1998 Decisions

Opinions of the United

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Precedential or Non-Precedential: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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Recommended Citation

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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