ORDER DENYING PLAINTIFF’S MOTION FOR PRELIMINARY INJUNCTION
This cause is before the Court on Plaintiffs Motion for Preliminary Injunction [Docket No. 24], filed on August 16, 2013, pursuant to Rule 65 of the Federal Rules of Civil Procedure. Plaintiff Chad Taylor, derivatively on behalf of other shareholders of Biglari Holdings, Inc. (BH), seeks to enjoin Defendants Sardar Biglari (“Biglari”), Phillip L. Cooley, Kenneth R. Cooper, William L. Johnson, James P. Mastri-an and Ruth J. Person (collectively, the “Board”) and nominal Defendant Biglari Holdings, Inc. (“BH”) from carrying out a rights offering initiated by BH, whereby the right to purchase shares was extended to BH shareholders. The rights offering commenced on August 27, 2013, and is scheduled to remain open until September 16, 2013.
Having considered Plaintiffs motion and the briefs submitted by the parties, the Court hereby DENIES Plaintiffs motion for injunctive relief.
Factual Background
Biglari Holdings (“BH”) is an Indiana corporation whose assets include two restaurant chains, Western Sizzlin and Steak n Shake. Compl. ¶ 4.
The driving force behind the emergence of BH in its present form is its CEO and namesake, Defendant Sardar Biglari, who
The current members of the BH board are Sardar Biglari, Phillip L. Cooley, Kenneth R. Cooper, Dr. Ruth J. Person, William L. Johnson, and James P. Mastrian. ¶ 28-32. All five members of the board other than Biglari have professional ties to him that extend outside their joint service on the BH board; these contacts include involvement with Biglari’s Lion Fund, service on the predecessor Western Sizzlin board, joint service on outside boards, and — in the case of Phillip Cooley — a previous professor-student relationship. Pl.’s Reply 5-6. Plaintiff alleges that the members of the board have approved three transactions in 2013 — what he calls the “Retrenchment Transactions” — that improperly benefit Biglari personally rather than the broader corporate interest their fiduciary duties bind them to safeguard. Pl.’s Mot. 3-4. The first, the Licensing Agreement, entitles BH to use Biglari’s name and likeness, conditioned on the company’s obligation to pay Biglari 2.5% of gross corporate revenues for five years after any “triggering event,” including the ouster of Biglari. ¶ 72; Pl.’s Mot. 4. The second is the company’s sale of the Lion Fund back to Biglari; Plaintiff alleges that the sale was a means of circumventing Biglari’s annual compensation cap with BH, allowing the nominally independent Fund to provide additional payments to him. PL’s Mot. 4.
The final “entrenchment transaction,” and the subject of this motion, is the Rights Offering, first disclosed by BH in a Form S-3 Registration Statement on February 5, 2013. ¶ 76; Defs.’ Resp. 6. A rights offering is a corporate stock device for raising capital, whereby a corporation issues a number of “rights” to existing shareholders, entitling them — if they choose to invest the additional capital re
On June 3, 2013, Plaintiff filed a shareholder derivative complaint against BH as a nominal defendant and the six board members as individual defendants, alleging that the “entrenchment transactions” and other board actions have violated the members’ duty to the corporate interest. Compl. 1. The complaint contains counts for breach of fiduciary duty, gross mismanagement, abuse of control, and waste of corporate assets. Id. at 41-44. On August 16, 2013, Plaintiff filed this Motion for Preliminary Injunction targeting only the Rights Offering.
