Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. BC373106, David P. Yaffe, Judge.
Finestone & Richter, Howard N. Gould and D. Jason Davis for Plaintiff and Appellant.
Gartenberg Gelfand Wasson & Selden, Edward Gartenberg and Shirley Hayton for Defendants and Respondents Robert B. Kraemer, individually and as Trustee, etc.
Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, Ronald J. Nessim, Jason D. Kogan and Marc E. Masters; Anderson, McPharlin & Conners, Eric A. Schneider, Richard P. Tricker and Kristin M. Kubec for Defendants and Respondents Gary E. Hutchinson, Jonathan G. Lasch, Robert F. Foster and Precision Dynamics Corporation.
Winston & Strawn, Steven D. Atlee and Matthew P. Kelly for Defendants and Respondents Water Street Healthcare Partners, Water Street Healthcare Management, and Precision Dynamics Holding.
Retired Judge of the Los Angeles Superior Court assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
INTRODUCTION
Plaintiff Walter W. Mosher, Jr., Trustee of the Walter W. Mosher, Jr. Living Trust, dated September 24, 1990, appeals from an order denying plaintiff’s application for a preliminary injunction against defendants Robert B. Kraemer, an individual and as Trustee under Declaration of Trust of the Robert B. Kraemer Living Trust dated November 25, 1986, Gary E. Hutchinson, Jonathan G. Lasch, Robert F. Foster, Precision Dynamics Corporation, Water Street Healthcare Partners, L.P., Water Street Healthcare Management, L.P., and Precision Dynamics Holding LLC. We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Necessarily, we present the factual background based upon the affidavits which were before the trial court and do not determine or intend to suggest that the factual matters provided herein have been conclusively established for the purposes of further proceedings in the case. In regard to a decision to grant or deny a preliminary injunction, “[t]he trial court’s interlocutory decision on the likelihood that the plaintiff will prevail at trial reflects nothing more than the court’s evaluation of the controversy based on the record before it at the time of its ruling. [Citation.]” (Howard S. Wright Construction Co. v. Superior Court (2003) 106 Cal.App.4th 314, 320.)
In 1956, Walter W. Mosher, Jr. (Mosher) invented a patient identification wristband and co-founded defendant Precision Dynamics Corporation (PDC) based upon his invention. In 1981, Robert B. Kraemer (Kraemer) became the co-owner of PDC. Mosher and Kraemer were each a 50 percent shareholder and one of the two directors on the PDC Board of Directors (PDC Board).
In 1999, Kraemer made efforts to sell most of his stock in PDC to an outside investor, but Mosher disagreed with the transaction. As a result, the transaction was not completed and Kraemer was not able to liquidate his stock. Thereafter, Mosher and Kraemer frequently came to impasses on PDC management. In 2002, in order to help resolve the impasses, Mosher and Kraemer reached an agreement to add three outside directors to the PDC Board and to make related amendments to the PDC Articles of Incorporation and other corporate governance documents.
Defendants Gary E. Hutchinson (Hutchinson), Jonathan G. Lasch (Lasch) and Robert F. Foster (Foster) became the three new directors. Together with Mosher and Kraemer, they made up the new five-member PDC Board. Later in 2002, Hutchinson became PDC’s President and Chief Executive Officer. Pursuant to his PDC employment agreement, Hutchinson obtained options to purchase 5 percent of PDC’s stock and, thereafter, acquired sufficient shares to make him a swing vote between Mosher and Kraemer in any matter requiring shareholder approval.
Kraemer, Hutchinson, Lasch and Foster are collectively referred to as the “director defendants.”
Accordingly, at times, Kraemer and Hutchinson are collectively referred to as the “majority shareholders.”
The PDC Restated and Amended Articles of Incorporation (PDC Articles) included one of the supermajority vote provisions in article VI (article VI), which required not less than four of the five directors to authorize issuance of new equity shares without obtaining shareholder approval. Another supermajority vote provision was in article IV of the PDC Articles (article IV). Under article IV, in the case of either a public offering of shares or any issuance of shares where PDC’s existing shareholders did not retain 51 percent voting control, approval required consent by 66 2/3 percent of the shareholders. At the time of the amendment, Mosher and Kraemer each owned 50 percent of the shares and could block either type of transaction. By the time the vote was taken on the Water Street transaction in 2007, Hutchinson owned 0.68 percent of the shares and Mosher and Kraemer each owned 49.7 percent. Thus, either Mosher or Kraemer could still unilaterally block transactions for which a supermajority vote of the shareholders was required. A result of the Water Street transaction would be to dilute Mosher’s shareholder voting power from 49.7 percent to 34.02 percent.
