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

205 N.J. 150, 14 A.3d 36 (2011)

CORPORATIONS; BUSINESS JUDGMENT RULE — The board of directors is protected by the business judgment rule where shareholders cannot show that no person of sound business judgment would have made the decision that was made by the board of directors.

A bank scheduled an annual meeting of stockholders, issued notice for it, and distributed a proxy statement. The notice stated that shareholders would be asked to consider and act on the bank’s Equity Incentive Plan. The proxy statement, filed with the Securities and Exchange Commission, contained an exhaustive summary of that plan, explaining that the board of directors had adopted the plan subject to stockholder approval, and attaching a complete copy of the plan as an appendix.

In particular, the proxy statement identified four purposes for the proposed plan: to attract and retain qualified personnel in key positions; to provide officers, employees, and non-employee directors with a proprietary interest in the bank as an incentive to contribute to the bank’s success; to promote the attention of management to other stockholder concerns; and to reward employees for outstanding performance. The proxy statement explained that a compensation committee would administer the plan and that awards would consist of either stock options or restricted stock awards. The statement further detailed the committee’s authorities and limitations.

A mutual holding company owned 55.2% of the outstanding shares of the bank’s common stock. The proxy statement said that the holding company was expected to vote for the plan, but that approval also required the affirmative vote of a majority of the votes cast at the annual meeting, excluding the shares held by the mutual holding company.

The plan was eventually approved at the annual meeting of stockholders. The compensation committee then issued grants of stock options to all seven of the members of the board of directors and to twenty-two other employees, and made restricted stock awards to the board members and to forty-two other employees. In doing so, the committee followed Office of Thrift Supervision regulations and consulted with counsel, accountants, and consultants.

After the awards, a shareholder filed a complaint in the General Equity Part of the Chancery Division alleging, among other things, that the stock option grants and restricted stock awards were wrongful and improper. Specifically, the shareholder claimed that the awards were clearly not designed to retain the services of the directors; that the awards failed to leave sufficient shares and options available to attract new qualified people; that the awards were not consistent with any study or survey; and that the awards constituted an unreasonably large portion of the bank’s net earnings.

At trial, the shareholder contended that a previous reorganization of the bank, which resulted in a mutual holding company structure, was improper and was designed to benefit insiders rather than the bank. The lower court dismissed the shareholder’s claims for failure to meet the burden of proof. It noted that the standard for waste is high and rarely satisfied. The lower court did find that the plaintiff established a prima facie case of waste, but concluded that the directors’ actions were entitled to deference under the business judgment rule as a sustainable position. It denied the shareholder’s plea for reconsideration, reiterating that the shareholder had failed to show that no person of sound business judgment would have found that the benefits conferred were completely unreasonable based on the services performed by the directors.

The Appellate Division affirmed the lower court’s rulings noting that, when the challenged acts have been ratified by the stockholders, a court will look into the transaction only far enough to see whether the terms are so unequal as to amount to waste or whether the question is such a close one as to call for the exercise of business judgment. The Appellate Division also rejected the shareholder’s claim of corporate waste for largely the same reasons as the lower court. The shareholder’s motion for reconsideration was denied. The New Jersey Supreme Court then granted certification on the claim for relief based on the approval by the interested directors of allegedly excessive awards of shares of stock and stock options for themselves under the plan.

The shareholder claimed that in order to trigger the application of the business judgment rule, stockholders must be fully informed beforehand, as an indispensable prerequisite to a valid stockholder approval or ratification. He claimed that neither the summary plan description contained in the proxy statement nor the text of the plan itself disclosed that the committee intended to issue the full amount of stock option grants to the directors or to make restricted stock awards allowable under the applicable federal regulations. He also asserted that the lack of disclosure nullified the approval granted at the annual meeting and, thus, the directors were not entitled to the protections afforded by the business judgment rule. The directors argued that the disclosures sufficed to permit the stockholders to make an informed decision in respect of approving the plan and, once approved, the compensation committee was authorized to issue stock option grants and restricted stock awards as envisioned by the plan, but subject to law. Thus, the Supreme Court was asked to determine whether the disclosures made in the proxy statement and the plan were sufficient to inform the stockholders that the maximum stock option grants and restricted stock awards allowable to the directors would, in fact, be made.

The Supreme Court found that the disclosures made in the proxy statement and in the plan itself sufficiently placed stockholders on notice that there were regulatory limits applicable as to who was eligible to receive stock under the plan and in what amounts. Further, there was no evidence that any shareholder was misled, and no shareholder testified to such.

In affirming, the Court also dismissed the shareholder’s claim of corporate waste by giving deference to the lower court’s determination that the stated purposes of the plan were satisfied by the stock option grants and restricted stock awards given by the compensation committee to the members of the board of directors.


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