I. INTRODUCTION AND SUMMARY

II. STATEMENT OF FACTS

A. The Plaintiffs

B. The Defendants

C. The Solicitation

III. DEFENDANTS VIOLATED SEC REGULATIONS BY NOT FILING THE SOLICITATION WITH THE SEC AND BY NOT DISSEMINATING OR FILING A PROXY STATEMENT

A. Defendants' March 21 Letter was a "Proxy Solicitation" Under SEC Regulations

B. Defendants Violated Exchange Act Rule 14a-3 by Sending the Solicitation to the Limited Partners Without Sending Them a Proxy Statement that was Filed with the SEC

C. Defendants Violated Exchange Act Rule 14a-6 by Sending the Solicitation to the Limited Partners Without Filing it With the SEC

IV. DEFENDANTS VIOLATED EXCHANGE ACT RULE 14a-9 BY FAILING TO DISCLOSE NUMEROUS MATERIAL FACTS IN THE SOLICITATION

A. The Solicitation Failed to Identify the Defendants, Disclose their Interests, or Disclose how those Interests Conflict with the Interests of the Limited Partners

B. The Solicitation Failed to Disclose Other Facts Which Would Be Important to a Limited Partner in Deciding how to Vote

V. THIS COURT SHOULD ISSUE AN INJUNCTION TO REMEDY DEFENDANTS' VIOLATIONS OF SEC REGULATIONS

VI. CONCLUSION

TABLE OF AUTHORITIES

Cases

Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051 (Del. Ch. 1987)

Kaufman v. Cooper Companies, Inc., 719 F. Supp. 174 (S.D.N.Y 1989)

Long Island Lighting Co. v. Barbash, 779 F.2d 793 (2d Cir. 1985)

Mendel v. Carroll, 651 A.2d 297 (Del. Ch. 1994)

Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970)

Nordyke v. Santa Clara County, 110 F.3d 707 (9th Cir. 1997)

Paramount Communications, Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994)

Rapid-American Corp. v. Harris, 603 A.2d 796 (Del. 1992)

Riggs Nat. Bank of Washington D.C. v. Allbritton, 516 F. Supp. 164 (D.D.C. 1981)

Robert M. Bass Group v. Evans, 552 A.2d 1227 (Del. 1988)

Securities & Exchange Comm'n v. Okin, 132 F.2d 784 (2d Cir. 1943)

Securities & Exchange Comm'n v. Topping, 85 F. Supp. 63 (S.D.N.Y. 1949)

Studebaker Corp. v. Gittlin, 360 F.2d 692 (2d Cir. 1966)

Thorpe by Castleman v. CERBCO, Inc., 676 A.2d 436 (Del. 1996),

Trans World Corp. v. Odyssey Partners, 561 F. Supp. 1315 (S.D.N.Y. 1983)

TSC Industries v. Northway, Inc., 426 U.S. 438 (1976)

Vision Sports, Inc. v. Melville Corp., 888 F.2d 609 (9th Cir. 1989)

Western District Council v. Louisiana Pacific Corp., 892 F.2d 1412 (9th Cir. 1989)

STATUTES

15 U.S.C. § 78n(a)

REGULATIONS

17 C.F.R. Sections 240.14a-2, 14a-3, 14a-6, 14a-9

I. INTRODUCTION AND SUMMARY

Plaintiff Wininger ("Plaintiff") is a limited partner in Synthetic Industries, L.P. ("the Partnership"), a Delaware limited partnership. The Partnership owns approximately two-thirds of the stock of Synthetic Industries, Inc. ("the Company"). Wininger Decl., Exh. A at 1. This controlling interest in the Company is the Partnership's only asset. The defendants in this case are the individuals and entities which control both the Partnership's general partner (the "General Partner") and the Company.

On March 21, 1997, the defendants sent a proxy solicitation ("the Solicitation") to the Partnership's limited partners. The Solicitation is a two-page document which announces a "Plan of Dissolution" for the Partnership, under which the Partnership's stock in the Company will be sold to the public and/or distributed in kind to the limited partners. The Solicitation urges the limited partners to support this Plan of Dissolution and advises that the limited partners will be asked to vote for it and will be able to vote by proxy.