Article VI stated: “[PDC] shall not, without the vote or written consent of at least [66 2/3 percent] of the members of the Board of Directors of [PDC]: [¶] (a) sell or otherwise issue any equity securities of [PDC]; or [¶] (b) create a new subsidiary of [PDC].”
Article IV stated: “[PDC] shall not, without the vote or written consent of (i) the holders of at least [66 2/3 percent] of the then outstanding shares of Common Stock and (ii) at least [66 2/3 percent] of the members of the Board of Directors of [PDC]: [¶] (a) sell or otherwise dispose of all or substantially all of [PDC’s] assets or sell or otherwise transfer any shares of the capital stock of any subsidiary of [PDC] . . .; [¶] (b) consolidate or merge [PDC] with or into another entity if, as a result of such consolidation or merger, the shareholders of [PDC] immediately prior to such consolidation or merger do not hold at least [51 percent] of the combined voting power of the surviving entity; [¶] (c) engage in a public offering of [PDC’s] equity securities; [¶] (d) change the authorized number of directors constituting the [PDC] Board . . .; or [¶] (e) amend or modify the By-laws of [PDC].”
Every year from 2003 to the beginning of the instant litigation in 2007, the PDC Board agreed PDC should expand its business by acquiring other companies and unanimously approved an aggressive plan to grow PDC to $100 million in sales by 2007. The members of the Board agreed that PDC needed to obtain financing from an outside source in order to proceed with the growth plan. The Board engaged in extensive discussions regarding whether to seek financing in the form of debt or equity investment.
In late 2006, the Board requested and obtained a detailed report of pros, cons and risks of the two modes of financing, which was prepared by PDC’s chief financial officer. Earlier in 2006, PDC began communicating with private equity firms and investment banking firms about the possibility of obtaining equity financing. One of the equity firms was defendant Water Street Healthcare Partners, L.P. (Water Street), an experienced private equity firm exclusively focused on investing in healthcare companies.
Another equity firm, Frazier Healthcare Ventures (Frazier), made a formal expression of interest in investing in PDC, which included a summary of proposed terms. Frazier withdrew its offer in or about March 2007, however, based upon communications from Mosher’s counsel about Mosher’s serious disagreement with Frazier’s proposal and Mosher’s willingness to proceed only under certain circumstances. Frazier determined they were untenable.
After extensive discussions with PDC, Water Street submitted a detailed written proposal to PDC. The PDC Board approved the submission of a letter of intent to Water Street to move forward with the proposal. The vote was 4 to 1, with Mosher voting against the proposal. Throughout the negotiation and drafting process with Water Street, PDC Board members, including Mosher, were given each successive draft of the agreements and an opportunity to comment.
Hutchinson emailed the final drafts of the Water Street transaction agreements to each PDC Board member on June 18, 2007 for review and comment prior to the special meeting of the PDC Board scheduled for June 26, 2007. On the same date, he also personally hand-delivered to Mosher copies of the agreements.
Key terms of the Water Street transaction were as follows: Water Street would purchase 5,510,204 shares of Series A Preferred Stock to be issued by PDC, which shares represented 42.03 percent of the outstanding capital stock of PDC. After purchasing another 816,327 shares of common stock directly from Kraemer, Water Street’s ownership interest would increase to 48.25 percent.
The purchase price would be $4.90 per share for the Series A Preferred Stock as well as for Kraemer’s common stock. The total Water Street would pay to PDC was $27 million. PDC would earmark the money to fund acquisitions, fund redemption of a portion of the outstanding shares of common stock, pay off PDC’s bank debt of more than $14 million and provide liquidity for certain key employees who held vested options to purchase common stock. As the result of retiring the debt, PDC’s future borrowing capacity for new acquisitions would be substantially increased. PDC had already targeted four companies for acquisition, which were expected to generate additional revenue of up to $80 million and additional cash flow for PDC. Water Street would commit to providing up to an additional $44 million to PDC.
Water Street offered to purchase shares from Mosher on the same terms as Kraemer, but Mosher indicated he was not interested in selling his shares.
On the preferred shares purchased, Water Street would be entitled to an 8 percent cumulative dividend that accrued annually. PDC would not be required to make annual cash payments of the dividend, however, but rather would pay it only if a liquidity event occurred or if Water Street elected to convert the preferred stock into common stock in connection with a transaction such as a public offering. The dividend was also subject to being reduced to 4 percent or eliminated entirely if it became payable and, in connection with the payment-triggering event, Water Street received specified returns on its investment. Water Street would be making available to PDC its considerable healthcare business expertise and contacts, and it would receive a $540,000 management fee each year.
