Motion Order

Cal. Super. - 6th Dist.October 8, 2021

NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG ANNE JOHNSON PALMER (SBN 302235) AnneJohnsonPalmer@r0pesgray. com ROPES & GRAY LLP Three Embarcadero Center San Francisco, CA 941 1 1-4006 Telephone: (4 1 5) 3 1 5-6337 RANDALL W. BODNER* Randall.Bodner@r0pesgray.com DANIEL V. WARD* Daniel. Ward@r0pesgray.com ROSS MACPHERSON* Ross.MacPhers0n@r0pesgmy.com ROPES & GRAY LLP Prudential Tower 800 Boylston Street Boston, Massachusetts 02 1 99-3600 Telephone: (617) 951-7000 *pro hac viceforthcoming Attorneys for Plaintiffs SERGUEI BELOUSSOV and ILYA ZUBAREV 21 CV38787O Santa Clara - Civil Electronically Filed by Superior Court of CA, County of Santa Clara, on 1/24/2022 2:30 PM Reviewed By: R. Walker Case #21 CV387870 Envelope: 8123712 SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF SANTA CLARA SERGUEI BELOUSSOV and ILYA ZUBAREV, Plaintiffs, V. BONITA VENTURES LLC and PETER BAUERT, Defendants, CLOUD LINUX HOLDINGS, LLC, Nominal Defendant, and CLOUD LINUX SOFTWARE, INC., Relief Defendant. Case N0. 2 1 CV387870 NOTICE OF MOTION AND PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF Date: ’ Aprll 27, 2022 Time: 1:30 pm. Dept: 3 Judge: Hon. Patricia M. Lucas Action Filed: October 8, 2021 NOTICE OF MOTION AND PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG TO ALL PARTIES AND THEIR COUNSEL OF RECORD: Please take notice that 0n the above-captioned date, time, and location, 0r as soon thereafter that this matter may be heard in the courtroom of the Honorable Patricia M. Lucas, Department 3 of the above- captioned Court, located at 191 N. First Street, San Jose, California 951 13, Plaintiffs Serguei Beloussov and Ilya Zubarev Will and hereby do move this Court for a preliminary injunction against Defendants Bonita Ventures LLC and Peter Bauert and, t0 the extent necessary to award equitable relief, Relief Defendant Cloud Linux Software, Inc. This motion is based upon this notice of motion, motion, and memorandum of points and authorities; all declarations in support of the motion; all documents in the Court’s file; and all evidence documents, and oral argument as may be presented t0 the Court at or before the hearing of this motion. Dated: January 24, 2022 ROPES & GRAY LLP /s/Anne Johnson Palmer ANNE JOHNSON PALMER (SBN 302235) Anne.J0hnsonPalmer@r0pesgray. com ROPES & GRAY LLP Three Embarcadero Center San Francisco, CA 941 1 1-4006 Telephone: (4 1 5) 3 1 5-6337 RANDALL W. BODNER* Randall.Bodner@r0pesgray.com DANIEL V. WARD* Daniel. Ward@r0pesgray.com ROSS MACPHERSON* Ross.MacPhers0n@r0pesgmy.com ROPES & GRAY LLP Prudential Tower 800 Boylston Street Boston, Massachusetts 02 1 99-3600 Telephone: (617) 951-7000 *pro hac vice application forthcoming Attorneys for Plaintiffs SERGUEI BELOUSSOV and ILYA ZUBAREV 1 NOTICE OF MOTION AND PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG ANNE JOHNSON PALMER (SBN 302235) AnneJohnsonPalmer@r0pesgray. com ROPES & GRAY LLP Three Embarcadero Center San Francisco, CA 941 1 1-4006 Telephone: (4 1 5) 3 1 5-6337 RANDALL W. BODNER* Randall.Bodner@r0pesgray.com DANIEL V. WARD* Daniel. Ward@r0pesgray.com ROSS MACPHERSON* Ross.MacPhers0n@r0pesgmy.com ROPES & GRAY LLP Prudential Tower 800 Boylston Street Boston, Massachusetts 02 1 99-3600 Telephone: (617) 951-7000 *pro hac viceforthcoming Attorneys for Plaintiffs SERGUEI BELOUSSOV and ILYA ZUBAREV SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF SANTA CLARA SERGUEI BELOUSSOV and ILYA ZUBAREV, Plaintiffs, V. BONITA VENTURES LLC and PETER BAUERT, Defendants, and CLOUD LINUX HOLDINGS, LLC, and CLOUD LINUX SOFTWARE, INC., Nominal Defendants. Case N0. 2 1 CV387870 PLAINTIFFS’ MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION FOR PRELIMINARY INJUNCTION Date: February 16, 2022 Time: 1:30 p.m. Dept: 3 Judge: Hon. Patricia M. Lucas Action Filed: October 8, 2021 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG I. II. TABLE OF CONTENTS STATEMENT OF FACTS. ............................................................................................ A. Plaintiffs Indirectly Invested in CLS Through CLH, A Holding Company Managed by Bauert Through His Alter Ego, Bonita Ventures. .......................................... B. Bauert and Seletskiy Authorize the Self-Dealing “Shoot-the-Moon” Incentive Program in Breach of Their Fiduciary Duties as Directors 0f CLS. ................................... C. Plaintiffs Seek a Declaration of “Misconduct” in This Court to Enable Removal of Bonita Ventures as Manager 0fCLH .............................................................................. D. Defendants Offer CLH Members the Option to Participate in an “In-Kind Distribution” in Order to Accelerate Carried Interest Payments t0 Themselves. ............... E. After Most Members Decline the In-Kind Distribution, Defendants Forcibly Distribute The Remaining Shares Into Escrow Without The Members’ Consent. ............. A PRELIMINARY INJUNCTION IS NECESSARY TO PREVENT Page ..........3 ..........3 ..........4 ..........5 ..........6 .......... 8 IRREPARABLE HARM TO PLAINTIFFS ...................................................................................... 9 III. A. Plaintiffs Are Likely to Prevail on the Merits Because Defendants’ Conduct Constitutes a Breach of Fiduciary Duty and Violates the Operating Agreement. .............. 1. By Forcing an In-Kind Distribution of CLS Stock, Defendants Breached Their Fiduciary Duties to the Members 0f CLH. ........................................................... 2. Defendants Breached the Operating Agreement By Attempting t0 Liquidate the Assets of the Company Before the Removal 0f the Manager For Misconduct. ....... 3. Defendants Breached the Operating Agreement By Failing to Effect a Complete Distribution to CLH Members, and Thus Are Not Entitled t0 Carried Interest. ........................................................................................................................... B. Plaintiffs Will Suffer Irreparable Harm If the Requested Preliminary Injunction Is Not Granted. .................................................................................................................... 1. Defendants’ Conduct Will Impose Irreparable Harm on Plaintiffs ....................... 2. The Interim Harm to Defendants Is Nonexistent or Self-Inflicted ........................ i CONCLUSION .............................................................................................................. .......... 10 .......... 10 .......... 12 .......... 12 .......... 13 .......... 13 .......... 15 .......... 