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Corporate Governance for Mutuals

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The American Bankers Association, on behalf of the more than two million men and women who work in the nation’s banks, brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership — which includes community, regional and money center banks and banking companies, as well as savings associations, trust companies and savings banks — makes ABA the largest banking trade association in the country. © 2013 American Bankers Association, Washington, D.C. All rights reserved. No part of the publication may be reproduced, stored in a retrieval system, or transmitted in any form or by an means­ — electronic, mechanical, photocopying, recording, or otherwise – without written permission from the American Bankers Association. Please call 1-800-BANKERS if you have any questions about this resource or ABA membership or if you would like to copy or license any part of this publication. This publication is designed to provide accurate information on the subject addressed. It is provided with the understanding that neither the authors, contributors nor the publisher is engaged in rendering legal, accounting or other expert or professional services. If legal or other expert assistance is required, the services of a competent professional should be sought. This guide in no way intends or effectuates a restraint of trade or other illegal concerted action.

Corporate Governance for Mutuals

Biographies for Authors Richard Schaberg, Partner, is the global co-head of the Hogan Lovells Financial Institutions sector and co-head of the Financial Institutions Group. Richard is a frequent speaker and resource for the American Bankers Association and has been engaged in corporate, securities, and bank regulatory representation and management of public offerings since 1985. He advises a wide variety of financial institutions and financial service providers in these areas. His practice also includes the representation of national, regional, and specialized investment banking firms in transactional matters. Richard has particular experience in initial and secondary debt and equity offerings, mergers and acquisitions, the formation of stock and no-stock holding companies and going private transactions. Richard advises public companies on corporate governance matters, anti-takeover defenses, proxy contests, securities law compliance and exchange listing standards. He also advises mutual financial institutions and credit unions in mergers and acquisitions, chartering matters, mutual to stock conversions and regulatory compliance. Richard advises credit unions on the conversion to a bank and advises on branch sale and acquisitions and the formation of de novo banking institutions. Richard practices before the SEC, all federal banking agencies (OCC, Federal Reserve, NCUA, and the FDIC), and selected state banking agencies.

Laura R. Biddle, Counsel, an attorney in Hogan Lovells Financial Institutions Group, represents banks, thrifts, credit unions and non-depository lenders as well as their holding companies, subsidiaries, affiliates and investors in connection with a broad range of regulatory and transactional matters. She has significant regulatory experience with financial institution strategic planning, mergers and acquisitions, holding company formation and activities, charter selection, formation and conversion, controlling and non-controlling private equity investments, reorganization, recapitalization and acquisitions of troubled banks through the FDIC’s receivership process, subsidiary state licensing requirements and compliance with margin lending regulations. Laura also has expertise with consumer financial protection laws such as the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act and the Truth in Lending Act, and she regularly counsels clients on compliance with these laws. In addition, Laura advises clients on various legislative and regulatory proposals affecting financial institutions and non-depository lenders. Hogan Lovells 200-lawyer Financial Institutions Group is one of the largest practices of its kind, with a presence in all the world’s financial hubs. Our multi-jurisdictional teams work on corporate, regulatory, commercial, and product issues, combining industry experience with an in-depth knowledge of the regulatory background to provide a perspective on financial services that few competitors can match. The group represents banks, brokers, insurers, asset managers, investment funds, regulators, and other market participants, large and small, on the full range of legal and regulatory issues confronting them, from the establishment of investment funds, insurance finance, consumer finance, outsourcing, product distribution, and payment systems to mergers and acquisitions in the financial services sector. The groups advisory services also cover developing financial services structures, governance, and commercial arrangements, along with transactional support and the distribution of products. Contact Information:

Richard Schaberg

Laura R. Biddle

Partner, Washington, D.C.

Counsel, Washington, D.C. Phone +1 202 637 5419 Fax +1 202 637 5910 [email protected]

Phone +1 202 637 5671 Fax +1 202 637 5910 [email protected]  

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American Bankers Association

Corporate Governance for Mutuals Table of Contents I.

