Drueke et al v. Bass et al

Filing 43

DECISION AND ORDER signed by Magistrate Judge William E Duffin on 10/13/2017 DENYING 9 Plaintiffs' Motion for Preliminary Injunction. (cc: all counsel) (lz)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
PAUL C. DRUEKE, et al.,
Plaintiffs,
v.

Case No. 17-CV-1061

ANDREW L. BASS, et al.,
Defendants.
DECISION AND ORDER
INTRODUCTION
On August 1, 2017, Paul C. Drueke and his wife Mary Jo Drueke filed this action
against the directors of FirsTime Design Limited, a Wisconsin corporation in which they
own stock. (ECF No. 1.) On August 25, 2017, the Druekes filed a motion for a
preliminary injunction. (ECF No. 9.) At the same time, the Druekes filed a motion to
expedite the briefing and hearing on their motion for a preliminary injunction. (ECF No.
8.)
On September 6, 2017, the court held a telephonic conference to discuss the
motion to expedite the briefing and hearing on the Druekes’ motion for a preliminary
injunction. (ECF No. 25.) After discussion with the parties, the court denied the

Druekes’ motion to expedite. The briefing on the motion for a preliminary injunction is
now complete and the matter is ready for resolution. All parties have consented to the
full jurisdiction of a magistrate judge. (ECF Nos. 7, 20, 24.)
The Druekes ask the court to issue a preliminary injunction that:
1. declares that the Druekes own at least 10 percent of the FirsTime stock for the
purpose of calling a special meeting of shareholders under Wis. Stat. § 180.0702;
2. prevents the defendants from requiring the Druekes to pay the costs of any such
special shareholder meeting unless the Druekes prevail on each matter voted
upon at the meeting;
3. enjoins the defendants from counting recently-issued shares for purposes of any
vote at the meeting; and
4. enjoins the defendants against causing FirsTime to repurchase shares during this
action.
(ECF No. 11 at 29.)
FACTS
FirsTime Design Limited is a Wisconsin corporation located in New Berlin,
Wisconsin. Plaintiffs Paul and Mary Jo Drueke have been shareholders of FirsTime since
2005. Together they own or beneficially own 172,687 shares. Up until June 30, 2017,
FirsTime had issued 1,502,119 shares of common stock, meaning the Druekes owned
more than ten percent of the company’s common voting stock.
Defendants Andrew Bass, Christopher Bering, and Jeffrey Cowie are the current
members of FirsTime’s Board of Directors. Bass has been a member of the Board since
2011, and Bering and Cowie have been Board members since 2013. Bering is also
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FirsTime’s CEO. Until June 26, 2017, FirsTime’s Board had a fourth member, Peter
Wierenga, who was the Board’s chairman.
It is apparently undisputed that, although FirsTime experienced financial
problems prior to 2012, from 2012 through 2016 it has been profitable. Its share price
increased from approximately $1.80 in 2011 to $6.15 as of mid-September 2017.
According to Paul Drueke, sometime in 2015 he became concerned about the
direction undertaken by the Board. Although he does not fully describe his concerns,
they apparently included his desire that the Board issue substantial dividends to the
shareholders. Drueke says he raised his concerns with the Board at the annual FirsTime
shareholder meeting held in June 2016. Drueke apparently told the Board that he was
considering nominating a slate of alternative director candidates in the future.
In December 2016 the Board amended FirsTime’s bylaws in several respects.
Relevant here, the amended bylaws required shareholders to submit nomination
materials for director candidates further in advance of the annual shareholders’ meeting
than previously required. (ECF No. 1, ¶¶ 40, 42, 52.) Another change related to
shareholders’ ability to demand special shareholders meetings. (ECF No. 1, ¶¶ 43-45.)
And yet another change required that FirsTime’s directors had to be elected by a
majority (rather than by a plurality, as set forth in Wis. Stat. § 180.0728(1)) of the votes
cast at a shareholders’ meeting. (ECF No. 1, ¶¶ 48-52.)

