Manbourne, Inc. v. Conrad

• Citation: 796 F.2d 884
• Decision Date: 23 June 1986
• Docket Number: No. 84-3104,84-3104
• Parties: MANBOURNE, INC., a California Corporation, Plaintiff-Appellee, v. Bruce CONRAD, Defendant and Third-Party Plaintiff-Appellant, v. EMPLOYERS INSURANCE OF WAUSAU, a mutual insurance company, James T. Lundberg, Melbourne B. Weddle and Norman A. Harris, Third-Party Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 884

796 F.2d 884

55 USLW 2080

MANBOURNE, INC., a California Corporation, Plaintiff-Appellee, v. Bruce CONRAD, Defendant and Third-Party Plaintiff-Appellant, v. EMPLOYERS INSURANCE OF WAUSAU, a mutual insurance company, James T. Lundberg, Melbourne B. Weddle and Norman

A. Harris, Third-Party Defendants-Appellees.

No. 84-3104.

United States Court of Appeals Seventh Circuit.

Argued June 4, 1985.

Decided June 23, 1986.

Charles P. Graupner, Michael, Best & Friedrich, Milwaukee, Wis., for defendant and third-party plaintiff-appellant.

Wayne E. Babler, Jr., Quarles & Brady, Milwaukee, Wis. for plaintiff-appellee.

Stewart L. Etten, Ruder, Ware, Michler & Forester, Wausau, Wis. for third-party defendants-appellees.

Before CUMMINGS, Chief Judge, ESCHBACH, Circuit Judge, and WRIGHT, Senior Circuit Judge. ^*

ESCHBACH, Circuit Judge.

Manbourne, Inc. ("Manbourne") brought this diversity action, governed by Wisconsin law, against Management Science, Inc. ("MSI") and Bruce Conrad, an officer, director, and shareholder of MSI, seeking preliminary and permanent injunctions protecting Manbourne's rights as MSI's majority shareholder. On November 13, 1984, the district court enjoined defendants from issuing stock to MSI officers and employees holding options to purchase common stock in MSI. Conrad appeals. The primary question presented by this appeal is whether the district court abused its discretion when it enjoined defendants from issuing stock to the option-holders. For the reasons stated below, we will affirm.

I

Manbourne is incorporated in California and has its principal place of business in that state. MSI, a Wisconsin corporation with its principal place of business in Wisconsin, creates and markets computer software. In 1982 the two companies negotiated, ultimately unsuccessfully, for Manbourne to acquire MSI.

Employers Insurance of Wausau ("Employers") was a principal shareholder of MSI. It held 10,000 shares of 10% cumulative convertible preferred stock, 50,891 shares of common stock, and a debenture for approximately $227,000. Unless first redeemed by MSI, the 10,000 preferred shares were convertible at will into 100,000 common shares. Conversion was deemed effective upon presentation of the preferred stock certificate, endorsed in blank for transfer, and of written notice of election to convert.

On August 5, 1983, Manbourne purchased Employers' interests in MSI. On August 9, 1983, Manbourne surrendered to Conrad and MSI the duly endorsed preferred stock certificate and written notice of Manbourne's election to convert. The district court found that, upon surrender of the certificate and notice of election to convert. Manbourne owned 150,891, or 50.23%, of the 300,400 common shares then outstanding.

On the same day, however, MSI denied Manbourne's oral request to inspect MSI's list of shareholders. On August 12, 1983, MSI mailed notice of a special shareholders' meeting to be held on August 22, 1983. Neither Manbourne nor Employers received written notice of the scheduled meeting.

On the day of the mailing, Manbourne officials visited MSI's offices to deliver a written demand to inspect the list of shareholders. While there, they noticed a letter from MSI's president Williard Kern to MSI shareholders, and observed MSI personnel preparing an expedited mailing. They asked Conrad whether MSI was mailing notice of a special shareholders' meeting. Conrad said he was not aware of any meeting, and told them to talk to MSI's attorney. When asked for the attorney's name, Conrad refused to give it.

Between August 15 and August 17, 1983, nine of MSI's employees and directors notified MSI of their intent to exercise options on 14,900 shares of MSI common stock. ¹ The stock option plan had been created in 1970 and the options were granted on several occasions between 1972 and 1982. On August 17, 1983, MSI's board of directors by unanimous consent authorized the issuance of 14,900 common shares, which would increase the number of outstanding common shares to 315,300. Manbourne then would own only 47.86% rather than 50.23% of the outstanding common shares.

Also on August 17, 1983, MSI's directors by unanimous consent amended MSI's by-laws. One amendment eliminated the shareholders' power to require a special shareholders' meeting. Another amendment provided that the shareholders could remove a director only for cause and only upon an affirmative vote of 80% of the outstanding shares. ² Manbourne filed suit on the same day.