Introduction………………………………….……………........……………1

II.

Source of Mutual Corporate Governance Guidance……………….………..4

III.

Evaluating Existing Charters and Bylaws………………….………….........11

IV.

Committees………………………………………………….………………17

V.

Policies and Procedures…………………………………….….……………25

VI.

Conclusion…………………………………………………………………..30

Additional copies of the book may be obtained from aba.com Appendix A – Court Decisions Appendix B – State Governance Requirements Appendix C – Sample Audit Committee Charter Appendix D – Sample Nominating Committee Charter Appendix E – Sample Compensation Committee Charter of the Board of Directors Appendix F – FDIC FIL 105-2005, “Corporate Codes of Conduct” Appendix G – Sample Code of Conduct and Ethics Appendix H – Sample Conflict of Interests Policy Appendix I – FDIC Appendix B to 12 CFR Part 364, “Interagency Guidelines Establishing Information Security Standards” Appendix J – Sample Confidentiality Policy

Corporate Governance for Mutuals

AMERICAN BANKERS ASSOCIATION

Corporate Governance for Mutuals I.

Introduction: The Need to Focus on Governance as a Mutual

If the corporate scandals of the past decade, including Enron and Worldcom, were not enough, the recent global financial crisis has further focused attention on corporate governance reform. It is possible, in fact, to conclude that “one major lesson to draw from the financial crisis is that corporate governance matters.”1 The legislative response to the crisis and scandals, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“DoddFrank”), the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), and their progeny, have served to intensely concentrate the attention of the corporate and regulatory world on governance compliance. As a result, corporations of all types are again finding renewed interest in corporate governance issues and trying to determine whether their own structures and procedures meet the challenges and requirements. An effective corporate governance structure is of particular importance in the banking industry because it is crucial to safety and soundness, not only for the institution itself but for the banking system as a whole. Although the legislative and regulatory responses to the crisis and scandals are largely geared towards public corporations and/or large banking organizations, the issues of corporate governance are applicable to non-public corporations, including mutual savings institutions. While a mutual savings institution is different in many ways from a public company, mutuals need to be just as concerned with corporate governance issues. The following sections highlight some of the reasons that a mutual savings institution should re-examine and revise its corporate governance structures. A.

Fiduciary Duties and Liability

Directors and officers of an insured depository institution, like directors and officers in other corporations, are in a fiduciary relationship with the institution and owe it certain fiduciary duties. This duty is a “duty of utmost good faith, trust, confidence and candor owed by a fiduciary … to the beneficiary.”2 The law expresses this relationship in the corporate duties of loyalty and care, which are generally encoded in the corporate law of each state. In addition, the Federal Deposit Insurance Corporation (“FDIC”) has issued a policy statement addressing the fiduciary duties of directors and officers of insured depository institutions, and the liability attached to the failure to fulfill those duties.3 In addition, the FDIC and the Office of the Comptroller of the Currency (“OCC”) have both issued guidance on ways depository institution directors are expected to meet their fiduciary obligations.4 The duty of loyalty requires directors and officers of an insured depository institution to place the interests of the institution ahead of their own personal interests. This means that the                                                                                                                 1  OECD  Observer  No.  273  (June  2009).  

2  BLACK’S  LAW  DICTIONARY  523  (7th  ed.  1999).   3  FDIC  FIL  87-­‐92,  Statement  Concerning  the  Responsibilities  of  Bank  Directors  and  Officers  (December  3,  1992).   4  Pocket  Guide  for  Directors  (FDIC  2007);  The  Director’s  Book  (OCC  2010).  

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directors and officers may not advance their own or others’ interests at the expense of the institution. The duty of care requires that the directors and officers of an insured depository institution act as prudent and diligent business persons in conducting the affairs of the institution. The key to the duty of care is the use of reasonable business judgment, based on all available information and proper deliberation, with regard to all business decisions on behalf of the institution. Proper corporate governance is essential to the fulfillment of directors’ and officers’ fiduciary duties. The various components of an effective system of corporate governance provide the tangible evidence that management5 is fulfilling its fiduciary duties. For example, when the board of directors selects, monitors and evaluates competent executive officers, it is simultaneously demonstrating good governance and fulfilling its duty of care to the institution. When a board of directors fails to institute a proper system of corporate governance, it fails to live up to its fiduciary duties to the institution. A failure of fiduciary responsibility exposes the directors and officers of an institution to potential corporate and personal liability. B.

