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Seidman v. Clifton Savings Bank, S.L.A.

A-4033-07T2 (N.J. Super. App. Div. 2009) (Unpublished)

CORPORATIONS; BUSINESS JUDGMENT RULE — New Jersey’s business judgment rule protects a board of directors from being questioned on the conduct of corporate affairs, except in cases of fraud, self-dealing or unconscionable conduct and, as such, directors have a wide discretion to make decisions on executive compensation based on the business judgment rule’s presumption of good faith and regularity.

A former bank chairman entered into several consulting agreements to perform services for the bank. The new bank chairman was hired in order to “take the [bank] public.” He had no frontline experience at running a bank, but was given a salary of more than double that of the bank’s chief executive officer who was successfully managing the bank’s operations. The bank’s compensation committee set the chairman’s compensation package. At the same time, the directors and certain employees were also granted stock awards under a shareholder-approved equity plan. A shareholder brought a derivative stockholders action against the bank and its board of directors alleging that the board had breached its fiduciary duties and had committed corporate waste by: (a) approving an excessive compensation package for the new chairman; (b) approving excessive allocations under the bank’s equity plan; and ©) approving unnecessary consulting agreements with its former chairman.

The Chancery Division dismissed all claims, except for the claim of waste relating to the compensation paid to the bank’s former chairman under the consulting agreements. The lower court found that the objecting shareholder failed to rebut the presumption, under the “business judgment rule,” that a board’s decisions were informed, and in good faith. It rejected the contention that the board had erroneously applied the business judgment rule because the challenged decisions involved self-interested directors who breached their duty of care. The lower court also found insufficient evidence to prove that the new chairman’s compensation involved self-dealing on the part of the directors. It ruled that the awards under the shareholder approved equity plan were consistent with other incentive plans of financial institutions of similar size. It found that the board reached this conclusion after its directors obtained the advice of outside counsel and advisors and believed the board was again protected by the business judgment rule. In addition, the Court determined that the objecting shareholders failed to establish corporate “waste” as to the chairman’s compensation package. It held the directors acted in good faith and that the bank received a benefit from the chairman’s services as he was “deeply involved in the conversion process … and spent considerable time negotiating branch opportunities.” It decided that there was substantial evidence distinguishing the CEO’s role chairman’s role and the CEO’s role and thus the CEO’s role was not duplicative of the chairman’s rule. On the other hand, it held that retaining the former chairman as a consultant constituted waste. It entered an order requiring review of the amount paid to the former chairmen after the conversion, but not before that time. The objecting shareholders appealed from the order insofar as it limited the reimbursement to money received after the conversion. They also appealed the lower court’s dismissal of its other claims.

The Appellate Court affirmed the lower court’s rulings with respect to the business judgment rule and the waste doctrine. It held that New Jersey’s business judgment rule protects a board of directors from being questioned on the conduct of corporate affairs, except in cases of fraud, self-dealing or unconscionable conduct. With respect to the current chairman’s compensation, the Court ruled that the directors had wide discretion to make decisions on executive compensation. It stated that the business judgment rule’s presumption of good faith and regularity carries particular force when the challenged decision concerns employee compensation. The Court ruled that if the presumption of the rule is not rebutted, the burden is on the objecting stockholders to convince the court that no person of ordinary, sound business judgment would be expected to entertain the view that the consideration was a fair exchange for the value given. In such situations, the conduct complained of must be egregious, constituting recklessness, gross neglect of duty or manifest disloyalty to the company. The Court believed no such conduct was evident here. Moreover, it noted that the shareholder had failed to present any evidence that any of the directors on the compensation committee received any financial gain in setting the chairman’s compensation. The Court therefore agreed with the lower court that the presumption of validity was not rebutted and thus it was satisfied that the board did not violate any duty towards shareholders.

The Court also agreed with the lower court that the board’s actions with respect to the equity incentive plan were proper and protected by the business judgment rule. It found that the directors awarded themselves stock and stock options and were thus “interested” in the transaction. Nevertheless, because a majority of the stockholders approved the incentive plan, the burden shifted to the objecting stockholders to show that the board’s actions were improper. Here, the Court opined that there was no evidence showing self-dealing on the part of the directors or any other disabling factor necessary to rebut the business judgment rule with respect to the directors’ stock awards. As to the issue of corporate waste, the Court held that the lower court had used an extreme test, very rarely satisfied by a shareholder-plaintiff. According to the Court, directors are guilty of corporate waste only when they authorize an exchange that is so one-sided that no businessperson of ordinary, sound judgment could conclude that the corporation had received adequate compensation. Here, the Court agreed with the lower court that the directors had acted in good faith when setting the new chairman’s compensation and believed that the corporation received a benefit from the chairman’s services.

Finally, it rejected the objecting shareholder’s claims that the bank was entitled to reimbursement of all of the consulting payments to the former chairman, which even would include money paid before the conversion. It held that the shareholders lacked standing to challenge the transactions of the bank before conversion because the shareholders were not members of the pre-conversion state-chartered savings and loan. The Court noted, however, that the lower court made no findings of fact as to the amounts paid to the former chairman under the consulting agreements after the conversion. Thus, it remanded that question to the lower court, asking it to ascertain the appropriate amount to be paid to the bank. Recovery was limited to payments made after the objecting shareholder became a stockholder. This was consistent with New Jersey’s “contemporaneous ownership rule” governing the issue of standing to bring a derivative suit. Under this rule, a person must be a stockholder of a corporation at the time of the challenged transaction to have standing.


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