The Solicitation violated several regulations of the Securities and Exchange Commission ("SEC") promulgated pursuant to the Securities and Exchange Act of 1934 ("Exchange Act Rules"). See 15 U.S.C. § 78n(a). The Solicitation was not filed with the SEC and was not accompanied or preceded by a publicly filed proxy statement, in violation of Exchange Act Rules 14a-3 and 14a-6. See 17 C.F.R. § 240.14a-3, .14a-6. The two-page Solicitation also failed to disclose numerous material facts which a reasonable limited partner would want to know in order to decide how to vote with regard to the Plan of Dissolution. The Solicitation thus violated Exchange Act Rule 14a-9. See 17 C.F.R. 240.14a-9.

Accordingly, plaintiffs request the court to issue injunctive relief to remedy the defendants' violations of SEC regulations.

II. STATEMENT OF FACTS

A. The Plaintiffs

There are approximately 1850 limited partners ("the Limited Partners") in the Partnership. Wininger Decl., Exh. A at 1. Plaintiff is bringing this case as a class action on behalf of all the other Limited Partners ("Plaintiffs").

B. The Defendants

The defendants control the General Partner and the Partnership. Because the Partnership owns a majority of the stock of the Company, they control the Company as well. The individuals who control both the Company and the Partnership, henceforth referred to as "the Management Defendants," have voted the Partnership's stock to elect the Company's Board of Directors and are also the principal executives officers of the Company.¹

C. The Solicitation

On March 21, 1997, defendants sent a letter (the "Solicitation") to Plaintiff and the other Limited Partners. Wininger Decl., Exh. A.² The Solicitation was signed by defendant Chill. Wininger Decl., Exh. A at 3.

The March 21 Solicitation announces a proposed Plan of Dissolution for the Partnership and advocates in favor of this proposed Plan. The first sentence of the Solicitation states,

I am pleased to inform you that we will soon propose for your approval a highly flexible Plan of Dissolution for the Partnership under which you may choose to receive cash, common stock of Synthetic Industries, Inc. or a combination of both for your interest in the Partnership.

The various terms of the Plan are intended to distribute the Partnership's assets to you in a manner that is in all of your best interests.

The Solicitation explains that the Plan of Dissolution is subject to approval of two-thirds of the Limited Partners. Wininger Decl., Exh. A at 1. The Solicitation then states,

We currently intend to hold a meeting of limited partners about one month after we send out the proxy statement, at which time we will answer any remaining questions and ask for your vote. I hope you will be able to attend this meeting. If not, you will be able to vote by proxy.

The Solicitation fails to disclose numerous material facts. It is only two-pages long. Notably, it says nothing about the individuals responsible for it, their interests, or how those interests conflict with the interests of the Limited Partners.

III. DEFENDANTS VIOLATED SEC REGULATIONS BY NOT FILING THE SOLICITATION WITH THE SEC AND BY NOT DISSEMINATING OR FILING A PROXY STATEMENT

A. Defendants' March 21 Letter was a "Proxy Solicitation" Under SEC Regulations

It is evident from its text that the Solicitation is designed to advocate for the proposed Plan of Dissolution and encourage the Limited Partners to vote for it. Under the applicable law, the Solicitation is thus a "proxy solicitation" subject to SEC regulations.

The Securities and Exchange Act of 1934 (the "Exchange Act") gives the SEC the power to promulgate regulations governing proxy solicitations and makes it unlawful for anyone to violate these regulations. 15 U.S.C. § 78n(a).³ Exchange Act Rule 14a-2 defines what communications constitute a "proxy solicitation" subject to the SEC's regulations. A "proxy solicitation" is:

(i) Any request for a proxy whether or not accompanied by or included in a form of proxy;

(ii) Any request to execute or not to execute, or to revoke, a proxy; or

(iii) The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy. 17 C.F.R. § 240.14a-2(l)(1) (emphasis added).

A long line of cases holds that the definition of "proxy solicitation" extends "to any other writings which are part of a continuous plan ending in solicitation and which prepare the way for its success." Securities & Exchange Comm'n v. Okin, 132 F.2d 784, 786 (2d Cir. 1943). As the Second Circuit later stated in Long Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d Cir. 1985), the SEC's proxy rules

apply not only to direct requests to furnish, revoke or withhold proxies, but also to communications which may indirectly accomplish such a result or constitute a step in a chain of communications designed ultimately to accomplish such a result.