Examination and Re-examination

Another reason for a mutual savings institution to reevaluate its corporate governance structure is that federal and state banking agencies emphasize the importance of corporate governance and are requiring institutions to do so. The rules and guidance, often issued collaboratively by the federal banking agencies, are layered due to overlapping jurisdictions. Certain of the FDIC rules apply to all FDIC-insured depository institutions. The chartering entity, whether the Office of the Comptroller of the Currency (the “OCC”) for federal mutual savings banks6 or the state banking commission for state-chartered institutions, has its own rules and requirements for directors. In addition, other state-chartered mutual institutions have chosen to become members of the Federal Reserve System thereby adding yet another layer of regulatory rules and requirements. Each of the federal banking agencies focuses on sound corporate governance in the operation of insured depository institutions. For example, the agencies consider the effectiveness of corporate governance as a part of their overall examination of an institution under the CAMELS framework, and consider corporate governance to be a key determinant of the overall performance of an institution.7 As recently noted by Governor Raskin of the Board of Governors

                                                                                                                5  As  used  in  this  Article,  the  term  “management”  refers  to  both  the  board  of  directors  and  the  executive  

officers  of  an  institution.   6  We  note  that  upon  dissolution  of  the  Office  of  Thrift  Supervision  (the  “OTS”)  on  July  21,  2011,  as  a  result  of   Dodd-­‐Frank,  the  OCC  has  republished,  with  nomenclature  and  technical  changes,  the  OTS  regulations  in  effect   as  of  that  date,  including  the  mutual  institution  regulations.  See  76  Fed.  Reg.  48950  (Aug.  9,  2011).    Dodd-­‐ Frank  continues  in  effect  all  OTS  orders,  resolutions,  determinations,  agreements,  regulations,  interpretive   rules,  other  interpretations,  guidelines,  procedures  and  other  advisory  materials  in  effect  on  the  date  before   the  dissolution  of  the  OTS  until  modified,  terminated,  set  aside  or  superseded  by  the  OCC.     7  See  FDIC  Risk  Management  Manual  of  Examination  Policies,  Part  II  Section  4.1;  The  Director’s  Book  (OCC     2010);  OTS  Examination  Handbook,  Section  310:  Management:  Oversight  by  the  Board  of  Directors  and  Section   330:  Management:  Management  Assessment;  Federal  Reserve  Commercial  Bank  Examination  Manual  §  5000:   Duties  and  Responsibilities  of  Directors.   2

                       

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of the Federal Reserve System (the “FRB”) to a group of community bankers, “at the core of a healthy bank is an effective corporate governance structure.”8 As a result, it is not surprising that the federal banking agencies “encourage” all insured depository institutions to implement sound corporate governance policies. Additionally, the agencies emphasize that insured depository institutions should “periodically review their policies and procedures relating to corporate governance and auditing matters.”9 The scope of such a review should include compliance with all applicable law, regulations and guidance.10 In addition, the institution should evaluate which corporate governance policies and procedures are most appropriate to its size, operations and resources.11 As a result of the crisis and the noted failures in corporate governance, the federal banking agencies are placing additional emphasis on corporate governance in their examination of mutual savings institutions as shareholders are not present to fulfill that role. C.

