On certification to the Superior Court, Appellate Division.
The opinion of the court was delivered by: Justice Rivera-soto
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
Seidman v. Clifton Savings Bank, S.L.A., et al. (A-100-09)
Argued January 5, 2011 -- Decided March 16, 2011
RIVERA-SOTO, J., writing for a unanimous Court.
The Court considers a challenge to a corporate management stock incentive plan, and determines whether the stockholders' approval of the plan was vitiated by a claimed failure to fully and completely disclose that the maximum stock option grants and restricted stock awards allowable to the entity's board of directors in fact would be made.
Clifton Savings Bank, S.L.A. (Bank) was reorganized in 2004 from a mutual savings and loan association to a stock savings and loan association under a mutual holding company structure. As a result of the reorganization, the Bank's issued and outstanding stock was held by Clifton Savings Bancorp, Inc. (Bancorp). Approximately 45% of Bancorp's stock was sold to the public, and the remainder was held by Clifton MHC, a federal mutual holding company. Plaintiff Lawrence B. Seidman became a stockholder of Bancorp during the 2004 reorganization.
In anticipation of its 2005 annual stockholders meeting, Bancorp issued to the stockholders a notice of the meeting and a proxy statement. The notice advised that the stockholders would be asked to consider and approve Bancorp's 2005 Equity Incentive Plan (2005 Plan or Plan). The proxy statement, which was subject to filing with and examination by the Securities and Exchange Commission (SEC) prior to its issuance, summarized the Plan and explained that Bancorp's board of directors had adopted it subject to stockholder approval. A copy of the Plan was attached to the proxy statement. The Plan's stated purposes included attracting and retaining qualified personnel in key positions; providing officers, employees and non-employee directors of Bancorp and the Bank with an incentive to contribute to Bancorp's success; and rewarding employees for outstanding performance. The proxy statement noted that the Plan would be administered by a compensation committee, which would select the individuals to receive stock incentives and determine the amount and type of incentive. The proxy statement's summary description of the Plan explained that there were limits on the awards and that, if the stockholders approved the Plan, the compensation committee would consider all necessary information in determining the awards, including individual job performances and surveys of grants awarded by similarly situated companies. The proxy statement also noted that Clifton MHC, whose directors were the same individuals as the directors of Bancorp, owned approximately 55% of the shares of common stock and would be voting "for" the Plan, but approval would require the affirmative vote of a majority of the votes cast at the meeting excluding the shares held by Clifton MHC. Finally, the Plan made clear that it would comply with federal regulations governing stock awards.
The stockholders approved the Plan. The compensation committee issued grants of stock options to Bancorp's board of directors and to twenty-two other employees of the Bank, and it issued restricted stock awards to Bancorp's board members and to forty-two Bank employees. The committee's decisions were guided by and complied with the federal regulations. The committee also reviewed four scenarios for granting the stock incentives and consulted with counsel, Certified Public Accounts, and other experts. Seidman sued the Bank, Bancorp, and the directors alleging that it was a foregone conclusion that the compensation committee was going to issue the maximum amount of stock option grants and restricted stock awards to the seven members of Bancorp's board of directors, and that the failure to make that disclosure vitiated any stockholder approval received. He also argued that the incentives were not designed to retain the directors' services, left insufficient shares and options to attract new qualified people, were not consistent with any study or survey, and constituted an unreasonable portion of Bancorp's net earnings.
On October 31, 2007, following a non-jury trial, the Chancery Court applied the business judgment rule and the doctrine of corporate waste and dismissed Seidman's claims in respect of the Plan for failure to meet the burden of proof. Seidman's motion for reconsideration was denied.
The Appellate Division affirmed in an unpublished opinion. The panel found that Seidman failed to demonstrate that the directors breached their duty of care or were otherwise unconscionable and rejected his claim of corporate waste. The Supreme Court granted Seidman's petition for certification. 203 N.J. 92 (2010).
HELD: On the record presented in this case, plaintiff Seidman failed to satisfy his burden to overcome the effect of the business judgment rule and to demonstrate that the stock option grants and restricted stock awards given to the directors of defendant Bancorp under the 2005 Equity Incentive Plan constituted corporate waste.
