The opinion of the court was delivered by: SAROKIN
Outsider challenges to corporate management characteristically take on the dimensions of warfare. Battles are waged by proxy, in the courts and in the press. Military and Arthurian metaphors are applied to the various actors and their maneuvers. The costs, both public and private, are tremendous.
This case is no exception. It has already generated three lawsuits, only one of which is presently before this court, two applications for emergency relief before this court alone, at least one emergency shareholders' meeting, two proxy fights, and, evidently, some press attention. The case involves a struggle between incumbent management of a publicly-held corporation, a bank holding company, and an insurgent group. The court in such cases must be wary not to upset the delicate balances of the marketplace, and at the same time, protect the shareholders and the public.
Before the court at this time is the defendants' motion for summary judgment as to Count 1 of the complaint, the only count remaining after a stipulation by the parties dismissing all other counts without prejudice. Because the court finds that plaintiffs' claims for relief in Count 1 are either without legal or factual basis, or have been mooted by developments subsequent to the filing of the complaint, the court will grant defendants' motion.
The plaintiffs are Hudson United Bank, a New Jersey bank, HUBCO, Inc., the bank's holding company, and James C. McClave, chairman of HUBCO's Board of Directors and the beneficial owner of 18,815 shares of HUBCO stock. At the outset of this litigation, the incumbent Board owned approximately 14 percent of HUBCO stock, considering each director's individual holdings.
Defendants Laurence J. Rappaport and Lawrence B. Seidman are attorneys and real estate entrepreneurs as well as substantial HUBCO shareholders. Defendant L. Enterprises is a New Jersey general partnership, of which Rappaport and Seidman are the only partners, which is engaged in the business of real estate development. Defendant Hudson Financial Associates (HFA) is a New Jersey limited partnership formed for the purpose of acquiring HUBCO stock. Since it commenced business on October 22, 1984, HFA has acquired 9.64 percent
of the issued and outstanding shares of HUBCO, apparently the largest block of HUBCO stock owned by any single entity, apart from the incumbent Board.
Rappaport and Seidman commenced their acquisition of HUBCO stock in the spring of 1984. They began soliciting members of HFA in August, 1984. After two preliminary meetings with HUBCO management in February and June of 1984, Rappaport and Seidman attempted, in September, 1984, to gain a position on HUBCO's Board of Directors and to gain access to the HUBCO shareholder list.
In response to these developments, plaintiffs commenced this action on October 24, 1984, seeking an order: (1) requiring defendants to divest themselves of all HUBCO shares beneficially owned by them; (2) enjoining defendants from acquiring or attempting to acquire any HUBCO stock or soliciting any proxies pending compliance with certain banking and securities regulations, from using their interests in HUBCO shares to affect the management of HUBCO, and from taking "any other steps in furtherance of defendants' unlawful scheme," Complaint, para. iB(v); and finally, (3) declaring that HUBCO is entitled to refuse to transfer on its books any shares purchased by defendants, and to refuse to recognize votes with respect to shares owned by defendants. Plaintiffs alleged, in what defendants have emphasized is an unverified complaint, that "Defendants intend to use their position [of control] to force the Bank to make loans to defendants . . . on preferential terms and conditions not available to any other borrower at the Bank," Complaint, para. 12, in order to "fuel the leveraged real estate ventures which Rappaport and Seidman have promoted, or in which they are involved." Id., para. 14. In their Complaint, plaintiffs charged that defendants have filed a false and misleading Schedule 13D with the Securities and Exchange Commission and the American Stock Exchange by not revealing the true nature of their enterprise and their intention to acquire control, as well as their improper motivation for acquiring control, paras. 16, 28-32, 37-42; that defendants violated section 14(a) of the Securities and Exchange Act by, in effect, soliciting proxies without complying with that section's requirements, paras. 17, 44-50; that defendants and ten "John Doe" defendants from whom Rappaport and Seidman solicited support, became a "bank holding company" by acquiring more than a ten percent beneficial interest in HUBCO, and that they violated banking laws by failing to obtain the prior approval of the Board of Governors of the Federal Reserve Systems, paras. 58-71; that defendants violated the Federal Reserve Act because they had the power to vote more than ten percent of the voting securities of HUBCO and they solicited loans from the Hudson United Bank "on terms not substantially the same as those prevailing at the same time at the Bank for comparable transactions with other persons," paras. 75, 72-77; and that defendants violated the Federal Deposit Insurance Act and New Jersey banking law by engaging in unsound business practices while participating in the affairs of the Bank, paras. 78-84.