PDC would set aside approximately $10.25 million from the proceeds of the Water Street transaction to redeem up to 2,091,837 shares of common stock at $4.90 per share from any shareholder, including Mosher, who elected to redeem any shares. As a result, the value would increase for the shares of common stock owned by PDC shareholders, including the 36.82 percent owned by Mosher. PDC would be able to honor its commitment made in 2003 to key PDC employees for a stock option plan and a share buy-back program as incentives for retaining the key employees.
Water Street would be permitted to initiate a public offering of PDC stock, but only upon the approval by shareholders and the directors as required by the PDC Articles. If any PDC shareholders were given a right to sell shares in connection with a public offering, all PDC shareholders, including Mosher, would have an equal right to participate in the offering. All shareholders who elected to sign the shareholder agreement would obtain preemptive rights with regard to future share issuances.
On June 22, 2007, before the final vote was to be taken on the Water Street transaction, Mosher filed the complaint in the instant case, together with an ex parte application for a temporary restraining order (TRO) and for an order to show cause why a preliminary injunction should not be granted (OSC) relating to the impending final approval of the Water Street transaction. More specifically, Mosher sought an order to restrain defendants Kraemer, Hutchinson, Lasch, Foster and PDC from approving the Water Street transaction, approving issuance of any PDC shares in relation to the Water Street transaction unless to Mosher or other PDC shareholders, selling or otherwise transferring any PDC share held by Kraemer in relation to the Water Street transaction unless to Mosher or other PDC shareholders, and abiding by the “no-shop” provision in the April 6, 2007 letter of intent between PDC and Water Street which prohibited PDC and its Board from considering any other competing proposals to invest in or provide financing to PDC.
The application stated that it was made “on the grounds that: (1) the Water Street Transaction threatens to violate and will violate, if such transaction is completed, Plaintiff’s rights under PDC’s articles of incorporation and bylaws and will render any judgment ineffectual; and (2) any award of pecuniary compensation will not afford adequate relief to Plaintiff . . . [and also] great and irreparable injury will result to Plaintiff before the matter can be heard on notice.”
Mosher claimed that he was likely to prevail on at least one of the numerous grounds he raised in the complaint. The complaint alleged the following causes of action: declaratory relief, injunctive relief, specific performance, breach of fiduciary duty by directors (derivative cause of action), breach of fiduciary duty by directors, breach of fiduciary duty by controlling shareholders, corporate waste and gift, and express contractual indemnity.
The contractual indemnity cause of action was unrelated to the Water Street transaction and, therefore, irrelevant to determining whether to grant or deny the preliminary injunction, rendering it also irrelevant to this appeal.
The gravamen of the allegations was two-fold. First, Mosher alleged that defendants failed to comply with the shareholder supermajority approval requirements set forth in article IV of the PDC Articles. Mosher also specifically alleged that the director defendants wrongfully took the position that only directors’ approval, without any shareholder approval, was required to approve the Water Street transaction, and, therefore, Mosher possessed quasi-preemptive rights to purchase the shares being offered to Water Street prior to the shares being offered to Water Street for purchase. Second, the director defendants had breached their fiduciary duties to PDC and to Mosher as a minority shareholder, and the majority shareholders had breached their fiduciary duties to Mosher as a minority shareholder. Mosher specifically alleged that the acts of the director defendants were not the product of a valid exercise of business judgment and not entitled to protection under the business judgment rule.
The trial court denied the application as to the TRO and granted it as to the OSC. In the ensuing period before the OSC hearing was to be held, Mosher and defendants continued activities with respect to the Water Street transaction. PDC had engaged one of the firms suggested by Mosher, KPMG Corporate Finance LLC (KPMG), to prepare an evaluation of the fairness of the Water Street proposal to PDC. At the special PDC Board meeting on June 26, 2007, KPMG presented its opinion that the proposed Water Street transaction was financially fair to PDC. After discussion, the PDC directors approved the Water Street transaction by a vote of four to one, Mosher having voted against it. The directors who voted in favor of approval each had extensive corporate management experience, and each confirmed that he voted for the Water Street transaction because he made a good faith determination that it was in the best interests of PDC and its shareholders.
The hearing on the OSC was held on July 18, 2007. The trial court issued a minute order denying the application for a preliminary injunction and summarizing its findings and conclusions as follows:
Mosher filed a Supplemental Memorandum on July 3, 2007 (without authorization by the trial court) advancing three additional arguments based upon events which had occurred subsequent to the issuance of the OSC: The director defendants wrongfully refused to consider a new lending proposal received just prior to the TRO hearing; the director defendants wrongfully isolated Mosher, in that he did not receive the latest version of the key agreements until too late to review with his counsel prior to the vote on approval; and the PDC Board proceeded with closing the Water Street transaction before the OSC hearing was held, even though the trial court had expressed misgivings about the transaction sufficient to issue the OSC.