In Okin, Judge Learned Hand explained that if the SEC's regulations of proxy solicitations did not cover "writings which are part of a continuous plan ending in solicitation and which prepare the way for its success," then "an easy way would be open to circumvent the statute: one need only spread the misinformation adequately before beginning to solicit, and the Commission would be powerless to protect shareholders." 132 F.2d at 786. Judge Hand added that "[t]he earlier stages in the execution of such a continuous purpose must be subject to regulation, if the purpose of Congress is to be fully carried out." Id.

It is clear from the excerpts of the Solicitation quoted earlier that the Solicitation is designed to advocate for the proposed Plan of Dissolution and encourage the Limited Partners to vote for it. Indeed, the Solicitation expressly tells the Limited Partners that the defendants will "ask for your vote" and that "you will be able to vote by proxy." Wininger Decl., Exh. A at 2. Without doubt, then, the Solicitation is "reasonably calculated to result in the procurement . . . of a proxy" (see 17 C.F.R. § 240.14a-2(l)(1)(iii)) and is "part of a continuous plan ending in solicitation and which prepares the way for its success" (see Okin, 132 F.2d at 786). The March 21 Solicitation is therefore a "proxy solicitation" subject to SEC regulations.

B. Defendants Violated Exchange Act Rule 14a-3 by Sending the Solicitation to the Limited Partners Without Sending Them a Proxy Statement that was Filed with the SEC

Exchange Act Rule 14a-3(a) provides that a proxy solicitation may not be made "unless each person solicited is concurrently furnished or has previously been furnished with a publicly-filed preliminary or definitive written proxy statement . . ." 17 C.F.R. § 240.14a-3. The defendants did not file a proxy statement with the SEC or send a proxy statement to the Limited Partners concurrently with or prior to sending the Solicitation to the Limited Partners. Luchenitser Decl. ¶¶ 1-2; Wininger Decl. ¶ 5. The defendants thereby violated Rule 14a-3(a).

C. Defendants Violated Exchange Act Rule 14a-6 by Sending the Solicitation to the Limited Partners Without Filing it With the SEC

Exchange Act Rule 14a-6(b) provides that "eight definitive copies of the proxy statement . . . and all other soliciting material . . . shall be filed with, or mailed for filing to, the [SEC] not later than the date such material is first sent or given to any security holders." 17 C.F.R. § 240.14a-6(b). The defendants did not file their Solicitation with the SEC. Luchenitser Decl. ¶¶ 1-3. The defendants thereby violated Rule 14a-6(b).

IV. DEFENDANTS VIOLATED EXCHANGE ACT RULE 14a-9 BY FAILING TO DISCLOSE NUMEROUS MATERIAL FACTS IN THE SOLICITATION

Exchange Act Rule 14a-9 provides that no proxy solicitation may make "any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading." 17 C.F.R. § 240.14a-9(a) (emphasis added). For purposes of Rule 14a-9, "[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976).

The Solicitation represents that the proposed Plan of Dissolution would be "fair" to the Limited Partners. The Solicitation does this through statements such as:

(a) "[T]he Plan has been designed to provide fair and equitable treatment of all our Limited Partners." (Wininger Decl., Exh. A at 3);

(b) "We have more than 1800 limited partners with a wide variety of investment goals and objectives. We believe the Plan will satisfy these diverse needs in a fair, equitable, and tax efficient manner." (Wininger Decl., Exh. A at 1);

(c) "[T]he Plan will provide that the General Partner will receive only amounts to which it is clearly entitled under the Partnership Agreement and the General Partner will not receive any fees or other compensation for carrying out the Plan." (Wininger Decl., Exh. A at 2); and

(d) "The various terms of the Plan are intended to distribute the Partnership's assets to you in a manner that is in all of your best interests. We will not conduct a stock offering at a price that, at the time, does not represent fair value for the shares." (Wininger Decl., Exh. A at 2).

Defendants have clearly failed to disclose numerous material facts necessary in order to make the Solicitation, and, in particular, the foregoing statements, not false or misleading.

