Court Opinion

ID: 6498322
Source: CourtListenerOpinion
Date Created: 2022-07-06 22:00:15.993292+00
Date Added: 2024-06-11T08:50:56.767297
License: Public Domain

PRECEDENTIAL

     UNITED STATES COURT OF APPEALS
          FOR THE THIRD CIRCUIT
               _____________

                   No. 22-2023
                  _____________

VERNON W. HILL, II; BRIAN TIERNEY; BARRY
                     SPEVAK,
Derivatively on Behalf of Republic First Bancorp Inc.

                         v.

     ANDREW B. COHEN; LISA JACOBS;
   HARRY MADONNA; HARRIS WILDSTEIN;
      REPUBLIC FIRST BANCORP INC.,

           Andrew B. Cohen, Lisa Jacobs,
          Harry Madonna, Harris Wildstein,
                              Appellants
                 _______________

   On Appeal from the United States District Court
      For the Eastern District of Pennsylvania
              (D.C. No. 2-22-cv-1924)
    District Judge: Honorable Paul S. Diamond
                 _______________

                      Argued
                   June 28, 2022
 Before: JORDAN, PORTER, and PHIPPS, Circuit Judges

                    (Filed: July 6, 2022)
                     _______________

Andrew M. Erdlen
John S. Summers
Hangley Aronchick Segal Pudlin & Schiller
One Logan Square
18th & Cherry Streets, 27th Floor
Philadelphia, PA 19103

Frank Olander
Michael E. Swartz [ARGUED]
Schulte Roth & Zabel
919 Third Avenue
New York, NY 10022
      Counsel for Appellants

Amit Agarwal [ARGUED]
Holland & Knight
315 South Calhoun Street, Suite 600
Tallahassee, FL 32301

Tracy Z. Quinn
Carolyn P. Short
Holland & Knight
2929 Arch Street, Suite 800
Philadelphia, PA 19104

                              2
Martin L. Seidel
Holland & Knight
31 West 52nd Street, 12th Floor
New York, NY 10019
      Counsel for Appellees
                     _______________

                 OPINION OF THE COURT
                     _______________

JORDAN, Circuit Judge.

       Under Pennsylvania law, a court has the power to
appoint a custodian to take control of a corporation if the
corporation’s board of directors is deadlocked or if the
directors’ acts are illegal, oppressive, fraudulent, or wasteful.
15 Pa. Cons. Stat. §§ 1767(a)(3), 1981(a). But that power
should be “used sparingly, with caution and circumspection,
and only in an extreme case[.]” Tate v. Phila. Transp. Co., 190
A.2d 316, 321 (Pa. 1963).

       This is not such an extreme case, though its facts are
dramatic. The eight-person Board of Directors of Republic
First Bancorp, Inc. (“Republic First” or “FRBK”1) became
evenly split into two factions – one led by the current CEO,
Vernon W. Hill, II (the “Hill Directors”), and one led by the
former CEO, Harry D. Madonna (the “Madonna Directors”)
– with competing visions for the future of Republic First and
its bank subsidiary. The deadlock persisted until May 10,

     “FRBK” is Republic First’s stock ticker symbol on the
       1

NASDAQ.

                               3
2022, when one of the Hill Directors died. The Madonna
Directors immediately used their newfound numerical
advantage to start rearranging the bank’s leadership and to take
steps to fill the vacancy on the Board with an ally. The Hill
Directors sued in the District Court to make them stop.

        Within hours of receiving the complaint, the District
Court ordered the Madonna Directors to cease their actions
while it considered whether to appoint a custodian. Nine days
later, without an evidentiary hearing or fact-finding, the Court
did appoint a custodian to take control of Republic First and to
hold a special shareholders’ meeting to fill the vacant Board
seat. The following month, the District Court – without
prompting from any shareholder or Board member – directed
the custodian to add an additional seat to the Board and to fill
that seat at the special shareholders’ meeting as well.

       The District Court’s decision to displace the corporate
governance structure of a publicly traded company, while no
doubt well-intended, did not reflect the required caution,
circumspection, or justification for such a drastic step.
Republic First’s bylaws (the “Bylaws”) provide instructions
for how the Board should proceed after the death of a director,
and, in this case, the Madonna Directors followed those
instructions. They were and are entitled to fill the vacancy,
thus presumptively giving them a Board majority. The District
Court abused its discretion by hastily supplanting the Bylaws
with its own process for filling the vacancy. Because the
Madonna Directors were acting pursuant to the Bylaws when
they took steps to appoint a new director, there was no
deadlock, illegality, oppression, or any other ground for
appointing a custodian for Republic First. Having expedited

                               4
consideration of the Madonna Directors’ appeal, we will now
reverse.

I.     BACKGROUND2

       The Board of Republic First is split into two factions
that are engaged in a contentious battle over the future of the
company. The first faction is led by Hill, current CEO of
Republic First. His allies are Brian Tierney and Barry Spevak,
and, prior to his passing, also included Theodore Flocco. The
other faction is led by Madonna, founder and former CEO of
Republic First. Madonna’s allies are Andrew Cohen, Lisa
Jacobs, and Harris Wildstein. In general, the Hill Directors’
vision for Republic First is to press forward with its current
strategy, which is focused on expanding its retail banking
business and adding new branch locations, while the Madonna
Directors have indicated an interest in refinancing or selling
the company.