Defendants strenuously deny plaintiffs' allegations of improper motivation or improper solicitation of loans. On November 7, 1984, defendants instituted an action themselves in the Superior Court of New Jersey, Chancery Division, Hudson County, to compel release of the shareholders list to them. On November 21, 1984, on the eve of the Thanksgiving weekend, in a move approved by HUBCO's Board of Directors at an October 16, 1984, meeting, HUBCO mailed out notices of a special shareholders' meeting scheduled for December 11, 1984. The meeting was called to consider and vote upon a series of proposed "anti-takeover" amendments to HUBCO's certificate of incorporation. HUBCO did not begin to release the shareholders list to defendants until December 3, 1984, the day an evidentiary hearing was scheduled in the state court on the question of the list's release.
On December 7, 1984, the court granted defendants' application for a stay. In addition to finding that the various equitable requisites for preliminary relief were satisfied, the court found that
defendants are likely to succeed in establishing that plaintiffs have violated their duty to shareholders by scheduling a meeting with insufficient notice to provide defendants with adequate time to present their opposing views to other shareholders. Indeed, defendants are likely to succeed in establishing that plaintiffs intentionally withheld both the shareholders list and information regarding the scheduled meeting for the very purpose of denying defendants the opportunity to communicate with other shareholders.
Transcript, 12/7/84, pg. 15, 11. 4-12. The meeting was rescheduled by consent of the parties for January 4, 1985. The court explicitly did not rule on the merits of defendants' challenge to plaintiffs' solicitation in favor of the proposed amendments, or on the legality of the amendments themselves, preferring to await the outcome of the vote rather than ruling in the abstract.
Quoting and italicizing the language of the court, defendants mailed out their own proxy solicitations on December 3, 1984. They claimed that "the overall design and effect of the proposed amendments is to perpetuate incumbent management in control, to the disadvantage and detriment of shareholders, HUBCO and Hudson United Bank." Exhibit 24 to Plaintiff's Mem. of Law in Opposition to Motion for Summary judgment, at 2. At the rescheduled meeting, the amendments were nevertheless adopted by the shareholders, with the exception of proposed Amendment No. 2, which was withdrawn when it appeared that its passage would result in HUBCO's delisting on the American Stock Exchange.
Thereafter, the court heard argument on the defendants' motion for summary judgment with regard to the plaintiffs' claims against them. Defendants argued that plaintiffs' claims under section 13(d) were mooted by amendments to defendants' Schedule 13D, or were unsubstantiated, or insufficiently particular under Federal Rule of Civil Procedure 9(b); that plaintiffs' claims under section 14(a) of the Exchange Act were baseless because defendants did not contact more than ten shareholders in connection with any solicitation of shareholders prior to its December 13 proxy solicitation; and that plaintiffs' claims under the remaining regulatory banking provisions did not state a cause of action because those provisions afford no private right of action in favor of a bank holding company for the relief sought and because the claims were factually insufficient. The court reserved decision.
In the ensuing weeks, defendants sought and obtained leave to file a supplemental counterclaim challenging the conduct of the January 4th meeting. Defendant Seidman ran unsuccessfully for election to a presently occupied seat on the HUBCO Board of Directors at the March 26, 1985, annual meeting of shareholders. An action by plaintiffs filed on December 27, 1984, in the Superior Court of New Jersey, Law Division, Hudson County, alleging libel, slander, and tortious interference with contractual relations and prospective economic advantage against the individual members of the Board and their attorney, Robert Jossen, was removed to this court, only to be remanded for lack of jurisdiction. And, the parties continued to engage in discovery at a fast and furious pace, at least once requiring the intervention of the court to rule that the words "reasonable notice" in Federal Rule of Civil Procedure 30(b)(1) meant more than one day.
