Litigation, especially involving shareholder disputes, can be messy, time-consuming and expensive. Sometimes, however, there is no alternative. In such cases, it is often necessary to go to the courts, and, moreover, to get a TRO, a preliminary injunction, or both, to ensure that those in control of a corporation are stopped from doing further damage to shareholders, or even the company itself, while the litigation is ongoing.
In order to get needed injunctive relief, which can often be the difference between life and death for a corporation, prosperity or poverty for a shareholder, one first has to understand the bases for requesting an injunction. This article will discuss the myriad bases an aggrieved shareholder can rely on in requesting an injunction.
Federal statutory law provides several bases for asserting a claim for injunctive relief on behalf of a shareholder of a publicly held corporation. These provisions apply in any jurisdiction in the United States.
In the aftermath of corporate restatements of financial reports, shareholders or former shareholders often feel that they were defrauded in connection with their purchases or sales of the corporation’s securities in that the corporation or those on the other side of such purchases or sales withheld or misrepresented material information. Where shareholders are claiming that fraud or deceptive practices occurred in connection with the purchase or sale of a security, injunctive relief can be sought pursuant to section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (2000), and SEC Rule 10(b)-5, 17 C.F.R. § 240.10(b)-5 (2008).
Shareholders frustrated with the management of a corporation may decide to find new candidates to manage the corporation and solicit the support of other shareholders to vote their shares in favor of these new candidates in an attempt to rid the corporation of old management. Shareholders who make such a move can be assured that old management will fight back by soliciting shareholders to vote in favor of their re-election, and a proxy war will ensue. For claims involving false or misleading statements made in the course of proxy solicitation, injunctive relief can be sought pursuant to section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a).
Shareholder claims often arise in the context of takeover bids for a corporation in the form of tender offers. Where a shareholder owning more than 5 percent of the outstanding shares of a corporation makes a tender offer for all or a significant portion of the corporation’s outstanding stock, or where the proposed acquisition will result in the shareholder owning more than 5 percent of the outstanding shares of the corporation, the Williams Act of 1968 requires certain disclosures in order to provide shareholders with enough information upon which to knowledgably accept or reject the offer. 15 U.S.C. §§ 78m(d)(1) (2002) and 78n(d)(1) (2008); 17 C.F.R. § 240.13(d)-1(e)(1). Among other things, bidders must disclose the identity of the prospective new owner, where his money for the takeover has come from, whether he plans to make any major re-organizations should the takeover succeed, and what stock or other securities this prospective owner already holds in the corporation at the time of the tender offer. The corporation that is the target of the takeover bid can seek injunctive relief where the required disclosures have not been made or are false or misleading.
Most of the bases for injunctive relief provided by the federal statutes involve fraud and nondisclosure and are most likely to be used where publicly held corporations are concerned. Situations affecting shareholders of closely held corporations, such as freeze-outs, deadlocks and oppression, are more likely to be addressed by state statutory law or common law.
The Model Business Corporation Act, adopted to varying degrees by 31 states, grants trial courts discretion to issue injunctions to protect shareholder rights. The Model Act specifically provides for injunctive relief for shareholders facing corporate dissolution and to stop director misconduct. The Model Act also provides that it does not in any way restrict a court’s normal equitable powers to issue injunctive relief in other situations. Some states, such as Illinois, have gone further in their adoption of the Model Act and provide that courts can issue injunctive relief as appropriate to preserve corporate assets and carry on the business of the corporation. Such actions could involve a deadlock in the corporation’s decision-making process or a deadlock among shareholders in their voting power; illegal, oppressive or fraudulent conduct by the directors; or misapplication or waste of corporate assets.
States that have not adopted the Model Act but have instead modeled their statute on Delaware’s Corporation Act do not have a specific provision allowing for equitable relief for violations of the statute. Injunctive relief in these states would have to be obtained on traditional grounds.
Shareholders have common law rights to injunctive relief based on traditional grounds for granting such relief. For example, a shareholder can seek an emergency injunction to enforce the terms of a shareholder agreement or other transactional document or to prevent changes to such agreements. These situations are often appropriate for injunctive relief because shareholders’ corporate rights may be at risk and the loss of such rights cannot easily be remedied by a money judgment alone.
Injunctive relief can also be obtained, under common law, to protect shareholder voting rights. A shareholder challenging an improper manipulation of the voting process will seldom have an adequate remedy at law.
An injunction may be obtained under the common law basis where a majority shareholder is accused of violating his fiduciary duties to the corporation, especially where the acts of the majority shareholder benefit himself at the expense of a minority shareholder. Injunctive relief may be particularly appropriate where the majority shareholder seeks to engage in self-dealing or waste corporate assets.
Finally, a court, under the common law, can enjoin a corporation from issuing more stock if the purpose of such an issuance is to dilute the shares already held by its shareholders. One possible scenario is where a corporation issues stock options under an employee stock ownership plan that, if exercised, will dilute the interests of non-employee shareholders in order to obtain or keep voting control of the corporation.