The opinion of the court was delivered by: Edward C. Reed, Jr., District Judge.
Vacated by the Court February 10, 1995.
AMERCO is a holding company. Its principal subsidiary is U-Haul International, Inc. Paul Shoen ("Paul")*fn1 owns just under nine percent of AMERCO's common stock, with an appraised value of over $59 million.*fn2 Paul is trying to change the composition of AMERCO's board of directors and amend the company's bylaws. Hence this litigation. He has filed suit against AMERCO, its directors, its employee stock ownership plan (or "ESOP"), and the ESOP's trustees, alleging that they have violated federal securities laws and breached their fiduciary duties under Nevada corporation law (in the case of the AMERCO directors) and ERISA (in the case of the ESOP trustees).
Paul seeks a preliminary injunction appointing a neutral trustee for the ESOP, voiding any proxies already obtained, and barring AMERCO from holding its annual meeting until the company circulates "curative disclosures" and files proxy materials with the SEC.*fn3 Also, he seeks a temporary restraining order compelling the ESOP trustees to either forward his proxy solicitation materials to the ESOP's participants or provide him with a list of the participants so he can send those materials to them himself.*fn4 The motions for a preliminary injunction and a TRO will be considered together, as one consolidated motion seeking various forms of relief against AMERCO and the trustees.
Over ninety percent of AMERCO's voting common stock is held by L.S. Shoen, the founder of U-Haul, and his twelve children.*fn5 The AMERCO common stock not owned by members of the Shoen family is held by the ESOP (about 7.3%), Rappel Aff. Ex. II at 10, and, Paul states, by approximately 160 individuals (about 2.2%). Prelim. Motion at 2. AMERCO's common stock is not publicly traded and the company's bylaws give it a right of first refusal on all sales and transfers of its stock. Shoen Aff. ¶ 2.
The Shoen family is split into two factions.*fn6 One, led by Samuel ("Sam") Shoen and L.S. Shoen, controls about 47.21% of AMERCO's common stock. Rappel Aff. Ex. II at 7. The other faction, led by defendant Joe Shoen, controls the company. Joe's faction is held together by a shareholder agreement. Paul is, involuntarily, a member of Joe's faction, because his AMERCO shares are subject to the shareholder agreement, as are Sophia Shoen's and the ESOP's non-allocated AMERCO shares. Whoever controls a majority of the shares subject to the shareholder agreement gets to vote all of the shares subject to the agreement — currently, 47.56% of AMERCO's common stock, id. at 5, although this number will fall to 46.3% upon completion by Sophia Shoen of a sale of 500,000 of her shares. Id. at 10. Joe, Mark Shoen and James ("Jim") Shoen are directors of AMERCO. Id. at 5. Together, they hold a majority of the shares subject to the agreement and therefore can vote all of the shares subject to the agreement. Id. at 8 n. 1.
There are at least two threats to Joe's control of the company. First, Paul and Sophia are seeking to be released from the shareholder agreement. Id. at 10-11. If they are successful, Joe's faction will control only about 32.6% of AMERCO's common stock and could well lose control of the company. Id. That dispute has been submitted to arbitration. The parties suggested that the matter would be resolved by September 9, 1994. It is now more than three weeks after that date and the court has not been notified of a decision.
Second, of the 7.3% of AMERCO stock held by the ESOP, approximately 4.5% is either (1) not allocated (i.e., not assigned to an individual participant in the ESOP) or (2) allocated to the ESOP trust accounts of Joe, Mark, Jim, Paul and Sophia Shoen.*fn7 Only that 4.5% must, pursuant to the shareholder agreement,*fn8 be voted by the ESOP trustees in support of Joe's faction. Id. at 8 n. 1. The other 2.8% of AMERCO common stock held by the ESOP has been allocated to the accounts of the approximately 5,500 other individual ESOP participants. Each participant, as the beneficial owner of the AMERCO shares allocated to his or her account, can instruct the ESOP trustees how to vote those shares. Id. at 10. However, if a participant does not direct the trustees how to vote his or her allocated shares, then the trustees themselves vote the shares. Rappel Aff. Ex. KK at 4. So, the fewer ESOP participants who tell the trustees how to vote their allocated shares, the greater the number of shares that will, by default, be voted by the trustees in favor of incumbent management.
Without control of the allocated ESOP shares and after completion of Sophia Shoen's sale of 500,000 of her shares, but with the shareholder agreement still in effect, Joe's faction will therefore have firm control over only about 43.5% of AMERCO's total outstanding common stock.
The essential point, for present purposes, is this: as long as the shareholder agreement is in effect, the two Shoen factions control roughly equal numbers of shares in the company. Therefore, AMERCO's other individual shareholders, and the ESOP participants who direct the trustees how to vote the shares allocated to their individual accounts, will cast the swing votes in the company's upcoming elections.