“Plaintiff Mosher and defendant Kraemer acquired all of the corporate stock in Precision Dynamics Corporation in 1981. Each owned fifty percent of said stock. By 1999, Mosher and Kraemer were at an impasse because Kraemer wanted to sell his interest in the corporation, but could not do so because the buyer would also be at an impasse if it and Mosher could not agree. According to Mosher’s declaration, he and Kraemer agreed, in 2001 and 2002, to add three outside directors. The terms of that agreement are not before the court. As a result of that agreement, the Articles of Incorporation were amended. The new articles are made available to the court by Mosher, but the old articles are not, so the court cannot determine exactly which provisions were changed and in what respect.
“Mosher admits, however, that the purpose of the agreement to add new directors was to break the impasse between Mosher and Kraemer. It appears that the two parties agreed that if either could convince the three new directors to agree with him, Mosher or Kraemer, could, over the objection of the other, sell his stock in the corporation and cause the corporation to issue new stock.
“The action by the Board that Mosher now seeks to enjoin does exactly what the parties intended to permit by their agreement. By a four to one vote, Mosher being the only dissenter, the Board has authorized: Kraemer to sell stock to a new investor; to cause the corporation to issue new preferred stock and sell it to the new investor; to allow for a majority of shareholders to authorize the sale of stock to the public; to reconstitute the Board, and to make other changes, all of which were, or should have been within the contemplation of the parties when they made the agreement to break the impasse between them.
“Mosher contends that the Board action is improvident, but there is a presumption to the contrary which Mosher does not overcome. The common law business judgment rule insulated from court intervention those management decisions which are made by directors in [g]ood faith in what they believe to be the corporation’s best interest. LAMDEN v. LA JOLLA SHORES [Clubdominium Homeowners Assn.] 21 Cal.4th 249, 257 (1999).
“Mosher objected at the hearing in this matter on June 22, 2007 [ex parte TRO hearing], that the Board’s action discriminated against him as a minority shareholder in violation of the holding in JONES v. H.F. AHMANSON & CO., 1 Cal.3d 93 (1969). Since that time the Board has taken action to eliminate that issue by giving Mosher the same rights to register his stock for public sale as all shareholders may do.
“Other contentions made by Mosher are also without merit.”
DISCUSSION
In its order denying the injunction, the trial court aptly summed up the essence of the instant case: The action by the PDC Board that Mosher sought to enjoin—approval of the Water Street transaction—did exactly what Mosher and Kraemer intended to permit by their agreement in 2002 by which they added three directors and authorized a supermajority of the Board to issue equity securities without shareholder approval.
Mosher contends, however, that the Water Street transaction was not merely an issuance of equity securities, but rather a consolidation or merger where PDC’s existing shareholders did not retain 51 percent voting control and, accordingly, a shareholders supermajority vote was required for approval. Further, he contends that the director defendants and the majority shareholders breached fiduciary duties owed to PDC and/or Mosher as a minority shareholder and engaged in wrongful conduct which created quasi-preemptive rights for Mosher. He claims that he should have been given the opportunity to purchase the newly-issued shares prior to their being offered to Water Street and that the transaction wrongfully resulted in personal advantage to the director defendants, as well as the majority shareholders, but was detrimental to minority shareholders, including himself. As we shall explain, we conclude that the trial court properly determined that Mosher was not likely to prevail on the merits and that its denial of the requested preliminary injunction should be affirmed.
1. Standard of Review
A trial court has discretion to grant or deny a preliminary injunction, and we review the court’s decision under the abuse of discretion standard. (14859 Moorpark Homeowner’s Assn. v. VRT Corp. (1998) 63 Cal.App.4th 1396, 1403.) A trial court abuses its discretion where the court’s determination exceeds the bounds of reason, that is, where there is no reasonable basis for the court’s decision, or where it contravenes uncontradicted evidence. (Westsider Community for Independent Living, Inc. v. Obledo (1983) 33 Cal.3d 348, 355; 14859 Moorpark Homeowner’s Assn., supra, at p. 1402.)
In order to issue a preliminary injunction, a trial court must determine that (1) the moving party is likely to prevail on the merits and (2) the interim harm which the moving party is likely to sustain if the injunction is denied is greater than the harm the opposing party is likely to sustain if the injunction is granted. (Sahlolbei v. Providence Healthcare, Inc. (2003) 112 Cal.App.4th 1137, 1145; 14859 Moorpark Homeowner’s Assn. v. VRT Corp., supra, 63 Cal.App.4th at p. 1402.) Where the trial court denies a preliminary injunction, we will affirm if the trial court correctly determined that the moving party failed to satisfy either of the criteria. (Sahlolbei, supra, at p. 1145.)