Professional Depositors

Yet another reason for a mutual savings institution to reevaluate its corporate governance structure is the presence of “professional depositors.” These individuals become depositors at mutual institutions or investors in the minority stock of intermediate holding companies with the primary intention of forcing changes in the governance and/or corporate structure of the mutual institution. These are not idle ruminations, but real litigated examples. Currently, Northeast Community Bancorp, Inc. (“Bancorp Inc.”), and Northeast Community Bancorp, MHC (“MHC”) are in protracted litigation with a depositor of Northeast Community Bank and an investor in Bancorp Inc. whereby the depositor/investor alleges the directors of Bancorp Inc. and MHC have breached their fiduciary duty by not expanding their respective boards to allow for disinterested consideration of a second-step conversion of the MHC.12 This same depositor/investor has similarly been involved with other mutual institutions, including, among others, Georgetown Bancorp, Inc. in Massachusetts, Malvern Bancorp, Inc. in Pennsylvania and Sound Financial, Inc. in Washington. Each of these institutions have since completed as secondstep conversion. In another case, a depositor of Spencer Savings Bank, a New Jersey-chartered mutual savings bank located in northern New Jersey (“Spencer”), filed suit in an attempt to force Spencer to provide its depositors with materials regarding his and another depositor’s nomination to Spencer’s board of directors. The complaint also accused Spencer’s board of directors of corporate waste and breach of fiduciary duties. The decision in favor of the depositor is a                                                                                                                

8  Governor  Sarah  Bloom  Raskin,  Remarks  before  the  Federal  Reserve  Bank  of  New  York  Community  Bankers  

Conference,  Community  Bankers  and  Supervisors:  Seeking  Balance  (April  7,  2011)  available  at   http://www.federalreserve.gov/newsevents/speech/raskin20110407a.htm.   9  See  Interagency  Statement  on  Application  of  Recent  Corporate  Governance  Initiatives  to  Non-­‐Public  Banking   Organizations  (May  5,  2003).   10  Id.   11  Id.   12  See  Stilwell  Value  Partners  IV  LLP  v.  Cavanaugh,  No.  2011/653011  (N.Y.  Sup.  Ct.  filed  Dec.  19,  2012).   American Bankers Association

                       

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cautionary tale underscoring the need for incorporation of careful governance procedures. See Appendix A. Similarly, a depositor of First Federal Savings & Loan Association of San Rafael, California (“First Federal”) formed a committee of depositors and sought to nominate a slate of directors to promote and implement a plan of conversion of First Federal from a mutual to a stock institution.13 In contrast, where solid governance procedures were in place, a small group of disgruntled depositor/investors were unable to overturn the reasoned and documented decision of the board of directors of Westboro Bancorp, MHC. See Appendix A. While it may be tempting for boards and management to dismiss professional depositors as financial mercenaries seeking their own interests at the expense of the bank, its customers and the community, the approach to board members and others is often cloaked in language that the bank itself would use: seeking board seats and actions to pursue the best interests of the institution and its depositors. Even if new or different board members or a plan of conversion might be in the best interest of the mutual institution, it is the leadership of the mutual institution, and not a lone, self-interested professional depositor, who should make that determination. Effective corporate governance will ensure that pivotal corporate decisions are in the hands of those charged with their consideration. II.

Sources of Mutual Corporate Governance Guidance

This section is not entitled “Mutual Corporate Governance Requirements,” but rather is stated in terms of guidance in order to emphasize that corporate governance of mutual savings institutions should not be approached as an exercise in compliance. There are relatively few hard and fast legal requirements addressing corporate governance structures that apply to mutual savings institutions. A mutual savings institution that approaches its corporate governance in terms of minimum compliance will find that it falls far short of what is considered effective corporate governance. While the corporate governance structure of a mutual institution, particularly internal controls, must ensure compliance with applicable law, minimum compliance with legal requirements should not be the goal of any mutual institution’s corporate governance policies and procedures.14 Although the following sections identify the extent to which the various legal frameworks for corporate governance impose legal and regulatory requirements on mutual institutions, it is important to bear in mind that failures in effective governance may not be apparent to those outside the institution until a significant breakdown has occurred. Any breakdown in this area brings with it high costs in the form of potential lawsuits and enforcement actions, not to mention damage to the institution’s reputation. For this reason, it is highly worthwhile for a mutual institution to review its governance and assess whether its processes reflects industry best                                                                                                                