1. When a stock incentive plan is approved or ratified by the stockholders, a challenger to the plan bears the burden of proving that no person of sound business judgment would view the consideration furnished by the individual directors as a fair exchange for the options conferred. The court's scope of review of the transaction is limited. It will look into the transaction only far enough to see whether the terms are so unequal as to amount to waste, or whether the question is such a close one as to call for the exercise of business judgment. The distinction between whether an action constitutes corporate waste or is subject to the business judgment rule is one of substance: In the former case, the court will reverse the decision of the stockholders; in the latter, it will not. (P. 25-9)
2. The Court reviews the business judgment rule as it was applied in prior opinions, including Eliasberg v. Standard Oil Co., 23 N.J. Super. 431 (Ch Div. 1952), aff'd o.b., 12 N.J. 467 (1953)(stockholder failed to meet burden of proof in challenging incentive stock plan adopted by the stockholders through which the directors awarded themselves stock options), and as codified by the American Law Institute's Principles of Corporate Governance. The Court reaffirms Eliasberg and reiterates that when corporate actions either have been approved or ratified by the stockholders, the propriety of those actions is to be gauged by the business judgment rule. Under that rule, stockholder-approved or -ratified corporate actions are presumed correct and the presumption may be rebutted only if the challenged corporate actions are so far from the norm of responsible corporate behavior as to be unconscionable or constitute a fraud, impermissible self-dealing, or corporate waste. (Pp. 29-37)
3. The Court rejects Seidman's argument that Bancorp is not entitled to the benefit of the business judgment rule because the 2005 Plan did not specifically advise that the compensation committee would issue to the directors the full measure of stock incentives allowable under the relevant federal regulations. The disclosures made to the stockholders sufficiently placed them on notice that there were regulatory limits governing who was eligible to receive stock under the Plan and in what amounts, and the Plan and proxy statement explained in detail how the decisions would be made. Additionally, no stockholder who voted for the Plan testified that he or she was misled, and the proxy was filed with the SEC. The Court finds that there is more than sufficient credible evidence in the record to support the Chancery Court's conclusion that plaintiff failed to satisfy his burden to overcome the effect of the business judgment rule. (Pp. 37-43)
4. Despite the protection of the business judgment rule, Bancorp could still be liable based on a theory of corporate waste. However, even though rewarding Bancorp's directors, who were long-term, well-compensated employees, did not align with a stated purpose of the Plan to attract new blood and retain existing personnel, the Chancery Court properly found that the other stated purposes of the Plan-to provide officers, employees and non-employee directors with a proprietary interest as an incentive to contribute to Bancorp's success and to reward for outstanding performance-were satisfied by the stock option grants and restricted stock awards given to the directors. On the record presented, Seidman failed to demonstrate that the stock option grants and restricted stock awards given to the directors under the 2005 Plan constituted corporate waste. (Pp. 43-45)
The judgment of the Appellate Division is AFFIRMED.
CHIEF JUSTICE RABNER and JUSTICES LONG, LaVECCHIA, ALBIN, and HOENS, and JUDGE STERN, (temporarily assigned), join in JUSTICE RIVERA-SOTO's opinion.
JUSTICE RIVERA-SOTO delivered the opinion of the Court. This appeal requires that we revisit a long-standing rule concerning corporate governance matters and how, in its application, corporate actions are to be gauged. That rule is set forth plainly in Eliasberg v. Standard Oil Co., 23 N.J. Super. 431 (Ch. Div. 1952), aff'd o.b., 12 N.J. 467 (1953). Commonly referred to as the business judgment rule, it provides that, once the shareholders approve or ratify a proposed corporate action, a court's scope of review of the transaction is limited: "the court will look into the transaction only far enough to see whether the terms are so unequal as to amount to waste, or whether on the other hand the question is such a close one as to call for the exercise of what is commonly called 'business judgment.'" Id. at 449. The distinction between whether an action constitutes corporate waste or is subject to the business judgment rule is one of substance: "In the former case, the court will reverse the decision of the stockholders; in the latter, it will not." Ibid.
