The Benchmark Company, Inc. (BCI) is a New York corporation and a registered broker-dealer. Lorraine Di Paolo ("Di Paolo") and Richard Whitman ("Whitman") are its officers. Benchmark Partners, L.P. ("BPL") is a Delaware limited partnership. BCI, Di Paolo, and Whitman are its general partners.
Last year, defendants nominated Ernest Beier, Jr. ("Beier") and Dennis Pollack ("Pollack") to IBSF's board of directors. This year, defendants nominated Beier and Whitman to IBSF's board of directors. In addition to their above-listed roles, Seidman, Whitman, Di Paolo, Pollack, and Beier each own IBSF stock individually.
Michael Mandelbaum ("Mandelbaum"), Jeffrey Greenberg, Steven Greenberg (together, "the Greenbergs"), Richard Baer ("Baer"), Brent Wolmer ("Wolmer"), and Mrs. Seidman are each IBSF shareholders who have agreements with Seidman regarding their shares. Mandelbaum and the Greenbergs have each agreed in writing that Seidman may buy, sell, and vote their IBSF shares until specified dates. Baer, Wolmer, and Mrs. Seidman have orally agreed to sell and vote their IBSF shares as Seidman directs. These oral agreements are at-will and may be terminated at Baer, Wolmer, and Mrs. Seidman's discretion.
Seidcal is composed of several members of the Cali family. Brant B. Cali is Seidcal's administrative manager, but Seidcal's operating agreement provides that a majority in interest shall manage and conduct Seidcal's business affairs. See Seidcal Operating Agreement at § 11.1. According to Brant Cali, the lion's share of Seidcal's funding probably derives from three Cali family "seniors," namely John J. Cali, Angelo Cali, and Ed Leshowitz, who are not themselves Seidcal members but whose children are Seidcal members.
Charisma's general partner is 8th Floor Realty Corp. ("8th Floor"); its limited partners are individuals whose identities have not been revealed. Moore is 8th Floor's vice president.
Defendants SAL, SAL II, Federal, SIP, Seidman, BCI, BPL, Di Paolo, Whitman, Beier, and Pollack comprise an unincorporated entity known as the "IBSF Committee to Maximize Shareholder Value" (the "Committee"). As the name suggests, the Committee aims to maximize the value of their IBSF shares.
B. Factual History
At last year's Annual Meeting, the Committee waged an unsuccessful proxy campaign to elect two independent directors--Whitman and Pollack--to IBSF's board. IBSF's incumbent nominees prevailed and were duly reinstalled as members of the board in 1996. After losing, Seidman reportedly vowed to try again this year. See Complaint at P 12 (quoting Jonathan D. Epstein, Insurgent in N.J. Proxy Fight Sues Thrift Board for Libel, Amer. Banker, Dec. 21, 1995, at 14). IBSF concedes that its board expected as much. See Plaintiff's Counterclaim Mem. Law at 12.
On July 19, 1996, director Frank G. Lockhart ("Lockhart") informed the IBSF board that he intended not to seek reelection. That same day, the board of directors amended its bylaws to reduce the size of the board from seven to six. As a consequence, one rather than two seats will come up for election at this year's Annual Meeting.
At their depositions, director Thomas J. Auchter ("Auchter") and chairman Joseph M. Ochman, Sr. ("Ochman"), offered three reasons for the reduction of the IBSF's board. First, the directors thought that the holding company's board need not be so large given that Interboro's board of directors performs the vast majority of the companies' day-to-day tasks. Director Ochman testified that the board had discussed such a decision on several occasions over the past two years, although IBSF has submitted no evidence or board minutes documenting these discussions, and director Auchter made no mention of these discussions.
Second, Ochman testified, reduction of the board was part of a long-range plan to maintain flexibility in case future acquisitions necessitated adding directors to the holding company's board. However, at its prereduction size of seven directors, IBSF could feasibly and legally expand its membership to nine to accommodate acquisition candidates. See Ochman Dep. at 11-12, 18 (reporting an acceptable range from five to fifteen directors). Moreover, Ochman testified that acquisition candidates would also request seats on Interboro's board of directors, which remains unreduced at seven directors. See id. at 33-34.
Third, Auchter and Ochman conceded that the elimination of a board seat was also meant to hinder the Committee's efforts in establishing a presence on IBSF's board. Ochman testified, "In the event there was any proxy contest, [it would be] in the best interest[s] of all shareholders to have only one nominee for directorship rather than two." Ochman Dep. at 13. He elaborated,
The dissident group of shareholders were advocating very clearly in their material and press releases that we should hire an investment banker and put the company up for sale through an auction. The board believed then and firmly believes today that that is absolutely not in the best interest of all our shareholders and that long range, that we can build the franchise, develop the company further and maximize the shareholder value.
