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February 14, 1991


The opinion of the court was delivered by: Lechner, District Judge.


This is a motion brought by David F. Bolger ("Bolger") and by Two-Forty Associates, a Pennsylvania limited partnership of which Bolger is the general partner ("Two-Forty Associates") (collectively, the "Plaintiffs"), for preliminary and permanent injunctive relief. The Plaintiffs seek to enjoin First State Financial Services, Inc. ("First State") from holding its 16 January 1991 annual stockholders meeting (the "16 January Meeting"), at which four directors will be elected, until First State has issued corrective proxy statements to shareholders.*fn1 Jurisdiction is alleged pursuant to § 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78aa, and 28 U.S.C. § 1331 and 1347.

At the 14 January 1991 oral argument on the application for a preliminary injunction, First State and the Plaintiffs ("the Parties") agreed there was no dispute on the facts. Accordingly, the oral argument on the motion for a preliminary injunction was converted to a final hearing on the merits with respect to permanent injunctive relief, the only relief sought in the complaint.

For the following reasons, as stated on 14 January 1990, the motion for permanent injunctive relief is denied and the Verified Complaint is dismissed.*fn2


First State is a Delaware corporation. First State common stock is registered under section 12 of the Securities Exchange Act, 15 U.S.C. § 78l, publicly traded in the over-the-counter-market and approved for quotation under NASDAQ. Stipulation of Facts, ¶ 3. The Chairman of the Board and Chief Executive Officer of First State is Michael J. Quigley, III ("Quigley"). Id., ¶ 8.

During fiscal year 1990 (which commenced 1 October 1989), First State reported a second-quarter loss of $2.9 million, compared to earnings of $802,000 for the same period during fiscal year 1989. Losses for the first six months of fiscal year 1990 totalled $2.6 million, compared to earnings of $1.5 million for the same period of fiscal year 1989. Id., ¶ 5. First State's 1990 Annual Report, dated 10 December 1990, attributed these losses largely to the deterioration of the New Jersey real estate market during this period. 1990 Annual Report at 4.

In addition, the price for common stock at the close of trading on 20 December 1990 was approximately $2.13, when at the close of fiscal year 1989 (approximately fifteen months earlier) it had reached a high of $7.625 and a low of $5.625. Stipulation of Facts, ¶ 7.

On 3 July 1990, Bolger began a letter-writing campaign expressing to First State his displeasure with the financial performance of First State for fiscal year 1990; Bolger demanded responsive action by First State. Bolger wrote the first of a series of letters to First State on 3 July 1990. See 3 July 1990 Bolger Letter to First State. Bolger complained of the losses suffered by First State in his 3 July 1990 letter, basing his complaints on information contained in the annual and periodic reports issued by First State and DeWitt Savings, on SEC filings and on other information available to the public. In addition, Bolger complained of the drop in value of First State stock, of the "erratic pattern of additions to the general loan loss reserves of DeWitt Savings," and of a perceived conflict of interest by senior directors in approving certain loans made by DeWitt Savings. Bolger also complained of the size of the salaried and ancillary benefits paid to officers and directors and of the 28 June 1990 payment of dividends to shareholders, in light of losses incurred for the quarter ending 31 March 1990. 3 July 1990 Bolger Letter to First State. Finally, Bolger complained that First State's directors "kept the institution wrapped up in the harshest of anti-takeover defenses and insulate[d themselves] and [their] salaries and benefits from the normal disciplines of the market place." Id.

Bolger demanded of First State that it provide "answers and explanations regarding the significant losses incurred by First State in recent periods," "the precipitous decline in the market value of First State's common stock," and "the recent trend in additions to [DeWitt Savings'] loan loss reserves." Id. at 1. In addition, Bolger demanded that First State "review, and commit to continue to review on an ongoing basis, all business relationships between or involving officers, directors and other fiduciaries of First State and/or [DeWitt Savings]." Id. at 2. Bolger further demanded that First State review the performance of Quigley and terminate him if his performance proved to be deficient or derelict, review all officer and director compensation, and "take all appropriate actions to terminate antitakeover defenses, `golden parachutes' and other impediments to the realization of shareholder value." Id. Bolger advised First State he submitted a copy of his letter with his Schedule 13D filed with the SEC.

