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.
First State conducts its principal business activity through
its wholly owned subsidiary, First DeWitt Savings and Loan
Association ("DeWitt Savings"). The principal place of business
of DeWitt Savings is
West Caldwell, New Jersey. Id., ¶ 3. DeWitt Savings operates
ten full-service offices in New Jersey and, as of 30 September
1990, reported total assets of approximately $450,000,000. Id.
As of 12 December 1990, the number of outstanding First State
common stock was 3,175,000 shares. Of this number, the
Plaintiffs own 314,325 shares, or 9.9% of total shares, as
reported in an amendment to an 11 August 1988 Rule 13d-1 filing
submitted to the Securities and Exchange Commission (the
"SEC"). Id., ¶ 4.
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
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
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
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 ...