“Irreparable Harm” and Injunctions in Close Business Owner Disputes
December 11, 2023
Injunctions are an indispensable weapon in the business divorce lawyer’s arsenal. Primarily defensive in nature, temporary restraining orders and preliminary injunctions tend to feature prominently at the outset of business divorce litigation, where many disputes start with an emergency: one side hoping to prevent the other’s seizure or illegitimate exercise of control of a business, or the dilution or extinguishment of an equity interest, or some combination thereof.
The good news for business owners facing loss of ownership, management, voting, or control rights in a closely-held business is that multiple, interrelated strands of case law unique to business divorce litigation have evolved to address the limitless factual circumstances in which these sorts of fights arise.
Whatever the dispute, as long as it’s not predominantly about money damages (for which injunctions generally are not available), chances are there’s a line of case law upon which to rely.
In this post, we’ll look at four lines of case law addressing the availability of injunctive relief in business divorce litigation.
Loss of Management or Control Rights
Let’s pretend you’re a member of a limited liability company. There’s a dispute among the members about the correct ownership percentages. While the dispute is percolating, your co-member decides to notice a meeting to take some action to consolidate his control and/or to wrest it from you. This is a perfect setup for an injunction.
The Appellate Division routinely holds that an equity owner’s loss of historic management or control rights in a closely-held business is precisely the sort of intangible, un-quantifiable loss that qualifies as “irreparable,” warranting injunctive relief:
Yemini v Goldberg, 60 AD3d 935 [2d Dept 2009] [“because control and management of ANO and its holdings were at stake, money damages were not sufficient. Thus, the defendants established the element of irreparable injury”] [citation omitted]; and
Let’s pretend this time you’re a shareholder. Your opponent notices a shareholder meeting that fails to comply with the minimum statutory notice requirements of the Business Corporation Law (the “BCL”), the By-Laws, or both. Due to the defectively noticed meeting, you will be unable to participate in the meeting. At the meeting, you may lose an officership, a directorship, or both. There’s a line of case law for that.
Based upon these principles, where a notice of a business entity meeting is defectively noticed, injunctive relief is appropriate (see e.g.Ocilla Indus., Inc. v Katz, 677 F Supp 1291 [ED NY 1987] [“The disenfranchisement of shareholders poses a serious risk of irreparable harm that cannot be measured in money damages”]).
State-court decisions enjoining contested votes include the following:
Max v ALP, Inc., 206 AD3d 495 [1st Dept 2022] [“Order . . . which granted defendants’ motion for a preliminary injunction to the extent of enjoining . . . from commencing a shareholders’ meeting for the purpose of restoring plaintiff as President and CEO of defendant ALP, Inc.. . . unanimously affirmed”]; and
ANO, Inc. v Goldberg, 167 AD3d 731 [2d Dept 2018] [“Yimini sought . . . injunctive relief . . . in order to preserve the status quo with respect to ANO’s voting rights as a two-thirds owner of Candlewood” and “we agree with the court’s determination granting the relief requested to protect the rights of ANO as a majority shareholder in Candlewood”].
Dilution or Extinguishment of an Equity Interest
Now let’s pretend you’re an entity owner and you face the potential dilution or total extinguishment of your interest in a business. There’s a line of case law for that.
BCL 623 (k), for example, contains the so-called “fraud or illegality” exception to the exclusive appraisal remedy permitting a shareholder faced with the prospect of loss of an equity interest resulting from a cash-out merger to which he or she dissents to bring an “appropriate action to obtain relief on the ground that such corporate action will be or is unlawful or fraudulent as to him,” language New York’s highest court has construed to be limited “equitable relief” (Breed v Barton, 54 NY2d 82 ).
Peter Sluka recently wrote about one example he litigated to conclusion of an injunction action successfully stopping a threatened cash-out merger before its consummation due to absence of any articulated, statutorily-required “business purpose.”
Examples of other cases granting injunctions to restrain dilution or elimination of equity interests and associated rights outside of the cash-out merger context include the following:
Spivak v Bertrand, 147 AD3d 650 [1st Dept 2017] [“Without the preliminary injunction, plaintiff will be irreparably harmed, since his shares . . . will be automatically transferred . . . and he will be stripped of his voting power and decision-making rights”];
Unauthorized Agency Action on Behalf of a Close Business
Now, let’s pretend you’re a partner of a general partnership. A battle erupted among the general partners over who should serve as managing agent of the partnership. The majority of the general partners voted to terminate the agent’s authority under Section 40 (8) of the Partnership Law. But a recalcitrant partner refuses to acknowledge the agent’s termination. As a result, the terminated agent continues to act as if it still has authority to bind the partnership. There’s even a line of case law for that.
In a series of decisions, the Appellate Division has held that an entity – especially a real estate owning entity – may suffer irreparable harm when a rogue agent continues to act on behalf of the entity or otherwise interfere in management of the business despite termination of the agent’s authority:
None of this is intended to suggest that courts just hand out injunctions for the asking. As we have previously written, injunctions are difficult to obtain, requiring not just a risk of “irreparable harm” (the subject of this article), but also, separately, both a “likelihood of success on the merits” and a “balance of the equities” in the movant’s favor.
So if you or your client face potential loss of voting, management, control, or ownership rights in a closely-held business, be proactive. Try to stop it with a prompt request for injunctive relief before the transaction has happened and it is too late to stop it.