                                                                                                                           Opinions of the United
1998 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


2-11-1998

IBS Fin Corp v. Seidman & Assoc LLC
Precedential or Non-Precedential:

Docket 97-5056




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Filed February 11, 1998

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 97-5056

IBS FINANCIAL CORPORATION,

Appellant,

v.

SEIDMAN AND ASSOCIATES, L.L.C.; SEIDMAN AND
ASSOCIATES II, L.L.C.; FEDERAL HOLDINGS, L.L.C.;
SEIDMAN INVESTMENT PARTNERSHIP, L.P.;
LAWRENCE B. SEIDMAN; THE BENCHMARK COMPANY,
INCORPORATED; BENCHMARK PARTNERS, L.P.;
LORRAINE DI PAOLO; RICHARD WHITMAN; ERNEST
BEIER, JR.; and DENNIS POLLACK,

On Appeal from an Order
of the United States District Court
for the District of New Jersey

D.C. No. 96-5435

Argued May 23, 1997

Before: SLOVITER, Chief Circuit Judge,*
ROTH, Circuit Judge, and POLLAK, District Judge**

(Filed February 11, 1998)



_________________________________________________________________

*Judge Sloviter was Chief Judge of the Court of Appeals for the Third
Circuit at the time this appeal was submitted. Judge Sloviter completed
her term as Chief Judge on January 31, 1998.

**Honorable Louis H. Pollak, United States District Judge for the Eastern
District of Pennsylvania, sitting by designation.
       Edward M. Posner (argued)
       T. Andrew Culbert
       Mary Catherine Roper
       Nancy L. Harris
       Drinker Biddle & Reath
       1345 Chestnut Street
       Philadelphia, PA 19107
       Attorneys for Appellant

       Peter R. Bray (argued)
       Bray, Chiocca, Rappaport &
        Rothstadt, L.L.C.
       100 Misty Lane
       Parsippany, NJ 07054
       Attorneys for Appellees

OPINION OF THE COURT

POLLAK, District Judge.

This appeal arises from the district court's final judgment
in a suit, seeking inter alia, to enforce certain disclosure
provisions of the Securities Exchange Act of 1934, 15
U.S.C. SS 77b et seq. (the "Exchange Act"). The facts of the
case revolve around the efforts of the IBSF Committee to
Maximize Shareholder Value ("the Committee")-- a group
of shareholders of IBS Financial Corporation ("IBSF"), a
New Jersey corporation -- to obtain two seats on IBSF 's
seven-member board.

In the summer of 1996, some five months before the
expected date of IBSF 's 1996 annual meeting, the
incumbent IBSF board reduced the number of board seats
from seven to six. The board later rejected the Committee's
nominee for the one open seat, citing the Committee's
failure to comply with certain provisions of the IBSF
Certificate of Incorporation. With a view to getting judicial
ratification of the board's course of action, IBSF in the fall
of 1996 brought this suit for a declaration that (1) the
Committee's "Schedule 13D" statement filed with the
Securities and Exchange Commission ("SEC") did not
conform to the requirements of 17 C.F.R. S 240.13d-101,

                               2
and (2) the board properly rejected the Committee's board
nominee. Some members of the Committee counterclaimed,
seeking an injunction requiring IBSF 's board to reinstate
the board seat it had eliminated.1 The district court, in an
opinion handed down on January 23, 1997, found in favor
of the Committee on each issue, ruling that (1) the
Committee's Schedule 13D statement was complete; (2)
IBSF was equitably estopped from rejecting the Committee's
board nominee; and (3) IBSF acted improperly in reducing
the number of board seats. The district court accordingly
ordered IBSF to reinstate the eliminated board seat and to
place two Committee nominees on the ballot at the
upcoming annual meeting. We will reverse the district
court's first two determinations, but will affirm the district
court's determination that IBSF's reduction of the number
of board seats was improper.

I. Dramatis personae

Identification of the numerous individuals and entities
that make up the IBSF Committee to Maximize Shareholder
Value is important to an understanding of the issues in this
case, particularly the issue of the completeness of the
Committee's Schedule 13D statement. We will borrow (and
modestly enlarge, with bracketed inserts) the district court's
concise description of the principal players:

        [Plaintiff-appellant] IBS Financial Corp. ("IBSF") is a
       savings and loan holding company owning Interboro
       Savings & Loan Association ("Interboro"). IBSF 's
       shares are publicly registered pursuant to the
       Securities Exchange Act of 1934, 15 U.S.C. SS 77b et
       seq. (the "Exchange Act"), and actively traded.
       Defendants together own approximately 8.5% of the
       outstanding shares of IBSF common stock.

