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. e du/thir dc ir c uit_1998/27Filed 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)

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*Judge Sloviter was Chief Judge of the Court of App eals for the Third Circuit at the time this appeal was submitted. Judg e 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 d isclosure provisions of the Securities Exchange Act of 1934, 15 U.S.C. SS 77b et seq. (the "Exchange Act"). The fac ts of the
case revolve around the efforts of the IBSF Committ ee to Maximize Shareholder Value ("the Committee")-- a gr oup of shareholders of IBS Financial Corporation ("IBSF "), a New Jersey corporation -- to obtain two seats on IB SF '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 se ats from seven to six. The board later rejected the Com mittee's nominee for the one open seat, citing the Committee 's failure to comply with certain provisions of the IB SF Certificate of Incorporation. With a view to gettin g 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,

2and (2) the board properly rejected the Committee's board

nominee. Some members of the Committee counterclaim ed, seeking an injunction requiring IBSF 's board to re instate
the board seat it had eliminated.1 The district cou rt, in an opinion handed down on January 23, 1997, found in f avor 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 Comm ittee's board nominee; and (3) IBSF acted improperly in red ucing
the number of board seats. The district court accor dingly
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 distri ct court's first two determinations, but will affirm t he 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 enti ties that make up the IBSF Committee to Maximize Shareho lder Value is important to an understanding of the issue s 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 distr ict court's concise description of the principal players:

[Plaintiff-appellant] IBS Financial Corp. ( "IBSF") is a savings and loan holding company owning Inte rboro Savings & Loan Association ("Interboro"). IB SF 's shares are publicly registered pursuant to t he Securities Exchange Act of 1934, 15 U.S.C. S S 77b et seq. (the "Exchange Act"), and actively trad ed. Defendants together own approximately 8.5% o f the outstanding shares of IBSF common stock.

Seidman & Associates, L.L.C. (SAL) is a lim ited liability company managed by Lawrence B. Sei dman ("Seidman"). SAL's members are Seidman, Seid cal & Associates, L.L.C. ("Seidcal"), Sonia Seidma n ("Mrs.

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

3Seidman"), and two other individuals. . . . Pursuant to

SAL's operating agreement, Seidman as managi ng member has exclusive and broad investment po wers. A majority in interest, however, may remove or replace Seidman as managing member with or without c ause upon payment of a removal penalty. [A majori ty in interest also has complete discretion with r espect to "[a]ll decisions, consents, authorizations a nd 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 manage r exclusive and broad investment powers. A maj ority in interest, however, may remove or replace Sei dman as manager with or without cause. [As with SAL, a majority in interest has complete discretion with respect to "[a]ll decisions, consents, autho rizations and rights in connection with the business and a ffairs" of SAL II.] At present, Seidcal owns a 75% inte rest in SAL
II but takes no active role in its affairs.

Federal Holdings, L.L.C. ("Federal") is a l imited 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 Co rp. ("8th Floor"), whose Vice President is Kevin Moore .] Under Federal's operating agreement, Seidman is in vestment manager and enjoys exclusive and complete po wer to buy, sell, and vote Federal's stock. The ope rating agreement names Kevin Moore ("Moore") admini strative manager and clothes him with the authority t o make
non-investment decisions and remove Seidman as investment manager for cause [until June 13, 1997, and to remove Seidman for any reason thereaf ter. The agreement makes no provision for removing Mo ore as administrative manager.] Neither Charisma, 8 th Floor,
nor Moore takes an active role in Federal's investment
affairs.

4. . . .

Seidcal is composed of several members of t he Cali family. Brant B. Cali is Seidcal's administr ative manager, but Seidcal's operating agreement p rovides that a majority in interest shall manage and conduct Seidcal's business affairs. According to Bra nt Cali, the lion's share of Seidcal's funding probably d erives from three Cali family "seniors," namely John J. Cali, Angelo Cali, and Ed Leshowitz, who are not themselv es Seidcal
members but whose children are Seidcal membe rs.