At this year's annual meeting, the board seats held by Joe, Mark Shoen, and Aubrey Johnson are at stake. Each incumbent is running for re-election. Id., Ex. HH at 2; Ex. II at 2-3. Paul is a candidate for the board seat currently held by Joe. Shoen Aff. ¶ 2. Paul states that Sophia Shoen, too, is a candidate for the board, and that members of Sam's faction are also running against the three incumbents. Prelim. Motion at 3. Moreover, Paul has submitted four proposals to be considered by shareholders at AMERCO's annual meeting. Shoen Aff. ¶ 4. One of those proposals would revise AMERCO's bylaws to eliminate the company's right of first refusal on sales and transfers of its stock, and is included in AMERCO's proxy materials pursuant to SEC Rule 14a-8. Rappel Aff.Ex. HH; see 17 C.F.R. § 240.14a-8. Losses in the board of directors elections could cost Joe's faction three seats on the board. Passage of the proposal to eliminate the company's right of first refusal on sales or transfers of its stock would diminish Joe's control of the company. Indeed, if members of Sam's faction were to purchase a sufficient number of AMERCO shares on the open market, Joe could lose control of the company.
Hence this dispute. In summary, Paul complains that AMERCO's board of directors, in collusion with the ESOP trustees:
(1) moved the date of the annual meeting forward by two months, in order both to preempt a possible arbitration decision terminating the shareholder agreement and to make it practically impossible for him to communicate effectively with the ESOP participants;
(2) solicited voting directions (de facto proxies) from the ESOP participants by means of premature, false and misleading proxy materials; and
(3) improperly prevented him from communicating with the ESOP's participants, all in an attempt to maintain current management's control of the company and to ensure the defeat of both his proposals to the shareholders and his bid for election to the board of directors. See generally Prelim. Motion at 4-7. He seeks the relief described above.
The court has jurisdiction over the ERISA claims in this matter pursuant to 29 U.S.C. § 1132(e) and over the Securities Exchange Act claims pursuant to 15 U.S.C. § 78aa. The state corporation law claims are pendent.
`[t]o obtain a preliminary injunction, a party must show either (1) a likelihood of success on the merits and the possibility of irreparable injury, or (2) the existence of serious questions going to the merits and the balance of hardships tipping in [the movant's] favor. These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases.'
In other words, `[w]here a party can show a strong chance of success on the merits, he need only show a possibility of irreparable harm. Where, on the other hand, a party can show only that serious questions are raised, he must show that the balance of hardships tips sharply in his favor.'
MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511, 516-17 (9th Cir.1993) (citations omitted).
A. PROBABILITY OF SUCCESS ON THE MERITS.
Paul is a party to a registration rights agreement — formally titled "Share Repurchase and Registration Rights Agreement" — with AMERCO, which provides that AMERCO must "take all steps necessary to register [Paul Shoen's AMERCO] shares and list such shares on a public exchange." Shoen Aff. at ¶ 6; Rappel Aff. Ex. II at 21. If AMERCO breaches this registration rights agreement, Paul can terminate the shareholder agreement.*fn9 Id.; see also Rappel Aff. Ex. II at 10-11, 23. On April 8, Paul notified AMERCO of his "submission of the dispute involving the Registration Rights Agreements to arbitration."*fn10 An arbitration decision favorable to Paul would result in termination of the shareholder agreement. Shoen Aff. ¶ 6. Moreover, such a decision would likely come before the traditional late September meeting date. Id. at ¶ 7. If so, Joe would probably lose control of AMERCO.
On April 27, AMERCO sought unsuccessfully to obtain a temporary restraining order enjoining the arbitration.*fn11
On May 3, the board decided to advance the meeting date from late September to July 21.*fn12 The next day, May 4, the board received notice of Paul's candidacy for election as a director and of his proposals for consideration at the shareholders' meeting. Id.
The board did not notify Paul of the advanced meeting date; instead, he discovered it "during a deposition of AMERCO's general counsel in an unrelated matter" on May 26, 1994. Shoen Aff. ¶ 8; Rappel Aff. at 2.
On May 27, Paul requested that the board reconsider its decision to advance the date of the annual meeting. Rappel Aff. Ex. B.
On June 6, Joe, acting in his capacity as President of AMERCO, amended the ESOP. Rappel Aff. Ex. KK at 5. Joe is also a trustee of the ESOP. Previously, according to Paul, the ESOP had required that participants submit proxies to the trustees at least ten days before the annual meeting. Prelim. Motion at 5. With the meeting scheduled for July 21, proxies would thus have had to be returned by July 11. According to Paul, AMERCO could not send out its proxy materials until July 8, due to SEC regulations. Id. This would make it almost impossible for participants to return proxies by July 11. Therefore, according to Paul, Joe amended the plan to require only that proxies be returned at least two days before the meeting, i.e., by July 19, thus making it possible for proxy materials to be sent out on July 8 and still returned in time for the meeting. Id.; Rappel Aff. Ex. KK at 4.
