Opinion
03-CV-0811E(F)
December 5, 2003
MEMORANDUM and ORDER
This decision may be cited in whole or in any part.
Plaintiffs, various minority shareholders of Dot Com Entertainment Group ("DCEG"), filed suit on October 31, 2003 seeking to prevent an allegedly illegal takeover of DCEG by the individual defendants in violation of sections 13(d) and 14(a) of the Securities Exchange Act of 1934 ("the 1934 Act"), Florida law and DCEG's By-Laws. Plaintiffs filed a motion on November 19 seeking expedited discovery and a preliminary injunction hearing no later than December 31, 2003. Plaintiffs' request for expedited discovery was argued and submitted on November 28. For the reasons set forth below, plaintiffs' motion for expedited discovery will be denied and their motion for a preliminary injunction will be denied without prejudice.
DCEG develops and supports software for internet gaming operations. It is organized under the laws of Florida.
Plaintiffs seek a preliminary injunction: (1) enjoining the imminent de-registration of DCEG's publicly traded securities; (2) ordering DCEG to convene a shareholders' meeting for the purpose of electing a new board of directors; (3) ordering the individual defendants to immediately file complete and accurate Schedule 13D's; (4) invalidating and disqualifying any proxies obtained by the individual defendants to date and disqualifying the individual defendants from using or relying upon such proxies; (5) enjoining the individual defendants and persons acting in concert with them from soliciting or attempting to solicit proxies from DCEG shareholders until they comply with sections 13(d) and 14(a) of the 1934 Act; (6) enjoining the individual defendants from voting their shares at the shareholders' meeting to elect a new board of directors; and (7) enjoining the individual defendants and persons acting in concert with them from further violations of the 1934 Act and regulations thereunder.
Plaintiffs ultimately seek to prevent the de-registration of DCEG's shares, which will purportedly become effective January 12, 2004. Plaintiffs contend that the individual defendants failed to file Schedule 13D's as required by section 13(d) of the 1934 Act — thus masking their intent to oust certain outside directors ("the Outside Directors") and to have DCEG's stock de-listed from the Over the Counter Bulletin Board ("OTCBB"). Plaintiffs also contend that the individual defendants violated section 14(a) of the 1934 Act when they solicited more than ten shareholders to support their plan to remove the Outside Directors without making the requisite public filings. Finally, plaintiffs contend that the individual defendants violated Florida law and DCEG's By-Laws by improperly removing the Outside Directors. In an Order dated November 20, 2003 this Court scheduled a hearing on December 18 on the issue of whether this Court should schedule a preliminary injunction hearing before December 31.
Plaintiffs claim that de-listing of DCEG stock would irreparably harm them and that they have been deprived of the right to participate in corporate governance.
Plaintiffs allege that the individual defendants informed the Outside Directors that they had sufficient shareholder support to remove them, but first gave them the option of resigning. The Outside Directors all resigned.
As DCEG noted at oral argument, the Complaint makes claims against the individual defendants, but not against it.
This Court will assume arguendo that the "good cause" standard for obtaining expedited discovery is applicable. If this Court were to apply the Notaro standard, plaintiffs would have to demonstrate, inter alia, that they will suffer irreparable injury. On the other hand, if this Court were to apply the "good cause" standard, plaintiffs would nonetheless ultimately have to demonstrate that they will suffer irreparable injury inasmuch as they are seeking expedited discovery in aid of a preliminary injunction hearing. As discussed below, however, this Court finds no irreparable injury, and thus no good cause exists for expedited discovery in preparation for a preliminary injunction hearing. Moreover, plaintiffs have not articulated anything sought through discovery that would assist them in articulating what irreparable harm they may suffer. Consequently, plaintiffs' request for expedited discovery will be denied regardless of the standard applied.