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On May 8, 2017, the Board notified FirsTime’s shareholders that the annual
shareholder meeting would occur on June 20, 2017. On June 6, 2017, Drueke sent a letter
to FirsTime shareholders urging them to vote “withhold” for each member of the Board.
Drueke also served FirsTime with a demand to inspect certain documents, including the
company’s bylaws, shareholder list, and minutes of Board meetings addressing certain
topics. Defendants responded that they would provide the bylaws, shareholders list,
and excerpts of certain meeting minutes after Drueke paid $5,000. When Drueke
withdrew his request for copies of meeting minutes and offered $100 for the bylaws and
shareholders list, FirsTime produced those documents.
FirsTime’s annual meeting took place on June 20, 2017. Bass, Cowie, and Bering
all received approximately 52 percent of the votes cast. Wierenga received less than 50
percent of the votes cast. Although the Board’s proxy statement stated that any
shareholder with stock “held in ‘street name’” by a broker could not vote in person at
the annual meeting unless the shareholder first obtained a proxy issued in the
shareholder’s name from his or her financial intermediary, approximately 100,000
shares voted by a shareholder without the required proxy were counted in tallying the
votes cast. Had these votes not counted, none of the Board members would have
received a majority of the votes cast.

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The same day as the annual meeting, the Druekes took the first step required
under FirsTime’s amended bylaws toward calling a special meeting at which the
shareholders could vote on removing the company’s Board members.
On June 26, 2017, Bass, Cowie, and Bering voted to reduce the Board to three
members and immediately removed Wierenga from the Board. In doing so, they relied
on the amended bylaws’ requirement that directors must be elected by a majority of the
votes cast by the shareholders. In opposing the Druekes’ motion for a preliminary
injunction, Bass, Cowie, and Bering state that their decision to remove Wierenga from
the Board was also based on a “concern that Wierenga had been disclosing confidential
information to Drueke.” (ECF No. 31 at 15).
Also on June 26, 2017, Bass, Cowie, and Bering resolved to issue up to 521,739 of
additional FirsTime shares through a private placement and initiate a program allowing
FirsTime to repurchase up to $2 million of existing FirsTime stock from its shareholders.
As of June 30, 2017, FirsTime sold 369,559 of the newly issued shares “to a number of
new and existing shareholders.” (ECF No. 31 at 15.) One effect of the issuance of the
new stock was to reduce the Druekes’ holdings to less than the 10 percent threshold
necessary to unilaterally demand a special shareholders meeting.
On July 13, 2017, the Druekes made a second written request to inspect corporate
records pursuant to Wis. Stat. § 180.1602. Among other things, they requested a current
list of shareholders, information on who purchased the stock made available in the

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recent private placement, and minutes of all shareholder and Board meetings in the last
24 months. Bass, Cowie, and Bering responded to the demand by requiring that the
Druekes first sign a confidentiality agreement and pay $12,000 to cover the “reasonable
costs initially incurred by the Company in producing the Information.”
ANALYSIS
“[A] preliminary injunction is an extraordinary and drastic remedy, one that
should not be granted unless the movant, by a clear showing, carries the burden of
persuasion.” Mazurek v. Armstrong, 520 U.S. 968, 972, 117 S. Ct. 1865, 1867, 138 L.Ed.2d
162, 167 (1997) (quoting 11A C. Wright, A. Miller, & M. Kane, Federal Practice and
Procedure § 2948, pp. 129-130 (2d ed. 1995)). A “preliminary injunction … is often seen
as a way to maintain the status quo until merits issues can be resolved at trial.” Michigan
v. United States Army Corps of Eng'rs, 667 F.3d 765, 783 (7th Cir. 2011).
In order to obtain a preliminary injunction, a plaintiff must show three
things: (1) without such relief, he will suffer irreparable harm before his
claim is finally resolved; (2) he has no adequate remedy at law; and (3) he
has some likelihood of success on the merits. Girl Scouts of Manitou
Council, Inc. v. Girl Scouts of U.S. of Am., Inc., 549 F.3d 1079, 1086 (7th Cir.
2008). If the plaintiff can do that much, the court must then weigh the
harm the plaintiff will suffer without an injunction against the harm the
defendant will suffer with one. Ty, Inc. v. Jones Grp., Inc., 237 F.3d 891, 895
(7th Cir. 2001). In addition, the court must ask whether the preliminary
injunction is in the public interest. Jones v. Markiewicz-Qualkinbush, 842
F.3d 1053, 1058 (7th Cir. 2016). This type of relief must not lightly be
granted …. Mazurek, 520 U.S. at 972.
Harlan v. Scholz, 866 F.3d 754, 758 (7th Cir. 2017).

