PNT LLC v. Post–N–Track Corporation et al. (2013)

RULING RE PLAINTIFF'S MOTION FOR TEMPORARY INJUNCTION

This case is an action for money damages and injunctive relief by the plaintiff, LongCap PNT, LLC (LongCap) against the defendants, Post–N–Track Corporation (PNT), G. Allen DeGraw (DeGraw) and others.   Following decision on defendants' motion to dismiss (Sheridan, J.), only Count One of the Complaint remains operative.   Count one is pled against PNT and DeGraw only and sounds in breach of contract regarding certain of LongCap's stockholder rights.   Presently before the court is LongCap's motion for a temporary injunction in aid of one of its stockholder rights:  board stacking.   For the following reasons, the motion is denied.

I

The plaintiff's motion was heard by the court on May 21, 2013.   The court heard the testimony of the following witnesses:  Andrew Zaback, managing member of LongCap and a member of the board of directors of PNT;  and Jeffrey Goodman, a member of the board of directors of PNT. The court also admitted into evidence various corporate documents, stockholder agreements, internal memos, correspondence and other financial records.   The parties filed briefs in support of their respective positions.

The court finds the following facts:  In March 2005, LongCap entered into several agreements with the defendants PNT and DeGraw by which LongCap made a substantial investment in PNT in exchange for Series A preferred stock.   Those agreements included a Stock Restriction Agreement, an Investor Rights Agreement, and a Series A Participating Convertible Preferred Stock Purchase Agreement.   Other major stockholders were Connecticut Innovations, Inc. and Marjorie O'Malley.   Redemption rights with respect to those types of shares were delineated in a Certificate of Designations filed with the Secretary of State of Delaware.¹

Section 5(a) of the Certificate of Designations provides that, upon the fifth anniversary after the acquisition of its Series A Preferred Stock, LongCap could request redemption of said shares.   LongCap made demand for redemption of its Series A Preferrred Stock on or about March 25, 2010, which was more than 5 years after the date on which LongCap had acquired said stock.   At that time, Connecticut Innovations and Marjorie O'Malley also exercised their right of redemption with respect to their Series A Preferred Stock.

Under the Certificate of Designations, PNT then was obligated to redeem the stock within 6 months after the demands for redemption.   The redemption price to be paid by PNT is the amount that is determined in accordance with provisions set forth in the Certificate of Designations.

Notwithstanding that the time for the redemption (Redemption Date) of LongCap's Series A Preferred Stock has passed, PNT has not paid all, or even most, of the redemption price required under the terms of the agreement.   PNT does not dispute that LongCap duly exercised its right of redemption (along with two other holders of Series A Preferred Stock);  that PNT did not make full payment of the redemption price to the redeeming stockholders within 6 months of the March 2010 demand;  or that PNT has not yet paid the full redemption amount to the redeeming holders of Series A Preferred Stock.   LongCap argues that these circumstances constitute a default under the agreements, triggering its board stacking rights under the pertinent corporate documents and agreements.

PNT lacks sufficient cash to make full redemption payment.   It has been making partial payments based on its calculation of what funds are “legally available” quarterly.   It takes the position that such payments are in compliance with its redemption obligations and, therefore, it is not in default and LongCap's board stacking rights have not been triggered.

The critical issue in dispute in the pending motion for temporary injunction is whether a default has occurred triggering LongCap's board stacking rights.

Under Article 4.1(b) of the Stock Restriction Agreement, following a default under the Certificate of Designations, if the holders of a majority of the outstanding shares of Series A Preferred stock subject to redemption make written demand to PNT's Board of Directors, then “the Board shall, effective fifteen (15) days after delivery of the Board Stacking Demand and without any further designation, be deemed to have increased in size [from five (5) to nine (9) members], and a majority of the holders of the then outstanding Series A Stock shall have the right to designate the new directors to fill the directorships so created.”

The term “default” under the Stock Restriction Agreement has the same definition as in the Certificate of Designations.   Stock Restriction Agreement § 2.19. The Certificate of Designations defines “default” as “the failure by the Corporation to make all or any portion of any redemption payment with respect to any of the Series A Preferred Stock as and when due and payable, as provided in Section 5 if such failure is not cured within thirty (30) days after the date such failure occurs (a “Payment Default”) ․” (Emphasis in original.)   Certificate of Designations, Definitions.