Courts are split as to whether a party seeking expedited discovery must satisfy a "good cause" or "reasonableness" standard or the more stringent standard set forth in Notaro v. Koch, 95 F.R.D. 403, 405 (S.D.N.Y. 1982), which largely tracks the standard required for obtaining a preliminary injunction. Compare Qwest Communications Int'l, Inc. v. Worldquest Networks, Inc., 213 F.R.D. 418, 419-420 (D. Colo. 2003) (discussing the split over the continuing vitality of Notaro and adopting the "good cause" standard) and Semitool, Inc. v. Tokyo Electron Am., Inc., 208 F.R.D. 273, 275-276 (N.D. Cal. 2002) (rejecting Notaro as having been based on a superseded version of the FRCvP) and Merrill Lynch v. O'Connor, 194 F.R.D. 618, 623-624 (N.D. In. 2000) (noting that Notaro involved a requested permanent injunction and holding that Notaro is inapplicable for a request for expedited discovery in preparation for a preliminary injunction hearing) and Philadelphia Newspapers, Inc. v. Gannett Satellite Info. Network, Inc., 1998 WL 404820, at *2 (E.D. Pa. 1998) (adopting "good cause" standard) with Irish Lesbian Gay Org. v. Giuliani, 918 F. Supp. 728, (S.D.N.Y. 1996) (applying Notaro where expedited discovery was sought in preparation for a preliminary injunction hearing) and Cecere v. Cty. of Nassau, 258 F. Supp.2d 184, 186 (E.D.N.Y. 2003) (applying Notaro standard in case involving constitutional challenge to legislative redistricting); Gucci Am., Inc. v. Daffy's, Inc., 2000 WL 1720738, at *5-6 (D.N.J. 2000) (applying Notaro in infringement action); see also Ellsworth Assocs., Inc. v. United States, 917 F. Supp. 841, 844 (D.D.C. 1996) (holding that good cause for expedited discovery may exist where a party seeks a preliminary injunction). One court has amalgamated these standards into one test. Entertainment Tech. Corp. v. Walt Disney Imagineering, 2003 WL 22519440, at *2-4 (E.D. Pa. 2003) (adopting a "reasonableness" inquiry "unless the circumstances are such that the Notaro factors apply"). In light of this Court's ensuing discussion, there is no need to select the appropriate standard to be applied to a request for expedited discovery because plaintiffs' request fails under either standard.
Notaro, supra note 7, at 405 (requiring party seeking expedited discovery to demonstrate "(1) irreparable injury, (2) some probability of success on the merits, (3) some connection between the expedited discovery and the avoidance of irreparable injury, and (4) some evidence that the injury that will result without expedited discovery looms greater the injury that the defendant will suffer if the expedited relief is granted").
Indeed, if there is no irreparable harm, then a preliminary injunction would be inappropriate and, if no preliminary injunction hearing is necessary, there is then no need for expedited discovery.
Plaintiffs have failed to demonstrate that they will suffer irreparable harm if this Court does not grant their request for expedited discovery (and ultimately their request for a preliminary injunction). In Justin Indus. v. Choctaw Sec. L.P., 747 F. Supp. 1218, 1219 (N.D. Tex.), aff'd, 920 F.2d 262, 268-269 (5th Cir. 1990), Choctaw Securities ("Choctaw"), a minority shareholder of Justin Industries, made a tender offer that was rejected by Justin Industries' board of directors. The board brought suit against Choctaw alleging violation of section 13(d) of the 1934 Act. Ibid. Choctaw made various counterclaims, including a request for preliminary and permanent injunctive relief requiring Justin Industries to hold a new election for directors. Id. at 1220-1221. Choctaw's purpose in electing a new board of directors was the elimination of certain defensive measures such as a "poison pill" adopted by the board of directors. Id. at 1221. The district court held that Choctaw had failed to demonstrate irreparable harm because it had failed to exhaust its legal remedies by calling a special shareholders' meeting pursuant to Justin Industries' by-laws. Ibid. Indeed, the court noted that it was "troubled by the fact that the precise relief that Sutherland [— one of Choctaw's principals —] seeks, a new election of directors, is within Choctaw's powers and privileges as a 10% shareholder." Ibid. The court also noted that the minority shareholder could "achieve the same remedy and the same result that a court-ordered injunction would accomplish." Ibid. The district court was affirmed on appeal by the Fifth Circuit Court of Appeals on the same grounds. Justin Indus. v. Choctaw Sec. L.P., 920 F.2d 262, 268-269 (5th Cir. 1990).