       Those competing visions created tension on the Board
and began playing out in public ahead of this year’s upcoming
annual shareholders’ meeting, at which the seats of three Hill
Directors, including Hill himself, are up for election. The first
indication that the upcoming Board election would be
unusually eventful came in October 2021, when Driver
Opportunity Partners I, LP (“Driver”), a shareholder of
Republic First, sent a letter to the Board criticizing Hill’s
leadership and the retail-expansion business strategy. Driver

       2
         The following background section is based on the
allegations of the Hill Directors’ complaint and what we
understand to be, from the record provided, undisputed facts.

                               5
called for the removal of Hill from the Board and from his
position as CEO. A month later, Driver submitted a slate of
three Board candidates to replace Hill and two of Hill’s allies,
Spevak and Flocco.

       Driver is not the only activist investor interested in the
upcoming Board election. In January 2022, a group of
shareholders consisting of Phillip Norcross, Gregory Braca,
and the Avery Conner Capital Trust (collectively, the
“Norcross Group”) sent a letter to the Board proposing several
business strategy changes and suggesting that Hill be replaced
as CEO. The Norcross Group wanted to meet with the Board
about its proposals, but “Hill indicated no interest on his part
in any discussions[.]” (App. at 73.) That prompted the
Norcross Group to announce that it intended to solicit proxies
in opposition to the incumbent directors.

       Around this same time, the Madonna Directors began
signaling their interest in a sale of Republic First. On multiple
occasions, they “proposed to vote, and voted, in favor of
entertaining inquiries and possible offers for the sale of FRBK
and have vigorously advocated for a sale to the Norcross
Group[.]” (App. at 73.) The Hill Directors opposed a sale,
arguing that the company is still in the middle of its expansion
strategy and that the recent market conditions for bank stocks
would result in unfavorable deal terms.

       Despite the divergent views on the merits of a sale, the
Board unanimously nominated Hill, Spevak, and Flocco for re-
election as Republic First’s slate of candidates at the annual
shareholders’ meeting. That cooperation quickly unraveled,
however, when the Board’s compensation committee (which

                               6
included Spevak and Flocco) voted to not renew Madonna’s
employment agreement with Republic First.3

       The next week, on March 4, 2022, the Madonna
Directors issued a press release accusing the Hill Directors of
self-dealing and mismanagement (the “March Press Release”).
Captioned “Concerned Republic First Bancorp Directors
Oppose Potential Harmful Actions by Other Company Board
Members,” the press release raised three “concerns”:

      1. the “[e]xtension of a contract to have a company
         owned by Hill’s wife … handle architecture, interior
         design and related services for the bank’s branches”;

      2. “[a]greements obligating the incurring [of] expenses
         related to the opening of new branches and the
         renovation of existing ones”; and

      3. “proposed amendments to certain employment
         contracts that would provide significantly
         augmented severance payments to, and risk
         retention of, key executives should Hill be voted off
         the company’s board at the upcoming annual
         meeting or cease to serve as CEO.”

(App. at 75.) The March Press Release garnered significant
press coverage. Days later, the Norcross Group filed a lawsuit
in Pennsylvania state court against Republic First and the Hill
Directors, based entirely on the allegations in the March Press

      3
       The complaint does not identify the entirety of the
compensation committee nor the nature of Madonna’s current
employment agreement.

                              7
Release. Almost simultaneously, the Norcross Group offered
an investment of at least $50 million in exchange for a 51%
stake in Republic First, the right to nominate at least two
members to the Board, and the resignation of Hill as chairman
and CEO. The lawsuit was later withdrawn, and the Board has
not acted on the offer, despite interest from the Madonna
Directors.

        The March Press Release also led Republic First’s
independent auditor, Crowe LLP, to express concern about the
forthcoming audit of Republic First’s financial statements for
the 2021 fiscal year. Crowe asked each director to sign a letter
representing that there was no substance to the concerns
expressed in the March Press Release. When the Madonna
Directors and the Hill Directors failed to agree on the contents
and conditions of such a letter, Crowe notified them that it
would not certify Republic First’s financial statements until an
independent investigation of the company had been completed.
The two Board factions agreed to hire Wilmer Cutler Pickering
Hale and Dorr LLP (“WilmerHale”) as independent legal
counsel to conduct that investigation. In the meantime,
however, Republic First would have no audited financial
statements, leaving it unable to file its Form 10-K for the 2021
fiscal year or solicit proxies for its proposed slate of directors.
The Board anticipated that it would have to delay its annual
shareholders’ meeting until after it could file the 10-K. During
this time, Driver continued to solicit proxy votes for its slate of
Board candidates.