Code of Civil Procedure section 526 provides in part: “(a) An injunction may be granted in the following cases: [¶] (1) When it appears by the complaint that the plaintiff is entitled to the relief demanded, and the relief, or any part thereof, consists in restraining the commission or continuance of the act complained of, either for a limited period or perpetually. [¶] (2) When it appears by the complaint or affidavits that the commission or continuance of some act during the litigation would produce waste, or great or irreparable injury, to a party to the action. [¶] (3) When it appears, during the litigation, that a party to the action is doing, or threatens, or is about to do, or is procuring or suffering to be done, some act in violation of the rights of another party to the action respecting the subject of the action, and tending to render the judgment ineffectual. [¶] (4) When pecuniary compensation would not afford adequate relief.”
Where the evidence is not conflicting, the issue is a question of law subject to our de novo review. (Howard S. Wright Construction Co. v. Superior Court, supra, 106 Cal.App.4th at p. 320.) Where there are conflicts in the evidence, as in the instant case, we must interpret the facts in the light most favorable to the prevailing party and draw all reasonable inferences in support of the trial court’s order. (Hilb, Rogal & Hamilton Ins. Services v. Robb (1995) 33 Cal.App.4th 1812, 1820.) We do not “resolve conflicts in the evidence, reweigh the evidence, or assess the credibility of witnesses.” (Whyte v. Schlage Lock Co. (2002) 101 Cal.App.4th 1443, 1450.) In the event the trial court fails to make express findings, we presume that it made appropriate factual findings. (14859 Moorpark Homeowner’s Assn. v. VRT Corp., supra, 63 Cal.App.4th at p. 1402.) Our task is solely to ensure that the trial court’s factual determinations are supported by substantial evidence. (Howard S. Wright Construction Co., supra, at p. 320.)
2. Likelihood of Mosher Prevailing on the Merits
The trial court’s minute order addresses the merits of Mosher’s case. The court’s implied finding is that it is not likely that Mosher will prevail on the merits, which, if correct, would be sufficient to affirm the trial court’s denial of the preliminary injunction. (Sahlolbei v. Providence Healthcare, Inc., supra, 112 Cal.App.4th at p. 1145.) The fundamental allegations in Mosher’s complaint fall into two categories. First, Mosher alleges violations of supermajority shareholder voting requirements which are set forth in the PDC Articles. Second, he alleges that the director defendants breached their fiduciary duties to PDC and to Mosher as a minority shareholder.
a. Supermajority Vote Requirements
As to supermajority vote violations, Mosher contends that approval of the Water Street transaction required a supermajority vote by PDC shareholders and would not have occurred, in that Mosher had sufficient shareholder voting power to defeat it. Mosher admits that, in 2002, in an effort to break the voting impasse between himself and Kraemer, they agreed to add outside directors to the PDC Board and make changes in the supermajority voting provisions in the PDC Articles and Bylaws. A key change, in article VI, was to give the PDC Board authority to issue new equity shares by a supermajority vote of not less than four of the five directors, without seeking shareholder approval.
The PDC Board did not have unilateral authority, however, to approve any issuance of shares in conjunction with a consolidation or merger where PDC’s existing shareholders did not retain 51 percent voting control. Under article IV(b), a shareholder vote of a supermajority of PDC shares was required to approve such a consolidation or merger. For approval of the Water Street transaction, Mosher claims that the shareholder supermajority vote requirements in article IV(b) were the applicable requirements.
The trial court disagreed with Mosher. The trial court’s implied finding was that the Water Street transaction was an issuance and sale of equity securities of PDC to a new investor, and therefore, the only vote required was approval by a supermajority of the PDC directors as set forth in article VI. The record shows that Mosher had intentionally approved article VI in order to allow a supermajority of the directors to approve such a stock sale or issuance of shares, without any vote by shareholders.
