IBS Financial Corp. v. Seidman and Associates, LLC

954 F. Supp. 980 (D. N.J. 1997)
  • Opinion Date: January 23, 1997

CORPORATIONS; DIRECTORS; FIDUCIARY DUTY—A corporation cannot amend its bylaws to reduce its number of directors for the purpose of frustrating disgruntled shareholders from gaining a board seat, even if the plain language of the by-laws permit it to try to do so.

The Board of a New Jersey corporation amended its By-laws to reduce the Board of Directors from seven members to six. As a consequence, only one seat would come up for election at the next annual meeting. One of the stated reasons for reducing the size of the Board was to hinder efforts of disgruntled shareholders to establish a presence on the Board.

The District Court ruled on a motion to compel the corporation to reinstate the Board seat it had eliminated. No New Jersey state law addressed this issue, but the District Court found ample Delaware precedent. The Court was particularly taken with a line of cases stating that board actions taken to impede the effectiveness of a shareholder vote can be sustained only upon a showing of compelling justification. Even though a board may think a dissident shareholder plan is bad for the company, there is a difference between expending corporate funds to educate the remaining shareholders and exercising power for the primary purpose of foreclosing shareholder action. The Court found that the corporation acted only to impede the shareholder vote and minimize the potential success of any impending proxy solicitation. The Court went on to hold that even though shareholders’ ideas may be bad for the corporation, such a determination is one properly left to the shareholders, not the board. Since the corporation did not offer any other compelling justification for its actions, the Court invalidated the seat elimination as a violation of the duty of loyalty owed by the board to the shareholders.