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From the moment Joseph Saline became a director at Commonwealth Energy Corp. he was locked in an all-out battle with his colleagues over whether the company should be acquired through a merger or conduct an initial public offering. Saline demanded access to certain company documents, which he thought would show that Commonwealth’s chief executive, Ian Carter, was blocking any public financing avenue other than an IPO. At first, the electricity provider refused to hand over the material because it believed that Saline intended to turn the records over to a rival power company he was encouraging to acquire Commonwealth. But Saline wouldn’t take no for an answer and sued the company in California state court in August 2001, insisting that he be allowed to inspect the documents. A trial court only gave him restricted access to the records and ordered him to keep their contents confidential. But in a ruling that has implications for the rights of corporate directors and free speech, a California appeals court ruled in Saline’s favor. In a July 30 opinion, the appeals panel said that the trial court didn’t make the findings necessary to justify the restrictions on Saline to see the documents and that it had no legal basis to impose a prior restraint on his speech. Neither Saline nor his attorneys at the Enterprise Counsel Group returned calls seeking comment. Warren L. Dennis, a partner in the New York law firm Proskauer Rose, said the decision represents the coming battle between increasing shareholder activism and corporate secrecy laws. “If [Saline's] claiming the information is part of a corporate governance fight, it is very, very, very hard to prevent him from getting the information and using it. This decision would be very useful for people in that position.” From the court opinion, it is clear that Saline was at odds with some of the other Commonwealth directors even when he was elected to the board in November 2000. He was elected following the ouster of the company’s former CEO and founder, Fred Bloom. According to published reports, Bloom got into trouble with the California Public Utilities Commission for faulty billing practices and his failure to disclose that he had been ordered by five states to stop selling unregistered securities. The company settled with the commission by paying a $350,000 fine, reimbursing customers, getting rid of Bloom and putting a new management team in place. When Saline was elected, members of the Commonwealth board opposed his status, and he had to confirm his seat by a court order. From the beginning, the appeals court noted, Saline was met with mistrust. In an e-mail to other Commonwealth directors, the current CEO and board member, Ian Carter, said he chose to “work around him … as much as possible …,” the court opinion said. And earlier this year Carter wrote to the company’s shareholders complaining about Saline, who had filed a string of lawsuits against the company. Saline’s “numerous legal actions and related machinations have created a major distraction,” Carter said. He added that Saline’s “persistent, and we believe unmerited, litigation” against Commonwealth could drive away potential strategic partners. Saline differed with Carter and some other directors over the company’s strategy. He believed that Carter was pursuing an IPO because the CEO’s contract called for generous stock options if the offering went through. But Commonwealth thought Saline was trying to take over the company and talking to an owner of several rival energy companies. In addition, Commonwealth claimed Saline had a conflict of interest because he was a shareholder in another company, New World Power Co., and he was encouraging that entity to take over Commonwealth. “The main reason I’m on the board is to help get us public,” Saline wrote to shareholders in October 2001. But Saline called negotiations for a merger with the already publicly traded New World Power “an unbelievably rapid and low cost way to accomplish that AND get into the distributed energy business AND do it almost FREE legally, at the expense of the IRS.” Commonwealth also alleged that Saline violated a confidentiality agreement when he posted on the Internet information about the company’s in-house billing system. The trial court allowed Saline to look at 14 categories of documents but imposed, among others, this restriction: He and his lawyers couldn’t disclose or discuss the contents with anyone other than themselves or the board. But the appeals court ruled that the restriction was an inappropriate restraint on Saline’s speech. The company never explained how it had been damaged by Saline’s posting of allegedly confidential information on the Internet regarding an in-house billing system. “Simply put, this bit of information was not the apocryphal ‘secret formula,’ the disclosure of which damaged the company beyond all repair,” according to the opinion. “There was no evidence that Saline intended to use the documents to disclose trade secrets, compete with or otherwise harm [Commonwealth Energy],” the judges wrote. A company will have to show imminent danger of an “egregious tort,” to preemptively silence a dissident director from passing on information to shareholders, the appeals court noted. Along with disputes over Carter’s compensation, Saline and his allies of shareholders also objected to the formation of Summit Energy Ventures LLC, a private investment arm of Commonwealth, referring to it as “a blatant misallocation of stockholder funds.” Commonwealth is pressing ahead with Summit Energy Ventures. Armed with up to $25 million from the energy company, Summit has invested in Santa Barbara, Calif.-based Envenergy Inc., a provider of hardware, software and networking technology for energy and facility management, and Ann Arbor, Mich.-based Power Efficiency Corp., a publicly traded company providing energy-saving controllers. The litigation between Saline and the company is still pending. But, Roy Reeves, vice president of marketing at Commonwealth, pointed to an Aug. 1 company announcement that said some of the issues involving the Saline and the board had been settled, with the agreement including “a commitment by both parties to work together to resolve future disputes without litigation.” Commonwealth, in documents filed with the U.S. Securities and Exchange Commission, said it had agreed to submit the case to mediation. As to an IPO for Commonwealth, Reeves said, “We haven’t felt the timing has been right to come out with publicly traded stock.” Copyright �2002 TDD, LLC. All rights reserved.

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