In addition, the record does not support a finding that the Water Street transaction constituted a consolidation or merger. “Strictly speaking, a consolidation signifies such a union as necessarily results in the creation of a new corporation and the termination of the constituents whereas a merger signifies the ‘absorption of one corporation by another which retains its name and corporate identity with the added capital, franchises and powers of the merged corporation.’” (Ortiz v. South Bend Lathe (1975) 46 Cal.App.3d 842, 848, disapproved on other grounds in Ray v. Alad Corp. (1977) 19 Cal.3d 22, 34.) PDC remained intact and simply added an investor which provided substantial new cash resources. Unlike a consolidation or a merger, PDC received valuable consideration for the control that Water Street gained and the consideration was available for PDC’s creditors and the redemption of shares from PDC shareholders. (Ray, supra, at p. 28.) Thus, substantial evidence supports a finding that the Water Street transaction was not a consolidation of Water Street and PDC or a merger in which PDC was absorbed into Water Street, and a determination that article IV(b) shareholder vote requirements did not apply. (Howard S. Wright Construction Co. v. Superior Court, supra, 106 Cal.App.4th at p. 320.)
Facts provided by defendants also indicate that, after Water Street purchased the newly issued preferred PDC stock and a portion of Kraemer’s common stock, Water Street’s ownership interest was 48.25 percent. Thus, the transaction did not have the result triggering the article IV(b) shareholder vote requirement, in that it left more than 51 percent ownership in PDC shareholders who held stock prior to the Water Street Transaction. The fact that it was possible that such shareholders would be given an opportunity in the future to sell their shares in sufficient number to Water Street for Water Street to have a greater percentage ownership was too uncertain to rise to the level of attributing such additional shares to Water Street for purposes of approval of the transaction.
Mosher further contends that a shareholder supermajority vote also was required under article IV(c), which relates to approval of a public offering of PDC shares. Clearly, the transaction itself was not a public offering. Mosher asserts, however, the approval of the Water Street transaction was tantamount to approving a public offering, in that the transaction gave Water Street the unilateral authority to initiate a public offering of its PDC shares, without such shareholder approval, and, therefore, was tantamount to a violation of article IV(c). At the time Mosher filed his application for an OSC, the then-current drafts of the agreements may have indicated that Water Street had such authority. The record shows, however, that pursuant to the agreements as approved in their final form, Water Street’s authority was not unilateral, but rather was subject to the shareholder supermajority vote in article IV(c). Also, all PDC shareholders were given the same rights to participate in any public offering. Thus, the contention was rendered moot prior to the time the Water Street transaction was approved and prior to the OSC hearing.
In summary, substantial evidence supports the trial court’s implied finding that the essential element of the Water Street transaction was the issuance and sale of new equity shares to Water Street for $27 million. (Howard S. Wright Construction Co. v. Superior Court, supra, 106 Cal.App.4th at p. 320.) As such, substantial evidence supports the trial court’s finding that the shareholder vote requirements in articles IV(b) and IV(c) did not apply, the applicable vote requirement was in article VI, and the vote of four out of five of the PDC directors to approve the Water Street transaction met that requirement. (Ibid.) Accordingly, the trial court properly concluded that Mosher was not likely to prevail on any of his claims based upon an alleged failure to comply with shareholder supermajority vote requirements.
b. Breach of Fiduciary Duty Claims
Mosher claims that the director defendants breached their fiduciary duties to PDC and its minority shareholders, and the two directors who together made up the majority shareholder control breached their fiduciary duties to the minority shareholders. He contends that the trial court erred in applying the business judgment rule, in that the director defendants had conflicts of interest, namely that they each stood to benefit personally from the transaction, financially and/or from the change in control of PDC, and, consequently, the business judgment rule did not apply. As discussed more fully below, Mosher has not shown that he is likely to prevail on his claims of breach of fiduciary duty.
The business judgment rule “is a judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions.” (Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 429.) It creates a rebuttable presumption that the directors’ decision was made in good faith and was based upon the directors’ exercise of informed business judgment resulting from reasonable inquiry as to facts material to determining what action is in the best interests of the corporation. (Lee v. Interinsurance Exchange (1996) 50 Cal.App.4th 694, 715.) An exception to the business judgment rule can arise if the circumstances inherently reveal that the director had a conflict of interest. (Ibid.) The exception arises, however, only when the plaintiff makes a sufficient threshold showing of the conflict of interest that is more than conclusory allegations. (Ibid.) If a sufficient showing of conflict of interest is made to constitute an exception to the business judgment rule presumption, the directors may be allocated the burden of proof that their action was made in good faith and after reasonable investigation; they may overcome the conflict of interest allegation by meeting their burden. (Ibid.)
Corporations Code section 309 (section 309) is a codification of the business judgment rule. (Gaillard v. Natomas Co. (1989) 208 Cal.App.3d 1250, 1264.) Subdivision (a) of section 309 provides: “A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” Subdivision (b) of section 309 provides that, in performing his duties, a director is “entitled to rely on information . . . prepared or presented by” corporate officers and employees, legal and other professionals, and/or certain corporate committees, provided they are competent to prepare such information. According to subdivision (c) of section 309, if a person performs his or her duties as a director in accordance with subdivisions (a) and (b), then the person “shall have no liability based upon any alleged failure to discharge the person’s obligations as a director.”
