independent analysis or seeking independent advice,
tends to show a
- ---------------------
/38/ Pl. Ans. Br. at 13 (quoting Strassburger v. Earley, Del. Ch., C.A. No.
14267, Jacobs, V.C. (Jan. 27, 2000)).
/39/ Aronson, Del. Supr., 473 A.2d at 815.
/40/ "Defendants assert that because this court can simply require Lerdal to
transfer the shares to the company as a remedy, Christenson does not face
personal liability. Defendants misinterpret the complaint, which clearly
requests, to the extent the stock cannot be transferred, that all of the
defendants be held jointly and severally liable to Kenetech.
/41/ Del. Supr., 673 A.2d 148, 152, n. 5 (1996).
15
disregard for corporate interests. After all, independent accountants and
lawyers may have been able to structure an acceptable transaction for Kenetech.
In the context of the well-pleaded allegations of the complaint,
particularly the highly valuable nature of the opportunity to Kenetech and its
stockholders, I am satisfied that Christenson is "conflicted" for purposes of
considering a demand. Since only half of the present board is capable of
impartially considering a demand, such exercise is excused as futile.
C. Does the Complaint State a Claim for Usurpation of a Corporate Opportunity?
Giving fair consideration to the arguments of the parties, I
conclude that the complaint states a claim upon which relief can be granted,
within the meaning of Rule 12(b)(6). Thus, I do not accept, at this stage of
the proceedings, defendants' multiple explanations why the corporate
opportunity doctrine is not relevant to this case.
The basic framework of Delaware's corporate opportunity doctrine was
laid down by the Delaware Supreme Court in Guth v. Loft, Inc., as follows:
if there is presented to a corporate officer or director a business
opportunity which the corporation is financially able to undertake,
is, from its nature, in the line of the corporation's business and
is of practical advantage to it, is one in which the corporation
has an interest or a reasonable expectancy, and by embracing the
opportunity, the self-interest of the officer or director will be
brought into conflict with that of his corporation, the law will
not permit him to seize the opportunity for himself. /42/
- ---------------------
/42/ Guth v. Loft, Inc., Del. Supr., 5 A.2d 503, 511 (1939).
16
Of course, as the Supreme Court recently recognized, because corporate
opportunity cases arise in widely varying factual contexts, "[h]ard and fast
rules are not easily crafted to deal with such an array of complex
situations." /43/
The peculiar facts of this case, involving a particularly striking
"opportunity" for the corporation to benefit its stockholders, would seem to
present a sufficiently substantial question of fiduciary misconduct to survive
a motion to dismiss. Defendants advance several arguments, however, that they
say require dismissal. First, defendants argue that because Kenetech did not
have in place any policy or plan for repurchasing its stock, Kenetech had no
cognizable expectancy in the Hillman offer. Next, defendants say that Section
160 of the DGCL, the contractual limitations in the Notes and the PRIDES
Certificate of Designations barred Kenetech from repurchasing its own shares.
Finally, defendants assert that the opportunity was presented to Lerdal in his
individual capacity and not as a director. I take each argument in turn.
1. Kenetech's "Expectancy" in the Opportunity
First, defendants argue that the Hillman offer was not the type of
opportunity that Delaware law requires be presented to the corporation.
Defendants say that because Kenetech had no share repurchase program in effect,
Hillman's offer did not constitute an opportunity in the company's line of
business. Defendants cite to Equity Corp. v. Milton, /44/ which can be read to
stand for the proposition that a corporation may have no expectancy in
receiving an opportunity to buy a block of its own stock at market prices.
Unsurprisingly,
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/43/ Broz v. Cellular Information Systems, Inc., Del Supr., 673 A.2d 148, 155
(1996).
/44/ Del. Supr., 221 A.2d 494 (1966).
17
neither that case nor any other holds that a Delaware corporation has no
expectancy in being presented with an opportunity to repurchase a large block
of its own stock for little or no consideration (thus providing nearly cost-
free returns to its stockholders). And I need no authority to conclude
otherwise.
The question, then, is whether plaintiffs allege that Kenetech could
have taken advantage of that opportunity.
