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March 26, 1999


The opinion of the court was delivered by: William C. Conner, Senior District Judge.


This purported class action on behalf of the minority shareholders*fn1 of Besicorp Group, Inc. ("Besicorp") is presently before the Court on the motion of plaintiffs James Lichtenberg ("Lichtenberg") and John Bansbach ("Bansbach") for a preliminary injunction enjoining violations of the federal securities laws in connection with the issuance of an allegedly misleading proxy statement soliciting shareholder approval of the Plan of Merger dated November 23, 1998 (the "Merger Plan"), by and among Besicorp, BGI Acquisition Corp. ("Merger Sub") and BGI Acquisition LLC ("Acquisition"). The Court has original jurisdiction over the action pursuant to the Securities and Exchange Act of 1934, as amended, 15 U.S.C. § 78n(a). The Court heard oral argument on the motion March 16, 1999. On March 18, 1999, we issued an Order granting in part and denying in part the relief sought, indicating that we would file this opinion shortly thereafter explicating our reasons for the Order.


Besicorp and its Board of Directors issued a proxy statement on Securities and Exchange Commission ("SEC") Schedule 14D-1, dated March 1, 1999 (the "Proxy"). Plaintiffs allege that the Proxy contains materially misleading statements, as well as material omissions of fact, in violation of Section 14(a) of the Securities Exchange Act of 1934 (the "Act"),*fn2 and implementing Rule 14a-9(a).*fn3 The alleged misrepresentations concern the Board's efforts, with the aid of Acquisition and Merger Sub, to structure the merger so as to terminate two shareholder derivative actions. Plaintiffs allege that defendants failed to disclose that a principal effect and purpose of the merger was to insulate Besicorp's current and former Board of Directors, comprised of defendants Michael Zinn, Michael Daley, Melanie Norden, Gerald Habib, Richard Rosen, Steven Eisenberg, and Martin Enowitz (the "Director Defendants"), from any liability as a result of these derivative actions. In addition, plaintiffs allege that the Proxy fails to disclose the material financial impact of the termination of the derivative suits upon the merger consideration to be paid to the shareholders. As described more fully below, successful adjudication of the derivative actions would result in an increase of more than 40% in the merger consideration available for distribution to the public shareholders, from $37.09 per share to approximately $62 per share.

I. The Derivative Suits

In March 1993, plaintiff Lichtenberg commenced a derivative action entitled Lichtenberg v. Zinn, Enowitz and Eisenberg, Index No. 93-1987 (Sup.Ct. Ulster Cty.) (the "Lichtenberg Action"), on behalf of Besicorp against defendants Zinn and former Besicorp directors Enowitz and Eisenberg (who, at that time, comprised the entire Besicorp Board of Directors). In that action, Lichtenberg alleges that Zinn, Eisenberg and Enowitz caused Besicorp to issue stock and warrants to themselves for little or no consideration, thereby breaching the fiduciary duties of loyalty and due care which they owed to Besicorp, as well as wasting corporate assets. In addition, Lichtenberg alleges that Zinn, Eisenberg and Enowitz caused Besicorp to engage in improper related-party transactions with Zinn, or Zinn-controlled entities, which also constituted a waste of corporate assets.

Specifically, Lichtenberg alleges that in December 1991, Besicorp's Board issued to Zinn a warrant for 350,000 shares of Besicorp common stock and 350,000 shares outright. In August 1992, Besicorp's Board of Directors issued another 285,000 shares to Zinn and 100,000 shares each to Eisenberg and Enowitz. Thus, between December 1991 and August 1992, Lichtenberg claims that Zinn, Enowitz, and Eisenberg improperly granted themselves approximately 1.2 million shares of Besicorp common stock (out of a resulting total of approximately 3 million outstanding shares) which, in addition to their prior holdings, gave Zinn, Eisenberg and Enowitz in excess of 51% of the ownership of Besicorp for little or no consideration. Lichtenberg also claims that Zinn, Eisenberg and Enowitz created a special litigation committee ("SLC") to assess the bases of these claims, but that Zinn orchestrated and personally controlled the operations of the SLC.

Prior to trial, Besicorp made a motion to dismiss and/or for summary judgment on the basis of the SLC's finding that the suit was not in the best interests of Besicorp. The trial court granted the motion and Lichtenberg filed a timely notice of appeal from that decision to the New York Supreme Court, Appellate Division, Third Department. Oral argument was heard on December 17, 1998, and the decision on appeal is presently pending.