15 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG TABLE OF AUTHORITIES Page(s) Cases Auriga Cap. Corp. v. Gatz Props., LLC, 40 A.3d 839 (Del. Ch.), afl’d, 59 A.3d 1206 (Del. 2012) ............................................................ 10 Blasius Indus., Inc. v. Atlas Corp, 564 A.2d 651 (Del. Ch. 1988) ...................................................................................................... 10 Brownfield v. Daniel Freeman Marina Hosp, 256 Cal. Rptr. 240 (Ct. App. 1989) .............................................................................................. 14 Calma ex rel. Citrix Sys., Inc. v. Templeton, 114 A.3d 563 (Del. Ch. 2015) ...................................................................................................... 11 Caster v. UIP C051, 255 A.3d 952 (Del. 2021) ...................................................................................................... 10, 14 ESG Cap. Partners II, LP v. Passport Special Opportunities Master Fund, LP, 2015 WL 9060982 (Del. Ch. Dec. 16, 2015) ............................................................................... 13 Franklin & Franklin v. 7-Eleven Ownersfor Fair Franchising, 102 Cal. Rptr. 2d 770 (Ct. App. 2000) ........................................................................................ 14 Fretz v. Burke, 55 Cal. Rptr. 879 (Ct. App. 1967) ................................................................................................ 15 Largo Legacy Grp., LLC v. Charles, 2021 WL 2692426 (Del. Ch. June 30, 2021) ............................................................................... 11 Nedlloyd Lines B. V. v. Superior CL, 834 P.2d 1148 (Cal. 1992) ........................................................................................................... 10 Pell v. Kill, 135 A.3d 764 (Del. Ch. 2016) ................................................................................................ 10, 14 Remillard Brick C0. v. Dandini, 117 P.2d 432 (Cal. 1941) ............................................................................................................. 14 Robbins v. Superior CL, 695 P.2d 695 (Cal. 1985) ............................................................................................................. 13 Schnell v. Christ-Craft Indus., Ina, 285 A.2d 437 (Del. 1971) ............................................................................................................ 11 State 0f Wise. Inv. Bd. v. Peerless Sys. Corp, 2000 WL 1805376 (Del. Ch. Dec. 4, 2000) ................................................................................. 10 ii MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG Telcom-SNIInvs., L.L.C. v. Sorrento Networks, Ina, 2001 WL 1117505 (Del. Ch. Sept. 7, 2001), aff’d, 790 A.2d 477 (Del. 2002) ........................... 14 V0 v. City ofGarden Grove, 9 Cal. Rptr. 3d 257 (Ct. App. 2004) ............................................................................................ 10 In re Walt Disney C0. Derivative Litig, 907 A.2d 693 (Del. Ch. 2005) ...................................................................................................... 11 White v. Davis, 68 P.3d 74 (Cal. 2003) ............................................................................................................. 9, 13 Wind v. Herbert, 8 Cal. Rptr. 817 (Ct. App. 1960) ............................................................................................ 10, 15 Statutes Del. Code. Ann. tit. 6, § 18-1 104 ....................................................................................................... 10 Other Authorities Cal. Code CiV. Proc. § 472 .................................................................................................................. 3 Cal. Code CiV. Proc. § 526 ................................................................................................................ 14 iii MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG Plaintiffs Serguei Beloussov and Ilya Zubarev (collectively, “Plaintiffs”) bring this motion for preliminary injunction to stop Defendants Bonita Ventures LLC (“Bonita Ventures”) and Peter Bauert (“Bauert” and together With Bonita Ventures, “Defendants”)-Who owe fiduciary duties to Plaintiffs- from taking actions to avoid liability for wrongful conduct that they have already admitted, While simultaneously enriching themselves at Plaintiffs’ expense. In October 2021, Plaintiffs filed suit in this Court for a determination that Defendants had previously engaged in misconduct as a predicate t0 a vote t0 remove Defendants for cause from their fiduciary roles. Without such removal, Defendants would stand to gain millions of dollars worth 0f incentive payments t0 which they are not entitled as a result of their prior wrongfiJI conduct. Within the last week, Defendants have yet again breached their fiduciary duties by seeking, in effect, to moot Plaintiff’s underlying complaint in this litigation, while at the same time ensuring they will receive their incentive payments. A preliminary injunction is needed to preserve or restore Plaintiffs’ key bargained-for voting rights t0 remove Defendants from their roles as fiduciaries, and prevent them from using self-help to enrich themselves and avoid the consequences of their misconduct. As described below, this is just the latest in a series 0f self-dealing maneuvers that Defendants have engaged in to secure exorbitant fees for themselves, while maintaining control of a company they are abusing for their own benefit. Plaintiffs are Members 0f Cloud Linux Holdings, LLC (“CLH”), a limited liability company (“LLC”). CLH was formed for the sole purpose of investing in Cloud Linux Software, Inc. (“CLS”), a successful software company. The Manager 0fCLH is Bonita Ventures, a wholly owned entity and alter ego of Bauert. As the Manager 0f CLH, Bonita Ventures (along With Bauert as its sole owner) owes fiduciary and contractual duties t0 Plaintiffs and other Members of CLH pursuant to the terms of the Operating Agreement 0fCLH (the “Operating Agreement”). In early 2021, Plaintiffs uncovered a scheme that Bauert and the only other director 0fCLS at the time had implemented to pay themselves excessive and unearned incentive compensation. Bauert also abused his role (through Bonita Ventures) as Manager of CLH to vote in favor 0f that plan, against the interests 0fCLH and its Members. As a result, in June 2021, Plaintiffs filed a shareholder derivative suit 0n behalf 0fCLS against Bauert and his fellow CLS director in the Delaware Court 0f Chancery. Caught With his hand in the CLS cookie jar, and looking t0 head off liability in Delaware, Bauert unilaterally 1 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG returned the incentive compensation he had awarded himself-essentially conceding that he had engaged in wrongful conduct. The Delaware litigation remains pending. In October 2021, Plaintiffs then filed suit in this Court against Defendants t0 establish that they had engaged in “Misconduct” (as that term is defined in the Operating Agreement), a necessary step before the Members of CLH can vote to remove Bonita Ventures from its role as the Manager 0f CLH. If not removed as Manager by such a vote, Bonita Ventures (and Bauert) would attempt t0 claim many millions 0f dollars in “carried interest” incentive payments under the Operating Agreement, t0 Which they are n0 longer entitled as a result of Bauert’s prior Misconduct-Which, again, Bauert has all but conceded in connection With the Delaware litigation. Faced with the likelihood of a for-cause removal from CLH and the prospect 0f losing his carried interest payments, Bauert embarked upon a series ofmachinations to preserve those payments for himself. First, in December 2021, Bauert sent a proposal t0 the Members offering to distribute their underlying shares of CLS “in kind.” While misleadingly described by Bauert as an innocuous option for all CLH Members to increase the liquidity of their investment, the true aim 0f Defendants’ in-kind distribution proposal was t0 preclude Members who opted to receive CLS shares from voting their CLH units to remove Bonita Ventures as CLH’s Manager and thereby to secure Bauert’s proportionate payment of carried interest from the distributed shares. Plaintiffs (and most other CLH Members) declined that offer. Thwarted in that effort to preclude a removal vote and the other consequences of their misconduct, Bauert and Bonita Ventures have now engaged in further self-dealing and self-help t0 obtain by force What they could not obtain by consent. After most of the CLH Members declined the option to receive an in- kind distribution ofCLS shares in December, Bauert and his Bonita Ventures still faced a vote for removal as Manager, along With the likely loss of the lion’s share of any carried interest payments. As a result, on January 13, 2022, Bauert sent another communication t0 the Members of CLH-the subject 0f this motion-informing them that an “in-kind distribution” 0f all remaining shares would take place, whether the Members elected t0 receive the distribution or not. The voting rights 0f CLH Members are tied t0 their beneficial ownership of underlying CLS stock; accordingly, by forcibly distributing those CLS shares, Bauert is effectively trying to eliminate any and all votes by the remaining CLH Members that might otherwise be used t0 remove him and Bonita Ventures from the role 0f Manager. In that way, the 2 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG Defendants seek to “lock in” a carried interest payday of approximately $13 million that would otherwise be at risk because 0f their prior misconduct and admitted fiduciary breaches. And to make matters worse, Bauert has informed the CLH Members that unless they agree to a new, amended shareholders’ agreement of CLS that he proposed (and that provides woefully inadequate minority shareholder protections), their CLS shares would be placed in “escrow,” Where they would be effectively held hostage until each Member signs his one-sided agreement. Plaintiffs therefore seek a preliminary injunction: (i) t0 prevent the in-kind distribution of their shares, 0r an order releasing those shares from escrow and returning them t0 CLH t0 the extent such a purported distribution has already taken place; (ii) to prevent Defendants from distributing carried interest payments t0 themselves; and (iii) to preserve the voting rights of Plaintiffs and other Members 0fCLH t0 remove and replace Bonita Ventures as Manager. As described herein, Plaintiffs are highly likely to prevail on the merits of their claims and a preliminary injunction is necessary to prevent irreparable harm. I. STATEMENT OF FACTS. A. Plaintiffs Indirectly Invested in CLS Through CLH, A Holding Company Managed by Bauert Through His Alter Ego, Bonita Ventures. CLS is a successful software business that was formed in 2018. Amended Complaint (“AC”) 1] 33.1 Bauert is the Chief Executive Officer (“CEO”) of CLS. Id. 1] 24. Bauert also serves as one 0f CLS’s directors, alongside Igor Seletskiy, another CLS executive. Id. fl 25. Except for a short time period during Which Bauert and Seletskiy installed two purported “independent” directors, Bauert and Seletskiy have been and currently are the only two directors 0f CLS. Id. 11 72. Immediately before January 1, 2022, Bauert, through his Wholly owned entity and alter ego, Bonita Ventures, was also one of only five CLS stockholders. See EX. 2.E (CLS Amended and Restated Shareholders’ Agreement).2 Bonita Ventures (and thus Bauert) further serves as the sole Manager of CLH (the “Manager”). Am. Compl. EX. A, CLH Operating Agreement § 1 (“AC EX. A”). CLH is a special-purpose LLC that 1 In conjunction with filing this Motion for Preliminary Injunction, Plaintiffs have also filed an Amended Complaint pursuant t0 California Code 0f Civil Procedure § 472. The original Complaint was filed on October 8, 2021. CLS has been added as a “relief defendant” solely to ensure that Plaintiffs may obtain the relief requested in the Amended Complaint. 2 A11 referenced exhibits are attached to the Declaration of Anne Johnson Palmer submitted in support of this Motion. 3 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG exists solely t0 “make, hold and dispose of direct 0r indirect investments” in CLS, and “engage in any and all activities related or incidental thereto.” AC Ex. A § 2.3. CLH invested in CLS and, until recently, was the holder of the maj ority of CLS’s outstanding voting shares. ACW 42, 5 1. Plaintiffs are Members of CLH, and thus are indirect investors in CLS. Immediately prior t0 the events giving rise to this Motion, Plaintiff Beloussov held a 20.08% membership interest in CLH, representing an approximate 10.15% indirect investment in CLS’S outstanding shares (9.57% 0n a fully diluted basis). Id. 1] 20. Plaintiff Zubarev held a 19.20% membership interest in CLH, representing approximately 9.70% 0f CLS’s outstanding shares (9.15% on a fully diluted basis). Id. 1] 21. As Manager of CLH, Bonita Ventures (and thus Bauert) owes fiduciary duties to CLH and its Members. The Operating Agreement adopts the fiduciary standard set forth in the Delaware Limited Liability Company Act. AC EX. A § 8.1. As a fiduciary, Bonita Ventures is required to act in the best interests ofCLH and its Members, and must refrain from self-dealing. B. Bauert and