        Seidman & Associates, L.L.C. (SAL) is a limited
       liability company managed by Lawrence B. Seidman
       ("Seidman"). SAL's members are Seidman, Seidcal &
       Associates, L.L.C. ("Seidcal"), Sonia Seidman ("Mrs.
_________________________________________________________________

1. Other claims and counterclaims were litigated at the district court
level, but are not before us on appeal.

                               3
Seidman"), and two other individuals. . . . Pursuant to
SAL's operating agreement, Seidman as managing
member has exclusive and broad investment powers. A
majority in interest, however, may remove or replace
Seidman as managing member with or without cause
upon payment of a removal penalty. [A majority in
interest also has complete discretion with respect to
"[a]ll decisions, consents, authorizations and rights in
connection with the business and affairs" of SAL.]
Seidcal currently owns a 71.43% interest in SAL but
takes no active role in its affairs.

 Seidman & Associates II, L.L.C. ("SAL II") is also a
limited liability company managed by Seidman. SAL II's
members are Mrs. Seidman and Seidcal. . . . SAL II's
operating agreement grants Seidman as manager
exclusive and broad investment powers. A majority in
interest, however, may remove or replace Seidman as
manager with or without cause. [As with SAL, a
majority in interest has complete discretion with
respect to "[a]ll decisions, consents, authorizations and
rights in connection with the business and affairs" of
SAL II.] At present, Seidcal owns a 75% interest in SAL
II but takes no active role in its affairs.

 Federal Holdings, L.L.C. ("Federal") is a limited
liability company managed in part by Seidman.
Federal's members are Charisma Partners, L.P.
("Charisma") and nine individuals. [Charisma in turn
has one general partner, 8th Floor Realty Corp. ("8th
Floor"), whose Vice President is Kevin Moore.] Under
Federal's operating agreement, Seidman is investment
manager and enjoys exclusive and complete power to
buy, sell, and vote Federal's stock. The operating
agreement names Kevin Moore ("Moore") administrative
manager and clothes him with the authority to make
non-investment decisions and remove Seidman as
investment manager for cause [until June 13, 1997,
and to remove Seidman for any reason thereafter. The
agreement makes no provision for removing Moore as
administrative manager.] Neither Charisma, 8th Floor,
nor Moore takes an active role in Federal's investment
affairs.

                        4
        . . . .

        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. 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.

        . . .

        Defendants SAL, SAL II, Federal, . . . [and] Seidman,
       [among others] . . . 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.

IBS Financial Corp. v. Seidman & Associates, L.L.C., 954 F.
Supp. 980, 983-84 (D.N.J. 1997) (citations omitted).

II. Background

The facts relating to the three dominant issues, and the
district court's ruling on each of these issues, may be
summarized as follows:

A. Schedule 13D statement: In September 1995, the
Committee filed a "Schedule 13D" statement with IBSF and
the SEC. The Securities Exchange Act of 1934 requires the
filing of a Schedule 13D statement by "any person who . . .
is directly or indirectly the beneficial owner of more than 5
per centum" of a class of equity securities, including a
syndicate or group acting for the purpose of acquiring such
ownership, 15 U.S.C. S 78m(d)(3), within ten days of
acquiring such ownership, id. S 78m(d)(1). The SEC's
implementing regulations also require, via Instruction C,
information regarding "each person controlling" a member
of a group filing a Schedule 13D statement. 17 C.F.R.
S 240.13d-101 Instruction C.

The Committee amended its initial Schedule 13D
statement nine times, with the ninth amendment filed

                               5
December 3, 1996, some three weeks after this litigation
was commenced. As amended, the Committee's Schedule
13D statement provides the information required by the
SEC's regulations, 17 C.F.R. SS 240.13d-1 to -101, with
respect to SAL, SAL II, and Federal, and with respect to
Seidman as a "person controlling" SAL, SAL II, and Federal.
However, no information was provided with respect to
Seidcal, Charisma, 8th Floor, Moore, or those who may be
perceived as "controlling" Seidcal, Charisma, 8th Floor, and
Moore.

The district court, in its January 23, 1997 opinion, ruled
that the Committee's Schedule 13D recitals were complete,
because Seidman managed SAL, SAL II, and Federal
without consulting others, and, indeed, the very purpose of
establishing each of the three funds was "to create a fund
for Seidman to invest in financial institutions at his
discretion." IBS Financial Corp., 954 F. Supp. at 988.
"Looking to the realities of each organization," the district
court concluded "that Seidman and not Seidcal controls
both SAL and SAL II within the meaning of Instruction C."
Id. at 987. Moreover, "Seidman makes all of Federal's
investment decisions without consulting Moore or other
investors . . . . Nor has IBSF alleged that Moore intends to
remove Seidman or that he uses his authority to do so to
influence Seidman's investment decisions . . . . Accordingly,
the court concludes that Moore is not a `controlling person'
within the meaning of Instruction C." Id. at 988.

