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DAVIS v. RONDINA

July 16, 1990

CAROLINE A. DAVIS, PLAINTIFF,
v.
WILLIAM D. RONDINA, WILLIAM RONDINA, INC., GRACE ROSE AND THE CONNAUGHT GROUP, LTD., DEFENDANTS.



The opinion of the court was delivered by: Cedarbaum, District Judge.

OPINION AND ORDER

Caroline Davis, owner of twenty-five percent of the shares of The Connaught Group, Ltd., brings this diversity action for a preliminary injunction, a permanent injunction, declaratory relief and damages. She alleges that she is being irreparably harmed by the conduct of William Rondina, the owner of the other seventy-five percent of the shares of Connaught, who breached the shareholders agreement between them.*fn1 After a three day evidentiary hearing addressed solely to the issue of interim relief, I find that plaintiff is entitled to a preliminary injunction.

FACTS

I.  FORMATION AND STRUCTURE OF THE CORPORATION

Caroline Davis and William Rondina met while working for Doncaster, Inc., a women's clothing company. Doncaster is a direct sales company which markets women's clothing through a national network of sales consultants who sell the clothing from their homes. William Rondina owns a company, William Rondina, Inc. ("Rondina, Inc."),*fn2 which manufactured clothing for Doncaster as an independent contractor. He also designed clothing. Caroline Davis held several positions with Doncaster. She began as a sales consultant and achieved the position of regional sales manager before she resigned. Davis also was very active in charitable organizations and held leadership positions in the Junior League which gave her a network of contacts across the country.

During the early 1980's, Rondina and Davis decided to leave Doncaster and form their own direct sales women's clothing company patterned on Doncaster's mode of operation but with a more expensive line of clothing. Rondina was to bring his manufacturing and designing experience to the venture; Davis was to contribute her contacts and her marketing experience. The plan, which was carried out, was for the new company to purchase all of its clothing from Rondina, Inc., which Rondina would continue to run, while Davis developed a network of women across the country to sell the clothing, and focused on advertising and promoting the clothing.

Their company, The Carlisle Collection, Ltd. ("Carlisle"), was incorporated in Delaware in 1981. The name of the company was changed in 1989 to The Connaught Group, Ltd. ("Connaught"). Rondina and Davis are its only shareholders; Rondina holds seventy-five percent of the stock, Davis, twenty-five percent.*fn3

At the inception of the corporation, Rondina and Davis entered into a shareholders agreement. Paragraph 2(a) of that agreement provides:

  Both Rondina and Davis shall be employed by the
  Corporation for a period of two years commencing
  as of October 1, 1981 in the form of the
  Agreements annexed. Except as hereinafter
  provided, their said employment shall be
  automatically renewed for successive two year
  periods. Their salaries and other compensation
  shall be equal and shall continue at the same rate
  unless changed by mutual agreement.

Paragraph 2(b) of the agreement provides:

    Davis shall devote her full time and efforts to
  her employment as President. . . . She is to be
  responsible for the overall management of the
  business of the Corporation. Her functions shall
  include, but shall not be limited to, the
  recruitment, training, supervision and replacement
  of managers and of saleswomen, the preparation of
  training and of operations manuals and of all
  other documents and forms, advertising and sales
  promotion. . . .

Paragraph 3 of the shareholders agreement specifies that an eighty-nine percent shareholder vote is required for:

  (a) Authorizing or consenting to any transaction
      not in the ordinary course of business,
      including but not limited to a major purchase
      of property;
  (e) Making any change in the employment contract
      or the terms of employment of Rondina or Davis
      or terminating or not renewing Davis or
      Rondina's employment contract for any two-year
      period;
  (i) The election or removal of officers or
      directors and establishing the number of
      directors.

Article XI, section 2 of the corporation's by-laws also requires an eighty-nine percent shareholder vote and unanimous director approval for the same matters.

The by-laws were amended on February 16, 1984, to provide for two directors. Rondina and Davis have always held those positions. The amendment also provided that in the event of a tie vote, Rondina may designate a third director to vote on items that do not require unanimous director approval.*fn4 In addition, article IV, section 3 of the by-laws also provides that:

  Any officer may be removed, either with or without
  cause, and a successor elected by a unanimous vote
  of the Board of Directors at any time.

The original by-laws provided that the President of the corporation shall be Chief Executive Officer of the corporation. However, in a resolution dated February 16, 1984, adopted unanimously by the Board of Directors, William Rondina was elected CEO of the corporation. Some time in 1989 Davis became Chief Operating Officer of the Corporation. She has retained her position as President throughout the corporation's existence.

Davis' employment agreement, a letter to her from The Carlisle Collection, Ltd. dated October 1, 1981, provides, in part:

    This letter constitutes your employment contract
  as President of The Carlisle Collection, Ltd. It
  is supplemental to our Stockholders Agreement of
  even date herewith. That agreement spells out the
  duties of your employment, the circumstances under
  which it is to be renewed from time to time and
  agreements relevant to activities competitive with
  The Carlisle Collection, Ltd.
    You are required at your own expense to have an
  office in Michigan. . . . The company will pay for
  a secretary . . .

The shareholders agreement also provides that in the event of a planned dissolution of the corporation, Davis has the option to purchase Rondina's shares at book value. Shareholders Agreement ¶¶ 8-9. Further, if Davis' employment is terminated, or if she becomes disabled or retires, the corporation shall purchase her shares for book value. Shareholders Agreement ¶¶ 6, 9. In the event of Rondina's termination of employment, disability, retirement or death, the corporation shall be dissolved, subject to Davis' option to purchase in the event of a dissolution. Shareholders Agreement ¶¶ 7-8.

II. THE GROWTH OF THE CORPORATION

The company has been very successful. It began its first season, Fall 1982, with a sales force of ninety consultants. By the fall of 1989, the company had approximately nine hundred consultants. Annual net sales have risen from approximately two million dollars to approximately twenty-eight million dollars. The company has been profitable in each year of its operation.

Originally Davis worked in Michigan while Rondina designed and manufactured the clothing in New York. In 1984, as the company grew larger and Davis' situation made it possible, she moved her office from Michigan to New York, where it remains.

Rondina and Davis are the top management at the company. Below them are a number of vice presidents. The company also has regional managers, district managers and sales consultants. Among the upper management are Howard Unker, who is the company's financial officer, John Hoffee, who heads the company's operations, Sheila Holderness, who was responsible for training and development, Pluma Bridges, who was responsible for recruitment, and Judith Bickel, who was responsible for St. A, a division of Connaught. The company also employs outside consultants, including accountants and lawyers.

It was the regular practice of Rondina and Davis to meet with Unker once a week to discuss the company's finances. Rondina and Davis together met with the company's outside advisors several times a year. In addition, the company held periodic meetings of regional managers and district managers. Before the trouble started, Davis and Rondina saw each other several times every day. Even when one was in New York and the other in Michigan, they spoke on the telephone at least four times a day and frequently ...


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