On August 18, 1983, the district court preliminary enjoined MSI, pending the disposition of the other issues, from (1) holding the special shareholders' meeting scheduled for August 22, 1983, (2) convening any shareholders' meeting without giving notice to Manbourne, and (3) denying Manbourne's right to inspect MSI's shareholders' list. ³ On August 19, 1983, MSI issued 14,900 shares of common stock to the nine option-holders. On September 16, 1983, however, the district court amended its earlier order and enjoined MSI from issuing any common stock and ordered it to cause all stock issued after August 17, 1983, to be returned and cancelled.

After conducting evidentiary hearings in October 1983, the district court on August 24, 1984, preliminarily enjoined MSI, inter alia, "from issuing any ... common stock ... without giving notice in writing to ... Manbourne ... at least ten days prior to issuance. Further, if ... Manbourne ... applies to this Court for relief with respect to such issuance within said ten-day period, ... [MSI] shall continue to be enjoined unless and until the Court orders otherwise." Manbourne, Inc. v. Conrad, No. 83 C 1492, slip op. at 16-17 (E.D.Wis. Aug. 24, 1984) ("August 24 order"). ⁴ MSI notified Manbourne on September 26, 1984, that it intended to issue the 14,900 shares of common stock pursuant to the stock option plan. On October 5, 1984, Manbourne applied for relief with respect to the issuance of the 14,900 shares; the issuance thus was enjoined pending further order of the court.

On November 11, 1984, the district court enjoined MSI from issuing to the option-holders the 14,900 shares of common stock. Manbourne, Inc. v. Conrad, No. 83 C 1492, slip op. at 9 (E.D.Wis. Nov. 11, 1984) ("November 11 order"). Conrad appeals from this order.

II

The plaintiff bears the burden of establishing the five elements necessary for the issuance of a preliminary injunction: (1) that it has no adequate remedy at law; (2) that it will suffer irreparable harm if the preliminary injunction is not issued; (3) that the irreparable harm it will suffer if the preliminary injunction is not granted outweighs the irreparable harm the defendant will suffer if the injunction is granted; (4) that it has a reasonable likelihood of prevailing on the merits; and (5) that the injunction will not harm the public interest. See Brunswick Corp. v. Jones, 784 F.2d 271, 273-74 (7th Cir.1986). In deciding whether to grant or deny a preliminary injunction, the district court first makes findings of fact and conclusions of law, and then exercises its discretion to grant or deny the injunction. We review the factual determinations for clear error, and the legal conclusions de novo. See Lawson Products, Inc. v. Avnet, Inc., 782 F.2d 1429, 1437 (7th Cir.1986). If the findings of fact are not clearly erroneous and the legal conclusions are correct, we review the district court's decision for an abuse of discretion, id.; however, a preliminary injunction (or denial of one) based upon a clearly erroneous factual determination or an incorrect legal conclusion constitutes an abuse of discretion. See id.; Roland Machinery Co. v. Dresser Industries, 749 F.2d 380, 385, 389-90 (7th Cir.1984); American Can Co. v. Mansukhani, 742 F.2d 314, 326 (7th Cir.1984); Shango v. Jurich, 681 F.2d 1091, 1097 (7th Cir.1982).

Conrad does not dispute the district court's determinations that Manbourne established the five elements required for a preliminary injunction. Instead he argues that, as a matter of law, the district court could not enjoin the exercise of the stock options. First, he argues that the options were validly granted pursuant to a long-standing stock option plan. As he notes MSI created the plan in 1970 to encourage and retain key employees. MSI granted the options involved in this appeal between 1972 and 1982--over a year before Manbourne acquired Employers' interests in MSI. Second, he asserts that the option-holders exercised their options independently of MSI's attempt to deny Manbourne control of the company. He contends that "the options were exercised and payment tendered even before this action was commenced," Appellant's brief at 15, and that "[m]ost of the optionholders had no role at all in the decision to contest Manbourne's takeover." Reply brief at 3. Conrad concludes that the preliminary injunction inappropriately "extinguished" valid stock options. Id. at 4.

We disagree with Conrad's contention that the district court could not enjoin exercise of the stock options as a matter of law. On appeal, Conrad does not dispute that the transfer of Employers' interests in MSI to Manbourne was effective. He, therefore, has waived any argument to the contrary. See Hershinow v. Bonamarte, 735 F.2d 264, 266 (7th Cir.1984) (even argument raised in brief but presented in a "prefunctory and undeveloped" manner is waived). Accordingly, we consider the transfer to be valid, and have good reasons under Wisconsin law for doing so. Under the law of that state, "[u]pon delivery of a security the purchaser acquires the rights in the security which his transferor had or had actual authority to convey." Wis.Stat. Sec. 408.301; see also United States v. Rosebush, 45 F.Supp. 664, 667 (E.D.Wis.1942) ("The transfer of possession of the stock, although unrecorded on the books of its issuing corporation, conveys the interest of the holder."). Manbourne thus acquired Employers' interests in MSI when it took possession...