Legal Analysis
Standard of Review
In reviewing a motion for injunctive relief, courts proceed in two distinct phases. First, we must determine whether the moving party has satisfied the threshold showing of entitlement to relief, which in turn consists of three elements: (1) absent a preliminary injunction, it will suffer irreparable harm in the interim period prior to final resolution of its claims, (2) traditional legal remedies would be inadequate, and (3) its claim has some likelihood of succeeding on the merits. Girl Scouts of Manitou Council, Inc. v. Girl Scouts of U.S. of Am., Inc.,
Our balancing of these equitable factors is not rigid or formulaic; rather, we employ a “sliding scale” approach — meaning, for example, that “the more likely it is the plaintiff will succeed on the merits, the less balance of irreparable harms need weigh toward its side; the less likely it is the plaintiff will succeed, the more the balance need weigh towards its side.” Abbott Labs. v. Mead Johnson & Co.,
Although discretion to issue a preliminary injunction lies with the courts, injunctive relief it is to be considered an “extraordinary remedy,” appropriate only on a “clear showing of need.” See Sierra Club v. Gates,
Discussion
We consider first the three threshold factors necessary to establish entitlement to injunctive relief. Only after determining whether Plaintiff has cleared this preliminary hurdle shall the larger balance of the equities for and against his proposed order blocking the Rights Offering be addressed.
I. Irreparable Harm
Plaintiff argues that “the company and its stockholders will suffer immediate and irreparable harm” if the Court declines to enter an injunction, primarily because a Rights Offering will be difficult to unwind after the rights have been traded on the market and numerous new third-party interests have become involved. See Pl.’s Mot. 8-9. There are a number of flaws in this argument, beginning with his tardiness in filing this motion, which seriously undermines its persuasiveness on this score. In addition, his substantive claim of corporate harm is both speculative and conceptually muddled.
A. The Timing of the Motion
As Defendants have pointed out, a delay in requesting equitable relief is inconsistent with a claim of irreparable injury. Defs.’ Resp. 10-11 (citing Shaffer v. Globe Protection, Inc.,
Here, BH first disclosed its planned Rights Offering on February 5, 2013, with the final details announced on August 6. Defs.’ Resp. 11. The company’s S-3 disclosure, filed in February, made the structure of the transaction clear; except for a subsequent increase in the capital target from $50 to $75 Million, Plaintiff and other shareholders were on notice from that point forward, should they object to the plan as a means of further entrenching Biglari. Id. at 7-8. When Plaintiff filed his complaint in this case on June 3, he included no request for injunctive relief, even though he knew of the Rights Offering at the time and included it in his list of the Board’s allegedly improper actions. See Compl. 31-32, 44-45. Instead, he waited until August 16 to file this motion, praying that the Court grant relief no later than the date of the Rights Offering’s termination on September 16. In so doing, Plaintiff all but guaranteed that we would be unable to receive briefing and resolve the issue until after trading on the Offering had already begun-thus unnecessarily creating the very “irreparable” harm of which he now complains. It is true that, until trading on the rights actually opened on August 22, the process Plaintiff here seeks to enjoin was not yet active. Cf. Shaffer,
B. Plaintiffs Claim of Injury
Because this is a derivative action, Plaintiff bears the burden of establishing the risk of irreparable harm to the corporation as a whole, rather than simply to his personal interests as a shareholder. See, e.g., In re Countrywide Fin. Corp. Derivative Litig.,
Plaintiffs motion and brief reflect some conceptual slippage on this issue. While he announces the correct standard in alleging damage to the corporation and the body of its shareholders, the specifics of his claimed harm — and the authority he cites in support of it — are more consistent with an interest particular to minority shareholders rather than the corporation as a whole. Shortly after reciting the proper elements of a derivative claim, Plaintiffs motion asserts that “the harm to Plaintiff is extensive because once completed S. Biglari will wield additional control of the Company and further his self-interested behavior.” Further, he cites a Delaware case for the proposition that “a shareholder-plaintiff is irreparably harmed where an improper offering is completed.” Pl.’s Mot. 8 (citing Hollinger Intern., Inc. v. Black,
The shortcomings in Plaintiffs argument amount to more than mere rhetorical imprecision. Defendants point out that no authority supports the notion that a transaction like the Rights Offering gives rise to corporate injury requiring injunctive relief. Furthermore, they point us towards a compelling reason why this might be so. On its face, the Rights Offering creates a subscription option that can be exercised on equal terms by large and small shareholders alike, Cf. Levco,
Even if we assume with Plaintiff that Biglari’s purpose in conducting the Rights Offering is to increase his ownership share, Plaintiffs argument that such a strategic motive constitutes irreparable harm to the corporation suffers from two serious defects.
