Opinion ID: 6498322
Heading Depth: 3
Heading Rank: 2

Heading: Fraudulent Conduct and Waste

Text: Independent of the District Court’s declaration that the Madonna Directors were acting ultra vires under the Bylaws, the Court also found that fraud and waste justified the appointment of a custodian. A review of the Court’s decision, however, reveals that there was no evidence to justify the drastic remedy of appointing a custodian. With respect to fraud, the District Court merely opined that the accusations between the two Board factions “suggest widespread self-dealing and dishonesty among the Directors.” (App. at 18.) It conceded that it did not actually know “if either accusation is true.” (App. at 18.) And that is a serious problem. Mere speculation of fraud will not justify appointing a custodian, particularly when that speculation is based on dispute over the Bylaws’ quorum requirement. Article II, Section 15 of the Bylaws defines a quorum as “[a] majority of the members or the entire Board of Directors[.]” (App. at 46.) The Madonna Directors interpret that to mean a majority of the directors then in office; the Hill Directors say that it contains a typo and should instead read “a majority of the members of the entire Board.” We need not offer an interpretation of that phrase, but Republic First would do well to amend Section 15 to clarify that language. 28 nothing more than the plaintiff’s unsupported allegations. See, e.g., Tyler v. O’Neill, 1998 WL 695991, at  (E.D. Pa. Oct. 6, 1998) (declining to appoint a custodian where there were “no substantiated allegations of present waste, mismanagement, fraud, or dissipation”), aff’d, 189 F.3d 465 (3d Cir. 1999). With respect to waste, the District Court expressed its concern that the infighting on the Board would “injure both public confidence in the institution and the institution itself.” (App. at 18-19.) But it acknowledged that it could not quantify that harm, and it cited no other evidence or even allegation of waste. Potential reputational damage stemming from infighting directors does not come close to the type of waste that justifies appointing a custodian. See Principles of Corp. Governance: Analysis & Recommendations § 1.42 (Am. Law Inst. 1994) (defining corporate waste as “an expenditure of corporate funds or a disposition of corporate assets” in exchange for little or no consideration and with no rational business purpose); In re Tower Air, Inc., 416 F.3d 229, 238 (3d Cir. 2005) (explaining that, to constitute corporate waste under Delaware law, “the decision must go so far beyond the bounds of reasonable business judgment that its only explanation is bad faith”). A contrary ruling would invite every dissenting director of a Pennsylvania corporation to request a custodian to supplant the governance rules of the company. The District Court’s terse reasoning and the lack of any well-developed evidentiary record expose the insufficient factual basis for the findings of fraud and waste. Appointing a custodian based on those reasons, on the current record, was an abuse of discretion. 29