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Likelihood of success
“A party moving for preliminary injunctive relief need not demonstrate a
likelihood of absolute success on the merits. Instead, he must only show that his
chances to succeed on his claims are ‘better than negligible.’ Cooper v. Salazar, 196 F.3d
809, 813 (7th Cir. 1999). This is a low threshold. U.S. Army Corps of Eng'rs, 667 F.3d at
782.” Whitaker v. Kenosha Unified Sch. Dist. No. 1 Bd. of Educ., 858 F.3d 1034, 1046 (7th Cir.
2017).
The Druekes contend that the defendants breached their fiduciary duties to the
shareholders when they undertook actions for the improper purpose of entrenching
their control of the Board. Specifically, they argue that amending the bylaws, issuing
new stock, and repurchasing stock from existing shareholders all were steps taken for
the purpose of thwarting the Druekes’ expressed desire to attempt to elect new
directors.
The defendants, naturally, have a different view. They contend they amended
the bylaws “to conform them with modern corporate standards and establish specific
procedures for director elections.” (ECF No. 31 at 19.) They then issued new stock to
raise capital specifically to do what the Druekes were demanding – buy them out as
well as the shareholders they introduced to the company.
As set forth above, to demonstrate a reasonable likelihood of success requires
only that the Drueke’s demonstrate a “better than negligible” chance of prevailing on

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the merits of their breach of fiduciary duty claim. At this stage the Druekes have cleared
that hurdle. While the defendants have offered justifications for amending the bylaws,
issuing new stock, and creating a repurchase program, the timing of those decisions is
also consistent with the Druekes’ contention that the motive was to thwart Paul
Drueke’s expressed intention to attempt to elect new directors. Under Wisconsin law,
decisions made by directors in power to entrench their positions can be a breach of the
directors’ fiduciary duty. Manbourne, Inc. v. Conrad, 796 F.2d 884, 889-90 (7th Cir. 1986);
Luther v. C.J. Luther Co., 118 Wis. 112, 122-23, 94 N.W. 69, 72-73 (1903); O'Leary v. Bd. of
Dirs., Howard Young Med. Ctr., Inc., 89 Wis. 2d 156, 167-69, 278 N.W.2d 217, 221-22 (Ct.
App. 1979)).
Irreparable harm
The Druekes devote little of their briefs to a discussion of irreparable harm. They
initially argue that, absent injunctive relief, “the only conceivable outcome is that
Defendants will remain in their positions throughout the pendency of this litigation.”
(ECF No. 11 at 28.) During that time, the defendants “will undoubtedly make countless
decisions about FirsTime’s stock, property, affairs, and business—decisions that cannot
be unwound after the litigation is over.” (Id.)
In response, the defendants argue that the Druekes “fail to articulate what
specific future harm they hope to avert by electing new [directors] and do not identify
any concrete actions of the defendants that need to be immediately remedied.” (ECF

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No. 31 at 19.) Moreover, the Druekes “do not explain how or why that unspecified harm
can only be averted if an injunction is granted now, as opposed to after a final ruling on
the merits.” (Id.) (emphasis in original.) The inability to point to a concrete and
imminent injury to be avoided demonstrates that they are not entitled to a preliminary
injunction.
It is obviously true that during the time a lawsuit is pending a corporate board
may make decisions that impact shareholders, which decisions likely cannot be undone.
But the Druekes have not alleged that the defendants have made decisions that have
adversely affected the financial performance of FirsTime or are on the verge of doing so.
More importantly, those board decisions that financially injure shareholders are
obviously not irreparable. They are likely compensable through money damages.
In their reply brief the Druekes raise a different argument, asserting that “[t]he
central harm is that Defendants have prevented them from exercising their fundamental
right as shareholders to participate in a fair election to determine who will sit on
FirsTime’s Board of Directors[,]” which loss of voting power constitutes irreparable
injury. (ECF No. 32 at 13.)
“Courts

have

consistently

found

that

corporate

management

subjects

shareholders to irreparable harm by denying them the right to vote their shares.” Pell v.
Kill, 135 A.3d 764, 793 (Del. Ch. 2016) (quoting Telcom-SNI Inv'rs, L.L.C. v. Sorrento
Networks, Inc., 2001 Del. Ch. LEXIS 114, 2001 WL 1117505, at *9 (Del. Ch. Sept. 7, 2001)).