. . .

Defendants SAL, SAL II, Federal, . . . [and ] Seidman, [among others] . . . comprise an unincorpora ted 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, an d the district court's ruling on each of these issues, ma y be
summarized as follows:

A. Schedule 13D statement: In September 1995, the
Committee filed a "Schedule 13D" statement with IBS F and the SEC. The Securities Exchange Act of 1934 requir es the filing of a Schedule 13D statement by "any person w ho . . . is directly or indirectly the beneficial owner of m ore than 5 per centum" of a class of equity securities, includ ing a syndicate or group acting for the purpose of acquir ing such ownership, 15 U.S.C. S 78m(d)(3), within ten days o f acquiring such ownership, id. S 78m(d)(1). The SEC' s implementing regulations also require, via Instruct ion C, information regarding "each person controlling" a m ember 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 file d

5December 3, 1996, some three weeks after this litig ation

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 respe ct to Seidman as a "person controlling" SAL, SAL II, and Federal. However, no information was provided with respect t o Seidcal, Charisma, 8th Floor, Moore, or those who m ay be perceived as "controlling" Seidcal, Charisma, 8th F loor, and

Moore.

The district court, in its January 23, 1997 opinion , ruled
that the Committee's Schedule 13D recitals were com plete, because Seidman managed SAL, SAL II, and Federal without consulting others, and, indeed, the very pu rpose 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 9 88. "Looking to the realities of each organization," th e district
court concluded "that Seidman and not Seidcal contr ols both SAL and SAL II within the meaning of Instructi on C." Id. at 987. Moreover, "Seidman makes all of Federal 's investment decisions without consulting Moore or ot her investors . . . . Nor has IBSF alleged that Moore i ntends to remove Seidman or that he uses his authority to do so to
influence Seidman's investment decisions . . . . Ac cordingly, the court concludes that Moore is not a `controllin g 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 -- Er nest
Beier and Richard Whitman -- for the two seats it e xpected to be open at the 1996 annual meeting; when informe d that only one seat would be open, the Committee selected Beier
as its nominee for that seat. The Committee also su pplied IBSF with information purportedly in compliance wit h 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 m ust be accompanied by certain information about the nom inee, including the information "that is required to be d isclosed in solicitations of proxies with respect to nominee s for

6election as directors, pursuant to Regulation 14A u nder the

Exchange Act." Article 9.3 gives the board the powe r 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 nominati on; the stockholder then may cure the identified deficienci es 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 pro blem, 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 v oting power as to their shares, the submission did not id entify the clients. IBSF believed that the identity of the clients was required to be disclosed by Regulation 14A of the S ecurities 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 Novembe r 8, 1996; the IBSF board granted the request. On Novemb er 8,
in Amendment 8 to the Committee's Schedule 13D statement, the Committee disclosed information abou t Seidman's arrangements with one of his clients, Mic hael

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 t he 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 i ncorporation to reject nominations "not timely made," brought th is suit seeking, inter alia, a declaration that it was enti tled not to recognize the Beier nomination. However, the distri ct 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 be cause IBSF had accepted the Committee's nominations in 19 95,

7allowing IBSF to reject the Committee's "substantia lly

similar submissions" in 1996 would be " `unjust in the eyes of the law.' " Id. (quoting Miller v. Teachers' Pen sion & Annuity Fund, 179 N.J. Super. 473, 477, 432 A.2d 56 0, 562 (App. Div.), cert. denied, 88 N.J. 502, 443 A.2 d 714 (1981). Second, the district court reasoned that th e Committee's untimeliness had not prejudiced IBSF, s ince the pertinent information had in fact been disclose d, 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 direct ors 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 reelectio n that year, announced that he intended to step down; the IBSF board thereupon voted to eliminate the Lockhart sea t as of the 1996 annual meeting, leaving only one seat open for election at that meeting.