Like DCEG's By-Laws, Justin Industries' By-Laws permitted a 10% shareholder to call a special shareholders' meeting. Justin Indus., at 1221.
The District court further noted that:
"By virtue of the bylaws, Sutherland, himself, can call for a special election of directors and can run his own slate of candidates for office. To date he has not done so. Should he choose to exercise this option and should he be successful, Sutherland and his hand-picked Board can undo all of the `entrenchment devices' allegedly put in place by the current Board. *** Thus, until such time as Sutherland has exhausted his legal remedies and can show irreparable harm, this Court will not intervene in the affairs of the corporation and no injunction will issue." Justin Indus., at 1221.
The Court of Appeals held that Sutherland's "self-help remedy means that [he] has not necessarily suffered an injury that is incapable of repair without judicial intervention." Justin Indus. v. Choctaw Sec. L.P., 920 F.2d 262, 269 (5th Cir. 1990). The court nonetheless noted that the minority shareholders' self-help remedy was inferior to the remedy being sought from the court because the self-help remedy involved a more burdensome voting standard. In the present case, however, the rules governing the election of directors are the same for both the annual and special shareholders' meetings pursuant to Art. 2, § 15 of DCEG's By-Laws.
The analysis of Justin Indus, is applicable here. Article 2, section 3 of DCEG's By-Laws provides that:
"Special meetings of the shareholders shall be held when called by the Board of Directors, or when requested in writing by the holders of not less than ten percent (10%) of all shares entitled to vote at the meeting." DCEG By-Laws, art. 2, § 3.
Plaintiffs hold in excess of ten percent of DCEG's shares. They are thus able to call a special shareholders' meeting wherein they can (1) discuss the alleged failure to file certain regulatory disclosures and (2) present a slate of directors including the Outside Directors for a shareholder vote. Consequently, plaintiffs have the opportunity to have elected a slate of directors that would reverse the actions taken by DCEG to de-list itself from the OTCBB. Plaintiffs thus fail to demonstrate that they will be irreparably harmed because they have recourse to a self-help remedy that is the same as the remedy sought from this Court. Justin Indus., at 1221.
DCEG's counsel conceded in its parting volley at oral argument that plaintiffs could call a new election of directors at a special meeting convened pursuant to art. 2, § 3 of the DCEG By-Laws.
The Second Circuit Court of Appeals has held that a preliminary injunction requires "a showing of irreparable harm, the absence of an adequate remedy at law, which is the sine qua non for the grant of such equitable relief." Plaintiffs failed to demonstrate the requisite irreparable harm for several reasons. First, like the minority shareholder in Justin Indus., plaintiffs have an adequate legal remedy in Article 2, section 3 of DCEG's By-Laws. Justin Indus. v. Choctaw Sec. L.P., 920 F.2d 262, 269 (5th Cir. 1990). Second, to the extent that plaintiffs' ultimate complaint about DCEG's pending de-listing is the illiquidity of its shares — and the consequent devaluation of plaintiffs' holdings — plaintiffs may seek money damages for any loss in value. Third, defendants' alleged violation of section 13(d) of the 1934 Act does not establish irreparable harm because plaintiffs have the ability to call a special shareholders' meeting to inform other shareholders about plaintiffs' allegations. Finally, inasmuch as there was no tender offer or other proposal to be voted upon by the DCEG shareholders, the alleged violations of sections 13(d) and 14(a) of the 1934 Act do not constitute irreparable harm. Accordingly, plaintiffs' motion seeking expedited discovery and a preliminary injunction will be denied.