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Thus, when directors have issued additional stock in an attempt to wrongfully maintain
control in the face of stockholder discontent, courts have intervened to thwart such
efforts. See Packer v. Yampol, C.A., No. 8432, 1986 Del. Ch. LEXIS 413, at *43 (Ch. Apr. 18,
1986).
The intangible harm of being denied the opportunity to fully exercise their
democratic rights as shareholders is a harm for which the Druekes are unlikely to be
fully remedied through monetary damages. According to the Druekes, that is the
“central harm” they seek to prevent with a preliminary injunction. (ECF No. 32 at 13.)
Therefore, the court concludes that the Druekes have sufficiently established that they
will suffer irreparable harm if no preliminary injunction is issued.
Balance of harms
The court is sensitive to the rights of shareholders in controlling the direction of a
corporation. But that concern weighs on both sides. The Druekes seek a preliminary
injunction to prevent the dilution of their influence on the corporation. But were the
court to grant the preliminary injunction, the shareholders who purchased the stock
that the Druekes allege was improperly issued would be prevented from voting those
shares. Thus, if the court were to issue the preliminary injunction requested by the
Druekes and strip the voting rights attendant the newly issued shares, the consequence
would be irreparable harm to the holders of those shares. See Pell, 135 A.3d at 793.

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The Druekes allege, “but for Defendants’ unlawful acts, there is a strong
likelihood that Defendants would be removed from FirsTime’s Board of Directors, and
that a majority of the shares would vote to replace them with a new slate of directors at
the special meeting demanded by the Druekes.” (ECF No. 11 at 27.) The Druekes seek to
install their directors while this litigation proceeds because “[d]uring [the pendency of
this litigation], [the directors] will undoubtedly make countless decisions about
FirsTime’s stock, property, affairs, and business—decisions that cannot be unwound
after the litigation is over.” (ECF No. 11 at 28.)
Even if it were certain that the Druekes would be able to replace the directors,
that, too, cuts both ways. If the court grants a preliminary injunction and the Druekes
succeed in replacing the directors, but the Druekes ultimately fail in this lawsuit, what
then? Would the court order the defendant directors reinstated? What about decisions
made by the new directors in the interim? Would they be nullified? What if the new
directors issue a dividend (as the Druekes seek (ECF No. 1, ¶¶ 28, 30))? Will that
dividend be clawed back from shareholders, including those who are not a party to this
suit? Will the shareholders not allied with the Druekes be compensated for actions the
new Board took if any actions were detrimental to their interests?
The risk of irreparable harm to the defendants, the corporation, and the nonparty shareholders if a preliminary injunction is issued is no less than the risk of
irreparable harm to the Druekes if their motion for a preliminary injunction is denied.

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Absent a preliminary injunction, the Druekes will suffer a diminishment of influence in
the corporate democratic process during the pendency of this lawsuit. Although the loss
of voting power per se is irreparable, many of the effects of this disenfranchisement are
remediable through monetary damages.
For the purposes of this motion, the court presumes that the Druekes’ likelihood
of ultimate success in this action is strong. But even if likely to prevail, the balancing of
the harms does not favor the issuance of a preliminary injunction. The court would
merely transfer a risk of harm from the Druekes to non-parties. The Druekes have not
demonstrated that there is any impending action by the Board that necessitates the
extraordinary relief of a preliminary injunction. Rather, it appears simply that the
Druekes would prefer to have the best chance for getting different directors in control of
the Board sooner rather than later. The preliminary injunction that the Druekes seek is,
in large part, an effort to summarily and prematurely obtain the ultimate relief they
seek through this lawsuit. Cf. Harlem Algonquin LLC v. Canadian Funding Corp., 742 F.
Supp. 2d 957, 962 (N.D. Ill. 2010) (“As the Seventh Circuit has noted, preliminary
injunctive relief is not appropriate if it gives to a plaintiff ‘the actual advantage which
would be obtained in a final decree.’”) (quoting W.A. Mack, Inc. v. General Motors Corp.,
260 F.2d 886, 890 (7th Cir. 1958). Consequently, the court concludes that the Druekes’
motion for a preliminary injunction must be denied.

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IT IS THEREFORE ORDERED that Paul C. Drueke and Mary Jo Drueke’s
Motion for a Preliminary Injunction (ECF No. 9) is denied.
Dated at Milwaukee, Wisconsin this 13th day of October, 2017.

_________________________
WILLIAM E. DUFFIN
U.S. Magistrate Judge

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