First, the claim that Biglari will exercise oversubscription rights to crowd out smaller shareholders and aggrandize his stock ownership is, at this stage, nothing more than a prediction. “Speculative injuries” are, by nature, insufficient to support a preliminary injunction. E. St. Louis Laborers’ Local 100 v. Bellon Wrecking & Salvage Co.,
Second, Plaintiffs argument contradicts the larger thrust of his complaint — that Biglari already dominates the company utterly. Plaintiffs multiple claims of Board misconduct are undergirded by the theory that the directors are beholden to Biglari; he alleges that Biglari has “complete domination and control over BH’s Board of Directors,” and that through his “minions” he treats the company as a mere vehicle for the advancement of his personal interests. Compl. 32-33, ¶¶ 78-80. If Biglari is already so firmly entrenched that the Board moves at his whim, it is difficult to understand — as Defendants point out— how the Rights Offering creates any new or distinct irreparable harm. See Defs.’ Resp. 16-17. Since Plaintiffs chance of success on the merits, see infra § III, depends entirely on the notion that the Board that unanimously approved the Rights Offering was already compromised by its subservience to Biglari, even an argument that succeeded in overcoming its speculative weaknesses would founder on this fundamental internal inconsistency.
II. Inadequacy of Legal Remedies
Plaintiff has not convincingly shown that compensatory damages would be inadequate to remedy any harm to the corporation caused by the Rights Offering. In fact, he does not even directly address the issue in his motion or supplemental brief. See Defs.’ Resp. 19. Plaintiffs argument on the issue, such as can be discerned, relates to his theory of irreparable harm: he asserts that “the Court will be hard pressed to unwind the Rights Offering with any reasonable ease, particularly because the rights in the offering will be tradeable, and therefore a number of third parties will be impacted by any attempts to rescind the transaction.” PL’s Mot. 8-9. In his reply, Plaintiff does make a more explicit argument, but the decisions he cites merely underline the weakness of his case on this point — they deal with situations whose urgency or irrevocability distinguish them from the Rights Offering at issue here. See MONY Group, Inc. v. Highfields Capital Mgmt., L.P.,
Additionally, Plaintiffs implicit argument on this score is weakened by the fact that he seeks compensatory damages for Defendants’ alleged improprieties, including the Rights Offering. Compl. 44. While it may be true, as Plaintiff reminds us, that the possibility of a later damages award is not per se inconsistent with in-junctive relief, see Levco,
III. Reasonable Likelihood of Success on the Merits
Plaintiff’s chance of prevailing on his challenge to the Rights Offering — and the other instances of alleged Board misconduct — depends on the threshold question of whether demand was excused.
Under Indiana law, a plaintiff in a shareholder derivative suit must satisfy certain threshold requirements in order for their claim to be considered. A plaintiff must show (1) that she was a shareholder at the time of the transaction of which she complains, (2) that she made efforts to obtain the requested action from the board of directors — or why she did not make demand on the board, and (3) that she fairly and adequately represents the interests of the shareholders as a whole. Ind.Code § 23-1-32-1; Trial Rule 23.1. The second criterion, the “demand” requirement, reflects the law’s general attitude of deference towards the decisions made by a corporation’s directors, as embodied in the Business Judgment Rule — “a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” G & N Aircraft,
Where, as here, the plaintiff initiates a derivative suit without first making demand on the corporation, he must show that demand would have been futile in order for the court to permit the suit to go forward. Ind.Code § 23-1-32-1. Because Indiana’s statutes provide little guidance as to the standard governing demand futility, Indiana looks to Delaware’s more fully developed body of corporate law. See In re ITT,
*858 The test of demand futility is a two-fold test under Aronson and its progeny. The first prong of the futility rubric is “whether, under the particularized facts alleged, a reasonable doubt is created that ... the directors are disinterested and independent.” The second prong is whether the pleading creates a reasonable doubt that “the challenged transaction was otherwise the product of a valid exercise of business judgment.” These prongs are in the disjunctive. Therefore, if either prong is satisfied, demand is excused.