In the course of this discovery, plaintiffs received from defendants a copy of a "Notice of Change in Control" filed by the defendants with the Federal Reserve Board on September 19, 1984, pursuant to the Change in Bank Control Act, 12 U.S.C. § 1817(j). Plaintiffs seized upon this notice, claiming that it indicated defendants' intention in September, 1984, to acquire more than twenty-five percent of the stock of HUBCO. They offered this document as proof of the defendants' nefarious intention to deceive HUBCO shareholders and the court, claiming that it contrasted with a declaration in an affidavit filed by defendant Seidman on December 3, 1984, in support of defendants' application for a stay of the special shareholders' meeting, and that it should have been disclosed under a previous discovery request. In addition, plaintiffs claimed to have uncovered proof of defendants' conspiracy with third parties to acquire HUBCO stock as part of a "group" within the meaning of section 13(d), without disclosing the existence of the group as required by that provision, and without obtaining approval for such additional acquisitions as required under the Change in Bank Control Act. Specifically, plaintiffs claimed to have evidence of a secret agreement between defendants and one Robert Kessler in which Kessler purportedly agreed to acquire stock on behalf of defendants.
Based on these discoveries, plaintiffs sought a preliminary injunction enjoining the defendants from acquiring or soliciting the purchase of any securities of HUBCO pending the filing of amendments to their Schedule 13D disclosing certain facts the plaintiffs deemed to be material. Defendants countered with arguments that the facts whose disclosure was sought were not material, and by supplying a proposed amendment to their Schedule 13D in the event the court should require one to be filed. The proposed amendment, see Affidavit of Lawrence Seidman, 4/26/85, Exhibit B, included an announcement that defendant HFA planned to send letters to the United States Attorney's Office, the Hudson County Prosecutor's Office, the Federal Reserve Board, and the Securities and Exchange Commission, requesting that they commence an investigation into the activities of HUBCO's Board of Directors in connection with this litigation. Plaintiffs replied by leveling charges that defendants' counsel's pursuit of an investigation by these authorities would constitute a breach of the Code of Professional Responsibility.
In the midst of this cross-fire, at oral argument on the plaintiffs' motion for preliminary relief, defendants announced that they had made certain commitments to the Federal Reserve Board in order to obtain its approval to purchase up to 14.4 percent of HUBCO's stock. As a condition to obtaining the Board's approval, defendants agreed that they would not:
1. seek or accept any representation on Hubco's Board of Directors or that of its subsidiary, Hudson United Bank;
2. propose a director or slate of directors in opposition to a nominee or slate of nominees proposed by the management or Board of Directors of Hubco or the Bank;
3. seek or have any representative serve as an officer, agent or employee of Hubco or the Bank;
4. attempt to influence the dividend policies and practices of Hubco or the Bank;
5. attempt to influence in any respect the loan and credit decisions or policies of Hubco or the Bank, the pricing of services, any personnel decisions, the location of any offices, branching, the hours of operations or similar activities of Hubco or the Bank;
6. solicit proxies or participate in any solicitation of proxies with respect to any matter presented to the shareholders of Hubco or the Bank;
7. exercise or attempt to exercise a controlling influence over the management or policies of Hubco or the Bank; or
8. enter into any other banking or non-banking transactions with Hubco or the Bank;
9. vote for Mr. Kessler as a director of Hubco, Inc.
10. acquire any Hubco shares from Robert Kessler.
Thereafter, defendants filed their fourth amended Schedule 13D, announcing these commitments. Defendants also announced that they would "seek to have the[se] commitments modified" in the future. Id. Moreover, they announced their "plan to acquire sufficient stock and authorization from the Federal Reserve to have some influence and/or control over the operations of Hubco and its subsidiaries," and that "if and when [they gained] such approval, they intended to cause the Board of Directors of Hubso [sic] to consider and review all aspects of its business to enhance and perhaps expand its operations and profitability; such influence may and probably will result in changes in the present management of the issuer." Id. They also revealed that they were engaged in discussions with "an unrelated third party" with the aim of selling one half of their shares of Hubco and executing a voting trust. They explained that any such transaction would "not be effective or operative unless and until the Federal Reserve grants approval for same." Id.
After receiving this documentation from defendants, plaintiffs notified the court that they would withdraw their motion for a preliminary injunction. Plaintiffs informed the court that
HUBCO believes that defendants' recent amendment leaves the public record seriously incomplete. Nonetheless, it does contain the central elements of relief sought in plaintiffs' motion for a preliminary injunction. Specifically, the amendment discloses that defendants are planning to seek a position of control in HUBCO, and also discloses the commitments made by defendants to the Federal Reserve Board pertaining to Mr. Kessler. This information at least ...