2. Section 160
A Delaware corporation may not repurchase its own shares "when the
capital of the corporation is impaired or when such purchase or redemption
would cause impairment of the capital of the corporation." /45/ A surplus
exists (meaning that the capital is not impaired) when the net assets of a
corporation exceed its total liabilities." /46/ Defendants argue that
Kenetech's capital was impaired in the amount of $131,710,000. Thus, Kenetech
could not purchase Hillman's shares even if it wanted to do so.
At first blush, this is a substantial imppediment to Kenetech's
ability to take advantage of the opportunity presented. Nevertheless, the well-
pleaded allegations of the complaint, taken as true, show that this balance
sheet capital account deficit would not have prevented Kenetech from acting.
This is so because the Eco-Electrica project was being carried at a low book
value and, it is alleged, Christenson and the rest of the board believed that
its actual worth could exceed $200 million. Further, on December 15, 1997,
Kenetech obtained financing for the project, thus making more likely an
ultimate realization of a substantial sale price for the asset.
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/45/ 8 Del. C. (S)160(a)(1).
/46/ (S)154.
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The complaint alleges that if the board revalued its assets to
reflect the market value of Eco-Electrica, it could have eliminated the capital
deficit and, thus, avoided the obstacle to a repurchase presented by Section
160 (a). Certainly, a corporation may "revalue properly its assets and
liabilities to show a surplus and thus conform to the statute." /47/ For these
reasons, neither Lerdal nor the other defendants can claim at this stage that
Section 160 really represented a barrier to a $1,000 stock repurchase by
Kenetech.
3. The Senior Notes Restriction
Because of its default in payment on the Senior Notes, Kenetech was
contractually restricted from repurchasing its own shares for value. Defendants
argue that this contractual provision barred Kenetech from taking advantage of
the Hillman offer. Yet, the Senior Notes holders had already waived their
rights in allowing bonus payments in excess of $1 million to Kenetech's
officers. Thus, the complaint alleges, there was reason to believe that the
holders of the Senior Notes would not have objected to Kenetech's paying $1,000
to repurchase the Hillman block of common stock. Additionally, the restrictions
found in the Senior Notes Indenture are not necessarily as forbidding as
defendants suggest. For example, Kenetech could complete "any purchase or
redemption . . . made by exchange for, or out of the substantially concurrent
sale of, Capital Stock of the Company." /48/ At least at this stage of the
proceeding, it is fair to infer that some means of effectuating the transaction
without violating the Senior Notes Indenture could have been arranged by a
properly motivated and counseled board of directors.
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/47/ Klang v. Sinith's Food & Drug Centers, Inc., Del. Supr., 702 A.2d 150, 154
(1997).
/48/ Bracegirdle Aff., Ex. A (S)10.09, P 2.
19
I recognize that in Broz, the Supreme Court held on post-trial
appeal that the corporation could not take the opportunity presented, in part
because certain note restrictions "severely limited the discretion of CIS as to
the acquisition of new assets and substantially restricted the ability of CIS
to incur new debt." /49/ That may, ultimately, prove to be the case here too.
But in the context of this motion to dismiss, I draw a contrary inference based
on the well-pleaded allegations of the complaint and the terms of the
Indenture." /50/
4. The PRIDES Certificate
Since Kenetech was in arrears in paying dividends on the PRIDES,
Kenetech was prohibited by Section 2(c) of the PRIDES Certificate of
Designations from repurchasing its own shares. Pertinently, this provides that
"no shares of any Junior Stock may be purchased, redeemed, or otherwise
acquired by the Corporation or any of its subsidiaries (except in connection
with a reclassification or exchange of any Junior Stock through the issuance of
other Junior Stock . . .)" whenever full dividends on the PRIDES have not been
paid.
Of course, reliance on this provision to require dismissal of
plaintiffs' claim requires a certain ironic sensibility. The restriction
against common share repurchases was undoubtedly included in the PRIDES
certificate to protect the holders of those "senior" securities against
depredation by the "junior", i.e., common, stockholders. Yet, based on the
well-pleaded allegations of the complaint, I must conclude at this stage of the
proceedings that the PRIDES holders were substantially harmed by Kenetech's
failure to purchase the
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/49/ Del. Supr., 673 A.2d at 155.