       The unexpected upheaval leading directly to this suit
arrived on May 10, when Flocco, one of the Hill Directors,
passed away. Two days later, Madonna called a special
meeting of the Board for May 13. The Hill Directors did not

                                8
attend that meeting, but the Madonna Directors, pressing
forward with a new 4-to-3 majority on the Board, proceeded to
remove Hill as Chairman of the Board, install Madonna as
Interim Chairman, authorize Madonna to approve external
communications on behalf of Republic First in certain
situations, and remove certain executives from the board of
directors of Republic First’s bank subsidiary. Later that day,
the Madonna Directors published a press release notifying
shareholders of the change in leadership (the “May Press
Release”). On May 16, Madonna called for two more special
board meetings – one on May 17 at 9:30 PM, and the next on
May 18 at 1:00 PM – intending, among other things, to appoint
a new director to fill the vacancy left by Flocco.

       In response, the Hill Directors filed this lawsuit on the
afternoon of May 17. Their verified complaint alleged that the
Madonna Directors (a) breached fiduciary duties, (b) violated
section 14(a) of the Securities Exchange Act of 1934, (c)
violated section 13(d) of the Exchange Act, and (d) violated
Republic First’s Bylaws. The complaint requested, among
other forms of relief, the appointment of a custodian to manage
Republic First, pending the outcome of the litigation. The Hill
Directors simultaneously filed a motion for a TRO and
preliminary injunction barring the Madonna Directors from
holding the proposed May 17 or 18 meetings or from making
any further board-level changes. The TRO motion did not,
however, request a custodian.

       At 5:30 that same afternoon, the District Court held a
hearing to consider the emergency motion. It denied the TRO
without prejudice and instructed the parties to enter into a
status quo order. The Court noted that it was inclined to find
that the Madonna Directors were violating the Bylaws by

                               9
conducting business at Board meetings without a proper
quorum. It also suggested that it was strongly considering
appointing a custodian to fix the company’s “big mess,” even
telling the parties that it had “already got one picked out.”
(App. at 185, 190.) After the hearing, the Court directed the
Madonna Directors to submit a brief addressing the Hill
Directors’ request for the appointment of a custodian. The
Madonna Directors filed their brief and an affidavit attaching
multiple news articles and press releases regarding Hill’s
alleged self-dealing, the letters from Driver and the Norcross
Group referenced in the complaint, the March Press Release,
and the May Press Release. Otherwise, there was no
presentation or consideration of evidence beyond the Hill
Directors’ verified complaint and the documents referenced in
it.

        On May 26, the Court issued an order which it described
in its accompanying opinion as “appoint[ing] a Custodian to
take control of Republic First.” (App. at 20.) It held that the
Madonna Directors’ actions at the May 13 special board
meeting were likely ultra vires and illegal, because the four
Madonna Directors did not constitute a proper quorum for
transacting official business at Board meetings. It construed
the Bylaws as requiring a majority of the eight-seat Board
– five directors – to form a quorum or to fill a vacancy on the
Board. Since the Madonna Directors were unable to meet that
threshold on their own, and because the Hill Directors refused
to attend any Board meetings called by Madonna, the District
Court concluded that the Board was deadlocked. The Court
also listed other reasons for appointing a custodian, including
that the accusations between the two parties were injuring the
public’s confidence in Republic First.

                              10
       Alfred W. Putnam, an attorney at Faegre Drinker Biddle
& Reath LLP in Philadelphia, was selected by the Court to
serve as Custodian of Republic First. The Court at first gave
him two duties, the first particular and the second very broad
indeed: (1) “Calling and overseeing a Special Shareholders’
Meeting to take place on or before July 10, 2022, at which
Republic First shareholders shall elect a new Director to
replace the late Theodore Flocco”; and (2) “Taking any and all
lawful actions necessary to manage Republic First in its
shareholders’ best interests, including, should the Custodian so
decide, the election of a ninth director[.]” (App. at 27.) The
Madonna Directors immediately appealed the appointment of
the Custodian, and we granted their motion to expedite this
appeal.

       While the appeal was pending, the Custodian filed a
motion to extend the deadline for holding the special
shareholders’ meeting from July 10 to July 29. The Madonna
Directors responded and proposed that Mr. Putnam not
convene a special shareholders’ meeting at all. Their reasoning
was that WilmerHale had informed Republic First that its
investigation would wrap up by the end of July, so audited
financial statements and the necessary securities filings could
be completed in time to hold the company’s annual
shareholders’ meeting in September. Since the shareholders
would be electing three directors at that meeting, including the
director seat made vacant by Flocco’s death, the Madonna
Directors said it would be a waste of time and money to hold a
proxy contest in July – to vote on a director who might only be
in office for two months – and then hold another meeting in
September.

                              11
        The Custodian objected to cancelling the special
shareholders’ meeting, arguing that the Madonna Directors’
timeline was just an optimistic estimate and that the actual
meeting might not be held until October or later. Norcross
supported the Custodian’s plan to hold the special meeting in
July. But Driver agreed with the Madonna Directors’ idea to
defer the election until the annual meeting. Most notably, even
the Hill Directors joined with the Madonna Directors’ request
to dispense with a special meeting in July. They emphasized
that the Custodian’s opinion on the timing of the meeting was
unnecessary because there was no deadlock on this issue. All
the directors agreed that the vote could wait until the regular
shareholders’ meeting. As the Hill Directors put it, “FRBK’s
entire Board has carefully considered the best interests of
FRBK’s shareholders … and provided the Court with a unified
position of FRBK’s Board.” (Dist. Ct. D.I. 44 at 3.)

