Kohls v. Duthie

Due to liquidity problems, Kenetech Corporation (Kenetech) (defendant), a small publicly traded company, considered strategic alternatives to selling off its assets and firing employees. The Hillman Company (Hillman), one of Kenetech’s largest stockholders, informed Kenetech’s president, Mark Lerdal (defendant), that Hillman intended to sell its shares and asked for Lerdal’s assistance in finding a buyer. Lerdal concluded that Kenetech could not buy back Hillman’s shares due to financial difficulties. Lerdal later bought Hillman’s shares for only $1,000. Other Kenetech shareholders (Kohls) (plaintiffs) filed a derivative action seeking to cancel Lerdal’s stock purchase, alleging that those shares were worth over $8.2 million. Thereafter, ValueAct Capital Partners, L.P. (ValueAct) proposed a buyout merger that would take Kenetech private. Kenetech’s board of directors (defendants) created a special committee to evaluate ValueAct’s offers and authorized the committee to negotiate. The committee hired a financial-advisory firm to analyze ValueAct’s offer of $0.95 per share. The committee made a counteroffer based on the advisory firm’s recommendation. At subsequent committee meetings, the advisory firm revised its valuation and opined that ValueAct’s offer was fair to the shareholders except for Lerdal. Relying on the advisory firm’s valuation, both the committee and the full board of directors approved the ValueAct merger. The advisory firm also valued Kohls’s derivative action at only $0.01 per share, a barely positive expected value, based upon the likelihood of success and the costs of litigating the derivative claim. Information about the advisory firm’s valuation methods, including a “decision tree” containing potential outcomes of the derivative suit, was provided to Kenetech’s shareholders. Kohls disagreed with the valuations and motioned for a preliminary injunction to stop the merger, arguing that the board of directors failed to make sufficient disclosures concerning the merger and the derivative claim valuation. The board of directors subsequently furnished supplemental disclosures containing further details about the merger and valuation.