Seletskiy Authorize the Self-Dealing “Shoot-the-Moon” Incentive Program in Breach 0f Their Fiduciary Duties as Directors 0f CLS. In October 2020, using their authority as the only two directors 0f CLS and its two most senior executives, and taking advantage 0f Bauert’s authority t0 vote CLH’S shares as Manager ofCLH (through Bonita Ventures), Bauert and Seletskiy concocted and authorized an extraordinary equity incentive scheme-called the “Shoot-the-Moon Program”-for their own benefit. AC W 44-60. Through the Shoot-the-Moon Program, Bauert and Seletskiy granted themselves excessive and unearned shares ofCLS stock based 0n CLS achieving certain performance benchmarks well in the future. Id. Critically, however, Bauert and Seletskiy (as directors) caused CLS t0 issue those shares t0 themselves up front, as ifCLS had already reached its most successfill performance milestones-subject only t0 repurchase years down the road ifCLS failed to achieve its benchmarks. Id. 1H] 47-50. In other words, the Shoot-the-Moon Program immediately and wrongfully enriched Bauert (through Bonita Ventures) and Seletskiy with substantial incentive compensation that had not yet been earned. Nothing about the Shoot-the-Moon Program was disclosed to the Members ofCLH until Plaintiffs uncovered this scheme in early 2021 in the course 0f seeking other information about their investments. Id. 1] 59. In June 2021, only after being caught and confronted with this misconduct, Bauert notified the Members 0f CLH that he was willing t0 “voluntarily” forego the Shoot-the-Moon shares that he and his 4 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG co-director and cohort, Seletskiy, had awarded t0 himself-all in a last-ditch and inadequate effort to avoid liability for breach of fiduciary duty as a CLS director and officer. Id. 1N 67-68. The other participants in the Shoot-the-Moon Program, however, retained their allotted shares at that time. See id. W 70-72. Shortly thereafter, Plaintiffs commenced a lawsuit in the Delaware Court 0f Chancery seeking t0 reverse the Shoot-the Moon-Program in its entirety and t0 hold Bauert and Seletskiy accountable for their self-dealing. Id. fl 71. As detailed in the Delaware complaint, Bonita Ventures and Bauert breached their duty of loyalty by implementing the self-dealing Shoot-the-Moon Program through Which Bauert, Via Bonita Ventures, nearly doubled his shares of CLS common stock t0 the detriment of CLH’S holdings- a textbook conflicted transaction. See Complaint, Beloussov v. Bauert, No. 2021-0512 (Del. Ch. filed June 10, 2021). In the course of that litigation, Seletskiy (the other director 0f CLS) also returned his Shoot-the-Moon shares and purported to restore CLH to majority shareholder status in an inept and ineffective effort to argue that the Delaware litigation was somehow “moot” and thereby avoid any consequences for the self-dealing transaction. AC fl 72. The Delaware action remains pending. C. Plaintiffs Seek a Declaration 0f “Misconduct” in This Court t0 Enable Removal of Bonita Ventures as Manager of CLH. With the Delaware action pending, Plaintiffs filed the instant lawsuit in October 2021, seeking a declaration of “Misconduct” as that term is defined in the Operating Agreement.3 Such a judicial determination is a necessary predicate to a vote for the removal of Bonita Ventures as the Manager of CLH. See id. fl 41. Section 11 ofthe Operating Agreement states that “[t]he Manager will cease t0 be the Manager 0f the Company . . . (iii) upon the vote of a Required Interest of Members in the event of Misconduct by the Manager.” AC EX. A § 1 1.2. “Misconduct” may be determined by a court 0fcompetent jurisdiction if the Manager: (a) “committed . . . any . . . act involving material improper personal benefit against the Company or its assets”; (b) “willfully and materially breached” the Operating Agreement “in a manner Which had a material adverse effect 0n the Company” Without cure; 0r (c) “committed gross negligence in the management of the Company.” Id. § 1. The “Required Interest” is defined as a vote 0f 3 The Operating Agreement includes a forum selection clause providing that any action brought by any party under or in relation t0 this Agreement shall be brought in the state or federal courts 0f Santa Clara County, California. AC EX. A § 15.10. 5 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG 67% 0f the Members’ proportionate holdings 0fCLH. Id. As detailed in the Amended Complaint, Bauert has engaged in Misconduct 0n multiple occasions by willfully and materially breaching the CLH Operating Agreement, by committing gross negligence (at best) in the management 0f CLH, and by repeatedly concocting and approving transactions that conferred an improper material personal benefit for himself While adversely impacting the interests of the other Members of CLH. Upon removal as the Manager ofCLH, Bonita Ventures (and Bauert) will lose their claim t0 certain incentive payments, most notably “Carried Interest” (as defined in Section 5.2 of the Operating Agreement). The potential value of those Carried Interest payments is approximately $13 million today, and could increase over time. See EX. 2.D (Distribution Schedule). Bonita Ventures and Bauert, however, have forfeited any right t0 Carried Interest as a result of their past Misconduct, and Will be cut off from any such payments upon a vote t0 remove Bonita Ventures as the Manager of CLH. D. Defendants Offer CLH Members the Option t0 Participate in an “In-Kind Distribution” in Order t0 Accelerate Carried Interest Payments t0 Themselves. Since the filing of this action, Bauert has engaged in a series 0f attempts t0 secure Carried Interest payments for himself and avoid the consequences of his past misdeeds. First, 0n 0r about December 1, 2021, Bauert sent an email to the Members of CLH offering them an option t0 accept an in-kind distribution 0fCLS shares in proportion t0 the value 0f their respective membership interests in CLH (the “In-Kind Distribution”). AC 1H] 73, 76; EX. 1 (Dec. 1 Email from Bauert). Bauert explained that the distribution was conditioned upon the Members executing a Joinder Agreement that would make them parties t0 an Amended and Restated Shareholders’ Agreement of CLS, which had been revised that same day. AC 1] 73; EX. 2.F (Dec. 1 Joinder Agreement). The Action by Written Consent attached t0 Bauert’s December 1 email (the “December Manager Consent”) also stated that the voluntary in-kind distribution would be made in accordance with Section 5.2 of the Operating Agreement, which sets forth a priority of payments-first t0 the Members 0f CLH Who exercised the option t0 take a