       Despite that, the District Court rejected the Board’s
position and adopted the Custodian’s proposal to hold the
meeting in late July. And then the District Court went even
further. After noting that the two factions “have not come to
any agreement as to how the Company should proceed after the
election” and that the Board will remain deadlocked “[i]f the
Hill Faction’s candidate is elected,” it stated:

      To prevent a continuing 4-4 Board split, the
      Custodian is directed to conduct that election so
      that shareholders will elect both a replacement
      for Mr. Flocco and a ninth Director.

(Dist. Ct. D.I. 46 at 1-2.) In short, having earlier given the
Custodian the power and discretion to create a new board seat,

                              12
the Court now directed the Custodian to do so. That order was
issued on June 24, and we heard oral argument on June 28.

II.    DISCUSSION

       Before turning to the merits of the District Court’s order
appointing a custodian, we address two jurisdictional
arguments: one made by the Hill Directors challenging our
appellate jurisdiction, and one by the Madonna Directors
challenging the District Court’s subject matter jurisdiction.
Finding neither challenge persuasive, we then turn to the merits
of the District Court’s order and hold that the Court abused its
discretion by appointing a custodian based on a
misinterpretation of the Bylaws and without a more developed
factual record.

       A.     Appellate Jurisdiction

       Our jurisdiction is typically limited to orders finally
disposing of a case, 28 U.S.C. § 1291, but we also have
jurisdiction to hear interlocutory appeals of “orders appointing
receivers, or refusing orders to wind up receiverships or to take
steps to accomplish the purposes thereof, such as directing
sales or other disposals of property[,]” 28 U.S.C. § 1292(a)(2).
The Hill Directors argue that we have no jurisdiction under that
provision here because the District Court appointed a
custodian, not a receiver. We are unconvinced by their fixation
on labels.

       The simple fact that the District Court’s appointee was
called a “custodian” is not determinative. “A receiver by any
other name, or by no name, is still a receiver.” In re Pressman-
Gutman Co., 459 F.3d 383, 393 (3d Cir. 2006) (quoting United

                               13
States v. Sylacauga Props., Inc., 323 F.2d 487, 490 (5th Cir.
1963)). We determine whether an appointee is a receiver under
§ 1292 by considering “the purposes of the receivership and
the extent of the powers possible in the situation.” Id. (citation
omitted).

       The Hill Directors highlight the distinct roles of
receivers and custodians under Pennsylvania law. They are
correct that a state statute says a custodian “continue[s] the
business of the corporation” while a receiver “liquidate[s] its
affairs and distribute[s] its assets.” 15 Pa. Cons. Stat.
§ 1767(c). That is consistent with traditional nomenclature in
corporate law. See 3 James D. Cox & Thomas Lee Hazen,
Treatise on the Law of Corporations § 14:15 (3d ed. 2021).
But what the word “receiver” means in § 1292, and hence
whether we have appellate jurisdiction, is a matter of federal,
not state, law.

        Federal courts have held that a variety of duties and
responsibilities will qualify someone as a “receiver” under
§ 1292. Most clearly, a person who is appointed to liquidate a
company is a receiver. E.g., Sriram v. Preferred Income Fund
III Ltd. P’ship, 22 F.3d 498, 501 (2d Cir. 1994). But receivers
are not only those operating in a liquidation context. A person
appointed to “take[] possession of and preserve[], pendente
lite, and for the benefit of the party ultimately entitled to it, the
fund or property in litigation” is also a receiver – specifically,
a receiver pendente lite. E.g., F.T.C. v. World Wide Factors,
Ltd., 882 F.2d 344, 348 (9th Cir. 1989). And receivers are also
not limited to possessing and preserving assets. Section 1292’s
use of “receiver” also covers individuals appointed to
“manage, operate, and control” a corporation during the
pendency of a legal proceeding. E.g., Chase Manhattan Bank,

                                 14
N. A. v. Turabo Shopping Ctr., Inc., 683 F.2d 25, 26 (1st Cir.
1982); accord, e.g., Lyman v. Spain, 774 F.2d 495, 497 (D.C.
Cir. 1985). Having an ability to control the assets or
corporation can in fact be a defining characteristic of a
receiver. In In re Pressman-Gutman, the district court
appointed a guardian ad litem to replace the administrators of
an ERISA benefits plan for the limited purpose of prosecuting
an ERISA lawsuit against those administrators. 459 F.3d at
390. Distinguishing that guardian ad litem from a receiver, we
emphasized that the guardian ad litem only had control over
the lawsuit and not the “myriad duties, functions and
responsibilities related to managing the Plan’s assets.” Id. at
394 & n.10; see also Hewlett-Packard Co. v. Quanta Storage,
Inc., 961 F.3d 731, 741 n.6 (5th Cir. 2020) (holding that a
constable who merely receives assets is not a “receiver”).