IBSF 's chairman, Joseph M. Ochman, Sr., and anothe r director, Thomas J. Auchter, gave deposition testim ony that the board acted for three reasons in reducing the b oard's size from seven to six. First, the board thought th at its work could be performed as well with one fewer memb er, because most of the decisions affecting IBSF -- a h olding company -- were made by the board of IBSF 's operat ing subsidiary, Interboro Savings & Loan Association. S econd, the board thought a smaller size would provide more flexibility if IBSF should in the future undertake acquisitions of other companies. Third, the board w ished to hinder the Committee's attempt to gain a substantia l presence on the board.

The district court concluded that the first two pro ffered reasons were "suspiciously pretextual" and that "th e 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 gr anted judgment on the Committee's counterclaim and set as ide
the elimination of the seventh board seat.

8D. District court opinion: As noted above, the dis trict

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 Comm ittee 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 14A filings were complete, and (5) declared that IBSF could not refuse to provide the Committee with a shareholder list. I BSF 's appeal challenges only the first three of these rul ings.

The district court had subject matter jurisdiction pursuant to 28 U.S.C. SS 78aa, 1331, and 1367; we h ave jurisdiction pursuant to 28 U.S.C. S 1291. Our revi ew of the district court's legal determinations and its appli cation of legal precepts to facts is plenary; we review the d istrict court's factual findings for clear error. See Epste in Family Partnership v. KMart Corp., 13 F.3d 762, 766 (3d Ci r. 1994).

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

IBSF argues first that the Committee failed to disc lose certain information required to be publicly disclos ed by section 78m(d) of the Exchange Act. This section re quires 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 securit ies, regardless of technique employed, which might repre sent a potential shift in corporate control.' " Hubco, Inc . v. Rappaport, 628 F. Supp. 345, 351 (D.N.J. 1985) (cit ations omitted).

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

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2. These items, in brief, are: (1) "Security and Is suer"; (2) "Identity

and Background"; (3) "Source and Amount of Funds or Oth er Consideration";

9Committee 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 li mited 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 ge neral partner or who functions as a general partne r of such limited partnership; (iii) each member of su ch syndicate or group; and (iv) each person con trolling 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 r eport information about the persons or entities "controll ing" 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 Federa l -- are each primarily owned by one other entity: Seidc al 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 obligat ed to file Schedule 13D information for Seidcal as a "per son 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 inform ation 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 "investmen t manager" of Federal. However, the operating agreeme nts of each of these three companies give others the power to remove him: Seidman may be removed from his positio ns

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(4) "Purpose of Transaction"; (5) "Interest in Secu rities of the Issuer"; (6) "Contracts, Arrangements, Understandings or Relatio nships with Respect to Securities of the Issuer"; and (7) "Material to be Filed as Exhibits."

17
C.F.R. S 240.13d-101.

10at, respectively, SAL and SAL II by a majority in i nterest of

the members of those companies; and Seidman may be removed from his position at Federal by Moore, Fede ral's administrative manager (for cause before June 13, 1 997, and without cause thereafter).

IBSF argues that Seidcal is a "person controlling" SAL and SAL II by virtue of its majority ownership inte rest in these companies; the defendants argue that only Sei dman, as manager or managing member, is a "person control ling" these companies. Similarly, IBSF argues that Charis ma, 8th Floor, and Moore are all "person[s] controlling " Federal, while the defendants argue that only Seidman is a"p erson 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 pr actice, only he has exercised actual control over these com panies. We disagree.

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

The term "control" (including the terms "con trolling," "controlled by" and "under common control wi th") means the possession, direct or indirect, of the power
to direct or cause the direction of the mana gement and policies of a person, whether through the ow nership of voting securities, by contract, or otherwise

.

