The opinion of the court was delivered by: Cedarbaum, District Judge.
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
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
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
(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
(i) The election or removal of officers or
directors and establishing the number of
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
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
Davis' employment agreement, a letter to her from The
Carlisle Collection, Ltd. dated October 1, 1981, provides, in
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 . . .
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
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 ...