        When looking beyond labels to consider what the
Custodian’s actual purpose and powers are here, he looks much
like a receiver pendente lite. See 15 Pa. Cons. Stat. § 1767(c)
(granting a custodian “all the power and title of a receiver”
other than to liquidate and distribute assets). He was appointed
pursuant to the Hill Directors’ request for a custodian “to
manage the affairs of FRBK pending the outcome of this
litigation.” (App. at 102.) The District Court found that a
custodian was necessary because the infighting was harming
Republic First’s assets, and a custodian would preserve “public
confidence in the institution” and “provide reassurance to
shareholders and the trading public that fraudulent conduct will
not occur.” (App. at 18-19.) The Court gave the Custodian the
power to “[take] any and all lawful actions necessary to
manage Republic First in its shareholders’ best interests.”
(App. at 27.) In other words, the Custodian was appointed to
manage and control Republic First to preserve its value during

                              15
the course of this lawsuit. That makes him a “receiver” under
§ 1292.

        Furthermore, to consider the Custodian a receiver under
§ 1292 is consistent with the purpose of that jurisdictional
statute. “Congress decided to make interlocutory orders
appointing receivers appealable under § 1292(a)(2) because
they curtail property rights in a way that may cause great
harm.” United States v. Solco I, LLC, 962 F.3d 1244, 1250
(10th Cir. 2020) (internal quotation marks omitted). That great
harm is a result of the receivership order “foreclosing
independent action and decision in irreparable ways.” 16
Charles Alan Wright & Arthur R. Miller, Federal Practice and
Procedure § 3925 (3d ed. 2015). The appointment of the
Custodian for Republic First threatens precisely that type of
harm. It is no slur upon Mr. Putnam, a litigator well-known
and respected in our legal community, to say that his
appointment foreclosed the method established by the Bylaws
for filling the vacancy on the Board with an interim director.
The election of a ninth director – which was never requested
by any director or shareholder – likewise would undermine the
independence of Republic First to make its own corporate
governance decisions. To construe § 1292(a)(2) as not
allowing appellate review where a custodian’s powers go
beyond just possessing and preserving the company – which
would itself justify appellate jurisdiction – would defeat the
purpose of the provision. We have jurisdiction over this appeal
pursuant to § 1292(a)(2), and we will exercise it.

                              16
       B.     Subject Matter Jurisdiction

       The Madonna Directors contend on appeal that the
District Court could not have appointed a custodian because it
lacked subject matter jurisdiction. We disagree.

        In general, the District Court has federal question
jurisdiction over all claims arising under federal law. 28
U.S.C. § 1331. In very limited circumstances, a purported
federal claim will not create subject matter jurisdiction because
it “clearly appears to be immaterial and made solely for the
purpose of obtaining jurisdiction or where such a claim is
wholly insubstantial and frivolous.” Steel Co. v. Citizens for a
Better Env’t, 523 U.S. 83, 89 (1998) (citation omitted). The
standard for dismissing a federal claim as wholly insubstantial
is “especially high[.]” Davis v. U.S. Sentencing Comm’n, 716
F.3d 660, 666 (D.C. Cir. 2013). Jurisdiction is not defeated
merely because “the averments might fail to state a cause of
action on which [the plaintiff] could actually recover,” Steel
Co., 523 U.S. at 89 (citation omitted), nor because “the legal
theory alleged is probably false[,]” Davis v. Wells Fargo, 824
F.3d 333, 350 (3d Cir. 2016) (citation omitted). Instead, we
will dismiss a federal claim for lack of subject matter
jurisdiction only when the claim is “so insubstantial,
implausible, foreclosed by prior decisions of [the Supreme]
Court, or otherwise completely devoid of merit as not to
involve a federal controversy.” Wells Fargo, 824 F.3d at 350
(citation omitted).

       The Hill Directors asserted two claims under the
Exchange Act, and, without prejudging them, those federal
claims are not wholly insubstantial. The Hill Directors’ first
federal claim arises under section 13(d), which requires the

                               17
disclosure of detailed information “[w]hen two or more
persons agree to act together for the purposes of acquiring,
holding, or voting equity securities of an issuer[.]” 17 C.F.R.
§ 240.13d-5(b)(1). Indicators of such a group can include a
common objective or coordinated action. Hallwood Realty
Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 618 (2d
Cir. 2002); Morales v. Quintel Ent., Inc., 249 F.3d 115, 127 (2d
Cir. 2001). Here, the Hill Directors allege that the Madonna
Directors formed a group with Driver and the Norcross Group
to oppose the re-election of three Hill Directors at the
upcoming shareholders’ meeting and to instead elect directors
who would support a sale of the company. Specifically, they
alleged that such a group is evidenced by the Madonna
Directors’ efforts to entertain acquisition offers from the
Norcross Group, the Madonna Directors issuing the March
Press Release, and the Norcross Group filing a corresponding
lawsuit days later. They also point to one of the Madonna
Directors serving on the board of a company where a candidate
on Driver’s slate also works. That evidence supports at least a
colorable argument that the Madonna Directors formed a group
with Driver and the Norcross Group for the purpose of voting
Republic First shares at the shareholder meeting. If that
argument holds up, the Madonna Directors will have violated
section 13(d) by not making the required disclosures.

