Sweegen v. Chen CA4/3
G059226
| Cal. Ct. App. | Jun 29, 2021Background
- Plaintiffs invested $18.8 million for 5.64% of SweeGen, a stevia-sweetener company controlled by Steven and Min Chen, who also control several vendor/service affiliates (Conagen, Blue California, ProTab, Anhui, Bug Venture).
- Plaintiffs discovered numerous large, unexplained or poorly documented transfers from SweeGen to the Chens and Chen-affiliates, including an interest-free loan to the Chen trust repaid by Blue California, large royalty payments to Conagen after a retroactive amendment, loans/transfers to ProTab and Blue California, and payments to Anhui with sparse invoicing.
- Plaintiffs alleged derivative and direct claims (breach of fiduciary duty, conversion, aiding and abetting, accounting, etc.) and sought an ex parte preliminary injunction to require five days’ advance notice before SweeGen could transfer funds or enter agreements with the Chens or Chen-affiliates (ordinary-course transactions excepted).
- The trial court granted a mandatory preliminary injunction (and set a $210,000 bond), finding substantial evidence of self-dealing, altered financial statements, misrepresentations (Bug Venture facility price), and a reasonable probability of further untraceable transfers and hard-to-quantify dilution of plaintiff stock value.
- Defendants appealed, arguing plaintiffs could not show likelihood of success, irreparable harm, the injunction was vague, and the bond was too low. The Court of Appeal affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Likelihood of success on fiduciary-duty/aiding-and-abetting claims | Evidence of self-dealing: interest-free loan to Chen trust, unexplained transfers to affiliates, altered financial statements, retroactive royalty amendment to Conagen, misrepresented asset purchase | Transfers were ordinary loans (repaid); business-judgment rule and NRS 78.138(7) protect officers/directors; no proof of intent or damages | Substantial evidence rebuts business-judgment rule, supports inference of intentional misconduct and self-dealing; plaintiffs likely to prevail on fiduciary claims |
| Irreparable harm / balance of harms | Continued self-dealing will dissipate assets, produce untraceable transfers, and dilute share value — damages hard to quantify | Monetary relief adequate; injunction will harm SweeGen operations and business relationships | Balance favors plaintiffs: risk of further untraceable transfers and hard-to-ascertain dilution outweighs defendants’ speculative business harms; injunction appropriate |
| Vagueness of injunction | Injunction is definite: requires disclosure 5 days before interested transactions; ordinary-course exemption preserves business | Phrase "ordinary course of daily business" is vague; injunction effectively makes plaintiffs de facto overseers | Injunction sufficiently definite; ordinary-course language is commonly used and ascertainable |
| Amount of bond | $210,000 reasonably estimates likely attorneys’ fees and is within court discretion | Bond too low given alleged potential $5M business loss and higher projected litigation fees | Trial court reasonably exercised discretion, rejected conclusory fee/loss estimates; $210,000 not an abuse of discretion |
Key Cases Cited
- Guzman v. Johnson, 483 P.3d 531 (Nev. 2021) (standard for rebutting business-judgment presumption in interested transactions)
- Johnson v. Couturier, 572 F.3d 1067 (9th Cir. 2009) (injunctive relief to prevent ongoing self-dealing by controlling shareholders)
- Wind v. Herbert, 186 Cal.App.2d 276 (Cal. Ct. App. 1960) (risk of untraceable dissipation supports prelim injunction)
- Integrated Dynamic Solutions, Inc. v. VitaVet Labs, Inc., 6 Cal.App.5th 1178 (Cal. Ct. App. 2016) (mandatory injunctions receive closer scrutiny)
- Oiye v. Fox, 211 Cal.App.4th 1036 (Cal. Ct. App. 2012) (mandatory injunctions require careful review)
- Costa Mesa City Employees’ Assn. v. City of Costa Mesa, 209 Cal.App.4th 298 (Cal. Ct. App. 2012) (appellant bears burden to show preliminary injunction was improper)