Section 5(c)(ii) of the Certificate of Designations provides as follows:

(ii) If the funds of the Corporation legally available for redemption of shares of Series A Preferred Stock on the Redemption Date are insufficient to redeem the total number of Series A Preferred Stock to be redeemed on the Redemption Date, the holders of such shares of Series A Preferred Stock shall share ratably in any funds legally available for redemption of such shares according to the respective amounts which would be payable to them if the full number of shares of Series A Preferred Stock to be redeemed on the Redemption Date were actually redeemed.   At any time thereafter when additional funds of the Corporation are legally available for the redemption of such shares of Series A Preferred Stock, such funds will be used to redeem the balance of such shares, or such portion thereof for which funds are then legally available, on the basis set forth above.   If the redemption of any shares of Series A Preferred Stock is deferred as describe in this subsection (ii) or the Corporation fails to pay all or any portion of the Redemption Price as and when due and payable with respect to the Redemption Date, in addition to any other remedies available to the holders of such shares of Series A Preferred Stock at law or in equity, the Dividend Rate shall increase as provided in Section 1(c).

Certificate of Designations § 5(c)(ii) (emphasis in original).

On November 17, 2010, LongCap and Connecticut Innovations, as holders of a majority of the outstanding shares of Series A Preferred stock subject to redemption, effectively declared a default and designated David Wurzer and Richard B. Steele as the sixth and seventh members of the board, purportedly in exercise of the claimed board stacking rights.   Wurzer and Steele joined the board and served for over one year, attending six meetings.

On January 24, 2012, over one year later, LongCap and Connecticut Innovations made another designation demand, this time adding Gordon Pratt and Nathanial Brinn as the eighth and ninth members of the board.   Pratt and Brinn were not accepted by the board, and the board at that time also refused to allow Wurzer and Steele to participate further because the board, apparently, had changed its position as to whether a default had occurred.   This suit followed.

Pursuant to the Certificate of Designations, LongCap's Series A Preferred stock was entitled to receive cumulative, compounding semi-annual cash dividends out of available funds at a rate of 8 percent per annum.   Under Section 5(c)(ii) of the Certificate of Designations, cited above, if redemption is deferred, that rate would become 11.5 percent per annum.   PNT has been affording LongCap dividends at the increased rate pursuant to that section of the Certificate of Designations, but it opposes LongCap's board stacking claims.

Other factual findings critical for resolving the issues are made below as needed.

II

The first issue is whether the court can entertain LongCap's motion at all because it is alleged that LongCap has not joined all necessary parties.   PNT argues that both Connecticut Innovations and Marjorie O'Malley are necessary, indeed indispensable, parties because, inter alia, the board stacking rights in issue in this case belong to the holders of “a majority of the outstanding shares of Series A Preferred Stock subject to the applicable Redemption Request(s).”  Stock Restriction Agreement § 4.1(b).  LongCap, by itself, does not hold a majority of those outstanding shares without Connecticut Innovations or Marjorie O'Malley and neither Connecticut Innovations nor Marjorie O'Malley are parties in this case.   It argues that the court should not act on LongCap's motion unless and until the absent shareholders whose interests are directly affected are made parties to this matter.

The court is not persuaded that this issue bars action by the court, or requires postponement of decision.  “No action shall be defeated by the nonjoinder or misjoinder of parties.”  General Statutes § 52–108;  Practice Book § 9–19.  “[T]he exclusive remedy for nonjoinder of parties is by motion to strike.”  Practice Book § 11–3.   No motion to strike or motion to cite in any party has been filed.   While that would not prevent the court from considering whether to refrain from action;  see Hilton v. New Haven, 233 Conn. 701, 723, 661 A.2d 701 (1995);  on a motion for temporary injunction the court is only aiming to preserve the status quo.   See Bozrah v. Chmurynski, 303 Conn. 676, 682, 36 A.3d 210 (2010);  Massachusetts Mutual Life Ins. Co. v. Blumenthal, 281 Conn. 805, 811, 917 A.2d 951 (2007);  Griffin Hospital v. Commission on Hospitals & Health Care, 196 Conn. 451, 457, 493 A.2d 229 (1985).   The achievement of that goal will not change the position of the parties.   Accordingly, the court will proceed to resolving LongCap's motion on its merits.