distribution, and then t0 the Manager (including Carried Interest). As a result, Bauert (through Bonita Ventures) stood t0 receive up to approximately $13 million worth ofpayments if all the Members ofCLH elected to receive the In-Kind Distribution. EX. 2.D (Distribution Schedule). In all respects, Bauert’s communication made it appear that Plaintiffs and the other Members 0f CLH had the choice t0 receive a distribution of their CLS shares. For those CLH Members who chose 6 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG not to receive the In-Kind Distribution (at least according t0 Bauert at the time), their shares would remain with CLH. Bauert’s email to Beloussov explicitly stated that “[t]he time Window for you to receive your portion of the shares is limited, so I would encourage you to review the materials, and ifyou agree, sign the Joinder Agreement” by January 1, 2022. EX. 1 (emphasis added). The December Manager Consent fithher stated that “the Company [defined as CLH] shall not distribute CLS Securities t0 any Member Who does not enter into a Joinder Agreement and shall hold any such CLS Securities pursuant to the Operating Agreement and the Restated Shareholders Agreement until such Member enters a Joinder Agreement.” EX. 2 (emphasis added). The effect of such a distribution, however, would be t0 deprive any Members receiving a distribution of their CLS shares 0f their right t0 vote t0 remove Bonita Ventures (and Bauert) as the Manager 0f CLH after a finding of “Misconduct” by this Court. Pursuant t0 the terms of the Operating Agreement, removal of the Manager (after a finding of Misconduct) is predicated upon receiving a vote representing at least 67% 0f the proportionate shares of CLS that are beneficially owned by the Members ofCLH. AC EX. A § 11.2. If all CLH Members elected an in-kind distribution of the CLS shares held by CLH, Bauert would effectively reduce the voting percentage 0f those Members to zero. Furthermore, Bauert conditioned the In-Kind Distribution on acceptance 0f the Amended and Restated Shareholders’ Agreement, Which did not provide adequate corporate governance protections for minority shareholders of CLS. EX. 2.E. For example, the newly proposed agreement included limitations on the right of holders to transfer their securities, did not provide for a compensation committee 0r a conflicts policy for CLS board members (a Vital requirement in light 0f the directors’ past manipulation of incentive compensation for their own benefit), and could be amended by a simple majority 0f shareholders-leaving the door open for the largest shareholders 0f CLS, the very insiders Who had previously abused their power t0 enrich themselves, t0 freely amend the agreement to serve their own interests. See id. Moreover, nothing in Bauert’s December 1 email or the December Manager Consent said anything about the fact that Bauert had been sued for breach 0f fiduciary duty in both Delaware 0r California, 0r that he would be subject to a vote for removal as Manager upon a finding 0f “Misconduct” by this Court. Nor did Bauert convey that he would lose the right t0 Carried Interest payments upon removal as Manager. 7 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG Plaintiffs therefore sent their own communication t0 the other Members 0f CLH on December 17, 2021, informing them that (a) Plaintiffs had brought suit against Bauert in both Delaware and California to establish breach of fiduciary duty and/or “Misconduct,” and (b) that Bauert and Bonita Ventures could be removed from the role of Manager 0f CLH upon a finding 0f “Misconduct” and a two-thirds vote 0f the Members, after which they would lose the right to any Carried Interest payments. As stated in Plaintiffs” December 17 email to the other Members, Bauert’s proposal “appear[ed] t0 be an attempt t0 secure his carried interest and potentially evade the consequences of pending lawsuits that have been advanced by [Plaintiffs] in the interests of all CLH Members t0 hold him and Bonita Ventures accountable for self- dealing actions at the expense 0f CLH.” EX. 5 (Dec. 17 Email 0n behalf of Plaintiffs). Having been informed by Plaintiffs of the circumstances surrounding Bauert’s proposal, CLH Members representing the vast maj ority ofCLS shares (approximately 75%) declined to participate in the In-Kind Distribution and refused to sign the Joinder Agreement before the January 1, 2022 deadline. See EX. 4.D (Escrow Instructions). When the dust settled, as a result 0f some Members electing t0 take the distribution, Plaintiffs’ percentage of CLH’s holdings actually increased from approximately 39% to over 50%-bringing them closer to the 67% threshold needed to vote for the removal of Bonita Ventures and Bauert as Manager upon a finding of Misconduct. Thus, as it turned out, Bauert’s plan to evade the consequences 0f his Misconduct backfired, and the vote t0 remove him as Manager became even more likely. E. After Most Members Decline the In-Kind Distribution, Defendants Forcibly Distribute The Remaining Shares Into Escrow Without The Members’ Consent. Finding himself in a more exposed position, on January 13, 2022, Bauert then sent another email t0 the Members 0f CLH, changing course once again in an effort t0 hang on as Manager and lock in his Carried Interest payments. In that email, Bauert informed the remaining Members that all shares of CLS would be distributed, Whether they agreed 0r not. EX. 3. The effect of Bauert’s forced distribution 0f all shares of CLS would be t0 eliminate the remaining Members’ ability t0 vote for his removal as Manager upon a finding of Misconduct, and t0 maximize his Carried Interest payments worth approximately $13 million.4 4 The Action by Written Consent of the Manager attached t0 Bauert’s January 13 email also referenced a “Carried Interest Manager Consent” of the same date, Which was not provided t0 the Members ofCLH 8 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG Mr. Bauert’s January 13 email also stated that because the remaining Members had not accepted his Amended and Restated Shareholders’ Agreement, their portion 0f the CLS shares would not be distributed to them directly, but rather would be held in “escrow” for their purported benefit. The “Escrow Instructions” attached t0 Bauert’s January 13 email further explained that the CLS shares would be released to the Members only upon acceptance of the newly revised CLS Amended and Restated Shareholders’ Agreement. EX. 4.B (CLS Amended and Restated Shareholder’s Agreement). Bauert also forwarded the Bylaws for CLS, Which had been amended by Bauert just days earlier, on January 10, t0 permit CLS t0 hold shares in