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Seidman v. United National Bankcorp

MRS-C-78-03 (N.J. Super. Ch. Div. 2003) (Unpublished)

CORPORATIONS; BY-LAWS—A corporation may change its by-laws to target and prevent certain individuals from being directors provided that its shareholders are not disenfranchised.

A shareholder challenged an amendment to a bank holding company’s bylaws that prohibited election to the board of an individual who had been found guilty of a criminal or banking statute or regulation, or had been subject to any cease and desist order issued by any state or federal agency with jurisdiction over banks or financial institutions. The shareholder was the subject of a cease and desist order by the Office of Thrift Supervision for dishonest conduct. Therefore, the shareholder would not have been permitted to run for a board position at the bank. The shareholder claimed that the bylaw change was invalid because it was adopted solely to prevent him from serving on the board of directors. The Court dismissed the complaint, finding that the board had statutory authority to create qualification bylaws, and that a corporation may enact bylaws to specifically target and prevent the election of certain individuals. The only requirement for qualification bylaws is that they may not disenfranchise the shareholders. The Court noted that the shareholder had ample notice of the bylaw and had sufficient time to nominate another individual to run in his place. Therefore, neither he nor the other shareholders were disenfranchised. Also, under the business judgment rule, a board of directors has a good faith reason to prevent people determined to be dishonest from being involved in corporate management. The shareholder also claimed that, since the company admitted to SEC violations, the entire board of directors was disqualified from running for office. The Court rejected this claim, finding that the language of the qualification bylaw was limited to criminal and banking violations, not securities violations.

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