Calculating the Appropriate TRO Bond Amount

In Applied Energetics, Inc. v. George Farley and AnneMarieCo., LLC, CA No. 2018-0489-TMR, the Vice Chancellor addressed the appropriate bond the Plaintiff must post in connection with a preliminary injunction.  Court of Chancery Rule 65(c) requires that any applicant seeking a restraining order or injunction post sufficient security for the payment of costs and damages suffered by a party that is improperly enjoined. The bond represents that maximum amount that the enjoined party may recover.

Courts “err on the high side in setting a bond” because actual damages are difficult if not impossible to calculate. The party seeking a bond must show a credible basis for the amount of claimed damages, however the bond need not be calculated with mathematical certainty.

The Defendants sought a bond of $1,750,000 –  representing 50% of the value of their 25,000,000 shares on July 5, 2018 with per-share damages of $0.07.

Plaintiff sought a nominal bond because of the strength of Plaintiff’s claims.  Even if the Court were to award more than a nominal bond, Plaintiff contended that Defendants’ damages were speculative and exaggerated because the Defendants cannot legally or practically sell all their 25,000,000 shares.

The Court held that the appropriate measure of damages for the shares “is the difference between (1) the price of Applied Energetics stock on the date Defendants could have and would have sold their shares at a higher price but for the injunction … and (2) the as-yet-unknown price of Applied Energetics stock on the date Defendants sell the shares.”  To calculate the unknown price, the Court analyzed the historical prices of Applied Energetics stock since the date the injunction was issued to find an average intraday low price of $0.111 per share. The per-share damages estimate was the difference between $0.14 (the share price when Defendants could have sold their shares) and $0.111, or $0.029.

The Court agreed, in part, with Plaintiff and found that AMC could not sell more than 1,911,949 of its 20,000,000 shares per quarter.  The Court found AMC’s estimated damages to be $55,446.52 –  1,911,949 shares multiplied by $0.029.  No trading restrictions applied to Farley’s 5,000,000 shares and thus the bond as applied to Farley’s shares was $145,000.  The Court set a bond of $200,446.52 – the total damages of AMC’s and Farley’s nearly 7,000,000 shares to be posted within five days of the Order.

The Court’s opinion is available here.

 

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