/50/ Because I reach this conclusion, I find it unnecessary to address
plaintiffs' argument that the directors' fiduciary duties might have required
them to authorize a breach of either the indenture or the PRIDES certificate of
designation as a matter of economic efficiency.
20
Hillman block of shares. This is so because the PRIDES were facing mandatory
conversion into common shares on May 14, 1998. Had the repurchase and
retirement of the Hillman block reduced the amount of outstanding common, the
PRIDES holders would have received in the mandatory conversion a substantially
greater percentage of the common equity.
As with the Senior Notes Indenture, I am unable, at this stage of
the case, to conclude with assurance that the PRIDES Certificate of Designation
presented such an obstacle to Kenetech's repurchase of the Hillman block as to
require dismissal. In this regard, I rely in part on the fact that the PRIDES
Certificate is a part of the corporation's Certificate of Incorporation and is
subject to amendment in accordance with Section 242 of the DGCL. Defendants are
correct that a repurchase in violation of the Certificate would constitute an
ultra vires act. However, as plaintiffs point out, Kenetech could have tried to
get an amendment of the Certificate between October and December 1997.
Alternatively, had the board actually considered its options and obtained
advice, skilled counsel might have suggested some other mechanism to avoid the
problems posed by the Certificate. Put simply, the Certificate does not present
such a clear barrier to taking the opportunity as to require dismissal of the
complaint. Rather, plaintiffs must be given the opportunity to prove their
allegation.
5. The Capacity in which Lerdal Received the Offer
The complaint does not expressly allege that Lerdal became aware of
the opportunity to purchase the Hillman block in his capacity as a President
and CEO of Kenetech. Nevertheless, considering all of the relevant well-pleaded
allegations of the complaint, it is fair to draw such an inference. For
example, paragraph 12 alleges that "[o]n or about October of 1997, Lerdal was
advised that a stockholder of Kenetech, Hillman
21
Company, was shopping the [block] and was going to sell [it] in 1997." The same
paragraph goes on to allege that "the other individual Defendants were also
advised that the [block] was for sale and considered jointly purchasing it."
When questioned at oral argument, defendants' counsel properly
conceded that in the circumstances, it is reasonable to infer that the offer
was made to Lerdal specifically because he was the President and CEO of the
Company. Thus, I will not consider this argument further.
* * *
For the reasons stated above, plaintiffs adequately allege against
Lerdal a claim for improper usurpation of a corporate opportunity. For the same
reasons, I conclude that it states a claim for relief against the other
defendants who knowingly acquiesced in Lerdal's alleged usurpation and failed
to takes steps to protect Kenetech's interest in purchasing the shares itself.
22
V. CONCLUSION
In summary, plaintiffs have established that demand under Court of
Chancery Rule 23.1 is excused because they have shown that half of the present
Kenetech board is unable to impartially consider any such demand. Further, I
conclude that the complaint states a claim upon which relief may be granted
against each person named as a defendant. Accordingly, I have today entered the
attached order denying the motion to dismiss in all respects. Counsel are
directed to confer and to report to the Court within thirty (30) days on a
schedule for the disposition of this matter.
/s/ Stephen P. Lamb
-------------------------------------
Vice Chancellor
23
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
ROBERT L. KOHLS and LOUISE A. KOHLS
Plaintiffs,
v.
ANGUS M. DUTHIE, MARK D. LERDAL,
GERALD R. ALDERSON, and CHARLES Civil Action No. 17762-NC
CHRISTENSON,
Defendants, and
KENETECH CORPORATION,
Nominal Defendant.
ORDER
For the reasons stated in the Court's Memorandum Opinion dated July
26, 2000, the defendants' Motion to Dismiss IS HEREBY DENIED.
/s/ Stephen P. Lamb
-------------------------------------
Vice Chancellor
Dated: July 26, 2000