1.-i 1-u n--I I-JIx.) hi hi 43'- Ln IN.) PATH: W259 CLERK. . 05021 Michael R. King #005903 Lisa T. Hauser #006985 Kevin J. Blakley #010777 Miehella Abner #022324 GAMMAGE BURNHAM A Peorassuomu. LIMITED COMPANY ATTORNEYS AT L.-aw Two Noam CENTRAL AVENUE FLOOR I'i1oE1-mt. AZ 35004 (fin!) 256-0566 Fax (602) 256-4475 EMAIL: a. "swamp Thomas A. Zlaket #001319 THOMAS A. ZLAKET, PLLC 310 Sotmi WILLIAMS BUULEVARD SUITE I70 TEIEPHDHE (520) 75 0-0250 FAX (520) 750-0243 EMAIL: Attorneys for Plaintiff SUPERIOR COURT OF ARIZONA PIMA COUNTY NO. C2005-5273 APPLICATION FOR TEMPORARY RESTRAINING ORDER, PRELIMINARY INJUNCTION AND ORDER TO SHOW CAUSE LISA FRANK GREEN, Plaintiff, vs. JAMES A. GREEN and LISA FRANK, an Arizona corporation, Defendants. (Assigned to the Honorable Deborah Bernini) Plaintiff Lisa Frank Green respectfully requests this court issue a "3 PH 5:92 -EPUTY Temporary Restraining Order and Order to Show Cause setting an expedited hearing for a preliminary injunction. This Application is supported by the Amended Complaint and the attached Memorandum of Points and Authorities 293635vl n.-an :3 Lani 1? u--I GN 00 -3 ts.) l'\J Lu ts) ab- b-J Cl': MEMORANDUM OF POINTS AND AUTHORITIES I. Factual Background Lisa Frank, Inc. (also referred to as the "Corporation") was founded by Lisa Frank Green in 1979 and is a major manufacturer of girls' toys and school supplies. Lisa Frank, Inc. employs approximately 80 people at its facilities in Tucson, Arizona. Lisa Frank married James A. Green on October 22, 1994. On or about December 1, 1995, plaintiff Lisa Frank Green and defendant James A. Green entered into a Buy-Sell Agreement (the "Buy-Sell Agreement"). Under this agreement, Lisa gifted to defendant James A. Green 20% of the outstanding shares of stock in Lisa Frank, Inc. Lisa subsequently gifted James an additional 29% of the outstanding shares so that James owns 49% of the outstanding shares and Ms. Frank Green owns 51% of the shares. The Buy--Sell Agreement provides that upon the tiling of a petition for a decree of dissolution of the marriage of James A. Green and Lisa, the Corporation has an option to purchase all of James' stock in the Corporation. if the Corporation tenninates this option or does not exercise it in 60 days then Lisa has an option to purchase all of James' stock. The option provides for the stock to be purchased at its fair market value as defined therein under specified payment terms. On September 28, 2005, Lisa filed a petition for a decree of dissolution of her marriage with defendant, Pima County Superior Court Action No. 1320050545. Consequently, Lisa Frank, Inc. has an option to purchase all of James' stock and Lisa has a contingent option to purchase all of James' stock. The officers of Lisa Frank, Inc. are currently James A. Green, President/Chief Executive Officer; Lisa Frank Green, Chairman of the Board of Directors; Rhonda Rowlette, Secretaryflixecutive Vice President; and Michael Richmond, Treasurer. James A. Green and Lisa Frank Green are the only directors of Lisa Frank, Inc. The directors are deadlocked on issues critical to the business. 2936-Sfivl 2 I ZDIDS 175 l\-James A. Green has mismanaged the Corporation and has engaged in a course of conduct that has impaired the value of the assets of Lisa Frank, Inc. and the value of all stock in the Corporation. James' actions include, but are not limited to, the following: In the past several years, while James was President and while Lisa has concentrated on raising their two small children, James has presided over a drastic reduction in corporate sales and profits; contentious working environment that has caused an extraordinary number of key Verbally abusing employees of the Corporation and creating a employees and other employees to resign or threaten to resign; Verbally abusing outside sales representatives, vendors anti customers and creating contentious relationships with those persons that has caused them to resign or terminate their relationship with the Corporation or threaten to do so; provide appropriate supervision and leadership to various corporate departments, Refusing to respond timely to employee inquiries and failing to including the sales department, art department and accounting department; Failing to hire a chief financial officer to fill a vacancy that has existed for over one year; Failing to authorize the retention of independent counsel for the Corporation in connection with this litigation which caused the General Counsel for the Corporation, Anne Aikman-Scalese, to resign her position of September 30, 2005; Chairman of the Board, in scheduling meetings of the shareholders and directors in order Failing to communicate with Lisa, as majority stockholder and to address the serious issues facing the Corporation, including whether to hire new management or take other steps in order to improve the Corporation's decreased sales 29Efi35vI 3 and profits in recent years and whether to exercise the Corp oration's option to purchase James' stock in the Corporation. Lisa has demanded that James resign as President but he refuses to do so. If James is allowed to continue to act as Executive Officer of the Corporation, the value of the Corporation's assets and business will continue to rapidly decline. Ms. Frank Green and James are the only directors of the Corporation and are therefore deadlocked on the issue of his continuing as President of the Corporation. The Corporation's bylaws provide that a special shareholders meeting shall be called by the President or Secretary upon the written request of the holders of not less