escrow. See EX. 4.C (Amended and Restated Bylaws 0fCLS dated January 10, 2022, at § 8.9). Plaintiffs and numerous other Members, however, had already rejected that agreement because it does not provide sufficient protections t0 minority shareholders. See EX. 2.E (CLS Amended and Restated Shareholders’ Agreement). Significantly, the Amended and Restated Shareholders’ Agreement can be amended at any time by a vote 0f the majority of shareholders. Id. § 6.1. Upon information and belief, following the transfer of the remaining Members’ shares into escrow and the distribution 0fCarried Interest t0 Bonita Ventures, Bauert and Seletskiy Will control the maj ority ofCLS ’s outstanding voting shares and thus could further amend the Amended and Restated Shareholders’ Agreement at any time. This would give the very insiders who had previously abused their positions to increase their own compensation the ability to further amend the shareholders’ agreement at Will. II. A PRELIMINARY INJUNCTION IS NECESSARY TO PREVENT IRREPARABLE HARM TO PLAINTIFFS. When granting a preliminary injunction, California courts consider “two interrelated factors: (1) the likelihood that the plaintiff will prevail on the merits; and (2) the relative balance 0f harms that is likely t0 result from the granting 0r denial 0f interim injunctive relief.” White v. Davis, 68 P.3d 74, 91 (Cal. 2003). In considering the relative balance 0f harms, a court may weigh “(1) the inadequacy 0f any other remedy; (2) the degree 0f irreparable injury the denial 0f the injunction will cause; (3) the necessity to preserve the status quo; [and] (4) the degree of adverse effect on the public interest 0r interests of third parties.” V0 v. City ofGarden Grove, 9 Cal. Rptr. 3d 257, 266 (Ct. App. 2004). with Bauert’s email. Plaintiffs are not able to determine the precise amount 0r mechanics of the Carried Interest distribution based on the information provided, and intend to seek discovery 0n this topic for a complete description and accounting 0f the Carried Interest payment. 9 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG A. Plaintiffs Are Likely t0 Prevail 0n the Merits Because Defendants’ Conduct Constitutes a Breach of Fiduciary Duty and Violates the Operating Agreement. Plaintiffs are highly likely to prevail on the merits because Defendants have repeatedly breached their fiduciary duties and their obligations under the Operating Agreement. Delaware law governs the substance 0f Plaintiffs’ claims. 5 California courts, like Delaware courts, may grant preliminary injunctions where Plaintiffs have demonstrated a likelihood of success 0n the merits of a claim for breach 0f fiduciary duty. See, e.g., Wind v. Herbert, 8 Cal. Rptr. 817, 823 (Ct. App. 1960) (affirming grant of preliminary injunction enjoining general partner from Withdrawing or disbursing funds during lawsuit alleging breach 0f fiduciary duties); see also Pell v. Kill, 135 A.3d 764, 794 (Del. Ch. 2016) (granting preliminary injunction preventing completion 0fboard reduction plan based 0n breach 0f fiduciary duty). 1. BV Forcing an In-Kind Distribution of CLS Stock, Defendants Breached Their Fiduciary Duties to the Members of CLH. Defendants breached their fiduciary duties by engaging in self-help to lock in their Carried Interest payments and t0 moot this lawsuit by stripping the Members 0fCLH of their right t0 vote for removal of the Manager. Under the standard articulated in Blasius Industries, Inc. v. Atlas Corp, 564 A.2d 651 (Del. Ch. 1988), when directors act “for the primary purpose 0f impeding stockholders’ franchise rights, the board must prove a ‘compelling justification’ for its actions.” Caster v. UIP C0s., 255 A.3d 952, 962 (Del. 2021); see also State 0f Wisc. Inv. Bd. v. Peerless Sys. Corp, 2000 WL 1805376, at *8, *12 (Del. Ch. Dec. 4, 2000) (Blasius standard is “quite onerous” and a “heavy burden” for defendants t0 overcome). These principles-like other fiduciary duties owed by directors-apply t0 managers of LLCs like Bonita Ventures. See Del. Code. Ann. tit. 6, § 18-1 104; Auriga Cap. Corp. v. Gatz Props., LLC, 40 A.3d 839, 850-51 (Del. Ch.), afl’d, 59 A.3d 1206 (Del. 2012) (like “[c]orporate directors, general partners, and trustees,” LLC managers owe a “special duty” to members and “easily fit[] the definition 0f a fiduciary”). Here, Defendants’ Escrow Transfer has impeded the CLH Members’ voting franchise rights by "6 diminishing Plaintiffs right to a proportionate voice and influence in [company] affairs” by effectively liquidating their holdings and thus eliminating their vote. Caster, 255 A.3d at 961 (citation omitted). And 5 The parties explicitly agreed that the Operating Agreement “shall be governed by, and construed under, the laws of the State of Delaware.” AC EX. A § 15.10. California courts generally enforce a choice-of- law clause in a fully negotiated commercial contract, see Nedlloyd Lines B. V. v. Superior CL, 834 P.2d 1148, 1151 (Cal. 1992), and so the merits of Plaintiffs’ claims are governed by the substantive law of Delaware. 10 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG Defendants have failed t0 present any “compelling justification” for their actions Within the meaning 0f Blasius. Indeed, Bauert’s January 13 email offers n0 justification for the Escrow Transfer whatsoever, see Exs. 3 & 4, and the forced distribution 0f all of the remaining CLS shares held by CLH is contrary to Bauert’s prior representation in December that CLH would continue t0 hold all shares for these Members Who did not elect t0 receive an in-kind distribution. See EXS. 1 & 2. Defendants have consistently plotted out and pursued a course of conduct elevating their own personal financial interests over those of the other Members, and have established a persistent pattern of acting against the interests of the Members for the Defendants’ own benefit. Before this action even began, Bauert had implemented the Shoot-the-Moon Program, a textbook conflicted transaction constituting a breach of the duty of loyalty because “no disinterested directors approved the compensation 0f the other directors.” Calma ex rel. Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 578 (Del. Ch. 2015). After being called out for his wrongful conduct in both this and the Delaware litigation, Bauert then further breached his duty of loyalty by forcing a distribution of the Members’ shares without their consent for his own benefit. In re Walt Disney C0. Derivative Litig, 907 A.2d 693, 751 (Del. Ch. 2005) (duty 0f loyalty breached where a fiduciary “appears on both sides of [the] transaction [and] receive[d] a personal benefit not shared by all shareholders.”). Regardless of whether in-kind distributions are permitted as a general matter under the Operating Agreement, “inequitable action does not become permissible simply because it is legally possible.” Largo Legacy Grp., LLC v. Charles, 2021 WL 2692426, at *16 (Del. Ch. June 30, 2021) (quoting Schnell v. Christ-Craft Indus., Ina, 285 A.2d 437, 439 (Del. 1971)). Here, Defendants ignored the best interests 0f the majority 0f Members Who decided not t0 participate in the In-Kind Distribution by authorizing the Escrow Transfer Without their consent so that Defendants could secure for themselves massive Carried Interest payments and also prevent removal 0f Bonita Ventures as the Manager 0f CLH. In addition, Plaintiffs’ shares are being held hostage in escrow until they agree to sign Bauert’s proposed Amended and Restated Shareholders’ Agreement. As a result 0f these purported transactions, insiders Bauert and Seletskiy may also now control a majority 0f the shares 0f CLS, Which would allow them t0 further revise the Amended and Restated Shareholders’ Agreement at any time. It is plainly against the best interests 0f CLH’s Members for Defendants t0 hold their investments hostage in escrow until those Members sign an agreement they have explicitly rej ected. 11 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG 2. Defendants Breached the Operating Agreement BV Attempting to Liquidate the Assets 0f the Company Before the Removal of the Manager For Misconduct. By distributing out of CLH the remaining securities 0f CLS and holding them in escrow, the Defendants are, in effect, attempting to liquidate CLH within the meaning 0f Section 12 of the Operating Agreement, but without following the requirements 0f that provision. See AC EX. A § 12. Through the In-Kind Distribution and Escrow Transfer, Defendants purport t0 transfer all of CLH’S shares of CLS stock to CLH Members in proportion to their membership interests. Bauert did not disclose that he had any intention 0f distributing all 0f CLH’s remaining assets in his December communication about an in- kind distribution, which was initially pitched as an ordinary and voluntary distribution pursuant t0 Section 5.3 of the Operating Agreement. The Escrow Transfer announced in January 2022, however, constitutes a transfer of all or substantially all 0f CLH’s assets, and thus qualifies as a liquidation of the Company. See id. § 12.1. As a consequence, to do so, the Manager must proceed With the “sale or liquidation of all 0f the assets 0f the Company (including, to the extent feasible, the conversion t0 cash or cash equivalents 0f its assets)” and distribute those assets according t0 an order 0f priority set forth by Section 12.2. Id. § 12.2. Defendants did not d0 so, and thus have violated the plain terms of the Operating Agreement. Section 12.2 fithher provides that if the Manager has been “removed under Section 11.2” and hasn’t been timely replaced, a liquidator selected by the Members may be appointed t0 oversee the sale 0r liquidation 0fthe assets 0fCLH. Id. Here, Plaintiffs have already taken significant steps t0 remove Bonita Ventures as the Manager ofCLH through this litigation, and are seeking a declaration from this Court that the Manager has committed “Misconduct,” a predicate to a removal vote. AC, Prayer for Relief. Defendants should not be permitted to unilaterally liquidate the assets of CLH while this lawsuit is pending, as doing so usurps the right 0f the Members to replace the Manager and appoint a liquidator. 3. Defendants Breached the Operating Agreement BV Failing to Effect a Complete Distribution t0 CLH Members, and Thus Are Not Entitled t0 Carried Interest. Plaintiffs are also likely to prevail on the merits because the Escrow Transfer does not amount t0 a distribution t0 the Members consistent with the Operating Agreement so as t0 trigger a Carried Interest payment t0 Bonita Ventures. AC EX. A § 12.2(6). Pursuant to the distribution provisions 0fthe Operating Agreement, the Manager of CLH may be entitled to certain payments, including Carried Interest, only after distributing cash 0r assets t0 the Members as set forth in Section 5.2 and Section 5.3 thereof. See 12 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG AC EX. A § 5.3 (noting that a “distribution ofan asset” or an “asset in kind” must be made “to a Member”). Here, however, n0 distribution has been made “t0” the Members at all-instead, the Members’ shares are being held hostage subject t0 a number 0f conditions that Defendants are demanding as ransom for their release. Indeed, Bonita Ventures is purporting to transfer Plaintiffs’ shares t0 CLS t0 be held in escrow, and the Members are unable t0 actually receive their shares 0f CLS unless and until they accept the Amended and Restated Shareholders” Agreement. T0 that end, in fithherance of the scheme described here, Defendant Bauert and his sole fellow CLS director, Seletskiy, Who together completely control CLS, very recently amended that company’s bylaws so that CLS can hold the non-consenting Members’ shares in escrow-in perpetuity ifnecessary. Because there has been no distribution t0 the Members, Defendants are not entitled to any payment of Carried Interest. See ESG Cap. Partners II, LP v. Passport Special Opportunities Master Fund, LP, 2015 WL 9060982, at *4-5 (Del. Ch. Dec. 16, 2015) (breach of contract where shares distributed to subset of partners in Violation of “plain language” of the agreement). B. Plaintiffs Will Suffer Irreparable Harm If the Requested Preliminary Injunction Is Not Granted. A trial court “must exercise its discretion in favor 0f the party most likely t0 be injured.” Robbins v. Superior CL, 695 P.2d 695, 698 (Cal. 1985) (internal quotation marks omitted). In performing the irreparable harm analysis, the court balances the “interim harm that the plaintiff is likely to sustain if the injunction were denied compared to the harm that the defendant is likely to suffer if the preliminary (C injunction were issued.” White, 68 P.3d at 91. In doing so, the Court’s ultimate goal . . . is to minimize the harm which an erroneous interim decision may cause.” Id. (citation omitted). 