B. Committee nominees: On October 7, 1996, the
Committee gave IBSF the names of two nominees -- Ernest
Beier and Richard Whitman -- for the two seats it expected
to be open at the 1996 annual meeting; when informed that
only one seat would be open, the Committee selected Beier
as its nominee for that seat. The Committee also supplied
IBSF with information purportedly in compliance with
Article 9.3 of IBSF 's Certificate of Incorporation.

Article 9.3 requires that stockholders' nominations of
potential members of the board be submitted to the board
in advance of the annual meeting. Each nomination must
be accompanied by certain information about the nominee,
including the information "that is required to be disclosed
in solicitations of proxies with respect to nominees for

                                6
election as directors, pursuant to Regulation 14A under the
Exchange Act." Article 9.3 gives the board the power to
reject nominations that are untimely or incomplete. If the
board believes that a submission is incomplete, it must
promptly notify the stockholder making the nomination; the
stockholder then may cure the identified deficiencies within
five days. If the board reasonably determines that the
stockholder has not cured any material deficiency, the
board has the power under Article 9.3 to reject the
nominee.

The Committee's submission of the Beier nomination was
timely. However, IBSF deemed it incomplete. The problem,
IBSF advised the Committee on October 31, 1996, was
that, although the Committee's submission reported that
"several" of Seidman's clients had given him sole voting
power as to their shares, the submission did not identify
the clients. IBSF believed that the identity of the clients was
required to be disclosed by Regulation 14A of the Securities
Exchange Act, and therefore was required by Article 9.3 to
be reported to the IBSF board. The Committee asked for an
extension of the five-day cure period until November 8,
1996; the IBSF board granted the request. On November 8,
in Amendment 8 to the Committee's Schedule 13D
statement, the Committee disclosed information about
Seidman's arrangements with one of his clients, Michael
Mandelbaum.

The Committee did not provide information about
Seidman's arrangements with his other clients until
December 3; on that date the Committee submitted a ninth
amendment to its Schedule 13D statement - an
amendment found by the district court to complete the
Committee's required disclosures. But prior to the
Committee's December 3 filing, IBSF, relying on its
authority under Article 9.3 of its certificate of incorporation
to reject nominations "not timely made," brought this suit
seeking, inter alia, a declaration that it was entitled not to
recognize the Beier nomination. However, the district court,
in its opinion of January 23, 1997, "decline[d] to [so
declare] for two reasons." IBS Financial Corp., 954 F. Supp.
at 991. First, the district court concluded that because
IBSF had accepted the Committee's nominations in 1995,

                               7
allowing IBSF to reject the Committee's "substantially
similar submissions" in 1996 would be " `unjust in the eyes
of the law.' " Id. (quoting Miller v. Teachers' Pension &
Annuity Fund, 179 N.J. Super. 473, 477, 432 A.2d 560,
562 (App. Div.), cert. denied, 88 N.J. 502, 443 A.2d 714
(1981). Second, the district court reasoned that the
Committee's untimeliness had not prejudiced IBSF, since
the pertinent information had in fact been disclosed, albeit
belatedly, via the December 3, 1996 Schedule 13D
amendment.

C. Size of the IBSF board: In December 1995, the
Committee attempted to elect two independent directors to
the then-seven-member IBSF board. When that attempt
proved unsuccessful, it was generally expected that the
Committee would again seek two board seats in 1996. In
July 1996, board member Frank Lockhart, who was one of
two incumbent directors slated to run for reelection that
year, announced that he intended to step down; the IBSF
board thereupon voted to eliminate the Lockhart seat as of
the 1996 annual meeting, leaving only one seat open for
election at that meeting.

IBSF 's chairman, Joseph M. Ochman, Sr., and another
director, Thomas J. Auchter, gave deposition testimony that
the board acted for three reasons in reducing the board's
size from seven to six. First, the board thought that its
work could be performed as well with one fewer member,
because most of the decisions affecting IBSF -- a holding
company -- were made by the board of IBSF 's operating
subsidiary, Interboro Savings & Loan Association. Second,
the board thought a smaller size would provide more
flexibility if IBSF should in the future undertake
acquisitions of other companies. Third, the board wished to
hinder the Committee's attempt to gain a substantial
presence on the board.

The district court concluded that the first two proffered
reasons were "suspiciously pretextual" and that "the third
rationale for eliminating Lockhart's board seat[was] the
primary motivation behind the IBSF board's decision." 954
F. Supp. at 985. Accordingly, the district court granted
judgment on the Committee's counterclaim and set aside
the elimination of the seventh board seat.

                                8
D. District court opinion: As noted above, the district
court's opinion of January 23, 1997 (1) found the
Committee's Schedule 13D filings to be complete, (2)
declared that IBSF was estopped from rejecting Committee
nominations for the board, and (3) set aside IBSF 's
elimination of the seventh board seat. The district court
also (4) declared that the Committee's Schedule 14Afilings
were complete, and (5) declared that IBSF could not refuse
to provide the Committee with a shareholder list. IBSF 's
appeal challenges only the first three of these rulings.

