Klaus v. Hi-Shear Corp., HI-SHEAR
| Decision Date | 15 December 1975 |
| Docket Number | 75--1394,75--2446 and 75--2012,75--1920,HI-SHEAR,75--1389,75--2380,Nos. 75--1544,s. 75--1544 |
| Citation | 528 F.2d 225 |
| Parties | Fed. Sec. L. Rep. P 95,404, 1 Employee Benefits Ca 1143 Frank A. KLAUS, Plaintiff-Appellant, v.CORPORATION et al., Defendants-Appellees. Frank A. KLAUS, Plaintiff-Appellee, v.CORPORATION, a California Corporation, and Hi-Shear Caribe, a California Corporation, Defendants-Appellants. Frank A. KLAUS, Plaintiff-Appellee, v. George S. WING and Perry A. Luth, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Before CHOY and GOODWIN, Circuit Judges, and TAYLOR, * District Judge.
Since early 1973, Frank A. Klaus has been attempting to wrest control of Hi-Shear Corporation away from George S. Wing and his allies, Hi-Shear's present management. Klaus is conducting litigation in district court in which he charges that the Wing group, in its effort to retain control of Hi-Shear, has violated federal and state securities laws and regulations. In a running endeavor to stabilize the battle for control, pending its decision on the merits, the district court issued over a period of months a number of preliminary injunctions against the voting of certain shares of stock. It refused to issue other injunctions requested by Klaus. One side or the other appeals from each order entered by the district court.
All the preliminary injunctions were improperly issued because they were based on a mistaken theory of the law. The plaintiff could not establish a likelihood of success under the Exchange Act claims, so no injunctions should issue on that basis. The ESOT injunction was improper in the circumstances here because plaintiff could not establish irreparable harm. The Caribe injunction and the Midwood order were improper for failure to join an indispensable party, and the injunction on the exercise of stock options was improper as untimely.
We affirm in part, reverse in part and remand.
Hi-Shear is a successful California corporation, founded in 1943 by Wing. Wing serves as president and chairman of the board. Klaus first tried to acquire control of Hi-Shear in April 1973 by making a cash tender offer for all outstanding stock. Hi-Shear's management countered by purchasing over 660,000 shares from its shareholders pursuant to its own tender offer. Rather than retain them all as non-voting treasury shares, Hi-Shear resold $130,000 of the shares at cost to its wholly-owned subsidiary Hi-Shear Caribe (Caribe). Hi-Shear reported to its shareholders and to the Securities and Exchange Commission (SEC) that it had purchased all of the 600,000 some shares. The district court found that Hi-Shear intended to convey the impression that only Hi-Shear had purchased the shares.
Klaus made a second tender offer on August 8, 1974, for a certain number of shares which he thought necessary for majority control. When his second offer closed on October 4, 1974, Klaus held 555,514 of Hi-Shear's 1,231,816 outstanding votable shares--about 45 percent. If the 130,000 shares held by Caribe had been non-votable treasury stock, as Klaus then believed, Klaus would have held over 50 percent of the total shares on October 4. At this point, Klaus demanded a special meeting of stockholders for an election of new directors. See Cal.Corp. Code § 2202. The meeting was scheduled for December 20, 1974.
During October 1974, Hi-Shear's management approved three stock issuances which resulted in Klaus' controlling a much smaller percentage of the total stock. On October 11, management issued 50,000 shares in exchange for all the stock of Southern California Signal Industries, Inc. (Signal), a machine shop. Under the acquisition agreement, Hi-Shear's management was granted an irrevocable proxy to vote the shares transferred to Signal's former owner.
On October 15, management approved formation of an Employee Stock Ownership Trust (ESOT). Hi-Shear donated to ESOT 30,000 treasury shares and guaranteed a bank loan with which ESOT purchased another 50,000 shares from Hi-Shear at market value.
Finally, on October 31, Hi-Shear acquired another shop, Western Methods Corporation (Western). Hi-Shear paid for Western by issuing 100,000 shares to Western's owner. The sale agreement allowed the seller to rescind the sale if Klaus later should obtain control of Hi-Shear, so long as the seller himself did not vote his 100,000 shares for Klaus.