Thus, Mosher had the initial burden of rebutting the presumption created by the business judgment rule. That is, he had to show facts demonstrating a conflict of interest. (Lee v. Interinsurance Exchange, supra, 50 Cal.App.4th at p. 715.) If he made this showing, the burden then shifted to the director defendants to show good faith. (Ibid.)
Mosher first states that the business judgment rule does not apply here, in that control of the corporation was material to the transaction, relying on a statement in Jones v. H. F. Ahmanson & Co., supra, 1 Cal.3d 93 that “the comprehensive rule of good faith and inherent fairness to the majority in any transaction where control of the corporation is material properly governs controlling shareholders in this state.” (Id. at p. 112, fn. omitted.) Jones goes on to hold that the majority shareholders may not “use[] their control of the [corporation] to obtain an advantage not made available to all stockholders . . . without regard to the resulting detriment to the minority shareholders and in the absence of any compelling business purpose.” (Id. at p. 114.) Nothing in Jones suggests that majority control of the corporation alone invalidates the business judgment rule. Additionally, Mosher points to no evidence that the director defendants used their control of PDC to obtain an advantage for themselves to the detriment of the minority shareholders. Rather, the evidence shows that the advantage of the Water Street transaction to the majority shareholders was available to the minority shareholders as well.
Mosher also argues that the business judgment does not apply because the director defendants had a material financial interest in the transaction, relying on Heckmann v. Ahmanson (1985) 168 Cal.App.3d 119. Heckmann holds that “[o]nce it is shown a director received a personal benefit from the transaction, . . . the burden shifts to the director to demonstrate not only the transaction was entered in good faith, but also to show its inherent fairness from the viewpoint of the corporation and those interested therein.” (Id. at p. 128.) Mosher fails to point to any evidence that the director defendants received a personal benefit from the Water Street transaction. Yes, they benefitted, but so did the minority shareholders as well as the corporation. Heckmann thus does not support Mosher’s claim that the business judgment rule did not apply.
Mosher finally claims the business judgment rule does not apply because the director defendants had conflicts of interest, specifically, because they benefitted financially from the Water Street transaction. In support of this claim, he relies on Everest Investors 8 v. McNeil Partners, supra, 114 Cal.App.4th 411. In Everest Investors 8, an appeal from a summary judgment based on the business judgment rule, this court found a triable issue of fact as to the existence of a conflict of interest. There was evidence of benefits to some members of the board of directors that would not be available to others, and that the transaction was structured to help them achieve those benefits. (Id. at p. 430.) Mosher points to no evidence of such conflicts here.
Rather, the record contains substantial evidence to support a finding that the director defendants reasonably believed the Water Street transaction was in the best interests of PDC and its shareholders. (§ 309; Howard S. Wright Construction Co. v. Superior Court, supra, 106 Cal.App.4th at p. 320; Lee v. Interinsurance Exchange, supra, 50 Cal.App.4th at p. 715.) The transaction substantially fulfilled PDC’s need for financing as well as healthcare business acquisition and management expertise to move forward with its well-established growth strategy. That all the directors, including Mosher, had approved and repeatedly affirmed the strategy over the previous four years supports a finding that the directors believed the Water Street transaction was in the best interests of PDC. The history of extensive discussions at PDC Board meetings, the PDC chief financial officer’s report and the KPMG fairness opinion support a finding that the directors made reasonable inquiry about debt versus equity financing and specifically the financial fairness of the proposed Water Street equity investment transaction prior to their decision to proceed with equity financing by approving the Water Street transaction. The provisions allowing sale or redemption of shares at the same price and giving the same rights to participate in a public offering of PDC shares are evidence that the majority shareholders did not benefit to the detriment of the minority shareholders. Water Street offered to purchase Mosher’s shares on the same terms as it purchased Kraemer’s shares, but Mosher had no interest in selling any of his shares. There thus is substantial evidence that the directors’ primary motivation was to act in the best interests of PDC, rather than solely for personal benefit, and therefore, that they acted in good faith. In short, substantial evidence supports a conclusion that the director defendants did not breach their fiduciary duties to PDC or its shareholders as established by section 309.