The district court had subject matter jurisdiction
pursuant to 28 U.S.C. SS 78aa, 1331, and 1367; we have
jurisdiction pursuant to 28 U.S.C. S 1291. Our review of the
district court's legal determinations and its application of
legal precepts to facts is plenary; we review the district
court's factual findings for clear error. See Epstein Family
Partnership v. KMart Corp., 13 F.3d 762, 766 (3d Cir. 1994).

III. Was there adequate disclosure of individuals or entities
       "controlling" members of the 13D group?

IBSF argues first that the Committee failed to disclose
certain information required to be publicly disclosed by
section 78m(d) of the Exchange Act. This section requires
that, within ten days of the date a person or group acquires
beneficial ownership of more than 5% of a class of
securities, certain information must be disclosed. This
section "was designed `to alert the marketplace to every
large, rapid aggregation or accumulation of securities,
regardless of technique employed, which might represent a
potential shift in corporate control.' " Hubco, Inc. v.
Rappaport, 628 F. Supp. 345, 351 (D.N.J. 1985) (citations
omitted).

The SEC regulations implementing section 78m(d) are at
17 C.F.R. S 240.13d-1 to -6; and the particular form --
Schedule 13D -- on which the disclosure is to be made is
at 17 C.F.R. 240.13d-101. Schedule 13D specifically
requires the person or group acquiring beneficial ownership
of more than 5% of a class of securities to provide seven
items of information.2 The dispute between IBSF and the
_________________________________________________________________

2. These items, in brief, are: (1) "Security and Issuer"; (2) "Identity
and
Background"; (3) "Source and Amount of Funds or Other Consideration";

                                9
Committee centers on which people and entities the
Committee must disclose information about.

Instruction C to Schedule 13D provides in relevant part
as follows:

       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.

17 C.F.R. S 240.13d-101 (emphasis added).

IBSF contends that the Committee's amended Schedule
13D statement was insufficient because it did not report
information about the persons or entities "controlling"
certain members of the Committee, which is a "group"
responsible for filing the Schedule 13D statement. Three
members of the Committee -- SAL, SAL II, and Federal --
are each primarily owned by one other entity: Seidcal
Associates, L.L.C. owns 71.43% of SAL; Seidcal also owns
75% of SAL II; and Charisma Partners, L.P. owns 54.55% of
Federal. IBSF argues that the Committee was obligated to
file Schedule 13D information for Seidcal as a "person
controlling" SAL and SAL II, and for Charisma as a "person
controlling" Federal. IBSF further argues that the
Committee was obligated to file Schedule 13D information
about 8th Floor and Kevin Moore because, in IBSF 's view,
each of them is also a "person controlling" Federal.

As described above, Seidman is the "managing member"
of SAL, the "manager" of SAL II, and the "investment
manager" of Federal. However, the operating agreements of
each of these three companies give others the power to
remove him: Seidman may be removed from his positions
_________________________________________________________________

(4) "Purpose of Transaction"; (5) "Interest in Securities of the Issuer";
(6)
"Contracts, Arrangements, Understandings or Relationships with Respect
to Securities of the Issuer"; and (7) "Material to be Filed as Exhibits."
17
C.F.R. S 240.13d-101.

                                10
at, respectively, SAL and SAL II by a majority in interest of
the members of those companies; and Seidman may be
removed from his position at Federal by Moore, Federal's
administrative manager (for cause before June 13, 1997,
and without cause thereafter).

IBSF argues that Seidcal is a "person controlling" SAL
and SAL II by virtue of its majority ownership interest in
these companies; the defendants argue that only Seidman,
as manager or managing member, is a "person controlling"
these companies. Similarly, IBSF argues that Charisma,
8th Floor, and Moore are all "person[s] controlling" Federal,
while the defendants argue that only Seidman is a"person
controlling" Federal. The district court's analysis of this
question concluded that only Seidman is a "person
controlling" SAL, SAL II and Federal because, in practice,
only he has exercised actual control over these companies.
We disagree.

The SEC has defined "control" as the term is used in
"forms for statements and reports" filed pursuant to section
13 of the Securities Exchange Act of 1934 -- forms such as
Schedule 13D -- as follows:

       The term "control" (including the terms "controlling,"
       "controlled by" and "under common control with")
       means the possession, direct or indirect, of the power
       to direct or cause the direction of the management and
       policies of a person, whether through the ownership of
       voting securities, by contract, or otherwise.