Id. at 15. A statement attributed to Ochman in the American Banker summarizes this sentiment: "The board's decision last month to eliminate a seat, reducing membership to six, is one way to stop the [dissident] group, [Ochman] said." Joanna Sullivan, Thrift Sues Investors Group Seeking Seat to Push for Sale, Amer. Banker, Nov. 19, 1996, at 10.
The Court considers this third rationale for eliminating Lockhart's board seat the primary motivation behind the IBSF board's decision. Viewed in the abstract, the board's efficiency and flexibility rationales appear bona fide and amply justify the elimination of a board seat. Viewed against the backdrop of the impending proxy contest, however, these two justifications seem suspiciously pretextual. Each rationale arose for the first time in depositions taken after the Court alerted the parties to the viability and caselaw applicable to defendants' third counterclaim. In addition, the board's flexibility rationale suffers from the above-mentioned inconsistencies, and its efficiency rationale lacks the testimonial or documentary corroboration one might expect.
In contrast, no such doubt can be cast on the board's third rationale for eliminating Lockhart's seat. Before defendants interposed their counterclaims, Ochman explained that the board's decision was meant to thwart the Committee's efforts at establishing a presence on the IBSF board. See Sullivan, supra, at 10. Both Auchter and Ochman admitted as much in their depositions. Indeed, at his deposition, Ochman explained at great length how such a strategy serves the best interests of IBSF and its shareholders. See Ochman Dep. at 15. Given these circumstances, this Court can only conclude that the IBSF board eliminated Lockhart's directorship primarily to hinder the Committee's proxy solicitation efforts.
On October 7, 1996, uninformed of the reduction in board size, the Committee notified IBSF of its nomination of Whitman and Beier for the two directorships it thought up for election. The Committee's nomination submission also supplied information required by Article 9.3 of IBSF's Certificate of Incorporation, and formally requested a IBSF's shareholder list in connection with the proxy solicitation.
By letter dated October 31, 1996, IBSF responded, itemizing claimed deficiencies in the Committee's nomination submissions, and allowing the Committee several days in which to "cure" them. The Committee responded to IBSF's request but did not cure all of the claimed deficiencies. IBSF then instituted the instant action on November 12, 1996.
The first count of plaintiff's complaint seeks a declaratory judgment that defendants have failed to make all of the disclosures required by Schedules 13D and 14A of the Exchange Act. Plaintiff's second count seeks a declaratory judgment that plaintiff may reject defendants' nomination to the board of directors pursuant to its Certificate of Incorporation for want of these disclosures. Plaintiff's third count seeks a declaratory judgment that plaintiff may refuse defendants' request for a shareholder list. Defendants counterclaimed on November 25, 1996 to compel plaintiff to reinstate the board of director seat it eliminated on July 19, 1996. On December 3, 1996, defendants made an additional filing with the SEC, not because they considered it required but rather in an effort to avoid litigation expenses and moot some of IBSF's objections. See Amendment 9 to Defendants' Schedule 13D.
II. CONCLUSIONS OF LAW
A. Burden of Proof
Plaintiff bears the burden of proving the material allegations of each of its counts by a preponderance of the evidence. Likewise, defendants bear the burden of proving the material allegations of their counterclaim by a preponderance of the evidence.
B. Defendants' 13D Filings
Exchange Act § 13(d), 15 U.S.C. § 78m(d), and the regulations promulgated thereunder, require any person who acquires beneficial ownership of more than five percent of a class of equity securities to file a statement with the SEC making certain disclosures. Schedule 13D is the form on which such statements are made. See 17 C.F.R. § 240.13d-101 (1996). Schedule 13D contains three general instructions and lists seven items which must filers must address. Plaintiff's first count alleges that defendants have failed to supply all of the information required by the general instructions and the regulations and cases interpreting them.
Instruction C to Schedule 13D reads, in pertinent part,
If the statement is filed by a general or limited partnership, syndicate, or other group, the information called for by Items 2-6, inclusive, shall be given with respect to (i) each partner of such general partnership; (ii) each partner who is denominated as a general partner or who functions as a general partner of such limited partnership; (iii) each member of such syndicate or group; and (iv) each person controlling such partner or member.
If the statement is filed by a corporation or if a person referred to in (i), (ii), (iii) or (iv) of this Instruction is a corporation, the information called for by the above mentioned items shall be given with respect to . . . (b) each person controlling such corporation; and (c) . . . [any] other person ultimately in control of such corporation.