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McDuffie v. Sautner

United States District Court, M.D. Georgia, Athens Division

November 8, 2019

ANGUS F. MCDUFFIE, et al., Plaintiffs,
v.
DAN SAUTNER, et al., Defendants.

          ORDER AND PRELIMINARY INJUNCTION

          CLAY D. LAND CHIEF U.S. DISTRICT COURT JUDGE

         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. The resolution of the pending motions for preliminary injunctive relief depends on which side has a substantial likelihood of succeeding on the issue of who has the controlling stake in the company.[1] For the reasons explained in the remainder of this Order, Defendants have a majority of the voting shares, and thus they are entitled to a preliminary injunction that prevents Plaintiffs from interfering with their management of the company.

         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, which is represented in this action by Plaintiffs. 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 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. After the purchases were consummated, a letter was delivered on September 19, 2019, to the Company directing that the share certificates for the shares be transferred to Hawthorne and Ontario. 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 taken by written consent in lieu of a special meeting. Compl. Ex. O, Action of the 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 for all purposes and, accordingly, shall not be bound to recognize any legal, equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law.” 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 surrendered their original stock certificates, stating that the owners had transferred their shares to Hawthorne and Ontario, and they asked that new share certificates be issued to Hawthorne and Ontario. Compl. Ex. K, Transfer Agent Instruction Letter (Sept. 19, 2019), ECF No. 1-12. 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. 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. It is undisputed that these shareholders sold their 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 did not present evidence of 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 restriction from several shareholders. There is no evidence that he ever did so. Thus, Plaintiffs did 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.

         Plaintiffs presented evidence that four of the stock certificates (Nos. 29, 30, 35, and 50) were subject to the Company's right of first refusal and that 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]

         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. ...


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