The second derivative action concerns the actions of Besicorp and its Board with respect to a criminal proceeding against Zinn. In June 1997, defendant Zinn pled guilty to two felony counts for causing false statements to be filed with the Federal Election Commission and causing a false corporate tax return to be filed with the Internal Revenue Service in connection with illegal contributions made to the 1992 election campaign of Congressman Maurice Hinchey of New York. United States v. Michael Zinn and Besicorp Group Inc., No. 97 Cr. 486 (S.D.N.Y. 1997) (CLB). According to plaintiffs, these criminal convictions arose from a scheme devised and perpetrated by defendant Zinn to illegally funnel Besicorp corporate funds into Congressman Hinchey's 1992 election campaign. In connection with his guilty pleas, Zinn confessed that he solicited "campaign contributions" to the Hinchey campaign from Besicorp employees by promising that those employees would be reimbursed by Besicorp through raises and bonuses. A number of Besicorp employees made such contributions and were reimbursed by Besicorp. Besicorp itself was prohibited by federal law from making campaign contributions.

Zinn's activities resulted in Besicorp's conviction on two related criminal charges and payment of a substantial fine. Zinn was fined $36,673 and sentenced to a six-month term of incarceration with a two-year term of supervised release thereafter. Upon his release from prison, he resumed his executive position as CEO, President and Chairman of the Board of the Company. Plaintiffs further allege that, in 1996 and 1997, Zinn and other defendants then constituting the Board, caused Besicorp to advance several hundred thousand dollars in legal costs to certain directors, officers, current and former employees and their spouses in connection with criminal proceeding.*fn4

On August 8, 1997, plaintiff Bansbach commenced a derivative action in New York State Supreme Court entitled Bansbach v. Zinn, Eisenberg, Habib, Rosen and Harris, Index No. 97-2573 (Sup.Ct. Ulster Cty.) (the "Bansbach Action"). Bansbach seeks to hold Zinn, Daley, Habib, Harris and Rosen liable to Besicorp for all of Besicorp's legal fees and costs, the legal fees and costs advanced to Zinn for his defense of the criminal case, as well as the legal fees and costs advanced by the company for various Besicorp employees and their spouses. Bansbach also seeks reimbursement from Zinn for the fines imposed upon Besicorp in connection with the criminal proceedings, and damages for all harm to the company's reputation and goodwill resulting from the criminal proceedings and Zinn's criminal actions.

The defendants in the Bansbach Action moved to dismiss the complaint for failure to make a pre-suit demand on the Board of Directors. The trial court granted this motion, and Bansbach filed a timely notice of appeal from that decision to the New York Supreme Court, Appellate Division, Third Department. In a unanimous decision dated February 4, 1999, the Third Department reversed the trial court's dismissal of the Bansbach Action, holding that plaintiff had made sufficient allegations to show that making a pre-suit demand would have been futile because the Board was not truly independent. Proceedings in the Bansbach Action are now pending at the state trial level.

II. The Merger Transaction

In July 1997, Besicorp entered into a Master Restructuring Agreement (the "MRA") with the Niagara Mohawk Power Corporation ("Niagara Mohawk") related to Besicorp's ownership interests in five power plants which provided power to Niagara Mohawk. In connection therewith, Besicorp received Niagara Mohawk common stock, valued at $69 million as of June 30, 1998, and net cash of $59 million.

The large capital gains realized by Besicorp in these transactions put it under great pressure to merge before the end of Besicorp's tax year (March 31, 1999) with a company having tax losses which could be applied to offset the gains. Thus, on November 23, 1998, the Besicorp Board of Directors entered into the Merger Plan with Acquisition and Merger Sub. Pursuant to this agreement, Besicorp would transfer its continuing businesses, as well as substantially all of the company's liabilities, to Besicorp, Ltd. ("Newco") (the "Spin-Off"). Besicorp would then authorize the pro-rata distribution of the common stock of Newco to the shareholders of Besicorp. The remainder of Besicorp's assets, which include, inter alia, the common stock received from Niagara Mohawk*fn5 and $59 million cash, would be retained by Besicorp.

