Commercial Division Grants Preliminary Injunction in Shareholder Dispute
On January 6, 2017, Justice Charles E. Ramos of the Commercial Division issued an order enjoining two corporations from taking action in violation of a shareholders agreement of a third company. The case, Ciment v. SpanTran, Inc., involves a contentious shareholder dispute in which it was alleged that the shareholders agreement of one company covered governance issues concerning two other companies. Justice Ramos ruled that the third company’s shareholders agreement contemplated the acquisition of additional entities, and was thus likely to apply to the other two corporations—which had subsequently come under the ownership of the same shareholders.
The dispute centers on three companies. The first company, Morningside Translations, Inc. (“Morningside”), provides “professional translation services.” The Plaintiff, Ivan Ciment, was a founder and 10% shareholder of Morningside. The company’s majority shareholder was Josh Eisen, who owned 61% of the company. The remainder of Morningside was owned by two other shareholders. Currently, Eisen owns 51% of the shares in Morningside and Plaintiff owns 34%. The Morningside shareholder agreement specified that it applied to all business entities owned by Morningside, and also included a number of provisions protecting the company’s minority shareholders.
The second company, SpanTran, was purchased by Plaintiff and Eisen in 2007. Eisen owns 61% of SpanTran’s shares, and Plaintiff owns 39%. The third company, Morningside Evaluations (“Evaluations”), was formed in 2011 as a spin-off from Morningside. Neither SpanTran nor Morningside has its own governing documents.
On July 31, 2014, Plaintiff and Eisen entered into an interim shareholder agreement, which defined the three companies as “Common Entities” and noted that the parties were negotiating new ownership and governance documents. That interim agreement also provided that the prior shareholders agreement remained in effect. Nonetheless, the parties never concluded the contemplated governance documents.
Over the years, the parties have had multiple business disputes. In particular, according to Plaintiff, Eisen has attempted to reconfigure the Board of Directors, has attempted to arrange a merger of SpanTran and Evaluations, and has sought indemnification from SpanTran for his legal fees in a pending criminal case. Plaintiff sued SpanTran and Evaluations to enforce his claimed rights as a minority shareholder.
Justice Ramos began his opinion by setting out the traditional standard for a preliminary injunction, “(1) a likelihood of success on the merits, (2) irreparable injury if provisional relief is not granted, and (3) that the equities are in his or her favor.”
On the issue of the likelihood of success, Plaintiff argued that this prong was met because the Morningside shareholders agreement applies to all businesses owned by Morningside (absent a contrary agreement) such that it covered SpanTran and Evaluations as “Common Entities.” As a result, Plaintiff contended that the Morningside shareholders agreement’s minority shareholder protections also apply to SpanTran and Evaluations. SpanTran and Evaluations countered that the shareholders agreement could only apply to entities that had been in existence at the time the shareholders agreement was signed unless that contract explicitly stated otherwise.
Justice Ramos disagreed with the Defendant companies, finding that the phrase “all other entities owned” by Morningside demonstrated sufficient intent to include future entities. In Justice Ramos’s view, the shareholder agreement specifically contemplated that the parties might acquire additional entities using the same ownership strategy as had been used in connection with Morningside. While Justice Ramos observed that there may be fact issues concerning the parties’ intentions, such fact questions alone would not defeat an injunction application. Thus, Justice Ramos found that Plaintiff had established a likelihood of success given that the Morningside minority shareholder protections likely applied to the two additional companies.
On this irreparable injury prong, Plaintiff argued that he would suffer irreparable harm because of his potential loss of corporate control over SpanTran and Evaluations. Plaintiff further suggested that if the shareholders agreements are modified, he could lose the opportunity to object to a merger. The Defendant companies argued that Plaintiff could not show irreparable injury, because he lacks standing to prohibit such corporate changes in his role as a minority shareholder. Further, the companies asserted that any harm could be compensated by money damages.
Justice Ramos held that Plaintiff had made an adequate showing of irreparable harm. Justice Ramos found that without an injunction, Plaintiff would be deprived of his “bargained-for minority rights.” Justice Ramos also ruled that such harm was not compensable by money damages because the “loss of decision making rights and corporate control is not capable of being calculated.”
Finally, Plaintiff argued that the equities where in his favor because enforcement of the shareholder and interim agreement would preserve the status-quo. The companies countered that the injunction would prevent Eisen from operating the business.
Justice Ramos ruled that the companies could not “suffer hardship merely from being bound by their contractual obligations.” Instead, Plaintiff would be prejudiced absent an injunction because he would no longer be able to take part in the governance of the corporate entities.
Under Justice Ramos’s reasoning, minority shareholder protections set out in shareholder agreements will likely carry over to later-acquired companies if the language of the contract contemplates that sort of extension.