Brehm,
Below we briefly summarize the parties’ arguments regarding the Rights Offering’s place within the larger scheme of alleged impropriety on the part of the BH board.
A. Board’s Lack of Independence or Disinterestedness
In order to prevail under the first part of the Aronson test, Plaintiff must show reasonable doubt as to a majority of the BH board’s disinterestedness in the transaction or its members’ independence. A director has impermissible self-interest “whenever divided loyalties are present, or a director has received, or is entitled to receive, a personal financial benefit from the challenged transaction which is not equally shared by the stockholders.” Rales v. Blasband,
Plaintiff alleges that Sardar Biglari dominates the other five members of the BH board to such an extent that there is no independent decision making majority. See Pl.’s Reply 5. Defendant Phillip Cooley, BH’s Vice Chairman and former audit committee chairman, has longstanding professional ties to Biglari, having served as an advisory director of Biglari Capital (a separate entity), a director of Western Siz-zlin with Biglari before its integration with BH, and a board member of the Lion Fund. Compl. 11, ¶ 28. Plaintiff claims that because of these ties, and the fact that Cooley was Biglari’s professor in business school, Cooley’s independence is compromised. Pl.’s Reply 5. Although this might not amount to the “close familial or personal relationship” that Plaintiffs citation to case law suggests it does, see Pl.’s Reply 5 (citing Orman v. Cullman,
The other four board members— Dr. Ruth Person, Kenneth Cooper, William Johnson, and James Mastrian — all have some professional ties to Biglari that extend beyond their joint BH board memberships. See Pl.’s Reply 5-6. As Defendants point out, these four members have been certified as “independent” under the public registration requirements of the New York Stock Exchange; although this may not be dispositive of the issue, see In re Oracle Corp. Derivative Litig.,
Allegations that Stewart and the other directors moved in the same social circles, attended the same weddings, developed business relationships before joining the board, and described each other as “friends,” even when coupled with Stewart’s 91% voting power, are insufficient, without more, to rebut the presumption of independence. They do not provide a sufficient basis from which reasonably to infer that [the board] may have been beholden to Stewart.
Beam,
B. Whether the Rights Offering was the Product of “Sound Business Judgment”
Under the second prong of the Aronson test, a plaintiff can show that demand is excused if the transaction in question is not entitled to the protections of the Busi
Here, Plaintiff argues that two transactions in particular are so substantively flawed that they were made in a matter that suggests bad faith — that the board “did not care [that] shareholders would suffer a loss” from them. See In re Tyson Foods, Inc.,
Moreover, in procedural terms, Plaintiff asserts that in undertaking a number of BH’s challenged transactions the board failed to act diligently or adequately inform itself, in violation of its duty of due care. According to Plaintiff, the BH board fell short of due diligence standards in failing to question Biglari regarding the Licensing Agreement, the amount of Biglari’s compensation, and selling the Lion Fund. Pl.’s Reply 6, 9, 11-12. As to the Rights Offering itself, Plaintiff points to the fact that BH “has failed to produce even a single presentation or report regarding the Rights Offering” — and alleges that the only outside opinion the board sought was from counsel, whose communications it has partially withheld.
In response, Defendants note that while evidence of reliance on outside experts in agreeing on the Rights Offering may be lacking, Plaintiff can substantiate no allegation that the board engaged in misconduct or acted irrationally. Defs. Resp. 28. As they point out, an allegation that board decisions are unworthy of the cloak of the Business Judgment Rule must clear a “high hurdle.” In re Tyson Foods,
While Plaintiff has pointed to some facts that plausibly call into question the BH board’s thoroughness and judgment in agreeing to a series of transactions highly favorable to Biglari in recent years, we cannot say at this stage that Plaintiff will succeed in establishing that the board either engaged in egregiously defective decision-making or committed itself to transactions so unfavorable to the corporate interest that they reflect bad faith.