13  See  Matthew  Squire,  The  Push  and  Pull  of  Depositor  Activism,  19  THRIFT  INVESTOR  4  (April  2005).   14  See  Governor  Susan  Schmidt  Bies,  Remarks  before  the  Annual  Convention  of  the  Arkansas  Bankers  

Association,  Corporate  Governance  and  Community  Banks  (May  17,  2004)  available  at   http://www.federalreserve.gov/boarddocs/speeches/2004/200405172/default.htm;  Governor  Susan   Schmidt  Bies,  Remarks  at  the  Federal  Reserve  Bank  of  Chicago  Community  Bank  Directors  Conference,   Corporate  Governance  and  Risk  Management  at  Community  Banks  (August  12,  2004)  available  at   http://www.federalreserve.gov/boarddocs/speeches/2004/200408122/default.htm;  FRB  SR  03-­‐8,   Statement  on  Application  of  Recent  Corporate  Governance  Initiatives  to  Non-­‐Public  Banking  Organizations  (May   5,  2003);  FDIC  FIL  17-­‐2003,  Corporate  Governance,  Audits,  and  Reporting  Requirements  (March  5,  2003).   4

                       

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practices, given its size and resources. This will provide a firm governance foundation for the institution.15 With a best practices framework in mind, it is useful to look to all available sources of guidance on corporate governance, particularly guidance tailored to non-public, mutual institutions. This section highlights basic governance structure provisions for federal and statechartered mutual savings institutions, the requirements of Dodd-Frank, the Federal Deposit Insurance Corporation Improvement Act (the “FDICIA”), Sarbanes-Oxley and federal banking agency guidance. A.

Federal and State Provisions Establishing Basic Governance Structure

A mutual savings institution’s basic corporate governance structure is governed by its particular chartering authority, whether federal or state. The corporate governance provisions for federal mutual savings institutions are primarily in the form of regulations originally promulgated by the former OTS and republished by the OCC on an interim basis. These may be found at 12 C.F.R. Part 144. The corporate governance of state-chartered mutual institutions varies from state to state, as each state has its own laws regarding mutual corporate governance. (i)

Federal Mutual Charter

Under the OCC rules, the affairs of a federal mutual institution are managed by a board of directors composed of at least five, but not more than 15 directors.16 The directors are elected by the members, who may also nominate a person for election to the board of directors.17 The members are the depositors of the institution.18 However, if a state-chartered institution with existing borrower members coverts to a federal charter, those borrower members will be grandfathered in as members of the federal mutual institution.19 Members vote at annual meetings and members holding at least 10% of the institution’s FDIC-insured deposits may call a special meeting.20 Any number of members present at a meeting constitutes a quorum.21 Presence includes presence by proxy, as proxy voting is allowed.22 Each depositor member receives one vote for every $100 of deposits or fraction thereof; grandfathered borrower members receive one vote.23 However, no member can receive more than 1,000 votes.24 Members also have the right to amend the bylaws, to communicate with other members and to inspect the corporate books and records.25 A federally-chartered mutual institution may follow the corporate governance provisions described above, or it may choose to follow the corporate governance procedures of the state                                                                                                                 15  Id.     16  12  C.F.R.  §  144.1.  

17  12  C.F.R.  §  144.5(b)(1)  &  (b)(13).   18  12  C.F.R.  §  144.1.   19  12  C.F.R.  §  144.1.   20  12  C.F.R.  §  144.5(b)(1)  &  (b)(2).   21  12  C.F.R.  §  144.5(b)(5).   22  12  C.F.R.  §  144.5(b)(6).   23  12  C.F.R.  §  144.1   24  Id.   25  12  C.F.R.  §§  144.5(b)  (15)  &  144.8.    