       The Hill Directors’ second federal claim arises under
section 14(a) of the Exchange Act, which, through follow-on
regulations, imposes procedural and substantive requirements
on proxy solicitations. 17 C.F.R. §§ 240.14a-3, -6, -9. The
regulations define a “solicitation” as, among other things,
“[t]he furnishing of … other communication to security
holders under circumstances reasonably calculated to result in
the procurement, withholding or revocation of a proxy[.]” Id.

                              18
§ 240.14a-1(l)(1)(iii). Some courts take an expansive view of
what communications qualify as solicitations. E.g., Long
Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d Cir.
1985) (applying the proxy solicitation rules to press releases
that “constitute a step in a chain of communications designed
ultimately to [request the furnishing of proxies]”). Here, the
Hill Directors allege that the March Press Release and May
Press Release were proxy solicitations that violated the
securities requirements. That claim is not insubstantial or
frivolous. Although the Madonna Directors challenge whether
the press releases were proxy solicitations, the contents and
timing of the announcements can at least plausibly be
characterized as meant to sway shareholders to vote against the
Hill Directors who were standing for re-election. Under an
expansive view of the regulations, there is a colorable claim
that they are a step in a chain of communications with the goal
of achieving that outcome.

        The Hill Directors’ Exchange Act claims are thus not
so “wholly insubstantial” that they fail to create federal
question jurisdiction. Steel Co., 523 U.S. at 89. And because
the state law claim to appoint a custodian shares “a common
nucleus of operative fact” with the federal claims, it is
amenable to supplemental jurisdiction. United Mine Workers
v. Gibbs, 383 U.S. 715, 725 (1966); 28 U.S.C. § 1367(a). It
was therefore within the District Court’s power to exercise
subject matter jurisdiction over the state law corporate
governance claim.4

       4
         We review for abuse of discretion a district court’s
decision to exercise supplemental jurisdiction. Cf. Elkadrawy
v. Vanguard Grp., Inc., 584 F.3d 169, 174 (3d Cir. 2009)
(reviewing for abuse of discretion the district court’s decision

                              19
       C.     Grounds for Appointing a Custodian5

       Section 1767(a)(3) of title 15 of the Pennsylvania
Consolidated Statutes permits a court to appoint a custodian
“of and for any business corporation when it is made to appear
that … the conditions specified in section 1981(a)(1), (2)[,] or

to decline supplemental jurisdiction); see also Valencia ex rel.
Franco v. Lee, 316 F.3d 299, 305 (2d Cir. 2003) (“[W]e review
the district court’s decision to exercise such jurisdiction under
an abuse-of-discretion standard.”). In this instance, however,
we need not delve deeply into that exercise of discretion, as the
parties have not addressed the issue and any complaint about it
has been forfeited. It is sufficient to observe that we do not
perceive an abuse of discretion.
       5
         We review the District Court’s decision to appoint a
custodian for abuse of discretion. Maxwell v. Enter. Wall
Paper Mfg. Co., 131 F.2d 400, 403 (3d Cir. 1942). A court
abuses its discretion if its “decision rests upon a clearly
erroneous finding of fact, an errant conclusion of law[,] or an
improper application of law to fact.” EEOC v. City of Long
Branch, 866 F.3d 93, 97-98 (3d Cir. 2017) (citation omitted).
       The interpretation of bylaws is subject to our plenary
review. Peters Creek United Presbyterian Church v. Wash.
Presbytery of Pa., 90 A.3d 95, 104 (Pa. Commw. Ct. 2014).
“When we interpret corporate bylaws, we must use the same
rules applicable to the interpretation of statutes.” M4 Holdings,
LLC v. Lake Harmony Ests. Prop. Owners’ Ass’n, 237 A.3d
1208, 1218 (Pa. Commw. Ct. 2020) (citation and internal
quotation marks omitted).

                               20
(3) … exist with respect to the corporation.” There are five
conditions specified in section 1981:

   (1) The acts of the directors are illegal,
   (2) The acts of the directors are oppressive,
   (3) The acts of the directors are fraudulent,
   (4) The corporate assets are being misapplied or wasted, or
   (5) The directors are deadlocked, the shareholders are
       unable to break the deadlock, and the corporation is
       suffering or being threatened to suffer irreparable
       injury.

See 15 Pa. Cons. Stat. § 1981(a). The District Court found that
each of those five grounds individually justified the
appointment of the Custodian in this case. The Court’s
conclusions, however, are based on a faulty interpretation of
the Bylaws and on unsupported findings of facts. Accordingly,
they cannot stand.

              1.     Illegality, Oppression, and Deadlock

        The District Court found that the Madonna Directors
acted illegally and oppressively and that the Republic First
Board was deadlocked. Each of those conclusions was based
on the Court’s interpretation of the Bylaws as requiring at least
five of the Board’s full complement of eight directors to be
present to form a quorum and conduct any business, including
filling any Board vacancy. Based on that interpretation, the
Court held that the four Madonna Directors violated the
Bylaws by their actions at the May 13 special board meeting
and by intending to fill the Board’s vacancy at the May 17

                               21
special board meeting.6 Similarly, it held that the Madonna
Directors’ attempt to “wrest immediate control of Republic
First” was oppressive, as those actions likely violated the
Bylaws and “are thus ultra vires or unjust.” (App. at 18.)
Finally, it concluded that the Board was deadlocked because
neither faction could muster enough directors to form a five-
person quorum. Each of those conclusions, however, is based
on an unsupportable interpretation of the Bylaws.