Buffalo Forge Co. v. Ampco-Pittsburgh Corp., 638 F.2d 568, 569 (2d Cir. 1981); see also Jayaraj v. Scappini, 66 F.3d 36, 39 (2d Cir. 1995) (quoting Jackson Dairy, Inc. v. H.P. Hood Sons, 596 F.2d 70, 72 (2d Cir. 1979) for the proposition that "irreparable harm means injury for which a monetary award cannot be adequate compensation").
Although the denial of a minority's right to participate in corporate management may constitute irreparable harm — see Wisdom Import Sales Co., L.L.C. v. Labatt Brewing Co. Ltd., 339 F.3d 101, 115 (2d Cir. 2003) (citing cases) —, plaintiffs' ability to call a special shareholder meeting indicates that they have not been denied such a right. Moreover, inasmuch as DCEG stock has been illiquid for some time — as disclosed in DCEG's. 10KSB's for 2000 and 2002 —, this case is distinguishable from Norlin Corp. v. Rooney, Pace, Inc., 744 F.2d 255 (2d Cir. 1984). Norlin is also distinguishable by the fact that it involved NYSE de-listing — as opposed to DCEG's pending OTCBB de-listing. This Court declines to interpret Norlin as holding that de-listing of any stock from any exchange constitutes irreparable harm under any circumstances. The parties have not briefed whether the Norlin rationale nonetheless applies here and plaintiffs may present such argument in the event that they renew their motion.
See Steiner v. Gordon Jewelry Corp., 675 F. Supp. 90, 92 (E.D.N.Y. 1987) (noting that shareholder's preliminary injunction request failed because, inter alia, he failed to demonstrate irreparable harm where the stockholders could seek damages for any decrease in value of their shares due to de-listing of the company). Indeed, plaintiffs submitted an affidavit of an investment adviser, David M. Greenhouse, which stated that if DCEG were de-listed, its "small shareholders (including
Special Situations) will likely be forced to sell their positions in the [DCEG] stock." Greenhouse Aff. ¶ 10. This further demonstrates that plaintiffs' ultimate harm would be a loss in stock value, which may be adequately remedied by money damages.
Cf. ICN Pharm., Inc. v. Khan, 2 F.3d 484, 489 (2d Cir. 1993) ("[A]n injunction will issue for a violation of § 13(d) only on a showing of irreparable harm to the interests which that section seeks to protect. Those interests are fully satisfied when the shareholders receive the information required to be filed.") (citations omitted and quoting Treadway Cos. v. Care Corp., 638 F.2d 357 (2d Cir. 1980)); Int'l Banknote Co., Inc. v. Muller, 713 F. Supp. 612, 621 (S.D.N.Y. 1989) (holding that violation of section 13(d) of the 1934 Act did not establish irreparable harm because an adequate legal remedy existed that would rectify the harm that had occurred — to wit, a curative disclosure); see also Pantry Pride, Inc. v. Rooney, 598 F. Supp. 891, 899 (S.D.N.Y. 1984) (holding that irreparable harm did not exist where the court had the power to, inter alia, set aside the subject election if the defendants' proxies were "ultimately found to be in violation of the securities laws").
See Onbancorp, Inc. v. Holtzman, 956 F. Supp. 250, 256 (N.D.N.Y. 1997) (citing Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 64-65 (1975) for the proposition that " Mills [v. Elec. Auto-Lite Co., 398 U.S. 375, 382-383, n. 5 (1970)] did not stand for the proposition that mere violation of the Exchange Act establishes irreparable harm"); Int'l Banknote, supra note 17, at 620 (noting that the purpose of section 13(d) is to ensure that shareholders are not forced to respond to tender offers without adequate information); Id. at 622 (noting that the purpose of section 14(a) is to ensure adequate disclosure of information and holding that irreparable harm is not established where a curative disclosure will remedy material omissions or misstatements).
Inasmuch as plaintiffs have access to an intra-corporate remedy, this Court declines to set aside DCEG's democratic structures.
Accordingly, it is hereby ORDERED that plaintiffs' motion for expedited discovery is denied, that plaintiffs' motion for preliminary injunction is denied without prejudice and that the hearing scheduled for December 18, 2003 is canceled.