17 C.F.R. S 240.12b-2. Because the definition of "control" in
S 240.12b-2 directs the court to look to "the power to direct
or cause the direction of the management and policies of a
person," Seidman's actual control of SAL, SAL II, and
Federal does not preclude a finding that Seidman's control
is shared with others if others have the power to direct the
management and policies of these companies.3
_________________________________________________________________

3. This court has previously construed the term "controlling person" as
the term is used in Section 20(a) of the Securities Exchange Act, 15
U.S.C. S 78t(a), which under certain circumstances imposes secondary
liability on those who control violators of the securities laws. In Rochez
Brothers, Inc. v. Rhoades, 527 F.2d 880 (3d Cir. 1975), this court quoted
the definition of "control" in 17 C.F.R.S 240.12b-2 and then said:

                               11
The operating agreements of SAL and SAL II give the
"majority in interest of the Members" -- i.e., Seidcal --
power to remove Seidman as manager or managing
member. Seidcal also has the power to carry on and
manage all decisions, consents, authorizations and rights
in connection with the business and affairs of both
companies. These two sources of authority mean that
Seidcal has had and continues to have "the power to direct
or cause the direction of the management and policies" of
SAL and SAL II, notwithstanding that Seidcal has refrained
from, and may continue to refrain from, exercising that
power. Seidcal is therefore a "person controlling" SAL and
SAL II, and the Committee's Schedule 13D statement
should, therefore, have included the information in items 2-
6 regarding Seidcal.

The operating agreement of Federal is somewhat
different. Kevin Moore, the administrative manager, has
authority to remove Seidman as investment manager and
also has authority over "all other decisions, consents,
authorizations and rights in connection with the
management of the Company." Moore therefore has"the
power to direct or cause the direction of the management
and policies" of Federal, and hence is a "person controlling"
Federal for whom Schedule 13D information should have
been reported.

The Federal operating agreement puts all administrative
powers in the hands of Moore, and makes no provision for
his removal as administrative manager; the operating
agreement does not in explicit terms vest any authority in
Charisma or its sole general partner, 8th Floor, of which
_________________________________________________________________

         Many factors are involved in determining if one is a "controlling
       person." In making this determination, the courts have given heavy
       consideration to the power or potential power to influence and
       control the activities of a person, as opposed to the actual
exercise
       thereof.

Id. at 890-91. There is no apparent reason for the term "controlling
person," as it is used in section 20(a), to be more broadly construed than
the term "person controlling," as it is used in Instruction C to Schedule
13D.

                                12
Moore is vice-president. At oral argument in this court,
counsel for IBSF acknowledged that its contention that
Charisma and 8th Floor must file Schedule 13D
information rests on an inference that, in his post as
administrative manager of Federal, Moore represents the
interests of 8th Floor and Charisma. We are unwilling to
draw such an inference in the absence of any formal legal
authority for 8th Floor or Charisma to direct Moore's
decisions with respect to Federal. Accordingly, we conclude
that the Committee was under no obligation to file
information regarding Charisma or 8th Floor in its
Schedule 13D statement.

IV. Was the IBSF board entitled to reject the Committee's
       nominees?

As noted above, the district court ordered IBSF to place
the Committee's two nominees on the 1996 ballot for two
reasons. First, the district court held that IBSF was
equitably estopped from rejecting the Committee's
nominations, because it had accepted substantially similar
nominations the year before. Second, the district court
found that IBSF would not be prejudiced by being required
to accept the nominations. We find neither reason
persuasive.

New Jersey's Supreme Court has defined equitable
estoppel as follows:

       `the effect of the voluntary conduct of a party whereby
       he is absolutely precluded, both at law and in equity,
       from asserting rights which might perhaps have
       otherwise existed . . . as against another person, who
       has in good faith relied upon such conduct, and has
       been led thereby to change his position for the worse
       . . . .'

W.V. Pangborne & Co., Inc. v. New Jersey Dep't of
Transportation, 562 A.2d 222, 227 (N.J. 1989) (quoting
Carlsen v. Masters, Mates & Pilots Pension Plan Trust, 403
A.2d 880, 882 (N.J. 1979)) (alterations in original).4 The
_________________________________________________________________

4. The district court applied New Jersey law to determine whether IBSF
was equitably estopped from rejecting the Committee's nominees. As no
party contests the application of New Jersey law and IBSF is a New
Jersey corporation, we follow the district court and look to New Jersey
law to determine whether IBSF is equitably estopped from rejecting the
Committee's nominees.

                                13
court has added that "[t]he doctrine of equitable estoppel is
applied `only in very compelling circumstances,'`where the
interests of justice, morality and common fairness clearly
dictate that course.' " Palatine I v. Planning Board, 628 A.2d
321, 328 (N.J. 1993) (quoting Timber Products, Inc. v.
Chester Township, 500 A.2d 757, 760 (N.J. Super. Ct. Law
Div. 1984), and Gruber v. Mayor of Raritan Township, 186
A.2d 489, 495 (N.J. 1962).