         Article II, Section 7 of the Bylaws addresses the process
for filling vacancies on the Board. Its first two sentences state:

       Any vacancies in the Board of Directors,
       whether arising from death, resignation, removal
       or any other cause except an increase in the
       number of directors, shall be filled by a vote of
       the majority of the Board of Directors then in
       office even though that majority is less than a
       quorum. A majority of the entire Board may fill
       a vacancy that results from an increase in the
       number of directors.

(App. at 45 (emphasis added).)

      That language is unambiguous. If a vacancy on the
Board arises from the death of a director, the majority of the
remaining directors must fill that vacancy, regardless of

       6
        The District Court held that violating the Bylaws was
illegal under title 15, section 1505 of the Pennsylvania
Consolidated Statutes, which states that the directors of a
corporation are bound by its bylaws.

                               22
whether they form a quorum. Based on that clear language, the
four Madonna Directors, who constituted a majority of the
seven remaining directors, had the power and in fact the
obligation to fill the vacancy left by Flocco.

       Contrary to the District Court’s holding, the clarity of
Section 7 is not “obscured” by its third sentence. (App. at 16.)
That sentence reads:

       In the event that at any time a vacancy exists in
       any office of a director that may not be filled by
       the remaining directors, a special meeting of the
       shareholders shall be held as promptly as
       possible and in any event within sixty (60) days,
       for the purpose of filling the vacancy or
       vacancies.

(App. at 45.) The District Court construed “may not be filled”
to mean “shall not be filled,” and then expressed confusion at
why Section 7 would, in the first two sentences, address
situations where the remaining directors shall fill a vacancy
and then, in the third sentence, imply that there are situations
where they shall not fill a vacancy. Based on that perceived
inconsistency, the Court concluded that Section 7 did not
permit the remaining directors to fill a vacancy.7

       7
         The District Court also reasoned that Republic First’s
articles of incorporation “seem to contemplate the filling of
Directorships only by shareholder election.” (App. at 17.) The
articles of incorporation indeed provide that shareholders will
elect directors to three-year terms at each annual shareholders’
meeting, but they do not exclude the availability of interim,
temporary appointments to the Board. Section 7 of the Bylaws

                              23
       But Section 7’s third sentence does not generate
ambiguity. Combined with the first two sentences, it leads to
a consistent and logical understanding of the Bylaw: The
remaining directors must fill a vacancy with a majority vote; if
the remaining directors are unable to fill the vacancy – such as
when the vacancy leaves the Board with an even number of
directors who are deadlocked – then the shareholders must fill
that vacancy. That clear construction gives effect to every
sentence of Section 7, and it makes sense. The District Court
needlessly stretched its reading of “may not be filled” to create
an inconsistency, making no discernable effort to harmonize
the provisions before tossing out that crucial Bylaw. See
Keystone Fabric Laminates, Inc. v. Fed. Ins. Co., 407 F.2d
1353, 1356 (3d Cir. 1969) (“It is axiomatic in contract law that
two provisions of a contract should be read so as not to be in
conflict with each other if it is reasonably possible.”). That
was error.

       The Hill Directors do not defend the District Court’s
analysis. Rather, their main argument is that a quorum is still
required for the remaining Board members to fill a vacancy,
and Section 7’s contrary language – “the majority of the Board
of Directors then in office even though that majority is less
than a quorum” – only comes into play if there are not enough
directors remaining to mathematically form a quorum. They

provides that “[a]ny director elected or appointed to fill a
vacancy shall hold office for the balance of the term then
remaining and until a successor has been chosen[.]” (App. at
45.) That does not conflict in any way with the articles of
incorporation.

                               24
are correct that, “[a]s a general rule[,] the directors of a
corporation may bind a corporation only when they act at a
legal meeting of the board.” Stone v. Am. Lacquer Solvents
Co., 345 A.2d 174, 176 (Pa. 1975). And a legal meeting
requires a quorum, unless the bylaws provide otherwise. 15
Pa. Cons. Stat. § 1727(a). Their argument fails here, however,
because the Bylaws plainly do provide otherwise.

        Moreover, Section 7 of the Bylaws tracks
Pennsylvania’s default rule for filling vacancies on the boards
of corporations: “Except as otherwise provided in the
bylaws[,] [v]acancies in the board of directors … may be filled
by a majority vote of the remaining members of the board
though less than a quorum, or by a sole remaining director[.]”
Id. § 1725(b)(1)(i). Pennsylvania courts have not addressed
whether the phrase “though less than a quorum” overrides the
general quorum requirement even when a quorum is possible,
but Delaware courts have provided helpful guidance in
applying their substantively identical statute, 8 Del. C.
§ 223(a)(1). Ninety years ago, the Delaware Court of
Chancery flatly stated that a bylaw implementing
section 223(a)(1) meant that “a majority of the remaining
directors may [fill a vacancy] regardless of whether a quorum
of the board is left in office or not.” In re Chelsea Exch. Corp.,
159 A. 432, 434 (Del. Ch. 1932). That interpretation has not
been abrogated by any later decision.

