OP successfully represented its client, a board member and significant shareholder of Forward Industries, Inc., in a proxy contest against the incumbent board of directors. In the process, OP achieved the rare result of persuading the Court to enjoin the issuance of preferred stock by the company, arguing that the issuance was nothing more than an unlawful entrenchment tactic by the incumbent directors.
OP’s client alleged that the majority of the company’s directors had breached their fiduciary duties by engaging in a number of self-interested transactions, pursing a reckless and unnecessary acquisition strategy rather than focusing on the company’s core business, and undertaking various improper steps to entrench themselves on the company’s board in the face of a competing slate of directors nominated by OP’s client. As part of their entrenchment scheme, these directors sought at the eleventh hour to issue voting preferred stock to investors handpicked by them, which would have diluted the existing common shareholders by almost 20% on the eve of the annual election of directors. The defendant directors claimed that the preferred stock issuance was intended to finance the company’s merger and acquisition strategy and was therefore entitled to the almost ironclad protection of the business judgment rule.
OP immediately moved for a preliminary injunction in the Commercial Division of the New York County Supreme Court. Despite having had almost no notice of the proposed issuance, and despite the fact that the defendants had systematically deprived OP’s client of information about their acquisition plans, OP was able to demonstrate to the Court that no transaction was imminent and that the only reason defendants sought to issue the shares at that time was to entrench themselves. The Court granted a preliminary injunction blocking the issuance of the preferred stock prior to the company’s annual meeting, holding that “ the record fails to support defendants’ claim that the proposed equity transaction is protected by the business judgment rule” and that “the record compels the finding that the transaction is an incumbent board entrenchment tactic.” The defendant directors’ attempt at emergency relief from the Appellate Division, First Department was successfully thwarted by OP. Ultimately, the director slate nominated by OP’s client was elected at the annual meeting and, subsequently, OP’s client was elected chairman of the board.
The OP team consisted of litigation partners Robert O’Hare and Jeff Lichtman and senior counsel Andrew Levitt and Michael Zarocostas.
Wise v. Johnson, et al., Index No. 652161/2014 (Sup. Ct., New York County)