III

The standards for issuance of a temporary injunction are well settled.   Ordinarily, in order to prevail on an application for temporary injunction, a plaintiff must establish:  (1) it has no adequate remedy at law;  (2) it will suffer irreparable harm without an injunction;  (3) it will likely prevail on the merits;  and (4) the balance of equities tips in its favor.  Aqleh v. Cadlerock Joint Venture II, L.P., 299 Conn. 84, 97, 10 A.3d 498 (2010);  Waterbury Teachers Association v. Freedom of Information Commission, 230 Conn. 441, 446, 645 A.2d 978 (1994).   The purpose of a temporary injunction is “to [maintain] the status quo while the rights of the parties are being determined.”  (Internal quotation marks omitted;  citation omitted.)  Bozrah v. Chmurynski, supra, 303 Conn. 682.   To prevail on an application for a temporary injunction, the burden is on the applicant.  Karls v. Alexandra Realty Corp., 179 Conn. 390, 401, 426 A.2d 784 (1980);  Hartford v. American Arbitration Assoc., 174 Conn. 472, 476, 391 A.2d 137 (1978).

“Relief by way of mandatory injunction is an extraordinary remedy and should only be granted under compelling circumstances.”  Herbert v. Smyth, 155 Conn. 78, 85, 230 A.2d 235 (1967).   The plaintiff here seeks a mandatory injunction which “is a court order commanding a party to perform an act ․ A party bears a heavy burden in showing that a mandatory injunction should be granted.   This is because [m]andatory injunctions are ․ disfavored as a harsh remedy and are used only with caution and in compelling circumstances.”   Citations omitted;  internal quotation marks omitted.)  Renaissance Management Co. v. Connecticut Housing Finance Authority, 281 Conn. 227, 230, 915 A.2d 290 (2007).

With regard to the first requirement, lack of adequate remedy at law, the court agrees with the plaintiff that it is eligible to seek injunctive relief.   There is no monetary award that could substitute for its board stacking rights in issue in the present motion.   Indeed, the parties stipulated to as much in their agreement.   Article 6.11 of the Stock Restriction Agreement provides:  “Each of the parties hereto acknowledges and agrees that the rights acquired by each party hereunder are unique and that irreparable damage would occur in the event that any of the provisions of this agreement to be performed by the other parties were not performed in accordance with their specific terms or were otherwise breached.   Accordingly, in addition to any other remedy to which the parties hereto are entitled under this Agreement or at law or in equity, each party hereto shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by any other party and to enforce specifically the terms and provisions hereof in any federal or state court to which the parties have agreed hereunder to submit to jurisdiction.”

The court is not persuaded that the plaintiff has satisfied the other requirements.

The right to board stacking created in Article 4.1(b) of the Stock Restriction Agreement arises only following “a Payment Default under the Certificate of Designations.”   The Certificate defines a Payment Default as a failure “to make all or any portion of any redemption payment with respect to any of the Series A Preferred Stock as and when due and payable, as provided in Section 5 ․” Certificate of Designations, Definitions (emphasis added), id.   Section 5(c)(ii) set forth in full above, distinguishes between (1) deferred payments from legally available funds and (2) the failure to pay.   Defendants witness testified, credibly, that PNT has been making deferred payments from legally available funds.   Therefore, it has not failed to pay, triggering LongCap's board stacking rights.   Consequently, it is unlikely that LongCap will prevail on the merits, at least with respect to the narrow issue involved in the motion presently before the court.

LongCap, nevertheless, argues that Section 5(a) provides no exception to, or qualification on, the requirement of a “closing” within 6 months of the Redemption request, and Section 5(c)(ii) contains no language suggesting that the ratable payments called for therein have any effect on the failure to complete the “closing” contemplated in section 5(a).   The argument is not persuasive.   Section 5(c) is labeled “Redemption Mechanics.”   Its applicability cannot be ignored.   It distinguishes deferred payments from a failure to pay.

Having concluded that LongCap is not likely to prevail on the merits, there is no justification for a finding that it will suffer irreparable harm without a temporary injunction or that the balance of equities tip in its favor.   Moreover, the board presently consists of five persons.   LongCap's request to increase it to nine members and to install four new members of its choice will hardly maintain the status quo.

IV

For all of the foregoing reasons, the plaintiff's motion for temporary injunction is denied.

Robert F. Vacchelli

Judge, Superior Court

FOOTNOTES

FN1. PNT is a Delaware corporation, although it is based in Connecticut and several of the agreements provide that they are governed by the laws of Connecticut..  FN1. PNT is a Delaware corporation, although it is based in Connecticut and several of the agreements provide that they are governed by the laws of Connecticut.

Vacchelli, Robert F., J.