Breach of fiduciary duties is also the key issue in Mosher’s claim that his quasi-preemptive rights were violated, in that he was not given the opportunity to purchase the new preferred shares issued before they were sold to Water Street. At some point during the PDC Board’s consideration of the Water Street transaction, Mosher sent to the Board a document entitled Notice of Election of Quasi Pre-emptive Rights. In it, he stated his intent “to exercise his common law quasi pre-emptive rights as a shareholder of a California corporation to exercise a prior right to acquire the [Series A Preferred] Stock for the same price per share as offered to Water Street under the same terms and conditions . . . .” He stated in the notice that he was “ready, willing and able to purchase and pay for all of the Stock . . . .” At the June 26, 2007 Board meeting at which the vote on the Water Street transaction was taken, Mosher informed the Board that he was exercising his quasi-preemptive rights to purchase the new preferred shares, but the Board refused to recognize those rights and approved the transaction.
As defendants point out, under the Corporations Code, provision of preemptive rights is an option for the articles of incorporation. Unless this option is included, shareholders have no such rights. Section 204, subdivision (a)(2), provides that the articles of incorporation may include a provision “[g]ranting to shareholders preemptive rights to subscribe to any or all issues of shares or securities.” Section 406 provides: “Unless the articles provide otherwise, the board may issue shares, options or securities having conversion or option rights without first offering them to shareholders of any class.”
The concept of a minority shareholder’s quasi-preemptive rights originates from the principle that shareholders “‘have the right to demand that directors and officers of the corporation do not use their positions for their own personal advantage, or to discriminate between stockholders, or to so cause stock to be issued as to make a profit for themselves or to obtain or retain control of the corporation’” to the detriment of the shareholders. (Sheppard v. Wilcox (1962) 210 Cal.App.2d 53, 59; see also Schwab v. Schwab-Wilson Machine Corp. (1936) 13 Cal.App.2d 1, 3.) It is the fiduciary duty of a director as well as a controlling shareholder to exercise his or her power in good faith and fair dealing, rather than for his or her personal advantage and to the detriment of the shareholders or to assure transactions wherein controlling shareholders gain an advantage over minority shareholders with respect to the sale or use of their shares. (Jones v. H. F. Ahmanson & Co., supra, 1 Cal.3d at pp. 108-110.)
In support of his claim to quasi-preemptive rights, Mosher cites cases involving directors and/or majority shareholders using their powers to take corporate action which was to their personal advantage, but clearly to the detriment of other shareholders and with no viable business reason for the action. (See Jones v. H. F. Ahmanson & Co., supra, 1 Cal.3d 93; Gaillard v. Natomas Co., supra, 208 Cal.App.3d 1250; Sheppard v. Wilcox, supra, 210 Cal.App.2d 53; Schwab v. Schwab-Wilson Machine Corp., supra, 13 Cal.App.2d 1.) As previously discussed, however, in the instant case, substantial evidence supports findings that there were viable business reasons for approval of the Water Street transaction and that minority shareholders received the same benefits as the majority shareholders. Accordingly, there is ample support for the conclusion that the director defendants did not breach any duty they had to the minority shareholders that would create quasi-preemptive rights for them. (Sheppard v. Wilcox, supra, 210 Cal.App.2d at p. 59.) Hence, the cases cited by Mosher do not support a conclusion that his quasi-preemptive rights were violated.
In sum, substantial evidence supports findings that there were no breaches of fiduciary duties to Mosher, as a minority shareholder, by the director defendants, including the two who are also controlling shareholders (Jones v. H. F. Ahmanson & Co., supra, 1 Cal.3d at pp. 108-110) and no violation of any quasi-preemptive rights which Mosher claimed to have (Sheppard v. Wilcox, supra, 210 Cal.App.2d at p. 59). Rather, substantial evidence supports a finding that the director defendants’ approval was made in accordance with sound business judgment (Everest Investors 8 v. McNeil Partners, supra, 114 Cal.App.4th at p. 430) and the trial court properly deferred to their judgment (Lee v. Interinsurance Exchange, supra, 50 Cal.App.4th at p. 715). Accordingly, the trial court reasonably concluded that Mosher was not likely to prevail on his claims based upon breaches of director or shareholder fiduciary duties or quasi-preemptive rights.
Based upon the foregoing analysis, we agree that the trial court correctly determined that Mosher is not likely to prevail on the merits of any other relevant specific allegations which we have not expressly addressed. We conclude that the trial court correctly found Mosher failed to satisfy one of the criteria required to grant a preliminary injunction, in that he was not likely to prevail on the merits. (Sahlolbei v. Providence Healthcare, Inc., supra, 112 Cal.App.4th at p. 1145.) Accordingly, the trial court did not abuse its discretion in denying Mosher’s application for the preliminary injunction. (Ibid.)
DISPOSITION
The order is affirmed.
We concur: MALLANO, P. J., ROTHSCHILD, J.