## Facts

- Kenetech Corporation, a small publicly traded company, faced serious liquidity problems and considered strategic alternatives, including asset sales, layoffs, and a potential sale or going-private transaction.
- The Hillman Company, one of Kenetech’s largest stockholders, told Kenetech’s president and CEO, Mark D. Lerdal, that Hillman intended to sell its Kenetech shares and asked for help finding a buyer.
- Lerdal concluded Kenetech could not repurchase Hillman’s shares because of Kenetech’s financial condition, and Lerdal later purchased Hillman’s block for $1,000.
- Stockholders Robert and Louise Kohls filed a derivative action seeking cancellation of Lerdal’s stock purchase, alleging the block was worth over $8.2 million and that the $1,000 price reflected extreme undervaluation.
- After the derivative suit was filed, ValueAct Capital Partners, L.P. proposed a transaction to take Kenetech private through a two-step structure (a tender offer followed by a cash-out merger) at the same per-share price.
- Lerdal, a significant stockholder and continuing manager, agreed to roll over his Kenetech equity into the acquisition vehicle in exchange for an equity interest, while public stockholders would receive cash.
- Kenetech’s board formed a special committee of outside directors to evaluate ValueAct’s proposal and negotiate terms; the committee retained independent legal counsel and a financial advisor (Houlihan Lokey).
- The committee reviewed an initial ValueAct proposal (including a $0.95-per-share indication) and negotiated, with the advisor updating valuation work during the process; the advisor ultimately opined that the final deal price was fair to stockholders other than Lerdal.
- The advisor treated the pending derivative case as a potential corporate asset and used a probability-weighted “decision tree” to estimate its expected value, concluding it added only about $0.01 per share in expected value after accounting for litigation risk, cost, and timing.
- Kenetech’s tender and proxy materials disclosed the derivative litigation and the advisor’s approach to valuing it, including the decision-tree framework; after plaintiffs raised disclosure objections, Kenetech issued supplemental disclosures with additional detail.
- Plaintiffs moved for a preliminary injunction to stop the tender offer and merger, arguing (among other things) that the deal process was conflicted (including because a committee member was a defendant in the derivative case) and that disclosures about the litigation valuation and related matters were materially deficient.

## Issues

1. Whether plaintiffs showed a reasonable probability that the going-private transaction would be reviewed under entire fairness (rather than business judgment) due to Lerdal’s participation and alleged conflicts affecting the special committee.
2. Whether the tender/proxy disclosures—especially those addressing the pending derivative action and its valuation—were materially misleading or incomplete.
3. Whether plaintiffs satisfied the requirements for a preliminary injunction by showing likely success on the merits, irreparable harm, and that the equities favored stopping the transaction.

## Decision

- The Court of Chancery denied the motion for a preliminary injunction.
- The court found plaintiffs had not shown a reasonable probability of success on fiduciary-duty or disclosure claims sufficient to justify the extraordinary remedy of an injunction.
- Based on the record at the injunction stage, the court viewed business judgment review as the likely standard because the special committee appeared independent, used independent advisors, negotiated with the buyer, and had authority to reject the deal.
- The court rejected the argument that a committee member’s status as a defendant in the separate derivative action, standing alone, made the committee unreliable for purposes of the transaction, particularly given the weakness of the derivative claim as presented at that stage.
- The court concluded the disclosures (including the original and supplemental materials) provided stockholders with the material information needed to decide whether to tender, including the nature of the derivative suit and the advisor’s probabilistic valuation approach.
- The court held that the impending loss of plaintiffs’ derivative standing if the merger closed did not, by itself, establish irreparable harm warranting an injunction, and that post-closing remedies could address any proven wrongdoing.

## Legal Principles

- A third-party take-private transaction involving management participation does not automatically trigger entire fairness where an independent, well-functioning special committee evaluates and negotiates the deal with independent advisors and real negotiating authority.
- A director’s status as a defendant in related stockholder litigation does not automatically destroy the director’s independence for transaction review; courts look for concrete indications that the litigation creates disabling self-interest or improper influence.
- Boards and committees may treat pending litigation as a company asset when evaluating price, and may rely on reasoned, probability-weighted methods (including decision-tree analysis) to estimate expected value for deal evaluation and disclosure.
- For a preliminary injunction in the deal context, plaintiffs must show a reasonable probability of success, irreparable harm, and a balance of hardships favoring an injunction; uncertainty about claims or the availability of monetary relief can weigh against pre-closing relief.
- Disclosure law requires that stockholders receive materially complete and non-misleading information; where disclosures and supplements describe the key background, conflicts, and financial analyses at a level adequate for stockholder decision-making, injunctive relief is not warranted.

## Conclusion

In Kohls v. Duthie, the Delaware Court of Chancery declined to enjoin Kenetech’s ValueAct-sponsored going-private transaction because plaintiffs did not show a sufficient likelihood of proving that the special committee process was disloyal or uninformed, or that the tender/proxy materials materially misled stockholders about the merger or the expected value of the pending derivative litigation; the court also held that loss of derivative standing, without more, did not justify stopping the deal.


Kohls v. Duthie, 765 A.2d 1274 (2000)