Renco Group, Inc., v. MacAndrews AMG Holdings LLC, C.A. No. 7668-VCN (June 19, 2013).
This decision is the latest in an ongoing dispute among Plaintiff The Renco Group, Inc. (“Renco”) and Defendants MacAndrews AMG Holdings LLC (“AMG”), MacAndrews & Forbes Holdings Inc. (“M&F”), and Ronald O. Perelman. Prior decisions in this case have been highlighted on these pages at this link. This decision is noteworthy because the Court addresses a unique form of relief sought by plaintiffs – a mandatory injunction as well as a prohibitory injunction.
Issue Addressed: Did Renco satisfy the standards for a mandatory and prohibitory injunction against AMG?
Short Answer : No, but the Court did conclude that Renco was entitled to “limited injunctive assistance.”
In 2004, Renco restructured its ownership interest in AM General LLC. Pursuant to an agreement between Renco and M&F (the “Holdco Agreement”), Renco transferred its ownership of AM General to Holdco. Renco and AMG, an affiliate of M&F, were the only members of Holdco, and AMG was the managing member. The Holdco Agreement provided for “Revalued Capital Accounts” which determined the members’ relative capital interests in Holdco. The Holdco Agreement expressly precluded Holdco from making any distributions to AMG if “it would cause [AMG’s] Revaluated Capital Account to be equal to or less than 20% of the aggregate Revalued Capital Accounts of all Members in [Holdco].” In that event, Section 8.3(b) of the Holdco Agreement allowed Renco to require Holdco to distribute to Renco all distributions that would have otherwise been paid to AMG.
On October 12, 2012, Renco notified AMG that Renco believed that AMG’s Revalued Capital Account was less than 20 percent of the members’ Revalued Capital Accounts. In addition, Renco informed AMG that it was electing to receive all distributions from Holdco that would otherwise be distributed to AMG pursuant to Sections 8.3(b) and 9.3(a) of the Holdco Agreement.
After the legal wrangling described in the three prior decisions, Renco moved for a mandatory and preliminary injunction: (1) requiring AMG to return to Holdco all distributions or loans made by Holdco to AMG since October 12, 2012; and (2) prohibiting Holdco (and AMG) from making (or causing Holdco to make) any future distributions or loans to AMG or its affiliates pending the determination of the Revaluated Capital Accounts by qualified appraisers in accordance with the appraisal procedure in Holdco’s LLC agreement.
Renco argued that AMG did not reasonably determine the members’ Revalued Capital Accounts before authorizing the December and February Distributions and that the Holdco Agreement required completion of the appraisal procedure (if invoked) before any distributions are permitted. Renco also argued that (1) AMG’s cash flow projections were objectively unreasonable; (2) AMG’s use of a single comparable transaction to derive an EBITDA multiple was unreasonable; and (3) AMG’s DCF analyses were unreasonable because they did not include hundreds of millions of dollars in retirement and pension obligations.
AMG argued that the Holdco Agreement did not prohibit distributions when the appraisal procedure was invoked and that it made a reasonable determination of the members’ Revalued Capital Accounts because it relied upon AM General’s management’s projections.
The Court noted that, in order to succeed on its preliminary injunction motion, Renco had to demonstrate: (1) a reasonable probability of success on the merits; (2) that it will suffer immediate and irreparable harm if an injunction is not granted; and (3) that the balance of the equities favors the issuance of an injunction. However, because Renco was seeking a mandatory preliminary injunction, the Court stated that it “must demonstrate that it is ‘entitled to judgment as a matter of law on the merits of [its] claim, not just a reasonable likelihood of success on the merits as is generally required for a preliminary injunction.'”
With respect to its claim that invoking the appraisal procedure stays all future distributions, the Court found that Renco had not established that it was entitled to judgment on the merits or that there was a reasonable probability that it would be successful. The Court also noted that Renco had “not quite” established a reasonable probability that AMG did not make “reasonable” determinations in December and February and the harm that Renco would suffer as well as the balance of the equities did not warrant granting Renco the relief it requested.
The Court raised a concern with “the relative ease with which AMG could manipulate future distributions in its favor cautions against leaving Renco without a timely opportunity to protect itself from greater harm. Indeed, Renco may not be given notice of future distributions to AMG or the facts necessary to challenge the reasonableness of any supporting determination.” As a result, the Court said that “better” relief would be to allow Renco, pending completion of the appraisal process, a meaningful opportunity to challenge AMG’s “unreasonable” determinations before any distribution is made, especially if there is a reasonable probability that Renco’s Revalued Capital Account would approach the 80 percent threshold.
The Court granted “an interim injunction requiring AMG to provide Renco a summary of its determination of the Revalued Capital Accounts fifteen calendar days before making any distributions. Fifteen days should give Renco enough time to challenge the reasonableness of AMG’s determination and to seek appropriate relief before a distribution is made. If Renco is able to show that there is a reasonable probability that (1) AMG made an unreasonable determination, and (2) Renco’s Revalued Capital Account is near the 80 percent threshold, Renco may be entitled to an order enjoining all distributions until the appraisal process is completed (or an intervening reasonable determination supports a proposed distribution).