than 50% of the Corporation's stock. [Exhibit A special meeting of the shareholders may be called for any purpose. On September 27, 2005, Lisa delivered to James, as President, and to Rhonda Rcwlette, as Secretary, a written request that a special meeting of the shareholders be called. The written request asked for a special meeting to consider changing the number of directors, electing new directors and any other matters that may properly be addressed at the special meeting. Lisa requested that the meeting be held on October 7, 2005 at 2:00 pm. James and Ms. Rowlette have failed and refused to call the special meeting of shareholders as requested by Lisa, the majority stockholder of the Corporation. Ms. Rowlette is very loyal to James and Lisa believes that she will refuse to call a meeting of the shareholders without his consent. Lisa and James are so divided respecting the management of the business and affairs of the Corporation that the Corporation is suffering and/or will stiffer irreparable injury, or the business and affairs of the Corporation can no longer be conducted to the advantage of the investors generally. The foregoing is supported by the affidavit of Lisa Frank Green. [Exhibit 13.] 29El5flSvI 4 and DO -l Ln -Ft bu hJ 5-1. I--I- FJ DJ hunt CDN I--II. Legal Analysis The party seeking preliminary injunction is required to show: A strong likelihood that he will succeed at trial on the merits; 2) The possibility of irreparable injury to him not rernediable by damages if the requested relief is not granted; 3) A balance of hardships favors himself; and 4) Public policy favors the injunction." Sheen v. Sheen, 167 Ariz. 58, 63; 304 P.2d 737, 792 (App. 1990). "The critical element in this analysis is the relative hardship of the parties. To meet this burden, the moving party may establish either 1) probable success on the merits and the possibility of irreparable injury; or 2) the presence of serious questions and 'the balance of hardships tip sharply' in his favor." Id. (quoting Justice v. Nor'! Coiiegiare Athletic Ass 577 F. Supp. 356, 363 (D. Ariz. 1933)). "These two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases." Lucketre v. Lewis, 333 . Supp. 471, 474 (D. Ariz. 1995) (quoting Diumontiney v. Borg, 913 F.2d 793, 795 (9th Cir.l990)). A. Likelihood of Success on the Merits Lisa is likely to succeed on the merits because as majority shareholder it is inevitable that she will succeed in exercising the vote of her majority shares at the next annual shareholders meeting to expand the number of directors to three to break the deadlock between the two current directors and to fill the new vacant director position. Together with the new director, Lisa will then succeed in appointing a new Presidentf Chief Executive Officer and electing someone other than James as a director. Given the serious and deteriorating situation facing Lisa Frank, Inc. with James at the helm, Lisa -- majority shareholder and chairman of the board of directors -- has determined that the situation demands action in advance of the December 26, 2005 annual meeting and has requested that a special meeting of the shareholders be called. James has refused to call this meeting or allow it to be called by the corporation secretary 293635vl 5 IWJQDUS 5 DJ 4'3 I1: 3 n--n 0'0 6 ts.) Ix.) IN.) DJ DJ U1 Ex.) despite the fact that Article 11, Sec. 5 of the corporate bylaws requires the meeting to be called by the president or secretary upon the request of the holder of at least 50% of the outstanding shares. According to this section of the bylaws, a special meeting of the shareholders can be held "for any purpose." The shareholders also have the authority under the bylaws to set the number of persons who shall constitute the board of directors at their annual meeting. A.R.S. then gives authority to the shareholders to elect the directors to fill vacancies, including those occurring as a result of newly created directorships. Should James claim that expansion of the board of directors must await the annual meeting, the shareholders can amend the bylaws in a special meeting. A.R.S. ?l0-1020; see also Campbell v. Loew Incorporated, 134 A.2d 852 (Del. Ch. 195?). One way or another, Lisa has the power and authority to remove James, President and CEO of Lisa Frank, Inc. and to buy him out and remove him as director. In the interim, inj unctive relief is necessary to prevent the minority shareholder, James, from further blocking any action of the shareholders or board of directors with which he does not approve. James' counterclaim requests a dissolution of the Corporation pursuant to A.R.S. 10- 1430(3) on the grounds that Lisa is acting in a manner that is illegal, oppressive or fraudulent. Lisa agrees that grounds for dissolution exist but for the statutory reason that "[t]he directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock and irreparable injury to the corporation is threatened or being suffered or the business and affairs of the corporation cannot be conducted to the advantage of the shareholders generally because of the deadlock." A.R.S. But now that thejudicial dissolution provision has been invoked by James, it triggers a 90-day window for exercising the opportunity for an election, first by the corporation and then by the other shareholders, to purchase all shares owned by the petitioning shareholder at the fair value of the shares. A.R.S. 293,535." 