A. The Solicitation Failed to Identify the Defendants, Disclose their Interests, or Disclose how those Interests Conflict with the Interests of the Limited Partners

The Solicitation fails to even identify the individuals (the Management Defendants) who are behind the Plan of Dissolution, and does not even mention any conflicts of interest that those individuals have in relation to the Plan of Dissolution. In evaluating the Solicitation's endorsement of the proposed Plan of Dissolution, and in deciding whether or not to vote for the Plan, reasonable Limited Partners would naturally consider important all material facts bearing on whether the Plan of Dissolution was in the interests of the Management Defendants and whether the interests of the Management Defendants conflict with the interests of the Limited Partners. Such facts are material as a matter of law. See TSC Industries, 426 U.S. at 449.

It is, of course, in the interests of the Limited Partners to have the Partnership liquidated at the highest possible price. Normally that would be accomplished by selling the stock held by the Partnership as a block. A buyer will usually pay more for a controlling block of stock than the price the company's shares trade for on the stock exchanges or other public markets, in order to acquire control. This increase in the value of a controlling block of stock, which results from the power created by the majority ownership held by the controlling block, is referred to as a "control premium."⁴

The Management Defendants, however, have incentives not to engage in a transaction involving a transfer of the controlling interest. Such a transaction would cause them to lose their absolute control over the Company. Such a transaction would therefore threaten the lucrative executive positions which the Management Defendants have in the Company, since an individual or entity which acquires the controlling interest would have the power to discharge them. By contrast, the proposed Plan of Dissolution, by dissipating the Partnership's stock in the Company into the hands of thousands of different shareholders, will leave the Management Defendants with effective control of the Company.⁵

The Solicitation failed to disclose anything about the defendants' interests relating to the Company or the proposed Plan of Dissolution; nor does it address the control issue or the defendants' conflicts. In particular, the Solicitation failed to disclose:

(a) the identities of the defendant individuals and entities who formulated the proposed Plan of Dissolution and authorized the sending of the Solicitation and how these individuals and entities stand to benefit from the Plan of Dissolution;

(b) the undisputed fact that the Management Defendants control both the Partnership and the Company (see Luchenitser Decl., Exh. B at 41, 46);

(c) that a sale or transfer of the Partnership's controlling interest in the Company would threaten the Management Defendants' control over the Company;

(d) that the Partnership's ownership of a controlling interest in the Company creates a control premium;

(e) that the proposed Plan of Dissolution would cause the control premium to be irrevocably dissipated and lost while securing the Management Defendants' control over the Company (see supra note 5); and

(f) the efforts, or lack thereof, of the defendants to market the Partnership's stock in the Company as a block or explore other alternatives to the proposed Plan of Dissolution.

In the Solicitation, defendants also failed to disclose a number of facts which show how lucrative the Management Defendants' control positions in the Company are and thereby demonstrate the extent of the Management Defendants' conflicts of interest. In this regard, the Solicitation failed to disclose:

(a) that defendants Chill, Wright, Kenner, and Freed receive substantial salaries and benefits from the Company;⁶

(b) that defendant Beckman has an agreement with the Company under which he receives $125,000 per year in exchange for being required to provide 20 hours of consulting services per month (Luchenitser Decl., Exh. B at 46);

(c) that the Management Defendants were able to use their control positions to grant themselves lucrative stock options;⁷ and

(d) that the Management Defendants were able to use their control positions to grant themselves lucrative "golden parachute" employment agreements.⁸

B. The Solicitation Failed to Disclose Other Facts Which Would Be Important to a Limited Partner in Deciding how to Vote

In violation of Rule 14a-9, defendants failed to disclose other facts which a reasonable Limited Partner would consider important in evaluating the proposed Plan of Dissolution:

(a) Defendants failed to disclose the existence and details of a lawsuit which has been filed against the defendants in Delaware.⁹ If this lawsuit is successful, a receiver will be appointed to assure that the dissolution of the Partnership brings the highest possible price for the Limited Partners. See Luchenitser Decl., Exh. E at 20. This is a material fact since, for example, a reasonable Limited Partner could decide to vote against the proposed Plan of Dissolution in the expectation that the Delaware lawsuit would bring a more favorable outcome.