In response to Bolger's letter, First State established on 18 July 1990 a special committee (the "Special Committee") of the Board of Directors (the "Board") composed entirely of directors independent of the management of First State and DeWitt Savings. Stipulation of Facts, ¶ 14. The Special Committee engaged special independent legal counsel ("Special Counsel") on 15 August 1990 to assist with the investigation to be conducted by the Special Committee. Id., ¶ 15.

First State responded to Bolger's 3 July 1990 letter with a 30 July 1990 letter, in which it advised Bolger: "[A] special committee of the board of directors has been formed to review the issues raised therein. This committee will conduct its review and report to the board in a manner that is appropriate under the circumstances." 30 July 1990 First State Letter to Bolger. First State also informed Bolger:

  You should be advised that the board, at this
  stage, suspects that given the inflammatory, if
  not inaccurate, incomplete and misleading, nature
  of various allegations contained in your letters,
  together with your continued focus on antitakeover
  aspects of the company's corporate structure
  (which have been in place from day one of the
  company's existence and of which you should have
  been fully aware when you acquired your First
  State shares), there may be ulterior motives
  behind both your letters and the method by which
  they have been publicized by you.


On 8 August 1990, Bolger again wrote to First State. In his 8 August 1990 letter, Bolger again complained of alleged mismanagement of First State's loan portfolio and loss reserves, of the filing of reports with the SEC allegedly rendered false and misleading by their characterization of DeWitt Savings as a "well-run, well-capitalized, profitable institution," of allegedly excessive compensation for management and of the payment of dividends to shareholders. 8 August 1990 Bolger Letter to First State at 2-6. In his 8 August 1990 letter, Bolger demanded that First State and DeWitt Savings take "all appropriate steps, including the institution of litigation," against the officers and directors "responsible for acts of corporate mismanagement, waste of corporate assets, corporate misconduct, and breaches of fiduciary duty, as detailed below and as may be revealed upon further investigation." Id. at 1. He stated:

  Should you fail to act as outlined here, I shall
  regard such failure as evidence of control and
  domination of the Boards of Directors by those
  responsible for the wrongful actions described
  above and evidence of the approval, acquiescence
  and participation by the majority of the Boards of
  Directors in the apparently wrongful and unlawful
  actions described.

Id. at 7. Finally, Bolger stated if he did not receive notice that First State was taking appropriate action with respect to his demands within ten working days, he would "take such action on behalf of the shareholders of the Companies, including litigation, as [he] may consider appropriate to redress the wrongs identified. . . ." Id. at 8.

On 21 August 1990, First State responded to Bolger's 8 August 1990 letter, advising him his 8 August demands were "under active consideration by the Board of Directors." 21 August 1990 First State Letter to Bolger. It further advised Bolger: "[T]he Board believes that it is unreasonable to expect, indeed that it would be imprudent to attempt to achieve, a decision as to whether the actions demanded should be instituted, within the ten . . . working day time frame demanded in your August 8 letter." Id. Bolger was advised he would be notified of the decision of the Board after the Board had finished considering his demands. Id.

Bolger's final letter was written on 30 August 1990, in which he stated: "I am pleased to learn from the August 21 letter that `active consideration' is being given to my demand, as stated in my August 8, 1990 letter, `that legal action be instituted on behalf of [First State] against certain officers and directors.'" 30 August 1990 Bolger Letter to First State at 1 (bracketed language in original).