       Nevertheless, the Hill Directors cite two cases they
believe signal that Chelsea Exchange is no longer good law.
The first is Applied Energetics, Inc. v. Farley, 239 A.3d 409
(Del. Ch. 2020). But Applied Energetics was not about filling
board vacancies. Rather, it was about whether a single director
could transact business even though he alone did not constitute

                               25
a quorum under his company’s bylaws. The Court of Chancery
held that he could not, but it pointed to section 223(a)(1) as one
of the very few instances in which a board can act without a
quorum. Id. at 426-47. The Applied Energetics decision did
not cite Chelsea Exchange.

        The second case is Tomlinson v. Loew’s Inc., 134 A.2d
518 (Del. Ch.), aff’d, 135 A.2d 136 (Del. 1957). In Tomlinson,
the company had a bylaw that expressly granted to the board
the power to fill vacancies. Id. at 523. The company also had
a second bylaw allowing for vacancies to be filled by a
majority of the remaining directors even if not a quorum,
similar to the bylaw in Chelsea Exchange (and here). Id. at
524. The Court of Chancery acknowledged the holding from
Chelsea Exchange, but it held that the existence of the first
bylaw made Chelsea Exchange distinguishable. The court said
that the two bylaws worked together to create a tiered
framework: If there were enough directors to form a quorum,
the first bylaw required board action at a meeting with a
quorum; if there were not enough directors to form a quorum,
the second bylaw permitted the remaining directors to fill
vacancies with a majority vote, regardless of any quorum
requirement. Id. at 525-28. In our case, however, there is no
separate Bylaw that specifically grants the Board the power to
fill vacancies. The Hill Directors’ request to have us adopt the
same framework as in Tomlinson is therefore without any
foundation in the governing documents of Republic First.8

       8
         The Hill Directors further claim that the Madonna
Directors cannot fill a Board vacancy without first allowing the
Board’s Nominating Committee to recommend a candidate.
The responsibilities of the Nominating Committee, as listed in
its charter, include “[i]dentify[ing] individuals qualified to

                               26
       The Bylaws here unambiguously permit – in fact,
require – the remaining directors in office to fill the vacancy
with a majority vote, regardless of whether those voting to fill
the vacancy constitute a quorum. The Madonna Directors
constitute four of the seven remaining directors, so they have
sufficient numbers to fill the vacancy. Because the Bylaws
give the Madonna Directors the power and obligation to fill the
vacancy, their efforts to do so were not illegal or oppressive,
and there is no deadlock on the Board.9 The District Court’s

become Board members” and, “[i]n the case of a vacancy in
the office of a director, … recommend[ing] to the Board an
individual to fill such vacancy though appointment by the
Board[.]” (App. at 344.) But nowhere in the Nominating
Committee’s charter (or any other constitutive document) is
there a requirement that the Board wait for a recommendation
from the Nominating Committee before filling a vacancy. The
Bylaws state that a vacancy arising from death “shall be filled
by a vote of the Majority of the Board of Directors then in
office[.]” (App. at 45.) The Board organized a committee to
assist in that process, but the Board did not abdicate its
appointment power or delegate it to the Nominating
Committee.
       9
         If the Madonna Directors appoint an ally, then they
will also have sufficient numbers (five out of eight) to ratify
past acts, including acts taken at the May 13 special board
meeting. See Stone v. Am. Lacquer Solvents Co., 345 A.2d
174, 177 (Pa. 1975) (noting that ratification can remedy acts
taken at an illegal board meeting).
       The Madonna Directors’ ability to fill the vacancy with
an allied fifth director likely renders irrelevant the parties’

                              27
interpretation of Section 7 is erroneous, and hence its findings
of illegality, oppression, and deadlock – all of which depended
on that interpretation – were abuses of discretion. None of
those grounds justified appointing a custodian for Republic
First.

              2.      Fraudulent Conduct and Waste

       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 *3 (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
III.   CONCLUSION

       In conclusion, there were no sound grounds for
appointing a custodian for Republic First. The Bylaws obligate
a majority of the directors in office to fill the vacancy resulting
from Flocco’s death, regardless of any quorum requirement.
Because the Madonna Directors make up a majority of the
directors in office, they “shall” fill the vacancy (App. at 45),
and then, with control of a full quorum, they can ratify past acts
and transact business on behalf of Republic First – at least until
the upcoming annual shareholders’ meeting, where the
shareholders will have an opportunity to alter the Board’s
composition. The fact that the Madonna Directors’ current
conquest of the Board came about through a sad and
unexpected event – rather than through a shareholder vote –
does not justify judicial intervention. The Bylaws, duly
adopted by Republic First’s shareholders, provide a
contingency plan for this exact situation. By jettisoning that
contingency plan and appointing a custodian, the District Court
abused its discretion. We will therefore reverse and remand
for proceedings consistent with this opinion.

                                30