Sonics Intern., Inc. v. Dorchester Enterprises, Inc., 20211

• Decision Date: 04 January 1980
• Docket Number: No. 20211,20211
• Citation: 593 S.W.2d 390
• Parties: SONICS INTERNATIONAL, INC., Appellant, v. DORCHESTER ENTERPRISES, INC. and Coastal Plains, Inc., Appellees.
• Court: Texas Court of Appeals

Page 390

593 S.W.2d 390

SONICS INTERNATIONAL, INC., Appellant, v. DORCHESTER ENTERPRISES, INC. and Coastal Plains, Inc., Appellees.

No. 20211.

Court of Civil Appeals of Texas, Dallas.

Jan. 4, 1980.

Mike McKool, Jr., Hewett, Johnson, Swanson & Barbee, Dallas, for appellant.

John H. McElhaney, Orrin L. Harrison, III., Locke, Purnell, Boren, Laney & Neely, Dallas, for appellees.

Before GUITTARD, C. J., and ROBERTSON and STOREY, JJ.

GUITTARD, Chief Justice.

On this temporary injunction appeal the question is whether the trial court abused its discretion in temporarily restraining the controlling stockholder of a corporation from entering into a contract with the corporation by which the controlling stockholder would be paid substantial sums for management consulting services. The suit was brought by another stockholder as a derivative action in behalf of the corporation, and one of the principal questions is whether the plaintiff stockholder has standing to maintain the action. Without passing on the ultimate question of standing, we hold that the showing of standing is sufficient to support the trial court's exercise of discretion in maintaining the status quo until trial on the merits.

1. Standing to Sue for Coastal Plains, Inc.

The corporation in question is Coastal Plains, Inc., which is engaged in the sale of power transmission equipment. The defendant is Sonics, Inc., which owns slightly more than fifty percent of the voting stock of Coastal. The suit was brought by Dorchester Enterprises, Inc., the other principal stockholder of Coastal. Dorchester owns about eighty-two percent of the equity of Coastal, but much of Dorchester's stock has no voting rights. Dorchester brought this suit without making any efforts to have the suit brought by Coastal's board of directors, as required by article 5.14(B) of the Texas Business Corporation Act, and it seeks to excuse such efforts by proof that such efforts would have been futile because a majority of the board was allied with defendant Sonics, Inc. On this appeal Sonics does not contend that a demand on Coastal's board of directors was required. Rather, it contends that the board had delegated the decision of whether the suit should be prosecuted to an independent special committee, whose decision not to prosecute it was made in the exercise of sound business judgment, and, consequently, is binding on both Coastal and Dorchester. In support of this contention, Sonics cites Abbey v. Control Data Corp., 460 F.Supp. 1242 (D.Minn.1978); Lasker v. Burks, 426 F.Supp. 844, 852 (S.D.N.Y.1977), Rev'd, 567 F.2d 1208 (2d Cir. 1978), Rev'd, 441 U.S. 471, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979); and Gall v. Exxon, 418 F.Supp. 508 (S.D.N.Y.1976).

We conclude that the action of the board and its special committee does not defeat plaintiff's standing to seek a temporary injunction. The board did not appoint the special committee until after Dorchester had already filed this suit and obtained a temporary restraining order. Without passing on the effect of the special committee's decision on Dorchester's right to obtain relief on the merits, we hold that the trial court had discretion to reserve that question for consideration at a later stage of the litigation and to determine the standing question for the purpose of the application for temporary injunction according to the situation as it existed when the suit was filed. ¹ Consequently, we hold that Dorchester has shown probable standing for the purpose of the temporary injunction. See Rogers v. Howell, 591 S.W.2d 932 (Tex.Civ.App. Dallas, No. 20222, December 7, 1979).

2. Probable Injury and Adequacy of Legal Remedy

Sonics also contends that the court abused its discretion in granting the temporary injunction because the evidence at the hearing fails to show that denial of the temporary injunction would cause Dorchester or Coastal immediate and irreparable injury for which Dorchester would have no adequate remedy at law. We cannot agree that the evidence shows abuse of discretion in this respect. As we have already noted, Sonics has control of Coastal by virtue of ownership of more than half of its voting stock. The chairman of Coastal's board of directors is LeRoy Erickson, who is also president and chairman of the board of Sonics. The proposed contract between Coastal and Sonics, which the temporary injunction restrained the parties from signing, provides that Sonics should act as management and financial consultant to Coastal during the period from August 20, 1979, through December 31, 1980, and that for an initial period of 180 days, Erickson should devote his major time and effort toward solving certain specific financial problems of Coastal. Other employees of Sonics would also be available during this initial period. As compensation for these services, Coastal would agree to pay Sonics a monthly retainer of $12,500 until December 31, 1979, an "incentive fee" of 35% Of Coastal's pre-tax profits during the year 1980, and additional fees of 15% And 8%, respectively, for two succeeding calendar years.

Thus it appears from the terms of the contract itself that its consummation would obligate Coastal to pay out more than $50,000 in fees, plus a share of its pre-tax profits for more than three years. The effect of payment of these fees on the financial stability of Coastal cannot be determined with certainty. Perhaps the services to be provided by Sonics would be worth the money, but that matter need not be determined before trial on the merits. We cannot say that the trial court abused its discretion in finding that the payment of such fees would be an immediate and irreparable injury to Coastal. There was evidence that Coastal's immediate financial problem was the high interest rate at which it had to borrow money. One of the experts testified that the "last thing Coastal needs" to deal with this problem is a reduced cash flow, such as would be occasioned by payment of the fees in question. The trial court was justified in finding that the contract in question would reduce the cash available to Coastal during the current period of high interest rates, thus causing financial difficulties for Coastal, and, would adversely affect its earnings during pendency of this litigation. Such an impairment of earnings would be difficult to establish precisely if compensation were sought by way of damages at a trial on the merits. Thus, the trial court was justified in concluding that denial of the temporary injunction would result in immediate and irreparable injury for which Coastal and, derivatively, Dorchester, would have no adequate remedy at law.

3. Overbreadth of Injunction

Sonics also complains that the injunction is overly broad in that it prohibits activities that are lawful and a proper exercise of Sonics' rights. The contract restrains Sonics:

(F)rom directly or indirectly entering into, implementing or creating any contract, accrued or otherwise, or making any payment of money or other consideration...