Focusing on the adoption and execution of a management stock incentive plan, plaintiffs assert that the stockholders' approval of that plan was vitiated by the failure to fully and completely disclose one discrete fact: that the full amount of stock options and restricted stock grants that could be granted to each of the members of the corporation's board of directors in fact would be granted to them. Defendants, on the other hand, reply that the disclosures made to stockholders in respect of the plan were fair and complete, and that disclosure of the specific stock option allocations or the specific stock awards to be made to individual directors in the future, once the plan was approved, was not required.
Applying the business judgment rule and the doctrine of waste, both the trial court and the Appellate Division dismissed plaintiffs' claims in respect of the stock option plan. We agree. In doing so, we reaffirm the rule of Eliasberg and reject plaintiffs' invitation to limit the scope of the business judgment rule.
The history of defendant Clifton Savings Bank, S.L.A. (Bank) is long and rich. Started in 1928 as the Botany Building & Loan Association in Clifton, a New Jersey state-chartered mutual savings and loan association, and later becoming one of the first savings and loan institutions in the United States to be approved by and given full insurance coverage by the Federal Savings & Loan Insurance Corporation (FSLIC), the Bank became Clifton Savings & Loan Association in 1954 and, in 1989, was renamed to its current name. In 2004, the Bank reorganized from a state-chartered mutual savings and loan association to a state-chartered stock savings and loan association. See generally, New Jersey Savings and Loan Act (1963), N.J.S.A. 17:12B-1 to -319. As a result of that reorganization, the Bank's issued and outstanding stock was held by Clifton Savings Bancorp., Inc. (Bancorp), a publicly traded corporation listed on the NASDAQ.*fn1 In turn, approximately fifty-five percent of Bancorp's stock is held by Clifton MHC, a federal mutual holding company,*fn2 and the remainder was sold to the public. Finally, in 2007, the Bank converted from a state-chartered savings and loan association into a federally chartered savings bank. See N.J.S.A. 17:12B-222 to -225.
In 1998, while the Bank was still a state-chartered mutual savings and loan association, plaintiff Lawrence B. Seidman became a depositor at -- and, because the Bank then was a mutual savings and loan association, a member of -- the Bank. Through the 2004 reorganization, the members of the Bank were converted into stockholders of Bancorp; in this process, Seidman also became a stockholder of Bancorp, a status he maintained until November 2004.*fn3
Adoption and Implementation of the 2005 Plan Bancorp scheduled its 2005 annual meeting of stockholders for July 14, 2005. In connection therewith, Bancorp issued a notice of annual meeting and proxy statement to its stockholders, including Seidman. The notice of the annual meeting of stockholders conspicuously noted that the stockholders would be asked to "consider and act on . . . [t]he approval of [Bancorp's] 2005 Equity Incentive Plan [(2005 Plan)]." The accompanying proxy statement -- which was subject to filing with and examination by the Securities and Exchange Commission (SEC) prior to its issuance*fn4 -- contained an exhaustive summary of that plan, explained that the board of directors of Bancorp had "adopted the 2005 Plan, subject to stockholder approval," and attached a complete copy of the 2005 Plan as an appendix to the proxy statement.
In particular, the proxy statement identified four purposes for the proposal and adoption of the 2005 Plan. These were (1) "to attract and retain qualified personnel in key positions[;]" (2) to "provide officers, employees and non-employee directors of [Bancorp] and [the Bank] with a proprietary interest in [Bancorp] as an incentive to contribute to the success of [Bancorp;]" (3) to "promote the attention of management to other stockholder concerns[;]" and (4) to "reward employees for outstanding performance." It noted further that Bancorp "believes that stock-based incentive awards will further focus employees and directors on the dual objectives of creating stockholder value and promoting [Bancorp]'s success, and that the 2005 Plan will help to attract, retain and motivate valued employees and directors." It emphasized that "the 2005 Plan will promote the interests of [Bancorp] and its stockholders and that it will give [Bancorp] flexibility to provide incentives based on the attainment of corporate objectives and increases in stockholder value."