IV. Balance of the Equities and Conclusion
Our task in ruling on this motion is not to weigh in definitively on the merits of Plaintiffs challenge to the Rights Offering and other BH transactions. Indeed, at this threshold stage, we examine the merits only to determine whether the underlying claim has “some likelihood” of success. Girl Scouts,
While we need not proceed, then, to the second, balancing stage of the analysis, we do briefly note that Plaintiffs argument will likely face insurmountable difficulties at that stage as well. In weighing the impact of Plaintiffs claimed injury and his likelihood of success on the merits, we use a “sliding scale” approach: “[T]he more likely it is the plaintiff will succeed on the merits, the less balance of irreparable harms need weigh toward its side; the less likely it is the plaintiff will succeed, the more the balance need weigh towards its side.” Annex Books, Inc. v. City of Indianapolis,
Neither is the potential harm to Defendants if an injunction issues — another factor to be considered at the equitable balancing stage — as trivial as Plaintiff would have us believe. See Meridian Mutual Ins. Co. v. Meridian Ins. Group, Inc.,
Plaintiff urges us several times in his briefs to consider the Rights Offering in the larger context of the BH board’s other allegedly improper transactions, arguing that only when situated within a pattern of entrenching behavior can it be seen for its true nature. See, e.g., Pl.’s Reply 9. As well-taken as this suggestion may be when considering Plaintiffs underlying complaint, it underlines the weakness of claim for injunctive relief here. If the pernicious effect of the Rights Offering derives from its status as the latest in a series of iniquities perpetrated by Biglari and his allies upon the corporate interest, it becomes difficult to see why this transaction alone warrants the extraordinary remedy of an injunction. Without foreclosing the possibility that Plaintiff may succeed in further substantiating his allegations as to the merits of his claims as a whole, we conclude that he has fallen well short of demonstrating the need to enjoin the Rights Offering. Accordingly, Plaintiffs Motion for Preliminary Injunction is DENIED.
IT IS SO ORDERED.
Notes
. Henceforth all paragraph citations refer to Plaintiffs complaint (Compl.) unless noted otherwise.
. See below, p. 851-52, for a brief description of rights offerings.
. Plaintiff's reply brief addresses the subject, arguing that precedent supports the proposition that an earlier motion for injunction— before the final details of the Offering had been announced — would have been premature, and the claim unripe. Pl.’s Reply 14-15 (citing S. Austin Coal. Cmty. Council v. SBC Commc’ns Inc.,
. Plaintiff does allege in his complaint that damages are inadequate for Count IV (Abuse of Control) and Count V (Waste of Corporate Assets). He does not, however, mention these counts anywhere in his brief or further develop any argument based on them specifically, and — as Defendants note — the original assertion in the complaint is likely without merit regardless. See Defs.’ Resp. 20, n. 14 (citing Tomczak v. Morton Thiokol, Inc.,
. Plaintiff points out that the other individual Defendant board members are shareholders, and plan on participating in the Rights Offering. However, participation in this form is not a "personal financial benefit from the transaction which is not equally shared by its stockholders,” since their right to participate is coextensive with the equal rights of all other holders of BH stock. Plaintiff has made no allegation that the other directors intend to use the Rights Offering to entrench themselves, but rather that they voted for it because of their domination by Biglari. See Pl.’s Reply 4, n. 7 (citing Opp. Ex. 20 at BH-TAYLOR-000040).
. Defendants argue that since Biglari does not have majority ownership of BH, he cannot be said to have the power to remove directors with “impunity.” As courts have recognized, however — most authoritatively in Delaware's Oracle decision' — one director’s leverage over another hardly begins or ends with sheer, literal financial dominance. See Defs. Resp. 25-26; see also In re Oracle Corp. Derivative Litig.,
. Plaintiff also claims that the board violated its duty of disclosure by failing to disclose the purpose behind the Rights Offering in its initial February Form S-3 and August press release. See Pl.’s Mot. 8; Pl.’s Reply 17-18. We find this allegation to be without any independent weight, since it depends on the premise that the "real” purpose of the rights offering was improper — the main subject of the parties' dispute. Additionally, as Defendants point out, it does appear that the Form S-3 disclosed the possibility of vote-share dilution from the Rights Offering. See Defs.’ Resp. 27, n. 19.
. Disputes between the parties as to this and other evidentiary issues are pending under the consideration of the Magistrate Judge.