The district court's invocation of the doctrine of equitable
estoppel took as its premise that "IBSF's approval of the
Committee's substantially similar submissions [in 1995] no
doubt influenced the content and timing of the Committee's
current submissions." That being so, the district court felt
it would be " `unjust' " to "allow the board's changed
interpretation of its Certificate of Incorporation to work
prejudice to defendants' nomination." We see no injustice
here. Whatever basis the Committee may have had for
relying on IBSF 's acceptance of the 1995 submissions
necessarily vanished when the Committee was placed on
notice of IBSF 's dissatisfaction in 1996. A situation in
which the Committee had eight days to cure the announced
deficiencies and elected not to do so hardly rises to the level
of " `very compelling circumstances,' `where the interests of
justice, morality and common fairness clearly dictate' " that
IBSF not be permitted to bar the Committee's nominations.

Moreover, the district court's determination that IBSF
would not be prejudiced by a requirement that it accept the
Committee's nominees, while perhaps correct as a factual
matter, is irrelevant as a legal matter. The Certificate of
Incorporation gives the board the discretion to reject
nominations if the nominees do not provide specified
information, after notice, within the time given to cure. "The
certificate of incorporation . . . constitute[s] a contract
between the corporation and its stockholders and the
stockholders inter sese." Faunce v. Boost Co., 83 A.2d 649,
651 (N.J. Super. Ct. Ch. Div. 1951). This is not a case in
which a provision of the certificate of incorporation offends
public policy and therefore may not be enforced. See, e.g.,
New Jersey v. Jefferson Lake Sulphur Co., 178 A.2d 329,
338-39 (N.J. 1962). Article 9.3 -- which provides notice and
an opportunity to cure before a nomination is rejected -- is

                               14
reasonable on its face. Mere absence of prejudice to the
corporation does not empower a court to veto a board of
directors' exercise of a discretionary authority vested in the
board by the certificate of incorporation.5

Accordingly, we conclude that the IBSF board was acting
within its authority in declining to accept the nominations
of the Committee for failure to comply with the provisions
of Article 9.3 of IBSF's certificate of incorporation.

V. Was the IBSF board entitled to reduce the board size
       from seven to six?

The district court determined that a New Jersey court
would measure the propriety of the board's action under
the standard set forth by Delaware courts in Blasius v.
Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), and subsequent
cases. Blasius requires that a board's action primarily
motivated by a desire to frustrate shareholder franchise be
justified by a compelling interest. In Blasius, Chancellor
Allen justified heightened scrutiny for board action that
dilutes the effectiveness of the shareholder vote because:

       [The shareholder franchise] is critical to the theory that
       legitimates the exercise of power by some (directors
       and officers) over vast aggregations of property that
       they do not own. Thus, when viewed from a broad
       institutional perspective, it can be seen that matters
       involving the integrity of the shareholder voting process
       involve considerations not present in any other context
       in which directors exercise delegated power.
_________________________________________________________________

5. In relying on the absence of prejudice to IBSF, the district court
cited
cases in which a corporate board asked a court to exercise the court's
judicial discretion to enjoin proxy solicitations. See Cook United, Inc.
v.
Stockholders Protective Committee of Cook United, Inc., Fed. Sec. L. Rep.
P 96,875, 1979 WL 1209 (S.D.N.Y. 1979); Twentieth Century Fox Film
Corp. v. Lewis, 334 F. Supp. 1398 (S.D.N.Y. 1971). Although it may well
be appropriate for a court to decline to enjoin a proxy contest for
failure
to comply with SEC rules where such failure has not demonstrably
prejudiced the moving party, this case is different. Here, the court is
not
making an original determination whether to enjoin a proxy contest, but
is reviewing actions of the board that are properly within the board's
purview.

                               15
Blasius, 564 A.2d at 659.

The district court found that the board's primary
motivation in reducing the number of board seats was to
hinder the Committee's attempts to gain a voice on the
board and held that, under Blasius, board action taken for
such a purpose was invalid. IBSF (1) objects to the district
court's importation of Blasius into New Jersey law and (2)
contends that even under the Blasius standard, as that
standard has been further refined by Delaware courts, the
board's action was valid.

IBSF argues that because New Jersey's business
judgment rule, as codified at N.J.S.A. 14A:6-1 6 & 6-14,7
differs significantly from Delaware's, New Jersey courts
would not look to Delaware to inform their application of
the business judgment rule. IBSF is correct that, unlike
Delaware, New Jersey has chosen not to apply heightened
scrutiny to director action taken in defense against a
proposed acquisition. N.J.S.A. 14A:6-1(3) states that when
_________________________________________________________________

6. N.J.S.A. 14A:6-1 provides in relevant part that:

         (3) If . . . the board of directors determines that any proposal or
offer
         to acquire the corporation is not in the best interest of the
         corporation, it may reject such proposal or offer. If the board of
         directors determines to reject any such proposal or offer, the
board
       of directors shall have no obligation to facilitate, remove any
barriers
       to, or refrain from impeding the proposal or offer.

