On July 7, the Delaware Court of Chancery issued an opinion in Sagarra Inversiones v. Cementos Portland Valderrivas in which the court denied a plaintiff’s motion for a status quo order that would prohibit the defendant from transferring funds pursuant to a stock purchase agreement during the pendency of the litigation.
This case involves a minority shareholder plaintiff’s claims that the defendant forced the acquisition of a company through its self-dealing because of its position as the majority shareholder on both sides of the transaction, which allegedly resulted in an excessive acquisition price being paid to the defendant. In its complaint, the minority shareholder plaintiff sought, among other things, money damages, an order enjoining the payment of additional funds under the stock purchase agreement, and a rescission of the stock purchase agreement.
The minority shareholder plaintiff also moved for preliminary injunctive relief, in the form of a proposed status quo order, based on its argument that the defendant was financially distressed, had difficulty satisfying its financial obligations and therefore money damages would not be an adequate relief to the extent the defendant would not have the ability to pay such a judgment at the end of the litigation. The Court of Chancery denied the plaintiff’s motion.
As an initial matter, the court treated the plaintiff’s motion for a status quo order as a request for a preliminary injunction, because the plaintiff was essentially seeking to enjoin the payment of monies under the stock purchase agreement until after the final adjudication of the case on the merits. The standard for granting a preliminary injunction is well-settled and requires the moving party to demonstrate: (1) a reasonable probability of success on the merits; (2) that absent injunctive relief, immediate and irreparable harm will occur; and (3) that the harm the moving party will suffer if the requested relief is denied outweighs the harm the opposing party will suffer if the relief is granted. The court found that the plaintiff failed to make a showing of irreparable harm and, therefore, there was no need to grant such interim relief, as the parties could wait until the court’s final decision on the merits.
The Court of Chancery reasoned that, although the record showed that the defendant was financially distressed and has had difficulty satisfying certain financial covenants, the record did not reflect any specific or imminent threat that the defendant and its related companies would be rendered insolvent. The court noted that, while the complaint was filed over five months ago, no additional evidence emerged that would indicate the defendant’s financial condition has materially deteriorated since the plaintiff first requested a status quo order at the beginning of the case. The court further noted that money or rescissory damages will likely suffice to remedy the plaintiff’s claim should it proceed on the merits.
The court specifically rejected the plaintiff’s reliance on Kansas City Southern v. Grupo , a 2003 Chancery Court case. In that case, the court, in granting an injunction from taking any action contrary to the terms of an acquisition agreement pending the outcome of an arbitration proceeding as to the enforcement of that agreement, expressed concerns that one of the firms might be near insolvency and therefore unable to satisfy a future money judgment. However, the Chancery Court in this case found that the plaintiff failed to demonstrate that the defendant was near insolvency. The court further noted that there is no irreparable harm if money damages are adequate to compensate the plaintiff or if the equitable remedy of rescission is available as a reasonably practicable way to return the parties to their pre-dispute positions.
The plaintiff’s request for a status quo order could have, arguably, been rejected for another reason not directly addressed by the court. In essence, the plaintiff sought a status quo order (or preliminary injunction) to create and/or preserve a pool of funds from which it could recover in the event it prevailed on the final adjudication of its claims on the merits. However, as the U.S. Supreme Court made clear in its 1999 opinion in Grupo Mexicano De Desarrollo, S.A. v. Alliance Bond Fund, Inc. , there is “no authority to issue a preliminary injunction preventing [defendants] from disposing of their assets pending adjudication,” unless a plaintiff claims a “lien or equitable interest” in the assets. Put another way, a preliminary injunction designed to freeze a defendant’s assets, so as to preserve the defendant’s funds for a future judgment, is beyond a court’s equitable powers. Delaware courts follow this approach as well.
For example, the Court on Chancery, in a 1989 case, E.I. Du Pont de Nemours and Co. v. HEM Research Inc. , similarly declined to issue a preliminary injunction where the function and effect of the preliminary injunction was to freeze the defendant’s assets in place to make them available to satisfy any money judgment that the plaintiff would obtain if it were to prevail. The Court of Chancery held that in such cases rescissory damages, not injunctive relief, was the proper course of action.
In sum, given that a preliminary injunction is an extraordinary remedy with a rigorous burden, it is extremely difficult, if not impossible, for a moving party to obtain a preliminary injunction freezing assets pending the final resolution of a case, especially where the function of the injunction is to create and/or preserve such assets to satisfy a future money judgment. •
Brian Rostocki is an attorney in the Delaware office of Reed Smith. His practice emphasizes business and complex litigation, primarily in the Delaware Court of
Chancery and nationwide. Rostocki can be reached at 302-778-7561 and brostocki@