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

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3. This court has previously construed the term "co ntrolling 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 sec urities laws. In Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (3d Cir. 19 75), this court quoted
the definition of "control" in 17 C.F.R.S 240.12b-2 and then said:

11The operating agreements of SAL and SAL II give the

"majority in interest of the Members" -- i.e., Seid cal -- 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 polici es" of SAL and SAL II, notwithstanding that Seidcal has re frained 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 a nd also has authority over "all other decisions, conse nts, authorizations and rights in connection with the management of the Company." Moore therefore has"the power to direct or cause the direction of the manag ement and policies" of Federal, and hence is a "person co ntrolling"
Federal for whom Schedule 13D information should ha ve been reported.

The Federal operating agreement puts all administra tive powers in the hands of Moore, and makes no provisio n for his removal as administrative manager; the operatin g agreement does not in explicit terms vest any autho rity in Charisma or its sole general partner, 8th Floor, of which

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Many factors are involved in determining if one is a "controlling person." In making this determination, the c ourts have given heavy consideration to the power or potential powe r to influence and control the activities of a person, as oppos ed 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 Ins truction C to Schedule

13D.

12Moore is vice-president. At oral argument in this c ourt,

counsel for IBSF acknowledged that its contention t hat
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 unwilli ng 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 Commi ttee'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 w as equitably estopped from rejecting the Committee's nominations, because it had accepted substantially similar nominations the year before. Second, the district c ourt found that IBSF would not be prejudiced by being re quired 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 pa rty whereby he is absolutely precluded, both at law and in equity, from asserting rights which might perhaps ha ve otherwise existed . . . as against another p erson, 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) (quot ing Carlsen v. Masters, Mates & Pilots Pension Plan Tru st, 403 A.2d 880, 882 (N.J. 1979)) (alterations in original ).4 The

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

13court has added that "[t]he doctrine of equitable e stoppel is

applied `only in very compelling circumstances,'`wh ere the interests of justice, morality and common fairness clearly dictate that course.' " Palatine I v. Planning Boar d, 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 1 995] no doubt influenced the content and timing of the Comm ittee's current submissions." That being so, the district c ourt felt it would be " `unjust' " to "allow the board's chan ged interpretation of its Certificate of Incorporation to work prejudice to defendants' nomination." We see no inj ustice here. Whatever basis the Committee may have had for relying on IBSF 's acceptance of the 1995 submissio ns necessarily vanished when the Committee was placed on notice of IBSF 's dissatisfaction in 1996. A situat ion in which the Committee had eight days to cure the anno unced deficiencies and elected not to do so hardly rises to the level of " `very compelling circumstances,' `where the in terests of justice, morality and common fairness clearly dicta te' " that IBSF not be permitted to bar the Committee's nomina tions.

Moreover, the district court's determination that I BSF would not be prejudiced by a requirement that it ac cept the Committee's nominees, while perhaps correct as a fa ctual matter, is irrelevant as a legal matter. The Certif icate of Incorporation gives the board the discretion to rej ect nominations if the nominees do not provide specifie d information, after notice, within the time given to cure. "The certificate of incorporation . . . constitute[s] a contract between the corporation and its stockholders and th e 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 incorporati on offends public policy and therefore may not be enforced. Se e, e.g., New Jersey v. Jefferson Lake Sulphur Co., 178 A.2d 329, 338-39 (N.J. 1962). Article 9.3 -- which provides n otice and an opportunity to cure before a nomination is rejec ted -- is

14reasonable on its face. Mere absence of prejudice t o the

corporation does not empower a court to veto a boar d of directors' exercise of a discretionary authority ve sted in the board by the certificate of incorporation.5

Accordingly, we conclude that the IBSF board was ac ting within its authority in declining to accept the nom inations of the Committee for failure to comply with the pro visions of Article 9.3 of IBSF's certificate of incorporati on.