In its summary description of the 2005 Plan, the proxy statement noted that the 2005 Plan would be administered by a compensation committee. It explained that stock awards under the 2005 Plan would consist of two types: grants of stock options, which "give the recipient the right to purchase shares of [Bancorp] common stock at a future date at a specified price per share[,]" and restricted stock awards, which are "grant[s] of a certain number of shares of common stock subject to the lapse of certain restrictions (such as continued service) determined by the [compensation c]committee." Specifically, the proxy statement noted that the [compensation c]committee has broad authority under the 2005 Plan with respect to awards granted thereunder, including, without limitation, the authority to:
* select the individuals to receive awards under the 2005 Plan;
* determine the type, number, vesting requirements and other features and conditions of individual awards, including whether performance goals will be attached to awards; and
* interpret the 2005 Plan and award agreements issued with respect to individual awards [of stock options or restricted stock awards].
The proxy statement's summary description of the 2005 Plan further explained that there were limits on the aggregate amount of stock subject to stock options and/or restricted stock awards, and that, subject to the stockholders first approving the 2005 Plan and "[p]rior to making any awards under the 2005 Plan, the [compensation c]committee will consider all information it determines to be necessary in order to make appropriate grants, including surveys detailing grants made by similarly situated companies." It further noted that, in the usual process of determining compensation levels, "[t]he [compensation c]committee reviews comparative salaries paid by other financial institutions when establishing salaries and benefits for given positions and intends to consider similar data when making awards." It repeated that, "[u]nder the terms of the 2005 Plan, the [compensation c]committee may consider, among other things, individual or [Bancorp] performance in making grants or as a condition of vesting for any grant."
Finally, the proxy statement conspicuously notes that "Clifton MHC, the mutual holding company for [Bancorp], owns 55.2% of the outstanding shares of common stock of [Bancorp;]" that "[a]ll shares of common stock owned by Clifton MHC will be voted in accordance with the instructions of the Board of Directors of Clifton MHC, the members of which are identical to the members of the Board of Directors of [Bancorp;]" and that "Clifton MHC is expected to vote such shares 'FOR'" approval of the 2005 Plan. That said, the proxy statement also makes clear that, in order for the 2005 Plan "[t]o be approved, this matter requires the affirmative vote of a majority of the votes eligible to be cast at the annual meeting, including the shares held by Clifton MHC ('Vote Standard A') and the affirmative vote of a majority of the votes cast at the annual meeting, excluding the shares held by Clifton MHC ('Vote Standard B')." (first emphasis in original; second emphasis supplied).*fn5
Likewise, the version of the 2005 Plan attached to the proxy statement further set forth the details of the 2005 Plan. In addition to the matters described in the summary plan description that is part of the proxy statement, the 2005 Plan made clear how the 2005 Plan was to be administered, the maximum number of shares available for either stock option grants or restricted stock awards, and, specifically, that the 2005 Plan "will comply with the requirements set forth in 12 C.F.R. [§] 575.8 and 12 C.F.R. [§] 563b.500."*fn6
It is uncontested that the 2005 Plan was approved at the July 14, 2005 annual meeting of Bancorp's stockholders. Based on that approval, the compensation committee issued (1) grants of stock options to all seven of the members of Bancorp's board of directors and to twenty-two other employees of the Bank, and (2) restricted stock awards to the board members and to forty-two other employees of the Bank. In doing so, the compensation committee was guided by and complied with the relevant OTS regulations, which limit the issuance of stock awards in mutual savings and loan associations that convert to stock savings and loan associations under a mutual holding company structure: the board of directors, in the aggregate, cannot receive more than thirty percent of the awards, 12 C.F.R. § 563b.500(a)(5); no member of the board of directors may receive more than five percent of the awards, ibid.; and any award granted to an employee is capped at twenty-five percent of the awards that can be granted, 12 C.F.R. § 563b.500(a)(4). Also, the compensation committee "reviewed four different scenarios for granting the stock awards, and consulted with counsel, various Certified Public Accountants, and a compensation consultant before awarding the stock and stock options under the  Plan."
Following the awards under the 2005 Plan, Seidman filed a complaint in the General Equity Part of the Chancery Division*fn7 alleging, among other things, that the stock option grants and restricted stock awards made to Bancorp's directors were "wrongful and improper[.]"*fn8 Specifically, he claimed that the "awards are clearly not designed to retain the services of the [director-defendants;]" that the "awards unduly and inappropriately reward the [director-defendants] without leaving sufficient shares and options available to attract new qualified people[;]" that, "[u]pon information and belief, these ...