Bolger also expressed displeasure that First State had not indicated in its 21 August 1990 letter or in any other correspondence "the nature and the content of the review by the special committee of the Board of Directors", that it had set "no deadline for completion of the Special Committee's deliberations," and that it had not provided the names of the directors appointed to the Special Committee or explained how they are independent. 30 August 1990 Bolger Letter to First State. Bolger stated:

    I believe that it is imperative that the Special
  Committee publically [sic] indicate a more
  proactive approach to this situation. More
  specifically, I believe that the Special Committee
  must present a report of the results of its review
  to the shareholders in sufficient time and in
  sufficient detail for the report to be considered
  fully by them prior to the next regular annual
  meeting of First State's shareholders.
  If th[e] discussion [of the issue raised in my
  letter] is to be productive and is to be carried
  on in a manner that serves the best interests of
  First State and [DeWitt Savings], the discussion
  must be an informed discussion. The Directors, and
  specifically the members of the Special Committee,
  have a particular fiduciary responsibility to
  supply the necessary information and to supply it
  in a timely fashion.

Id. at 2 (emphasis in original).

Bolger then demanded that the Special Committee examine additional matters of concern to him. These concerns included whether First State complied with SEC Financial Reporting Release 29 in determining the amounts to be added each quarter to loan loss reserves, whether First State complied with the Statement of Financial Accounting Standards No. 15 in the accounting treatment afforded restructured loans and whether any previous SEC filings required amendment. Id. at 2-10. Bolger demanded a "detailed" review of the policies and practices used in making loan loss provisions, of each collateralized loan made by DeWitt Savings which was more than ninety days delinquent and of each modified loan. Id. at 5, 10.

Finally, Bolger alleged a failure by First State to comply "with the general standards of full and fair disclosure under the 1933 Act." Id. He demanded disclosure of: 1) the nature and content of the review being conducted by the Special Committee, 2) the composition and names of members of the Special Committee, 3) how Special Committee members are independent, 4) the specific instructions given to the Special Committee, 5) the names of special counsel or other independent advisers to the Special Committee, 6) the timetable for the Special Committee's investigation and 7) the intentions to disclose the Special Committee's findings to the Boards of First State and DeWitt Savings and to shareholders. Id. at 11. He stated he expected to hear from First State shortly regarding his demand concerning litigation on behalf of First State and DeWitt Savings. Id. at 10.

On 17 November 1990, Edward D. Johnson ("Johnson"), counsel to the Special Committee, wrote to Bolger requesting an interview in connection with its investigation of Bolger's allegations. Johnson stated:

  The committee is requesting this interview to
  ensure that every allegation raised in your demand
  letter has been thoroughly investigated. We would
  like to question you concerning the facts
  underlying the allegations of your demand letter
  so that the committee will have the benefit of
  your insights into these matters before reporting
  its findings.

17 November 1990 Johnson Letter to Bolger. On 14 December 1990, a representative of the Plaintiffs was interviewed with respect to Bolger's allegations. Stipulation of Facts, ¶ 15.

On 12 December 1990, First State mailed its proxy materials to shareholders. Stipulation of Facts, ¶ 18. The Proxy Statement stated two issues are to be voted on at the 16 January 1991 Meeting. First, it stated shareholders are to vote on Bolger's proposal to remove "anti-takeover" provisions from the Certificate of Incorporation. Proxy Statement at 18; Opposition at 10. Second, it stated shareholders are to vote on the re-election of four directors, including Quigley, for terms of three years each. See Proxy Statement at 4-5; Quigley Aff., ¶ 2. In addition, the Proxy Statement contained a detailed eleven-page description of the compensation of Quigley and other directors, including information regarding their annual retainer fee and payment for each meeting attended, the cash compensation for Quigley and others, the compensation provisions in Quigley's employment agreement, retirement plan benefits, insurance plan benefits and bonuses and other compensation features with respect to Quigley and others. Proxy Statement at 7-18.

The four nominees listed in the Proxy Statement are uncontested; neither Bolger nor anyone else nominated a competing slate of candidates. Defendant's Stipulation of Facts, ¶ 9; Quigley Aff., ¶ 2. Because the By-Laws provide directors are elected by a plurality vote, the proposed slate will be elected if any one share is voted for each director. Opposition at 10.*fn3 It was ...

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