Topspin Partners L.P. v. RockSolid Systems, Inc., (Del. Ch., Jan. 21, 2009), read letter opinion here. This Chancery Court case was commenced on an expedited basis, seeking dissolution and the appointment of a custodian for a closely-held company that was suffering from strife among the shareholders and the managers who could not agree on how to spend the precious few funds available to run the business, among other problems. This decision involves an expedited request by preferred shareholders for a Temporary Restraining Order (TRO) to prevent the defendant managers from dissipating the funds that the plaintiffs invested, which were expected to be exhausted in short order for daily operating expenses.
A key basis for the TRO request was the risk that once the company’s funds were depleted, the plaintiffs would not have any ability to be repaid.
The Chancery Court recited the familiar prerequisites that must be satisfied before it will grant a TRO. Plaintiffs fared well on the initial "colorable claim" element. A helpful excerpt from the opinion on this point follows:
… That money was invested by the plaintiffs and was designated as the source from which to redeem their stock. Once it is dissipated, there is no other source of liquid assets available to pay any part of that redemption preference. Moreover, the defendants’ counsel has represented to the court that the individual defendants are not “persons of means” and are unlikely to be able to finance the company through another month, let alone make good on the already expended funds. Assuming, without deciding, that the plaintiffs have met their burden to show the threat of imminent, irreparable harm, the court will move on to the other factors in the test.
For the purposes of an application for a temporary restraining order, the analysis of whether the claims asserted are meritorious requires nothing more than a showing “that a colorable claim has been made out if the facts alleged are true.” The plaintiffs have easily met this low burden.
When it next addressed the balancing of equities, the court was moved by the fact that the net result of issuing a TRO would shut down the company and prevent it from completing a product that had been in the process of being developed for some time. Moreover, the court was concerned about the applicability of a laches argument. Nonetheless, the court ordered that the parties negotiate a status quo order within two (2) days of the date of this opinion along the parameters set forth by the court in its decision.