MCDUFFIE et al v. SAUTNER et al, No. 3:2019cv00087 - Document 31 (M.D. Ga. 2019)

Court Description: ORDER granting 21 Motion for Preliminary Injunction; denying 2 Motion for Preliminary Injunction Ordered by US DISTRICT JUDGE CLAY D LAND on 11/08/2019 (CCL)
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IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF GEORGIA ATHENS DIVISION ANGUS F. MCDUFFIE, et al., * Plaintiffs, * vs. * DAN SAUTNER, et al., * Defendants. * CASE NO. 3:19-CV-87 (CDL) ORDER and PRELIMINARY INJUNCTION The parties in this action are shareholders in the same corporation. Plaintiffs believe that they collectively own a majority of the shares, while Defendants contend that they now own the controlling stake in the company. Each side seeks a preliminary injunction to prevent the other from controlling the company. injunctive The resolution of the pending motions for preliminary relief depends on which side has a substantial likelihood of succeeding on the issue of who has the controlling stake in remainder voting the of company.1 this shares, and Order, thus For the reasons Defendants they are have entitled a explained in the majority of the to a preliminary injunction that prevents Plaintiffs from interfering with their management of the company. 1 The parties agree that the other essential elements for the issuance of preliminary injunctive relief are not at issue. BACKGROUND In August 2019, Defendants began what Plaintiffs describe as a “hostile takeover” of SmallBizPros, Inc. (“the Company”). Prior to that time, Plaintiffs and Defendants were shareholders in the Company, which was largely managed by Plaintiffs. Dissatisfied with that management arrangement, Defendants Dan Sautner and Brian Austin purchased additional common shares from some existing shareholders through two entities which they controlled, Hawthorne 2018, LLC (“Hawthorne”) and 619047 Ontario Ltd. (“Ontario”). These transactions gave Sautner and Austin effective control of the Company. The shareholders aligned with them, including Hawthorne, Ontario, and the other Defendants in this action, voted to oust the current Board of Directors and management team, Plaintiffs. which is represented in this action by The dispositive issue to be resolved for purposes of deciding the dueling motions for preliminary injunction is which side is substantially likely to establish that it controlled a majority of the voting shares. DISCUSSION I. The Hawthorne and Ontario Purchases If the Hawthorne and Ontario share purchases are recognized, then Defendants control a majority of the common shares in the Company. Plaintiffs argue that these purchases should not be recognized because the transactions were never 2 properly reflected on the Company’s records after the sales were allegedly consummated, and the transactions are void because the Company had an enforceable right of first refusal which it was not given the opportunity to exercise. The Court finds Plaintiffs’ failure to record the shares argument unpersuasive. letter was directing After the purchases were consummated, a delivered that the on September share 19, 2019, certificates transferred to Hawthorne and Ontario. to for the the Company shares be Compl. Ex. K, Transfer Agent Instruction Letter (Sept. 19, 2019), ECF No. 1-12. The next day, Hawthorne, Ontario, Sautner, and Brian and Elizabeth Austin—claiming to be the holders of the majority of the outstanding shares of common stock—voted to remove the Company’s incumbent directors and install new directors via action of the shareholders meeting. taken Compl. by Ex. written O, consent Action in of lieu the of a special Shareholders of SmallBizPros, Inc. Taken by Written Consent in Lieu of Special Meeting (Sept. 20, 2019), ECF No. 1-16. Then, the new directors voted to remove the Company’s officers and install new ones. The Company’s bylaws of course contemplate that after shares are sold, the change in ownership shall be reflected on the Company’s records. Those bylaws provide: “The Corporation shall be entitled to treat the holder of record of any share or shares as the absolute owner thereof 3 for all purposes and, accordingly, shall not equitable other claim or be bound to, or to recognize interest in, any such legal, share or shares on the part of any other person, whether or not it shall have express or other notice expressly provided by law.” thereof, except as otherwise Defs.’ Answer Ex. G, Bylaws art. V § 3(b), ECF No. 16-7 (emphasis added). The bylaws also state: “Transfers of shares of the Corporation shall be made on the share records of the Corporation only by the holder of record thereof, in person or by his duly authorized attorney, upon surrender for cancellation of the certificate or certificates representing such shares, with an assignment or power of transfer endorsed thereon or delivered therewith duly executed, with such proof of the authenticity of the signature and of authority to transfer and of payment of transfer taxes as the Corporation or its agents may require.” Id. art V. § 3(a). Here, with the Transfer Agent Instruction Letter, several shareholders stating Hawthorne surrendered that and the owners Ontario, their had original stock transferred and they asked certificates, their shares that new certificates be issued to Hawthorne and Ontario. to share Compl. Ex. K, Transfer Agent Instruction Letter (Sept. 19, 2019), ECF No. 112. The