1. Defendants’ Conduct Will Impose Irreparable Harm 0n Plaintiffs. Plaintiffs seek the prevention of the distribution 0f their shares, 0r an order returning those shares t0 CLH from escrow t0 the extent such a purported distribution has already taken place. Absent such relief, Plaintiffs Will suffer irreparable harm that cannot be remedied by monetary damages or restored retroactively. See Brownfield v. Daniel Freeman Marina Hosp, 256 Cal. Rptr. 240, 243 (Ct. App. 1989) (defined as “an actual 0r threatened injury” that “cannot be compensated by an ordinary damage award”). First, if the Escrow Transfer is consummated, Plaintiffs will be effectively stripped 0f their bargained-for contractual protections in the Operating Agreement without any “compelling justification.” Caster, 255 A.3d at 962. Specifically, if allowed, the Escrow Transfer would rob Plaintiffs of their right 13 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG t0 vote t0 remove Bonita Ventures as Manager by distributing their investments to CLS, eliminating Plaintiffs’ contractual recourse as Members 0fCLH for Defendants’ breaches 0f contract and self-dealing. See AC EX. A § 11.2. Breaches 0f fiduciary duty aimed at depriving equity holders 0f their voting rights constitute irreparable harm, as other courts have recognized. See Pell, 135 A.3d at 793 (enjoining implementation 0f plan affecting shareholders’ voting rights because its proposed “loss 0f voting power constitute[s] irreparable injury”); Telcom-SNIInvs., L.L.C. v. Sorrento Networks, Inc, 2001 WL 1117505, at *9 (Del. Ch. Sept. 7, 2001), afl’d, 790 A.2d 477 (Del. 2002) (same). Second, Defendants’ conduct is a transparent attempt t0 moot the very relief that Plaintiffs have sought in this litigation by denying them the ability t0 vote for the removal of Bonita Ventures as the Manager ofCLH upon a finding 0f “Misconduct.” California courts are statutorily authorized t0 issue an injunction when “a party t0 the action is doing, or threatens, or is about to d0, . . . some act in Violation 0f the rights 0f another party to the action respecting the subject of the action, and tending to render the judgment ineffectual.” Cal. Code CiV. Pro. § 526(a)(3). Defendants seek to subvert this Court’s power to grant any relief by unilaterally converting all Members of CLH into direct shareholders of CLS, thereby eliminating any CLH Member with the ability t0 vote to remove Bonita Ventures as CLH’s Manager. An injunction is manifestly appropriate under such circumstances. See, e.g. , Franklin & Franklin v. 7-Eleven Owners for Fair Franchising, 102 Cal. Rptr. 2d 770, 776 (Ct. App. 2000) (collecting cases upholding injunctions needed to protect “litigation from being impaired by collateral acts of one 0f the parties”). Third, through the Escrow Transfer, Defendants are attempting t0 enrich themselves to the tune of $13 million by orchestrating a Carried Interest payment in contravention 0f CLH’s Operating Agreement. See AC 1] 77. This threatened dissipation 0f corporate assets likewise constitutes irreparable harm to Plaintiffs, and warrants an order enjoining Defendants from dispersing those payments to themselves and/or freezing those assets. See, e.g., Wind, 8 Cal. Rptr. at 822-23 (injunction restrained partners from freely dispersing partnership funds during litigation); Remillard Brick C0. v. Dandim', 117 P.2d 432, 434 (Cal. 1941) (injunction against directors based 0n allegations 0f misappropriation 0f corporate funds). Fourth, in the event that the Escrow Transfer has already been consummated, the release of Plaintiffs’ shares from escrow and return t0 CLH is necessary and appropriate to preserve the “status quo.” A release 0f shares from escrow pending litigation is within the authority 0f the Court at the preliminary 14 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG injunction stage. See Fretz v. Burke, 55 Cal. Rptr. 879, 883 (Ct. App. 1967) (ordering release of partnership funds from “suspense account” pending litigation t0 “preserv[e] the status quo”). Before Defendants’ most recent misconduct, Plaintiffs held beneficial shares 0f CLS through CLH, despite Bauert’s offer to distribute their CLS shares to them directly if they joined the Amended and Restated Shareholders’ Agreement. See AC fl 79. Defendants, however, then proceeded t0 transfer Plaintiffs’ beneficial shares of CLS into escrow. Id. 1] 82. The result is t0 diminish Plaintiffs’ right to vote for the removal ofthe Manager 0fCLH by reducing their voting percentage to zero. An order releasing the shares from escrow and restoring the holdings of CLH that existed immediately before January 13, 2022 maintains the status quo by preventing Defendants from “putting funds which belong t0 [P]laintiffs into a suspense account” during ongoing litigation. See Fretz, 55 Cal. Rptr. at 883. 2. The Interim Harm to Defendants Is Nonexistent or Self-Inflicted. By contrast, Defendants will not suffer any injury, monetary or otherwise, if the requested injunction is granted. The relief Plaintiffs seek is nothing more than to maintain the status quo and to require Defendants to comply with their bargained-for contractual and fiduciary responsibilities. Defendants’ inability to continue their misconduct is not a cognizable harm, and any injury suffered by them is entirely self-inflicted. Moreover, even if Plaintiffs do not later prevail on their claims, the only “harm” Defendants could plausibly allege is that they were temporarily delayed in their disbursement of the Carried Interest payments-Which may actually be more valuable as CLS grows. Because Plaintiffs’ injuries would be greater in the absence of the requested relief than any injuries that Defendants would suffer ifan injunction enters, the equities overwhelmingly support the issuance ofthe requested injunction. III. CONCLUSION For the foregoing reasons, Plaintiffs respectfully request that their Motion be granted and that the Court issue an order: (1) enjoining Defendants from distributing Plaintiffs’ underlying shares in CLS pursuant t0 the Escrow Transfer or, t0 the extent such distribution has already occurred, releasing those shares from escrow and returning them t0 CLH; (2) enjoining Carried Interest payments t0 Defendants; and (3) enjoining any action t0 deny, inhibit, negate, or lessen Plaintiffs’ exercise of their bargained-for voting rights under CLH’s Operating Agreement. 15 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870 NOWQONUIhMNH NNNNNNNNNHHHHHHHHHH “\IONUIRMNHGwmflQUIhMNHG Dated: January 24, 2022 ROPES & GRAY LLP By: /s/Anne Johnson Palmer ANNE JOHNSON PALMER (SBN 302235) Anne.J0hns0nPalmer@r0pesgray.com ROPES & GRAY LLP Three Embarcadero Center San Francisco, CA 941 1 1-4006 Telephone: (415) 3 15-6337 RANDALL W. BODNER* Randall.Bodner@r0pesgray.com DANIEL V. WARD* Daniel. Ward@r0pesgray.com ROSS MACPHERSON* Ross.MacPherson@r0pesgray. com ROPES & GRAY LLP Prudential Tower 800 Boylston Street Boston, Massachusetts 02199-3600 Telephone: (6 1 7) 95 1 -7000 *pro hac vice application forthcoming Attorneys for Plaintiffs SERGUEI BELOUSSOV and ILYA ZUBAREV 16 MEMORANDUM OF POINTS AND AUTHORITIES ISO MOTION FOR PRELIMINARY INJUNCTION CASE NO. 21CV387870