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

The district court determined that a New Jersey cou rt would measure the propriety of the board's action u nder the standard set forth by Delaware courts in Blasiu s v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), and subs equent cases. Blasius requires that a board's action prima rily motivated by a desire to frustrate shareholder fran chise be justified by a compelling interest. In Blasius, Cha ncellor Allen justified heightened scrutiny for board actio n that
dilutes the effectiveness of the shareholder vote b ecause:

[The shareholder franchise] is critical to t he theory that legitimates the exercise of power by some (d irectors and officers) over vast aggregations of prop erty that they do not own. Thus, when viewed from a br oad institutional perspective, it can be seen th at matters involving the integrity of the shareholder v oting process involve considerations not present in any ot her context in which directors exercise delegated power.

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5. In relying on the absence of prejudice to IBSF, the district court
cited cases in which a corporate board asked a court to e xercise the court's judicial discretion to enjoin proxy solicitations. See Cook United, Inc.

v. Stockholders Protective Committee of Cook United, I nc., Fed. Sec. L. Rep. P 96,875, 1979 WL 1209 (S.D.N.Y. 1979); Twentieth C entury 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 p roxy 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.

15Blasius, 564 A.2d at 659.

The district court found that the board's primary motivation in reducing the number of board seats wa s to hinder the Committee's attempts to gain a voice on the board and held that, under Blasius, board action ta ken 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 t hat standard has been further refined by Delaware court s, 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 c ourts would not look to Delaware to inform their applicat ion of the business judgment rule. IBSF is correct that, u nlike Delaware, New Jersey has chosen not to apply height ened scrutiny to director action taken in defense agains t a proposed acquisition. N.J.S.A. 14A:6-1(3) states th at when

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

(3) If . . . the board of directors determin es that any proposal or

offer to acquire the corporation is not in the bes t interest of the corporation, it may reject such proposal or offer. If the board of directors determines to reject any such prop osal or offer, the

board of directors shall have no obligation to fac ilitate, 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 d esignated by the board shall discharge their duties in good f aith and with that degree of diligence, care and skill which ordinaril y prudent people would
exercise under similar circumstances in like positions.

. . .

(4) In taking action, including, without lim itation, action which

may involve or relate to a change or potential c hange 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 pu rpose of thissubsection, "control" means the possession, directly or indirectly,

of the power to direct or cause the direction o f the management and policies of the corporation, whether through the ownership of voting shares, by contract or otherwise.

16faced with "any proposal or offer to acquire the co rporation

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

Neither the briefs of the parties, nor our research es, have identified New Jersey cases which have addressed th e level of scrutiny to be applied to action by a board of d irectors intended to hamper the exercise by some shareholder s 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 la w. When faced with novel issues of corporate law, New Jerse y courts
have often looked to Delaware's rich abundance of corporate law for guidance. See, e.g., In re Pruden tial Ins. Co. Derivative Litigation, 659 A.2d 961, 968-69 (N. J. Super. App. Div. 1995)("Delaware is recognized as a pacese tter in the area of corporate law."); Strasenburgh v. Strau bmuller, 683 A.2d 818, 829 (N.J. 1996)(citing Delaware law f or 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 refe rence is the law of Delaware."), cert. denied, 484 U.S. 964 (1987).

We believe that it is likely that a New Jersey cour t 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 postp onement of an annual meeting by unilateral action of the bo ard of directors constituted an infringement of the shareh olders' 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 v ote as a

17"basic contractual right" and "an incident to membe rship or

of the property in the stock, of which the stockhol der 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 woul d look to Blasius to assess the propriety of the board's redu ction in
size.

IBSF also contends, however, that the district cour t erred in applying Blasius to this case because: 1) the di strict court erred in finding that the board's primary mot ivation 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 proce ss had not been engaged nor could the Committee have gaine d control of IBSF. Analysis of these contentions requ ires review of a factual finding by the district court a s well as
characterization of Blasius itself.