question is whether the fact that the action to oust the Plaintiffs was done after the purchase of the shares but before they had been registered voids the shareholder vote. 4 The Court finds that it does not. To find otherwise would mean that an incumbent board and management could refuse to perform the ministerial duty of reflecting the transaction on the company records and thus prevent the legitimate sale of shares from becoming consummated. sold their It is undisputed that these shareholders shares to Hawthorne and Ontario; that they surrendered those shares; and that they asked the Company to reflect the change of ownership on the Company books. The Court finds that they did not have to delay shareholder action until the incumbent management granted their request. Plaintiffs also argue that the Hawthorne and Ontario transactions are void because the Company had a right of first refusal to purchase the shares. But Plaintiffs acknowledge that they of did not present evidence a right of first refusal restriction for any share certificates other than Certificate Nos. 29, 30, 35, and 50, which are addressed in more detail below. Rather, they pointed to Steven Rafsky’s testimony that Brian Austin was supposed to obtain subscription agreements with such a evidence restriction that he from ever several did so. shareholders. Thus, There Plaintiffs is did no not establish that share certificates 14, 15, 17, 18, 19A, 19B, 20, 21, 22, 23, 24, 25, 53, and 54 were not validly transferred to Hawthorne and Ontario. 5 Plaintiffs certificates Company’s presented (Nos. right of 29, evidence 30, first 35, that and refusal 50) and four were that of the subject the stock to the transfers to Hawthorne and Ontario were void because the Company would have exercised its right of first refusal had it been offered. But, even if these shares were subject to a valid right of first refusal such that the transfers were void, the three shareholders who attempted to sell their shares to Hawthorne and Ontario—Dan Sautner, Thornhill Consulting, and Allfax Realty— signed the October 22, 2019 shareholder action confirming that if the transfers were void then they consent to and ratify the September 20, 2019 action purporting to remove the old directors and install new ones. Defs.’ Resp. to Pl.’s Mot. for Prelim. Inj. Ex. 3, Action of the Shareholders of SmallBizPros, Inc. Taken by Written Consent in Lieu of Special Meeting (Oct. 22, 2019), ECF No. 15-3. Accordingly, if the Court accepts Plaintiffs’ argument that these four transfers were void, then the original shareholders should be permitted to vote their own shares. They did so on October 22, 2019, aligning themselves with Hawthorne and Ontario.2 2 The Court notes that if the sales of these shares subject to the right of first refusal were void, then no offer to purchase the shares remained on the table and thus there was nothing for the Company to accept or refuse. It was as if the transaction never occurred. And the selling shareholders remained as shareholders. 6 The Court finds that a majority of the shares in the Company at the time the Plaintiffs were ousted were controlled by the Defendants. Accordingly, if each share represented one vote, Defendants, not Plaintiffs, are substantially likely to prevail on the merits. II. Weighted Voting Plaintiffs assert that even if they did not hold a majority of the shares, enforceable they weighted have a voting majority agreement. of votes The under weighted an voting agreement upon which they rely, however, was never adopted in compliance with Georgia law. Accordingly, it is not enforceable. In general, under Georgia law, “unless the articles of incorporation provide otherwise, each outstanding share . . ., regardless of class, is entitled to one vote on each matter voted on at a shareholders’ meeting.” O.C.G.A. § 14-2-721(a). The Company’s bylaws state, “Except as otherwise provided by statute or by the Articles of Incorporation, at each meeting of shareholders each holder of record of shares of the Corporation entitled to vote thereat, shall be entitled to one vote for each share registered in his name on the books of the Corporation.” Defs.’ Answer Ex. G, Bylaws art. II § 6(b), ECF No. 16-7. articles of incorporation preferred stock and fix no permit voting 7 the directors powers to to those The issue shares. Defs.’ Resp. to Pls.’ Mot. for Prelim. Inj. Ex. 7, Articles of Amendment, ECF No. 15-7; accord Defs.’ Resp. to Pls.’ Mot. for Prelim. Inj. Ex. 8, Written Consent of Directors (Apr. 26, 2007), ECF No. 15-8 (stating that the preferred shares issued to McDuffie in 2007 “shall be non-voting”). Plaintiffs did not point to evidence that the articles of incorporation provide for a voting scheme other than one-share-one-vote for common shares. Plaintiffs nonetheless argue that the weighted voting agreement is enforceable because the shareholders may come to an agreement that governs “the exercise or division of voting power by or between the shareholders and directors or by or among any of them, including use of weighted voting rights or director proxies.” O.C.G.A. § 14-2-732(a)(4). But an agreement authorized by O.C.G.A. § 14-2-732(a)(4) must be set forth in the articles of incorporation or bylaws and approved by all persons who are “written shareholders agreement at that the time is signed of by the agreement all persons shareholders at the time of the agreement.” 