Zavakos v. Zavakos Enterprises, Inc.

• Decision Date: 26 May 1989
• Docket Number: No. 11357,11357
• Citation: 63 Ohio App.3d 100,577 N.E.2d 1170
• Parties: ZAVAKOS, Appellee, v. ZAVAKOS ENTERPRISES, INC. et al., Appellants. *
• Court: Ohio Court of Appeals

Page 100

63 Ohio App.3d 100

577 N.E.2d 1170

ZAVAKOS, Appellee, v. ZAVAKOS ENTERPRISES, INC. et al., Appellants. ^*

No. 11357.

Court of Appeals of Ohio, Second District, Montgomery County.

Decided May 26, 1989.

Coolidge, Wall, Womsley & Lombard, Co., L.P.A., Jacob A. Myers and Roger J. Makley, Dayton, for appellee.

Thompson, Hine & Flory, Paxton & Seasongood Office, Earle Jay Maiman and Louis F. Solimine, Cincinnati, for appellants.

PER CURIAM.

This case is an appeal of the trial court's judgment which overruled the appellants' complaint for a permanent injunction and motion for contempt for violation of a temporary injunction. The issue arose when Christ Zavakos, appellee, filed a shareholder's derivative suit against appellants James Zavakos and Zavakos Enterprises, Inc., the corporation which is the subject of the within appeal. After the initiation of the shareholder's suit, James Zavakos filed a request for an injunction pursuant to R.C. 2727.02 which alleged that certain proposed actions of Christ Zavakos should be enjoined. Christ had developed two contracts and planned certain other acts which involved a sale of stock to Christ from Maria (Zavakos) Alex, another minority shareholder. The sale would make Christ Zavakos a majority shareholder and give him effective control of the corporation. Zavakos Enterprises shares are owned at the present time by Christ Zavakos (thirty percent), Maria (Zavakos) Alex (thirty percent), James Zavakos (thirty percent) and Julia Zavakos (ten percent). Julia Zavakos is the mother of James, Christ and Maria.

The trial court issued a temporary injunction, restraining Christ Zavakos "from consummating, performing upon or taking any action in furtherance of the contracts attached as exhibits to the Motion for Temporary Restraining Order." The temporary injunction was filed on December 6, 1988. On December 7, 1988, a stockholder's meeting was called by Christ Zavakos wherein the number of directors was increased from four to five and some new directors were elected.

Thereafter, a hearing was held on the issue of the injunction, which by agreement of the parties was a hearing on the merits of a permanent injunction. See Civ.R. 65(B)(2). The trial court also heard the motion of James Zavakos to hold Christ in contempt of court for calling the December 7, 1988 stockholders meeting, which was claimed to violate the temporary injunction issued December 6, 1988. The trial court overruled the request for a permanent injunction and also overruled the request to find Christ in contempt. From that decision, appellants perfected an appeal.

The appellants present two assignments of error. The first assignment of error is:

"The trial court erred as a matter of law in denying appellants' motion for permanent injunction."

At the outset, we note that the patent objective of the two contracts, and requisite corporate actions to complete their provisions, is that Christ Zavakos seeks to become the majority shareholder of the corporation and gain effective control of the company. Although we recognize the purpose of the contracts, we must determine whether the trial court should have, as a matter of law, granted the injunction as the objective of the contracts alone is not sufficient to warrant injunctive relief and prohibit their consummation.

An injunction may be granted only upon the showing, by clear and convincing evidence, that the movant is entitled to an injunction. See Southern Ohio Bank v. Southern Ohio Savings Assn. (1976), 51 Ohio App.2d 67, 5 O.O.3d 183, 366 N.E.2d 296. Further, an injunction should not be granted where there is an adequate remedy at law. An injunction is warranted only where the act sought to be enjoined would produce great or irreparable injury to the plaintiff. R.C. 2727.02. We must therefore examine the provisions of the contracts in order to ascertain whether irreparable harm would result if either contract were completed.

The Share Purchase Agreement

The Share Purchase Agreement contemplates a recapitalization of the corporation including issuance of a preferred stock dividend. It also anticipates formation of an employee stock ownership plan ("ESOP"), which would ultimately purchase 155 shares of Maria Alex's common stock and 775 shares of her preferred stock. In addition, Christ would individually buy 620 shares of Maria's common stock, which would make Christ majority shareholder of the common, voting stock. As ESOP trustee, Christ will control the majority of the preferred shares, which are also voting shares. See Irrevocable Proxy.

According to the Share Purchase Agreement, Christ is the purchaser of Maria's 775 preferred shares and 155 common shares that are destined for purchase by the ESOP, and Christ is to borrow the funds required for the purchase. Christ will then assign his rights and obligations under the Share Purchase Agreement to the ESOP, thereby encumbering the ESOP with debt.

The Share Purchase Agreement allows for the same offer to purchase shares to be made to James and Julia Zavakos or for an offer to spin off part of the corporation through disbursement of some of the corporate assets to James and/or Julia. The spin off could be accomplished through arbitration. Maria was given an option to purchase two properties of the corporation at a stated price (1987 appraisal).

With regard to recapitalization, we note that such act may be accomplished only by a two-thirds vote of the shareholders. R.C. 1701.71 (two-thirds vote required to amend articles of incorporation). Achievement of the primary purpose of the Share Purchase Agreement requires recapitalization of the corporation, which could be vetoed by either James or Julia as Christ and Maria together do not have two thirds of the voting stock. Therefore, by voting against a proposed recapitalization, James or Julia could prevent its occurrence and thus effectively frustrate the primary purpose of the Share Purchase Agreement. The other provisions of the Share Purchase Agreement require a vote of the board of directors. The board would vote on the sale of property to Maria, establishing the ESOP, borrowing any funds, and transactions involved in any spin off. Any shareholder would have a remedy at law through a shareholder's derivative suit against any director who voted for an action detrimental to the corporation. Regarding the ESOP, appellants admit that an ESOP can be instituted for legitimate corporate purposes. Buckhorn, Inc. v. Ropak Corp. (D.Ohio 1987), 656 F.Supp. 209. In Buckhorn, the corporation adopted an ESOP in response to a hostile takeover bid, wherein the shares held by the ESOP were placed under control of the directors or the management. In this case, there is no evidence that the ESOP is being created for any purpose which would be harmful to the corporation or the value of the shares held by the shareholders. An ESOP is particularly authorized under Ohio corporate law. R.C. 1701.17 and 1701.35. We do not find that the institution of an ESOP per se results in a breach of fiduciary duty owed by Christ Zavakos to the other shareholders of the corporation, which would cause irreparable harm that should be enjoined.

The Put Option

The Put Option provides that Christ Zavakos has an option to buy 575 shares of...