In challenging the district court's finding that th e 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 improperl y disregarded the directors' other reasons for reduci ng board size -- 1) flexibility to add board members in case of an acquisition, and 2) efficiency. IBSF does not dispu te that the directors were motivated at least in part by a desire to prevent the Committee from being able to gain two s eats on
the board.8 The district court found that the effic iency and

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8. As the district court noted, the chairman of IBS F's board, Joseph M. Ochman, Sr., gave deposition testimony that "[i]n t he event there was any proxy contest, [it would be] in the best intere st[s] of all

shareholders to have only one nominee for directorship rather th an two." R. at 302a. Later in his deposition, Ochman linked the best int erests of the shareholders to the defeat of the proposal urged by the Committee, stating that:

[T]he dissident group of shareholders were a dvocating very clearly
in their material and press releases that we sh ould hire an investment banker and put the company up for sale throu gh an auction. The board believed then and firmly believes toda y that it is absolutely

18flexibility rationales were pretextual in light of the ability of

the board to accommodate up to fifteen members in t he event of an acquisition, and the lack of documentat ion of discussions of flexibility or efficiency gains from a reduction in board size at prior board meetings.9 IBS Financ ial Corp., 954 F. Supp. at 985. This court is not convinced th at the district court was clearly in error in determining that, of the three rationales, the desire to foreclose the Commi ttee from electing two directors was paramount. To the contra ry, the district court's finding appears to us to have subs tantial 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 Commi ttee
could take control of the board. The district court rejected the argument that a contest must be for outright co ntrol of the board in order to trigger Blasius, reasoning th at the

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not in the best interest of all our sharehol ders 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. Aucht er, testified on deposition that one of the reasons discussed by the board for reducing
the board size was that the reduction "would make i t 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 h ave to be added to
that board. The district court further observed tha t the efficiency and flexibility rationales were dubious because they"ar ose for the first time in depositions taken after the Court alerted the pa rties to the viability and case law applicable to [the claim for reinstate ment of the second open director seat]." However, in response to IBSF' s motion to correct or modify the record, the district court revised its f indings of fact to

read:

Each rationale arose for the first time in d epositions taken after

the litigation had commenced and in all but one instance after the Court alerted the parties to the viability o f and case law applicable
to defendants' first counterclaim.19anticipated 1996 election represented a step toward s

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 di d not establish a compelling justification in the distric t court and does not urge such a justification in this appeal. Because we uphold the district court's finding that the boa rd
reduced its size in order to frustrate the Committe e'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.

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10. IBSF 's attempts to characterize Blasius and th e cases following it as requiring that the proxy process be "engaged" are a lso unsuccessful. We read the cases cited by IBSF in support of an "enga gement" requirement as allowing Delaware courts to consider the degree to which the proxy process has been invoked in determining whether act ion 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 con stitute an inequitable manipulation, I can in no event see tha t the franchise process can be said to be sufficiently engaged befo re the fixing of this meeting date to give rise to that possibility"); Do lgoff v. Projectavision, 1996 WL 91945 (Del. Ch. Feb. 29, 1996)(denying prel iminary injunctive relief where an annual meeting was scheduled in con formance with the corporation's bylaws and where there was no reason to believe a proxy
contest was at hand because these facts indicated t hat 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 p roposition that "the franchise process [cannot] be said to be sufficient ly engaged before the fixing of the meeting date to give rise to . . . .[ the possibility of inequitable manipulation]." None of these cases est ablishes 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, general ly expected, following
the Committee's failure to elect directors of its c hoice in December 1995, that the Committee would resume its campaign in 199 6; thus when the board acted, in the summer of 1996, to eliminate th e Lockhart seat as of the 1996 election, the proxy contest process had , realistically, been "engaged" ever since the fall of 1995.

20VI. Conclusion

In sum, we (1) disagree with the district court's r uling
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 rej ecting the Committee's nominee, but (3) agree with the dis trict court's ruling that the IBSF board's reduction of t he size of the board from seven to six was improper. According ly, the judgment of the district court as it relates to iss ues (1) and (2) is reversed, and the judgment of the district c ourt as it relates to issue (3) is affirmed, and the case is r emanded for further proceedings consistent with this opinion.

A True Copy:

Teste:

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

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