Preventing Directors, Officers, and Shareholders from Wasting Company Assets During Litigation

December 3, 2021

Photo courtesy of Fora Financial

By Agatha Mingos

Prior to, or during the course of, litigation, it may be necessary to restrain and/or enjoin the opposing party from partaking in detrimental actions that irreparably harm the company. 

What is a TRO or a Preliminary Injunction and Why Might You Want One?

A temporary restraining order and/or a preliminary injunction are tools that can help a party prevent harm to a company during the course of litigation. They are remedies granted by a court ordering a party to perform or refrain from performing an act before the entry of final judgment in that action. The aim of a preliminary injunction is to maintain the status quo during litigation, to preserve assets, and prevent dissipation of the property at issue.Preliminary injunctions are especially useful for situations where a defendant’s conduct threatens to destroy a plaintiff’s interest in the subject matter of a lawsuit, such as when other directors, members, or shareholders are depleting, mismanaging, or comingling corporate funds. 

Courts will grant a preliminary injunction where it appears a defendant threatens or is about to commit an act in violation of the plaintiff’s rights respecting the subject of litigation that would render a judgment in such an action ineffectual. For example, an LLC member can seek a preliminary injunction to, among other things, preserve the LLC’s assets from waste by a member who is allegedly transferring funds to a competing business. In such cases, the Court may limit a preliminary injunction order so that corporate assets are preserved while allowing the business to continue to operate normally. 

In extraordinary cases, where the plaintiff shows that immediate and irreparable injury, loss, or damage will result unless the defendant is restrained before a hearing on the preliminary injunction can be had, a temporary restraining order may be granted without notice to the defendant. If a temporary restraining order is granted, the court will set a hearing for the preliminary injunction at the earliest possible time.

How to Get a Preliminary Injunction

To get a preliminary injunction in your favor, you will need to show that:

(1) based on the facts of your case, you are likely to succeed on the merits; 

(2) without an injunction, you will be immediately and irreparably injured; and 

(3) the balance of equities is in your favor, which means the failure to grant a preliminary injunction will be more burdensome to you than the harm caused to the defendant from its imposition.   

At KI Legal, we have helped many of our clients obtain preliminary injunctions, safeguarding their company’s assets while giving the court a chance to decide the matter at hand. If you feel you need a preliminary injunction, please reach out to the knowledgeable attorneys at KI Legal.  

Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team, or fill out a new client intake form.