6 I--fl 5- l--dI -32- LII I--I- I--I Ix} bx.) LU B.) 41'- Ch (B). This, again, underscores the likelihood that Lisa will be successful in reclaiming l.isa Frank, Inc. from James. But James' request under A.R.S. ?10-143 003) also gives this Court broad discretion to "issue injunctions, appoint a receiver with all of the powers and duties the court directs, take other action required to preserve the corporate assets wherever located and carry on the business of the corporation until a full hearing can be held." A.R.S. 10-143 Accordingly, this Court may remove James Green from the board of directors and from the offices of President and Chief Executive Officer of the corporation; enjoin his interference with the company's business and operations, including the destruction, copying or removal of any of the corporation's assets or proprietary information; appoint a provisional director to break the deadlock, or appoint a receiver to manage the operations and business of the corporation in place of the existing officers. See Abreu v. Union Industrial Sales, Inc. 224 Ill. App661 (1991) (noting that appointment of a provisional director as an "alternative tojudicial dissolution in times of corporate strife to help guide the company through a crisis toward the goal of stabilization and prosperity"); Pathnk v. Trivedi, LL. 2003 WL 23 932562 (Va. Cir. Ct. 2003) (authority to appoint a CPA to prepare tax returns in order to preserve corporate assets). A.R.S. 10-1431 also provides judicial authority for issuance of an order to hold a shareholder meeting to increase the number of electors at which Lisa can exercise her voting rights as majority shareholder and to the elect the additional director(s). B. Irreparable Injugy Lisa can also show that the Corporation, of which she is the majority shareholder, will suffer irreparable injury absent the issuance of a temporary restraining order and preliminary injunction. I ames has in the past and will continue to cause the Corporation irreparable injury. James' actions as President have damaged the 19368Svl 7 'Lul- Ln IN.) ON Corporation through a steady decline in sales over the last 7 years. James has caused numerous employees to leave the Corporation and his intimidation and verbal abuse of key employees continues to cause employee resignations. James has and continues to interfere and impede the daily operations of the Corporation by blocking purchase orders, missing production deadlines and not conducting business or responding to employees' requests in a timely manner. James also recently asked artists used by the Corporation to copy artwork to CD5 for him, in violation of his fiduciary responsibilities to protect the intellectual property of the Corporation. These actions are causing irreparable harm to the Corporation's daily business operations and the Corporation's reputation. C. Balance of Hardships Weigh Sharply in Lisa Frank Green's Favor The balance of hardships also weigh sharply in Lisa's favor. Lisa is the majority shareholder of the Corporation and the directors are currently in a deadlock about how to run the Corporation. The Corporation's business cannot come to a standstill while the directors work out their differences the long way. By whatever mechanism, the deadlock must be broken and James removed so that the operations of the Corporation can continue until there is a final decision by the Court in this case. CONCLUSION Lisa has shown that she has a likelihood of success on the merits and that the Corporation will be irreparably harmed absent immediate injunctive relief. Wherefore, plaintiff, Lisa Frank Green, respectfully requests that this Court: 1. Issue a temporary restraining order enjoining James Green from violating his fiduciary duties to the Corporation, including but not limited to, harassing employees; blocking purchase orders; disclosing proprietary information about the Corporation; removing the intellectual property or other assets from the Corporation; and any other actions that might damage the daily operations or reputation of the Corporation. 3 IDEJFZUUS _n 3.: DJ 3 3. --J I--n 00 ND CD IR-J IN-J Lu.) NF ON. 2. Set an evidentiary hearing on Lisa's application for preliminary injunction within 10 days unless the parties or the Court agrees to extend the temporary restraining order. 3. Issue a preliminary injunction ordering the removal of James A. Green from the board of directors and from the positions of Presidentr'Chief Executive Officer of the corporation and order the filling of these vacancies or, alternatively. to appoint a provisional, tie-breaking director or a receiver to protect the value of the corporation's business and assets. 4. Issue a preliminary injunction ordering James to call a special meeting of the shareholders in accordance with the bylaws of the Corporation or under A.R.S. 10-1431. 5. Issue a preliminary injunction against James from further breaching his fiduciary duties to the Corporation, as set forth in the Temporary Restraining Order, which shall remain in effect until there is a final determination on the merits. 5. Consider combining the evidentiary hearing on preliminary injunction with a trial on the merits. 6. Order such further relief as the Court dcemsjust and appropriate. DATED this gay of October, 2005. GAMMAGE BURNHAM P.L.C. Michael R. King Lisa T. Hauser Kevin J. Blakley Michelle Abner Two North Central Avenue, 13"' Floor Phoenix, Arizona 35004 and zssassva 9 'j Co of the foregoing mailed this day of October, 2005, to: John N. Iurino Lewis Roea LLP One South Church, Suite 700 Tucson, Arizona 85701 Attorneys for James A. Green Goal>> Thomas A. Zlaket Thomas A. Zlaket, PLLC 310 S. Williams Boulevard, Suite 170 Tucson, Arizona 8571 1-4446 Attorneys for Plaintiff !Di"3