## Facts

- Moise Katz held Oak Industries, Inc.’s long-term notes and debentures and sued on behalf of similarly situated debt holders.
- Oak, a Delaware corporation, was in severe financial distress, with large operating losses and a major stock-price decline.
- Oak’s board approved a recapitalization and reorganization plan tied to (1) a transaction with Allied-Signal, Inc. and (2) a reduction of Oak’s long-term debt.
- Oak launched an exchange offer to bondholders offering cash or stock worth less than face value but more than market prices.
- The exchange offer was paired with a consent solicitation requiring tendering holders to approve indenture amendments eliminating most protective financial covenants.
- The Allied-Signal transaction was conditioned on at least 85% of Oak’s long-term debt accepting the exchange offer.
- Non-tendering holders would retain the same formal payment terms but would hold securities stripped of significant covenant protections.
- Katz sought a preliminary injunction to block consummation, alleging the tender-and-consent structure “coerced” acceptance and breached the indentures, including the implied covenant of good faith and fair dealing.

## Issues

1. Whether conditioning an exchange offer on bondholder consents that remove key indenture covenants breaches the indentures or the implied covenant of good faith and fair dealing.
2. Whether the plaintiff showed a likelihood of success and equitable grounds sufficient for a preliminary injunction enjoining the exchange offer and consent solicitation.

## Decision

- The Court of Chancery denied the preliminary injunction.
- The court held the exchange offer and consent solicitation did not breach any express indenture term or the implied covenant of good faith and fair dealing.
- The court concluded plaintiff failed to show a likelihood of success on the merits.
- The court found the balance of hardships weighed strongly against enjoining a restructuring presented as necessary to address Oak’s distressed condition.

## Legal Principles

- A corporation’s obligations to bondholders are generally contractual; directors do not owe bondholders shareholder-like fiduciary duties absent a contractual undertaking.
- The implied covenant of good faith and fair dealing protects the parties’ reasonable expectations reflected in the contract; it does not supply a general fairness limit or rewrite negotiated risk allocations.
- “Economic pressure” created by a transaction’s incentives is not, by itself, legally wrongful coercion; illegality depends on conflict with express contractual protections or the contract’s reasonably expected operation.
- Absent an indenture provision restricting such conduct, an issuer may use an exchange offer coupled with covenant-stripping consents to encourage participation in a restructuring.
- Preliminary injunctive relief requires a strong showing on the merits and equitable support; severe harm to the issuer from stopping a restructuring can weigh heavily against an injunction.

## Conclusion

The court refused to block Oak’s tender-and-consent restructuring, treating bondholders’ protections as limited to the indentures’ express terms and holding that the implied covenant could not be used to prohibit an economically compelling exit-consent exchange offer in the absence of a contractual constraint.


Katz v. Oak Indus., Inc., 508 A.2d 873 (Del. Ch. 1986)