On October 18, Klaus responded to these maneuvers with a suit in district court alleging violations of sections 10(b) and 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n(e). Amendments to his complaint also alleged violations of section 14(a) of the Act, 15 U.S.C. § 78n(a), and of management's fiduciary duties under state law. He requested rescission of the stock transfers to Signal, and injunctions against the voting of those shares transferred and against any future transfers pursuant to the Signal agreement. On November 7, he amended his complaint to request similar relief as to ESOT and Western transfers.
During November, Klaus apparently learned for the first time that the Caribe shares were outstanding shares, which management intended to vote. On December 13, he again amended his complaint, asserting that the Caribe shares could not be voted under California law and asking that their voting be enjoined. On December 19, the eve of the special election, the court issued a temporary restraining order against the voting of the Caribe shares. The next day, Klaus nevertheless lost his bid for control, as the newly-issued Signal, ESOT, and Western shares were voted for management.
The court scheduled hearings for December 10--13, 1974, on Klaus' motions for preliminary injunctions. In subsequent weeks, the court issued a number of orders granting or refusing preliminary injunctions pending a decision on the merits of Klaus' amended complaint.
January 13--Order granting 'Caribe Injunction'--The court noted its intention to grant a preliminary injunction barring the voting of Caribe's 130,000 shares. At this time, Caribe was not a named party in the action. On January 28, and 29, Caribe sold 128,000 of its Hi-Shear shares to Midwood Industries. Klaus added Caribe as a defendant in his third amended complaint on February 4.
January 14--'Rule 62c Injunction'--The court ordered Hi-Shear to held its regular annual meeting of stockholders, which had not been held in 1974, no later than February 28, 1975. It also ordered Hi-Shear to issue no new stock before the annual meeting. The court stated that the injunction was issued pursuant to Fed.R.Civ.P. 62(c) (Injunction Pending Appeal), apparently in anticipation of appeals from orders which were not formally announced until February 5.
February 5--Order denying Klaus' motions for preliminary injunctions against the voting of the shares issued to Signal and Western Methods.
February 5--'ESOT Injunction'--The court issued a preliminary injunction barring the voting or counting of shares held by ESOT.
February 5--'Caribe Injunction'--The court issued a preliminary injunction against the voting of the Hi-Shear stock held by Caribe.
February 12--'Midwood Order'--The court extended the Caribe Injunction to forbid the voting of the 128,000 shares which Caribe had transferred to Midwood, and barred their being voted by any future transferee.
February 13--Order denying Hi-Shear's motion to modify the ESOT trust agreement to permit ESOT's Hi-Shear stock to be voted by its employee beneficiaries rather than by the ESOT committee which was under the influence of Hi-Shear's management.
After the December hearings which resulted in these orders, Hi-Shear's management encouraged its employees to exercise stock options which had previously been issued to them. Under an option plan adopted in 1972, holders could exercise their options by executing a note to Hi-Shear in payment for the purchased shares. Management now provided its employees forms for long-term promissory notes and offered them rescission agreements binding Hi-Shear to repurchase the stock if Klaus should gain control. By January 14, when the Rule 62(c) Injunction banned further stock issuances, Hi-Shear employees had exercised options for 71,000 shares, 27,000 of them by Vice President Perry A. Luth, but the certificates were not delivered until January 22. The court held that issuance of the certificates violated the Rule 62(c) Injunction, and another series of orders was forthcoming:
February 26--'Temporary Restraining Order' and 'Preliminary Injunction in Aid of Jurisdiction of Court (28 U.S.C. § 1651(a) (All Writs Act))'--The court enjoined Luth from voting his 27,000 shares and enjoined President Wing from voting a number of his own shares equal to those issued under the 1972 stock option plan to non-party employees not within the court's jurisdiction.
The court-ordered 1974 annual meeting was held on February 28, 1975. Management defeated Klaus 615,453 to 593,687. Injunctions prevented another 281,000 shares from being cast for management.
April 1--'Stock Option Injunction'--The court issued a preliminary injunction, after a March 14 hearing, restating the February 26 orders.
April 2--'Second Rule 62c Injunction'--T...
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