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Manbourne Inc. v. Conrad

decided: June 23, 1986.

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



Appeal from the United States District Court for the Eastern District of Wisconsin, No. 83 C 1492 -- Robert W. Warren, Judge.

Author: Eschbach

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

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 Employer's 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 office 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.*fn1 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, 1982, 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.*fn2 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.*fn3 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").*fn4 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 14892, slip op. at 9 (E.D. Wis. Nov. 11, 1984) ...


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