Under the terms of the Merger Plan, Merger Sub would then be merged into Besicorp, and Besicorp would be the surviving company. On the effective date of the merger transaction, each share of Besicorp common stock which was issued and outstanding immediately prior to the effective date would be converted into the right to receive $34.50 in cash, plus an additional amount per share pursuant to a formula described in the Merger Plan if certain contingencies occurred. Under this formula, and based upon the trading price of Besicorp's common stock on the date the Proxy was issued, the shareholders would have the right to receive $37.09 per share. Pursuant to the terms of the Merger Plan, all issued and outstanding shares of Besicorp common stock would thereafter automatically be canceled. As a result of the merger, the present Besicorp shareholders would have no continuing equity interest in Besicorp, which would become a wholly-owned subsidiary of Acquisition, and there would cease to be a public market for the company's common stock. Defendants Zinn, Eisenberg and Enowitz would receive in excess of $44.5 million in merger consideration for the approximately 1.2 million shares of stock allegedly improperly issued to them.

Finally, the Merger Plan specifically contemplated the treatment of the company shares which were the subject of pending litigation between Besicorp and defendant Enowitz (the "Enowitz Action"). This lawsuit was brought by Besicorp to compel Enowitz to return 100,000 disputed shares of corporate stock in his possession to the company. Under the terms of the final Merger Plan, the merger consideration received for such 100,000 shares would be held in escrow pending a final determination regarding Enowitz's right to the underlying stock. Besicorp would transfer the rights to any proceeds from that litigation to Besicorp's shareholders (the shareholders of Newco subsequent to the consummation of the merger). Under the terms of the Merger Plan, if it is ultimately determined that Enowitz was not entitled to the stock, and is therefore not entitled to the merger consideration for said stock, the merger consideration would be distributed on a pro rata basis to Newco's shareholders, including, of course, the Board of Directors. Thus, plaintiffs allege that Zinn and the Director Defendants preserved the Enowitz Action by transferring Besicorp's interest in such action to Newco, because of their significant financial interest in that lawsuit, but deliberately ensured that the Bansbach and Lichtenberg Actions (collectively the "derivative suits") could not be pursued by the plaintiffs, in order to eliminate their potential liability with respect to such actions.

On March 19, 1999, the vote was held with respect to the Merger Plan and the merger was approved. The merger was consummated on March 22, 1999.

III. Relief Sought in Motion for Preliminary Injunction

Plaintiffs here allege that the Proxy is materially misleading with respect to its statements concerning the impact of the merger on the Bansbach and Lichtenberg Actions. In particular, plaintiffs complain that the Proxy fails to disclose that the merger will effectively terminate these actions and that successful adjudication of the Lichtenberg Action would result in defendants Zinn, Enowitz and Eisenberg returning 1.2 million shares of Besicorp common stock making an additional $44.5 million in merger consideration available for distribution to the minority shareholders. Such distribution would result in an increase in merger consideration from $37.09 per share to approximately $62 per share, an increase of approximately 40%.

Plaintiffs further allege that the Proxy failed to disclose that successful adjudication of the Bansbach Action would result in the recoupment of more than $1 million dollars in legal defense costs and fines which the company paid in connection with the criminal convictions of Besicorp and defendant Zinn. Finally, plaintiffs allege that the defendants the Proxy should have disclosed the fact that the merger was intentionally structured to terminate the Bansbach and Lichtenberg Actions.

Based on these allegations, plaintiffs moved on March 9, 1999 for a preliminary injunction to enjoin the alleged violations of § 14(a) of the Act and for expedited discovery in connection with the issues presented. The Proxy vote was scheduled to take place on March 19, 1999 and, by the terms of the merger agreement, the merger had to be consummated by March 22, 1999 or else Besicorp would forfeit $1.4 million. On March 9, 1999, District Judge Pauley signed an Order to Show Cause granting plaintiffs' request for expedited discovery, and scheduling a hearing on the motion for a preliminary injunction on March 16, 1999.

At said hearing, plaintiffs requested an order directing that: (1) prior to the consummation of the merger, the Bansbach and Lichtenberg Actions be transferred to Newco as assets thereof in order to preserve these actions as assets of Newco pending final adjudication thereof; and (2) the merger consideration received for stock at issue in the Lichtenberg Action and the monies at issue in the Bansbach Action be held in escrow pending final adjudication of those actions and damages claims asserted herein. On March 18, 1999, we issued an Order granting in part and denying in part the relief sought, for the reasons discussed below.


A party seeking a preliminary injunction must establish "(a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979). "The purpose of a preliminary injunction is to preserve the status quo between parties pending a final determination of the merits." See Alliance Bond Fund, Inc. v. Grupo Mexicano de Desarrollo, S.A., 143 F.3d 688, 692 (2d Cir. 1998). Once the legal requirements for an injunction are met, this ...

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