Part 2 of a 2 Part Series
In my first post, I explained in detail the facts leading up to a family shareholder dispute between two brothers. In this post, I give you our memorandum of law in support our request for injunctive relief.
Legal Argument
Because Plaintiff Satisfies All the Criteria Established by the Case Law for the Issuance of Injunctive Relief, There Stands No Reason Why This Court Should Not Issue That Requested Relief
The case setting forth the standard for the granting of injunctive relief is Crowe v. DeGioia, 90 N.J. 126 (1982). Under Crowe, shareholders seeking injunctive relief must show the following.
One principal is that a preliminary injunction should not issue except when necessary to prevent irreparable harm. Harm is generally considered irreparable in equity if it cannot be addressed adequately by monetary damages. In certain circumstances, severe personal inconvenience can constitute irreparable injury justifying issuance of injunctive relief. Pecuniary damages may be inadequate because of the nature of the injury or of the right affected.
A second principal is that temporary relief should be withheld when the legal right underlying Plaintiff’s claim is unsettled.
A third rule is that a preliminary injunction should not issue where all material facts are controverted. Thus, to prevail on an application for temporary relief, a Plaintiff must make a preliminary showing of a reasonable probability of ultimate success on the merits. That requirement is tempered by the principal that mere doubt as to the validity of the claim is not an adequate basis for refusing to maintain the status quo.
The final test in considering the granting of a preliminary injunction is the relative hardship to the shareholders in granting or denying relief.
[Id. at 132-133, 133-134 (citations omitted).]
In applying these standards to this case, it is submitted that irreparable harm is sure to follow simply because no adequate relief can be addressed by the issuance of monetary damages. Business decisions have already been made and, if allowed, will continue to be made that change the status quo of X, Inc. as well as the business direction and financial position of the company. It has been documented that defendant is unilaterally changing the operational direction of the company and making decisions and incurring indebtedness which will or may obligate Richard in the future. He is making officer/shareholder decisions in total disregard of the shareholders agreement, corporate by-laws and the historical operations and relationships between these brothers. It will be highly unlikely that Richard will be able to completely prevent an adverse financial impact to X, Inc. given Vincent’s acquisition of expensive equipment and personnel relating to the company’s untimely entrance into the electronic discovery market. Furthermore, “severe personal inconvenience” has already and will continue to issue to Richard should injunctive relief not issue. The nature of the injury and the rights affected by Vincent’s unilateral and detrimental actions will cause harm of such a magnitude that relief must be afforded by this Court at this time which will enjoin any further diversion from the status quo regarding X, Inc.’s operations and management.
In applying the second Crowe factor, that of the legal right underlying the Plaintiff’s claim, it is submitted that the various claims are justiciable under the law. When dealing with a corporate deadlock and dissolution, our Supreme Court has held that injunctive relief is proper to maintain the status quo and prevent one partner from obtaining an advantage over another. Balsamides v. Protameen Chemicals, Inc., 160 N.J. 352, 356 (1999).
Moreover, statutory and case law indicates that relief is available to Plaintiff in this case for the cause of action for shareholder oppression and corporate deadlock.
N.J.S.A. 14A:12-7. N.J.S.A. 14A:12-7, provides in relevant part that:
The Superior Court, in an action brought under this section, may appoint a custodian, appoint a provisional director, order a sale of the corporation’s stock as provided below, or enter a judgment dissolving the corporation, upon proof that …
(b) The directors of the corporation, or the person or persons having the management authority otherwise in the board … are unable to effect action on one or more substantial matters respecting the management of the corporations affairs; or
(c) In the case of a corporation having 25 or less shareholders, the directors or those in control have acted fraudulently or illegally, mismanaged the corporation, or abused their authority as corporate officers or directors or have acted oppressively or unfairly toward one or more of the minority shareholders, directors, officers or employees.
A fifty-percent shareholder satisfies the criteria for a minority shareholder. Berger v. Berger, 249 N.J. Super. 305 (Ch. Div. 1991)(In context of a closely held corporation, the term “minority shareholder” must be leniently construed to further the purpose of the close corporation statute intended to prevent abusive and oppressive acts in closely held corporations); Bonavita v. Corbo, 300 N.J. Super. 179 (Ch. Div. 1996). A holder of 50% stock in a closely held corporation considered “minority shareholder”).
In this case, Richard, a fifty-percent shareholder, is being oppressed and frozen out by his brother Vincent, the other fifty-percent shareholder. Plaintiff satisfies his burden of proof by showing X, Inc.’s prior inability to take action due to the brother’s divergent visions for the company and Vincent’s subsequent oppressive and unfair conduct toward Richard. See Bonavita, supra, 300 N.J. Super. at 127.
Accordingly, New Jersey’s law is well settled that relief can issue upon the proper showings which this hearing before this Court will demonstrate. Additionally, the attached Certification of Richard fully shows that no material facts are controverted. It is undeniable that Vincent has taken over total control of the corporation and frozen Richard out, preventing him from acting in his traditional capacity. Vincent has no right to take the actions he has taken, placing this matter squarely within the contemplation of N.J.S.A. 14A:12-7. Furthermore, at this juncture, Richard merely seeks reinstatement of the status quo prior to Vincent’s oppressive and unfair actions. Mere doubt as to the validity of the claim is not an adequate basis for refusing to maintain the status quo. Crowe, supra, 90 N.J. at 133.
The final test to be considered is the relative hardship test set forth by the Crowe court. It is undeniable that the hardship to Richard and the future status of X, Inc. will far outweigh any hardship to Vincent. The hardship to be suffered by Richard is obvious regarding his inability to make any decisions relating to or operating the company which he founded and whose future as it is known may forever be altered by Vincent’s unilateral actions, as well as personal inconvenience and financial hardship to Richard. (i.e. unilateral notice of termination of salary, benefits and compensation.)
Conclusion
On the basis of the foregoing principals and arguments discussed herein with this Brief, plaintiff respectfully requests that this Court grant the relief requested, maintaining the status quo of X, Inc., by returning operations to the state of affairs prior to Vincent’s unilateral, detrimental actions, maintaining the shareholders’ respective responsibilities and roles with regard to business and organization operations, and returning the payment of payroll and cash distributions and credit privileges to the status quo.
So What Happened?
As a result of our efforts, we were able to obtain injunctive relief on behalf of our client.
To discuss your NJ business, commercial or LLC matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.
By Fredrick P. Niemann, a Freehold Township, Monmouth County NJ Shareholder Rights Law Attorney