(b) Defendants failed to disclose that they have entered into a lock-up agreement with Bear, Stearns & Co., Inc. ("Bear Stearns") which impairs the Partnership's ability to dispose of its stock in the Company. While the agreement is in effect, it might prevent the Partnership from engaging in a transaction involving a block transfer of its controlling interest in the Company, even though such a transaction would probably provide the greatest return to the Limited Partners. This is a material fact because, for example, a reasonable Limited Partner could conclude that defendants' proposed Plan of Dissolution should be rejected because a dissolution plan that brings a higher return could be implemented after the lock-up agreement fully expires on December 1, 1997.¹⁰

(c) Defendants stated in the Solicitation that "[t]he Plan has been designed to preserve the long-term financial strength of our Company." Wininger Decl., Exh. A. at 3 (emphasis added). However, defendants failed to disclose that the interests of the Partnership and the Limited Partners may conflict with the long-term interests of the Company and with the interests of minority shareholders in the Company.¹¹

V. THIS COURT SHOULD ISSUE AN INJUNCTION TO REMEDY DEFENDANTS' VIOLATIONS OF SEC REGULATIONS

This court should issue an injunction to remedy defendants' violations of Exchange Act Rules 14a-3, 14a-6, and 14a-9. "In the Ninth Circuit, in order to obtain a preliminary injunction, the moving party must show a combination of probable success on the merits and the possibility of irreparable injury or that serious questions are raised and the balance of hardship tips sharply in its favor." Nordyke v. Santa Clara County, 110 F.3d 707, 710 (9th Cir. 1997); see also Vision Sports, Inc. v. Melville Corp., 888 F.2d 609, 612 (9th Cir. 1989).

In this case, Plaintiffs have shown an overwhelming probability of success on the merits -- defendants clearly violated Rules 14a-3, 14a-6, and 14a-9. Moreover, the balance of harms tips sharply in Plaintiffs' favor. Defendants should not be permitted to circumvent SEC regulations through their attempt "to spread the misinformation adequately before beginning to solicit" proxies formally. See Okin, 132 F.2d at 786. The Limited Partners will suffer irreparable harm to their right to cast a fully informed vote on the proposed Plan of Dissolution if defendants are not ordered to disclose the material facts that were omitted in their March 21 Solicitation. See Kaufman v. Cooper Companies, Inc., 719 F. Supp. 174, 178, 185 (S.D.N.Y 1989); Riggs Nat. Bank of Washington D.C. v. Allbritton, 516 F. Supp. 164, 181 (D.D.C. 1981); see also Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051, 1062 (Del. Ch. 1987). By contrast, defendants will suffer no harm from simply being ordered to comply with the law.

The cases confirm that, under these circumstances, injunctive relief should be granted. In Studebaker, 360 F.2d at 696, for example, the court found that a communication with shareholders which did not expressly request a vote but only requested an authorization to obtain a stockholder list was "part of a 'continuous plan' intended to end in solicitation and to prepare the way for its success." The court affirmed an injunction that required the person who made the communication to comply with SEC Rules 14a-3 and 14a-6. Id. And it is well-established that equitable relief may be granted to remedy violations of Rule 14a-9. E.g., Mills v. Electric Auto-Lite Co., 396 U.S. 375, 386 (1970); Western District Council v. Louisiana Pacific Corp., 892 F.2d 1412, 1416 (9th Cir. 1989).

Plaintiffs accordingly ask the court to issue a preliminary injunction which enjoins defendants from conducting further solicitations until defendants:

(1) Comply with Exchange Act Rule 14a-3(a) by filing a proxy statement with the SEC which complies with SEC regulations and by sending the proxy statement to all the Limited Partners;

(2) Comply with Exchange Act Rule 14a-6(b) by filing the March 21 Solicitation with the SEC; and

(3) Comply with Exchange Act Rule 14a-9 by sending a corrective disclosure to the Limited Partners which makes full disclosure of all facts material to the matter with respect to which the March 21 Solicitation was made, including:

(a) the parties behind the Plan of Dissolution;

(b) how defendants Chill, Freed, Kenner, and Wright control both the Partnership and the Company;

(c) the positions of defendants Chill, Freed, Kenner, and Wright in the Company;

(d) the salaries and other compensation which defendants Chill, Freed, Kenner, Wright, and Beckman receive from the Company;