On June 16, AMERCO replied to Paul's May 27 request that it reconsider its decision to advance the meeting date. After justifying its decision to advance the meeting on various grounds (e.g., New York Stock Exchange policies, and cost savings from incorporation into AMERCO's SEC filings of items previously disclosed in its proxy statements), it nevertheless agreed to consider Paul's request. See Rappel Aff. Ex. J at 2. AMERCO requested that Paul give it until 5:00 p.m., June 30 to respond, id., and Paul agreed. Rappel Aff. Ex. K.
During the last week of June, Paul claims, all ESOP participants received two documents that he terms "management solicitation[s]." See Prelim. Motion at 6. One was the June edition of U-Haul News, the monthly company newsletter. The newsletter is about twenty-three pages long. Pages six and seven contain a notice, dated June 20 and titled "Pass Through Voting Rights," from the ESOP trustees to the ESOP participants*fn13 The second document was a flyer enclosed in the participants' payroll envelopes on June 24. Id. At this time, AMERCO had not yet provided proxy materials to its shareholders. Prelim. Motion at 6; AMERCO Answer at ¶ 39.
On June 30, fifteen minutes before the deadline for its response to Paul's request for reconsideration of the meeting date, AMERCO informed him that the meeting would go forward, as planned, on July 21. See Rappel Aff. Ex. L.*fn14 AMERCO cited two factors supporting its decision. First, "the logistics and planning that go into scheduling the annual shareholders meeting for a company the size of AMERCO." Id. Second, the recommendation contained in § 401.04 of the New York Stock Exchange's Listed Company Manual that companies hold their annual meetings "within a reasonable interval after the close of the fiscal year" and the fact that the majority of listed companies hold their meetings within three months of the end of the fiscal year.*fn15 Id.
On July 8, the trustees forwarded AMERCO's proxy materials to the ESOP participants, along with a `Final Notice of Voting Rights' and a voting card.*fn16
On July 12, Paul's own proxy materials were cleared by the SEC. TRO Motion at 2. On July 13 and 14, he delivered these materials to the ESOP trustees for mailing to the participants. Id. at 3.
On July 14, at a meeting of parties to the shareholder agreement, the trustees voted the non-allocated ESOP shares in favor of incumbent management and against Paul's shareholder proposal.*fn17
On July 15, the ESOP trustees met and decided "that Paul Shoen's proxy materials should not be forwarded to ESOP participants as there was insufficient time for participants to review the information and make an informed decision as to the positions contained therein."*fn18
On July 20, this court, acting on an application from Paul, issued a TRO enjoining AMERCO from holding its annual meeting on July 21. That TRO was amended on July 21 to enjoin the meeting until September 24.
Since then, the parties have been sparring over Paul's demand that the ESOP trustees either mail his proxy materials to the ESOP participants or return the materials to him, along with mailing labels and the participants' addresses.*fn19 Apparently the ESOP trustees are willing to return the proxy materials. See ESOP TRO Opp. at 7. What they are not willing to turn over is a list of ESOP participants or mailing labels with the participants' names and addresses. Id.
2. The Decision to Advance AMERCO's Annual Meeting Date.
The directors of a corporation are fiduciaries and owe a duty of loyalty to the shareholders. Horwitz v. Southwest Forest Industries, Inc., 604 F.Supp. 1130, 1134 (D.Nev.1985). In determining whether that duty has been breached, a director's actions typically are analyzed under the "business judgment" rule. Id. The rule provides that "if directors' actions can arguably be taken to have been done for the benefit of the corporation, then the directors are presumed to have been exercising their sound business judgment" rather than acting in their own self-interest, and "[t]he burden of showing bad faith rests upon the plaintiff." Id. at 1135.
Because directors' decisions will give rise to liability to the shareholders only if those decisions fail to satisfy the business judgment rule, and because that rule is deferential and thus easy to satisfy, shareholders normally have "only two protections against perceived inadequate business performance. They may sell their stock ..., or they may vote to replace incumbent board members." 564 A.2d at 659. Indeed, one of the justifications for the business judgment rule's insulation of directors from liability for almost all of their decisions is that unhappy shareholders can always vote the directors out of office. Thus, interference with shareholder voting is an especially serious matter, not to be left to the directors' business judgment, precisely because it undercuts a primary justification for allowing directors to rely on their judgment in almost every other context. Put another way, "the ordinary considerations to which the business judgment rule originally responded are simply not present in the shareholder voting context," Blasius Indus. v. ...