U.S. Energy Systems settles with Nakash Energy over governance disputes

By Rebecca Melvin

New York, Feb. 15 - U.S. Energy Systems Inc. is seeking court approval of a proposed settlement with 15% shareholder Nakash Energy LLC over corporate governance disputes, according to a Thursday filing with the U.S. Bankruptcy Court for the Southern District of New York.

The settlement will result in reconstituting US Energy's board of directors with at least three members proposed by Nakash.

Nakash will also have an allowed administrative claim of up to $250,000 for attorneys fees and expenses, and will withdraw litigation and a portion of the adversary proceeding, as well as submit a letter to the office of the U.S. Trustee for the Southern District of New York withdrawing its request for the appointment of an official committee of equity security holders.

In the filing, no mention was made of a settlement with former chairman and chief executive Asher E. Fogel, who initiated the governance litigation last October.

In defense of its Nakash settlement, the company said that the pending litigation wasn't in the best interests of the company, its creditors or equity security holders, at this critical juncture of the Chapter 11 bankruptcy case.

The settlement also "puts in place a framework for a good working relationship between USEY and its largest equity constituent [Nakash], which is important for the reorganization..." the filing states.

Under the settlement, called the governance agreement, board members Jacob Feinstein and Ronny Strauss are resigning effective Feb. 11, together with Robert Schneider, who resigned Jan. 20.

Bruce Levy and Michael Novosel are replacing Feinstein and Strauss.

Of three remaining board members, two more - Richard Augustine and Joseph Reynolds - resigned as a result of the settlement, leaving only one board member of the old guard, Bernard Zahren.

Three new directors proposed by Nakash were elected, including Emzon Shung, Robert Spiegelman and Salvators Nobile.

Also under the settlement, the parties agree that the reconstituted board cannot be changed until the confirmation and substantial consummation of the Chapter 11 plan for each of the bankruptcy cases. And the company agrees to file a stipulation dismissing Nakash from the adversary proceeding without prejudice.

The company said it has reviewed the claims and defenses of the Nakash litigation and the adversary proceeding and found that its prospects for success are uncertain given the intensive nature of the dispute and the parties' fundamental disagreement.

If the dispute were allowed to continue, the proceedings would be contentious and complicated and would require extensive discovery, motion practice, preparation of witnesses and experts, trials on the merits, including presentation of evidence related to the history of U.S. Energy, valuation issues, and matters relating the economic stake of the company's equity security holders, and post-trial briefing and appeal.

A proposed hearing date for approval of the settlement is Feb. 21.

In a related matter, the company received court permission to adjourn again a special meeting of stockholders to Feb. 26, from Feb. 19, according to an SEC filing.

The meeting was ordered by the Delaware Court in response to the Fogel suit.

U.S. Energy Systems, based in Avon, Conn., owns energy projects including natural gas and cogeneration facilities in the United States and United Kingdom. Its Chapter 11 case number is 08-10054.

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