(e) that the Partnership has a control premium by virtue of its ownership of a controlling interest in the Company;

(f) how a sale or transfer of the Partnership's controlling interest in the Company would threaten the control of defendants Chill, Freed, Kenner, and Wright over the Company;

(g) that the proposed Plan of Dissolution would cause the control premium to be irrevocably dissipated and lost while securing the Management Defendants' control over the Company;

(h) the efforts, or lack thereof, of the defendants to market the Partnership's stock in the Company as a block or explore other alternatives to the proposed Plan of Dissolution;

(i) that the interests of the Partnership and the Limited Partners may conflict with the long-term interests of the Company and with the interests of minority shareholders in the Company;

(j) that the Management Defendants own stock options in the Company;

(k) the details of those stock options;

(l) the lawsuit filed by Plaintiff in Delaware;

(m) the details of the lawsuit;

(n) that defendants Chill, Freed, Kenner, and Wright have "golden parachute" employment agreements with the Company;

(o) the details of these employment agreements;

(p) the lock-up agreement with Bear Stearns;

(q) the details of the lock-up agreement; and

(r) that defendants violated SEC regulations for the reasons described in this brief.

VI. CONCLUSION

For the foregoing reasons, this court should issue the injunctive relief which Plaintiffs have requested.

¹ Defendant SI Management L.P., a Delaware limited partnership, is the sole general partner of the Partnership. Defendant Synthetic Management G.P., a Georgia general partnership, is the sole general partner of SI Management L.P. Luchenitser Decl., Exh. B at 46. Plaintiffs are informed and believe that defendant Synthetic Management G.P. is also known as SI Management G.P. See Wininger Decl., Exh. A at 3.

The Managing General Partner of Synthetic Management G.P. is defendant Chill Investments, Inc. Luchenitser Decl., Exh. C at 10. Defendant Leonard Chill is the sole director and stockholder of Chill Investments, Inc. Luchenitser Decl., Exh. B at 46. Defendant Chill is also President, Chief Executive Officer, and a director of the Company. Luchenitser Decl., Exh. B at 41.

The other general partners of Synthetic Management G.P. are defendants Beckman Investments, Inc., Freed Investments, Inc., Kenner Investments, Inc., and Wright Investments, Inc. Luchenitser Decl., Exh. B at 46. Defendant Jon Beckman is the sole director and stockholder of Beckman Investments. Luchenitser Decl., Exh. B at 46. Defendant Beckman is also a former executive officer and director of the Company and is now a consultant to the Company. Luchenitser Decl., Exh. B at 46.

Defendant W. Wayne Freed is the sole director and stockholder of Freed Investments. Luchenitser Decl., Exh. B at 46. Defendant Freed is also "Vice President -- Market Development" of the Company. Luchenitser Decl., Exh. B at 41.

Defendant Ralph Kenner is the sole director and stockholder of Kenner Investments. Luchenitser Decl., Exh. B at 46. Defendant Kenner is also "Vice President -- Manufacturing" of the Company. Luchenitser Decl., Exh. B at 41.

Defendant W. Gardner Wright is the sole director and stockholder of Wright Investments. Luchenitser Decl., Exh. B at 46. Defendant Wright is also "Vice President -- General Manager -- Carpet Backing Division" of the Company. Luchenitser Decl., Exh. B at 41.

² From the text of the Solicitation, it is apparent that the Solicitation was a form letter sent to all the Limited Partners. The Solicitation is addressed, "Dear Limited Partner." Wininger Decl., Exh. A at 1.

³ Section 14(a) of the Exchange Act provides, in relevant part, that:

It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce . . . or otherwise, in contravention of such rules and regulations as the [SEC] may prescribe . . . to solicit . . . any proxy or consent or authorization in respect of any security . . . registered pursuant to section 78l of this title.