7. N.J.S.A. 14A:6-14 provides in relevant part that:

         (1) Directors and members of any committee designated by the
         board shall discharge their duties in good faith and with that
degree
         of diligence, care and skill which ordinarily prudent people would
         exercise under similar circumstances in like positions.

         . . .

         (4) In taking action, including, without limitation, action which
may
         involve or relate to a change or potential change in the control of
the
         corporation, a director shall be entitled to consider, without
         limitation, both the long-term and the short-term interests of the
         corporation and its shareholders. For the purpose of this
         subsection, "control" means the possession, directly or indirectly,
of
         the power to direct or cause the direction of the management and
         policies of the corporation, whether through the ownership of
voting
         shares, by contract or otherwise.

                                 16
faced with "any proposal or offer to acquire the corporation
. . . the board of directors shall have no obligation to
facilitate, remove any barriers to, or refrain from impeding
the proposal or offer." Cf. Unocal Corp. v. Mesa Petroleum
Co., 493 A.2d 946 (Del. 1985)(requiring the directors'
response to a hostile tender offer to be proportionate to the
threat posed). In this case, however, IBSF was not faced
with a "proposal or offer to acquire the corporation," so
N.J.S.A. 14A:6-1(3) does not insulate the board's action
from judicial scrutiny.

Neither the briefs of the parties, nor our researches, have
identified New Jersey cases which have addressed the level
of scrutiny to be applied to action by a board of directors
intended to hamper the exercise by some shareholders of
their franchise. Given the absence of pertinent New Jersey
case law, the district court was, in our judgment, correct in
concluding that New Jersey courts confronted with a case
like the case at bar would look to Delaware case law. When
faced with novel issues of corporate law, New Jersey courts
have often looked to Delaware's rich abundance of
corporate law for guidance. See, e.g., In re Prudential Ins.
Co. Derivative Litigation, 659 A.2d 961, 968-69 (N.J. Super.
App. Div. 1995)("Delaware is recognized as a pacesetter in
the area of corporate law."); Strasenburgh v. Straubmuller,
683 A.2d 818, 829 (N.J. 1996)(citing Delaware law for the
importance of distinguishing between individual and
derivative actions); Pogostin v. Leighton, 523 A.2d 1078
(N.J. Super. Ct. App. Div.)("As the issue involved herein is
one of corporate law, an appropriate source of reference is
the law of Delaware."), cert. denied, 484 U.S. 964 (1987).

We believe that it is likely that a New Jersey court would
again follow Delaware law in this case, especially because
New Jersey shares Delaware's interest in providing
significant protection to a shareholder's right to vote. In
Penn-Texas Corp. v. Niles-Bement-Pond Co., 112 A.2d 302,
307 (N.J. Ch. 1955), the court found that the postponement
of an annual meeting by unilateral action of the board of
directors constituted an infringement of the shareholders'
right to vote sufficient to invoke intervention by the court.
Penn-Texas cited Faunce v. Boost Co., 83 A.2d 649 (N.J. Ch.
1951), where the court characterized the right to vote as a

                               17
"basic contractual right" and "an incident to membership or
of the property in the stock, of which the stockholder or
member cannot be deprived without his consent." Id. at
652. In light of the protection that New Jersey law has
provided to shareholder voting rights, the district court was
not in error in finding that New Jersey courts would look to
Blasius to assess the propriety of the board's reduction in
size.

IBSF also contends, however, that the district court erred
in applying Blasius to this case because: 1) the district
court erred in finding that the board's primary motivation
in reducing its size was to hinder the Committee's proxy
solicitation; and 2) Blasius applies only where the franchise
process has been engaged in a challenge for control of a
company and in the present case the franchise process had
not been engaged nor could the Committee have gained
control of IBSF. Analysis of these contentions requires
review of a factual finding by the district court as well as
characterization of Blasius itself.

In challenging the district court's finding that the board's
elimination of an open seat was primarily intended to
impede the Committee's attempts to gain a voice on the
board, IBSF urges that the district court improperly
disregarded the directors' other reasons for reducing board
size -- 1) flexibility to add board members in case of an
acquisition, and 2) efficiency. IBSF does not dispute that
the directors were motivated at least in part by a desire to
prevent the Committee from being able to gain two seats on
the board.8 The district court found that the efficiency and
_________________________________________________________________

8. As the district court noted, the chairman of IBSF's board, Joseph M.
Ochman, Sr., gave deposition testimony that "[i]n 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." R. at 302a.
Later in his deposition, Ochman linked the best interests of the
shareholders to the defeat of the proposal urged by the Committee,
stating that:

       [T]he 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 it is absolutely

                               18
flexibility rationales were pretextual in light of the ability of
the board to accommodate up to fifteen members in the
event of an acquisition, and the lack of documentation of
discussions of flexibility or efficiency gains from a reduction
in board size at prior board meetings.9 IBS Financial Corp.,
954 F. Supp. at 985. This court is not convinced that the
district court was clearly in error in determining that, of the
three rationales, the desire to foreclose the Committee from
electing two directors was paramount. To the contrary, the
district court's finding appears to us to have substantial
support in the record.