732(b)(1). that all agreement. or in who a are O.C.G.A. § 14-2- Based on the present record, there is no evidence shareholders voted in favor of a weighted voting Accordingly, each common share is entitled to one vote. Plaintiffs’ alternative argument § 14-2-731(a) is also unpersuasive. 8 relying upon O.C.G.A. Georgia law does authorize pooling agreements whereby “[t]wo or more shareholders may provide for the manner in which their shares will be voted by signing an indication agreement here that for that any of purpose.” the But shareholders there is entered no into pooling agreements that would have an impact on the shareholder votes in question. III. A Hail Mary—Preferred Shares are Really Common Shares Plaintiffs make a final desperate argument that preferred shares held by Angus McDuffie are really common shares and thus they should be counted in control of the Company. determining who has the majority Specifically, Plaintiffs claim that McDuffie holds 74,942.652 shares of common voting stock, instead of 50,801.709 shares of common voting stock and 24,140.943 shares of preferred nonvoting stock as the Company’s records show. counted It is undisputed that if all of McDuffie’s shares were as voting stock, then Plaintiffs would control a majority of the shares. In 2006, McDuffie cancelled a promissory note for million in exchange for common stock in the Company. 26, 2007, the shareholders who were present at $3.6 On April a special shareholders meeting, including McDuffie, unanimously voted to amend the Company’s articles of incorporation to permit issuance of preferred stock. Defs.’ Resp. to Pls.’ Mot. for Prelim. Inj. Ex. 6, Minutes of Special Stockholders Meeting (Apr. 26, 2007), 9 ECF No. 15-6; accord Defs.’ Resp. to Pls.’ Mot. for Prelim. Inj. Ex. 7, Articles of Amendment, ECF No. 15-7. The same day, the board of directors, which included McDuffie, approved issuance of 38,625.508 shares of preferred stock and approved issuance of those shares to McDuffie in exchange for the same number of shares of common stock. Defs.’ Resp. to Pls.’ Mot. for Prelim. Inj. Ex. 8, Written Consent of Directors (Apr. 26, 2007), ECF No. 15-8. The board canceled McDuffie’s common stock certificates Nos. 45 and 47 and issued a new stock certificate, No. 49, for the preferred shares. Id. The Company has since treated these shares as preferred and listed them separately on its schedules of shares. McDuffie later sold 14,484.565 shares of the preferred stock back to the Company. Plaintiffs necessary to Supplemental argue that effectuate Mem. in it this Supp. “appears exchange of Mot. that not all occurred.” for Prelim. steps Pls.’ Inj. Specifically, Plaintiffs point out that O.C.G.A. § 14-2-602(d) requires a company to file with the secretary of state articles of amendment setting forth, among other things, the text of the amendment determining the terms of the class of shares. The statute states that these articles of amendment must be filed with the secretary of state before issuing any shares of the new class. Id. Here, although the shareholders voted to amend the articles of incorporation and the board of directors voted to 10 issue shares of preferred stock on April 26, 2007, the Company did not submit the amended articles of incorporation reflecting the new preferred stock to the Georgia secretary of state until June 8, 2007. Plaintiffs, however, did not point to any authority that shares issued after the articles of amendment are passed but before the amendment are void. official filing of the articles of The overwhelming evidence establishes that McDuffie’s preferred shares were what he and the Company treated them to be before preferred shares. the current predicament arose—nonvoting They cannot be considered otherwise. CONCLUSION Based on the present record, a majority of the shareholders of common voting stock voted on October 22, 2019 to remove the old board of directors and install a new board of directors. Thus, Plaintiffs have not established a substantial likelihood of success on the merits preliminary injunction. and they are not entitled to a In contrast, the present record shows that Defendants were the controlling shareholders. The Court therefore finds that Defendants are entitled to the relief they seek. Plaintiffs’ motion (ECF No. 2) is denied, and Defendants’ motion (ECF No. 21) is granted. preliminary injunction: 11 The Court issues the following PRELIMINARY INJUNCTION 1. Plaintiffs and the Old Board of Directors (which consists of those persons who served prior to the actions of the Defendants ousting them that are the subject of this action) shall be restrained from purporting to act as the Company’s Board of Directors; 2. Plaintiffs shall be restrained from attempting to enforce the purported Weighted Voting Plan; 3. Plaintiff Steven Rafsky shall be restrained from purporting to act as the Company’s Chief Executive Officer; 4. Plaintiffs shall be restrained from holding themselves out to employees, franchisees, or third parties as representing the management of the Company; and 5. Plaintiffs shall be restrained from Defendants’ management of the Company. interfering with 6. Defendants shall post a bond in the amount of $10,000 within ten days of today’s order for the duration of the preliminary injunction. IT IS SO ORDERED, this 8th day of November, 2019. S/Clay D. Land CLAY D. LAND CHIEF U.S. DISTRICT COURT JUDGE MIDDLE DISTRICT OF GEORGIA 12