Call Us For a Consultation: 775-210-0499

Department 9 of the Washoe County Business Court entered a May 24, 2016 temporary restraining order to protect a proposed settlement for which court approval was being sought.

Val Holms, an approximately 47% shareholder of Bakken Resources, Inc. (“BRI”), was sued in a separate derivative action on behalf of BRI by Manuel Graiwer and other plaintiffs. After participating in two mediations, Mr. Holms agreed to settle all claims against him by selling all of his BRI stock to Mr. Graiwer. While Mr. Holms was negotiating the settlement and preparing a motion for court approval of the settlement agreement was pending, BRI and its board of directors took the following actions: (1) BRI filed a lawsuit in Montana to prevent Mr. Holms from voting his shares in a way that would replace the board of directors; (2) BRI’s board of directors amended the bylaws to provide for a staggered board so that a majority of the board could not be replaced in any given year, and by removing the shareholders’ right to amend or repeal any board changes to the bylaws; and (3) BRI entered into a line of credit secured by newly-created preferred shares, the effect of which would be to dilute Mr. Holms’ percentage share ownership from 47% to 21% as soon as BRI drew on the line of credit. The Court determined that there was little public market for Mr. Holms’ stock and that the proposed settlement was a unique opportunity for Holms to divest himself of his BRI stock and extricate himself from the derivative action.

The court determined that Mr. Holms had a reasonable probability of success on his claims against BRI and its directors for breach of fiduciary duty and intentional interference with contract. The court was persuaded that Mr. Holms could show that the BRI directors put their interests above those of Mr. Holms by restricting the ability of Mr. Holms and other shareholders to replace the board of directors, amend the bylaws, and by unreasonably diluting Mr. Holms’ shares. The court also believed BRI and its directors took the foregoing actions with knowledge of, and in an effort to disrupt, Mr. Holms’ settlement. While each of the individual actions of which Mr. Holms complained may have been defensible when viewed in isolation, it appears the court believed the board actions were more properly viewed in combination.

The court also found that Mr. Holms would suffer irreparable harm absent a temporary restraining order because BRI could at any moment draw on the line of credit and thereby thwart Mr. Holms’ unique opportunity to sell his shares and settle his lawsuit. The court was so concerned about the likelihood of this scenario that it entered the temporary restraining order without notice to BRI or its directors. The temporary restraining order enjoined BRI and its directors from drawing on the line of credit, from taking any other action to dilute or impair Mr. Holms’ voting rights, or from otherwise impairing the terms of Mr. Holms’ settlement agreement.