⁴ Numerous cases have recognized that ownership of a controlling interest entitles the owner to be compensated through a control premium. For instance, in Mendel v. Carroll, 651 A.2d 297, 305 (Del. Ch. 1994), the court stated, "Financial markets in widely traded corporate stock accord a premium to a block of stock that can assure corporate control. . . . [I]t is widely understood that buyers of corporate control will be required to pay a premium above the market price for the company's traded securities." In Thorpe by Castleman v. CERBCO, Inc., 676 A.2d 436, 442 (Del. 1996), the court stated that a basic precept of corporate law is "that controlling shareholders have a right to sell their shares, and in doing so capture and retain a control premium." And in Rapid-American Corp. v. Harris, 603 A.2d 796, 806-07 (Del. 1992), the court ruled that the value of a control premium had to be taken into account when appraising a corporation. See also Paramount Communications, Inc. v. QVC Network Inc., 637 A.2d 34, 43 (Del. 1994) ("The acquisition of majority status and the consequent privilege of exerting the powers of majority ownership come at a price. That price is usually a control premium which recognizes not only the value of a control block of shares, but also compensates the minority stockholders for their resulting loss of voting power."); Robert M. Bass Group v. Evans, 552 A.2d 1227, 1243 (Del. Ch.) (a transfer of effective control "under normal market conditions would command a control premium"), appeal dismissed, 548 A.2d 498 (Del. 1988).

⁵ The proposed Plan of Dissolution announced in the Solicitation would consist of a public offering of shares in the Company and a subsequent distribution of any remaining shares to the Limited Partners. See Wininger Decl., Exh. A at 1. Thus, if the Plan of Dissolution goes through, the Company's stock will be diffused to many stockholders and no individual or entity will have a controlling interest in the Company. Therefore, the Plan of Dissolution would destroy the control premium without giving the Partnership and the Limited Partners an opportunity to receive cash value for it by selling the controlling interest to one party as a block.

⁶ Defendant Chill's annual salary is $270,163. In addition to his salary, defendant Chill received $104,651 in bonuses and other compensation in the fiscal year ending on September 30, 1995. Defendant Freed's annual salary is $161,544. In addition to his salary, defendant Freed received $34,165 in bonuses and other compensation in the fiscal year ending on September 30, 1995. Defendant Kenner's annual salary is $154,731. In addition to his salary, defendant Kenner received $48,752 in bonuses and other compensation in the fiscal year ending on September 30, 1995. Defendant Wright's annual salary is $249,803. In addition to his salary, defendant Wright received $74,547 in bonuses and other compensation in the fiscal year ending on September 30, 1995. Luchenitser Decl., Exh. B at 41-42.

⁷ The Management Defendants have caused the Company to issue stock options to themselves. Luchenitser Decl., Exh. B at 43-44, F-15. The Management Defendants caused the stock options to be issued with unreasonably low exercise prices.

⁸ The Management Defendants awarded "golden parachute" employment agreements to defendants Chill, Freed, Kenner, and Wright. Luchenitser Decl., Exh. B at 43. These employment agreements provide that, should there be a "change in control" of the Company, the defendants' stock options will immediately vest and defendants Chill, Freed, Kenner, and Wright will each be entitled to a lump sum payment equal to twice his annual compensation and to other substantial payments. A "change in control" would occur if any person or group became the owner of 35 percent or more of the Company's voting stock, or if the members of the Company's Board of Directors as of September 6, 1996 ceased or were about to cease to constitute a majority of the Board. Luchenitser Decl., Exh. B at 43.

⁹ In February 1997, in order to remedy the conflicts of interests of defendants and wrongful conduct committed by them, Plaintiff Wininger filed a class and derivative lawsuit in Delaware Chancery Court. This lawsuit seeks invalidation of the Management Defendants' stock options and "golden parachute" employment agreements, damages for actions taken by the defendants that lessened the value of the Limited Partners' partnership units, appointment of a receiver to liquidate the Partnership at the highest possible price, and other relief. Luchenitser Decl., Exh. E.

¹⁰ The lock-up agreement prohibits the Partnership from selling, without the consent of Bear Stearns, any Company stock for a period of 270 days after a public offering which took place in the Fall of 1996. The lock-up agreement prohibits the Partnership from selling any Company stock except pursuant to an underwritten public offering until December 1, 1997. Luchenitser Decl., Exh. B at 50.

¹¹ The Partnership owns approximately two-thirds of the stock of the Company. Wininger Decl., Exh. A at 1. The remaining third was sold to public stockholders through a public offering which took place in the Fall of 1996. See Luchenitser Decl., Exh. C at 5; Luchenitser Decl., Exh. D.