IBSF argues that even if the board was primarily
motivated by a desire to prevent the Committee from
gaining two seats on the board, the board's action does not
fall within the Blasius rubric because at the time the board
reduced its size there was no chance that the Committee
could take control of the board. The district court rejected
the argument that a contest must be for outright control of
the board in order to trigger Blasius, reasoning that the
_________________________________________________________________

         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.

Furthermore, another IBSF director, Thomas J. Auchter, testified on
deposition that one of the reasons discussed by the board for reducing
the board size was that the reduction "would make it more difficult for
Mr. Seidman to gain control of IBSF." R. at 293a.

9. The district court also found that the board of Interboro (IBSF's
operating subsidiary) remained unchanged, at seven directors, and that,
in the event of an acquisition, new members would have to be added to
that board. The district court further observed that the efficiency and
flexibility rationales were dubious because they"arose for the first time
in depositions taken after the Court alerted the parties to the viability
and case law applicable to [the claim for reinstatement of the second
open director seat]." However, in response to IBSF's motion to correct or
modify the record, the district court revised its findings of fact to
read:

         Each rationale arose for the first time in depositions taken after
the
       litigation had commenced and in all but one instance after the
       Court alerted the parties to the viability of and case law
applicable
       to defendants' first counterclaim.
19
anticipated 1996 election represented a step towards
control of the board by the Committee.10 We agree.

Blasius dictates that actions taken for the purpose of
interfering with the shareholder franchise must be
supported by compelling justification. The board did not
establish a compelling justification in the district court and
does not urge such a justification in this appeal. Because
we uphold the district court's finding that the board
reduced its size in order to frustrate the Committee's
attempt to gain a substantial presence on the board, and
because the board has not articulated a compelling
justification for its action, the district court's invalidation of
the reduction in the board will be sustained.
_________________________________________________________________

10. IBSF 's attempts to characterize Blasius and the cases following it as
requiring that the proxy process be "engaged" are also unsuccessful. We
read the cases cited by IBSF in support of an "engagement" requirement
as allowing Delaware courts to consider the degree to which the proxy
process has been invoked in determining whether action taken by a
board is primarily motivated by a desire to impair the shareholder
franchise. See, e.g., Stahl v. Apple Bancorp, Inc., 579 A.2d 1115 (Del.
1990)(denying preliminary injunctive relief because"while postponement
of a noticed meeting will in some circumstances constitute an
inequitable manipulation, I can in no event see that the franchise
process can be said to be sufficiently engaged before the fixing of this
meeting date to give rise to that possibility"); Dolgoff v.
Projectavision,
1996 WL 91945 (Del. Ch. Feb. 29, 1996)(denying preliminary injunctive
relief where an annual meeting was scheduled in conformance with the
corporation's bylaws and where there was no reason to believe a proxy
contest was at hand because these facts indicated that the board's
action in scheduling the meeting early in the year was not intended to
thwart the exercise of the shareholder franchise); Kidsco v. Dinsmore,
674 A.2d 483 (Del. Ch. 1995)(citing Stahl for the proposition that "the
franchise process [cannot] be said to be sufficiently engaged before the
fixing of the meeting date to give rise to . . . .[the possibility of
inequitable manipulation]." None of these cases establishes a hard line
rule that a proxy contest must be engaged in order for Blasius to apply.
In the case at bar, it was, as noted supra, generally expected, following
the Committee's failure to elect directors of its choice in December 1995,
that the Committee would resume its campaign in 1996; thus when the
board acted, in the summer of 1996, to eliminate the Lockhart seat as
of the 1996 election, the proxy contest process had, realistically, been
"engaged" ever since the fall of 1995.

                               20
VI. Conclusion

In sum, we (1) disagree with the district court's ruling
that the Committee's Schedule 13D statement was
complete, and (2) disagree with the district court's ruling
that the IBSF board was equitably estopped from rejecting
the Committee's nominee, but (3) agree with the district
court's ruling that the IBSF board's reduction of the size of
the board from seven to six was improper. Accordingly, the
judgment of the district court as it relates to issues (1) and
(2) is reversed, and the judgment of the district court as it
relates to issue (3) is affirmed, and the case is remanded for
further proceedings consistent with this opinion.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               21