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where its main office is located, to the extent such procedures are not inconsistent with applicable federal statutes and regulations and general safety and soundness.26 (ii)

State Mutual Charters

The corporate governance provisions applicable to state-chartered mutual institutions will vary from state to state. In many cases they are very similar to the federal structure. That is, many states require a board of directors, which is elected by the members, who are either depositors, or depositors and borrowers. The members vote at annual meetings—depositors receive votes in proportion to their deposits, and borrowers receive one vote. Many states also have a cap on the number of votes any one borrower may receive. Other provisions have greater variance between the states. Not all states grant members the right to call a special meeting, and among those that do, the representative percentage required to call the special meeting varies. States also are split as to granting members the right to vote by proxy and many leave it to be determined in the bylaws. While a number of states declare a quorum for any number of members present, others require that a certain percentage be present to establish a quorum. Some states grant members the right to amend the bylaws, while others leave it up to the mutual institution to determine in its bylaws. While a few states follow the federal model granting members communication and inspection rights, most states do not address issues of member communication and the right to inspect books and records. There also are a number of states that provide for a board of directors elected by the existing board members. Members generally have the right to vote on significant transactions, such as mergers, conversion and liquidation, but have no right to elect the institution’s directors. A few states follow a very different corporate governance structure. Rather than providing for a board of directors elected by members, these states set up a board of trustees, composed of, and elected by, a group of “corporators.” Although corporators must usually be depositors, not all depositors are corporators. The corporators are a smaller group who act in the interests of the mutual savings institution. The first group of corporators is approved by the state chartering authority when the mutual savings institution is formed. Thereafter, the corporators elect a certain number of new corporators each year. Further information regarding mutual corporate governance provisions under state law can be found in the survey of state provisions attached as Appendix B to this Article. B.

Dodd-­‐Frank  –  Compensation  Reform  

Dodd-Frank provides for many compensation related items that apply to all public companies irrespective of their industry (i.e., have no direct relationship to financial services).27 The requirements that are currently effective impose say-on-pay votes in the annual proxy statements of public companies (with the frequency of such votes to be held every one to three years) and say-on-golden parachute votes in materials in which shareholders are asked to                                                                                                                 26  12  C.F.R.  §  144.5(c)(3).  

27  Dodd-­‐Frank,  Subtitle  E.  

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approve corporate transactions.28 The say-on-pay votes are designed to provide a non-binding shareholder referendum on the compensation paid to the top executives at public companies while the say-on-golden parachute votes provide a similar non-binding shareholder referendum compensation paid in the context of corporate transactions (as a practical matter this is usually severance paid to departing executives). In January 2013, the SEC finalized NYSE and NASDAQ listing standards addressing compensation committee independence as well as compensation consultant independence and oversight required by Dodd-Frank for public companies (again regardless of industry).29 The precise rules and effective dates differ between NYSE and NASDAQ, but generally require compensation committees to be comprised of independent directors, have the authority and funding to retain independent advisors and provide guidelines to be used in assessing the independence of the advisors retained. Dodd-Frank will also impose enhanced compensation disclosures and policies for public companies related to executive compensation, the exact terms of which have yet to be finalized. These disclosures and policies will address the relationship of executive pay to performance, internal pay equity metrics (i.e., relationship of CEO compensation to the median compensation paid to all other employees at the company), and clawback policies applicable to incentive compensation.30 There are currently no firm timetables or deadlines as to when these requirements will become effective. While these Dodd-Frank requirements do not apply to mutual savings institutions, it is expected that they will have a large influence on the standards that the banking regulators will apply to financial institutions in terms of enhanced requirements on corporate governance related to compensation issues. This is especially true for mutual institutions since, in the absence of shareholders conducting say-on-pay and say-on-golden parachute votes, banking regulators will likely feel a heightened duty to monitor and police the compensation practices of mutual institutions for purposes of safety and soundness. The role of compensation consultants and their independence as well as the relationship of pay to performance are expected to loom large in the examinations done by regulators of all financial institutions, including mutual institutions. Similarly, the implementation of clawback policies on incentive compensation is expected to become a standard best practice. Dodd-Frank will also impose substantial regulations upon all covered financial institutions with assets of at least $1 billion.31 These regulations essentially strengthen and elaborate upon the pre-existing Interagency Guidance on Sound Incentive Compensation Policies.32 Dodd-Frank requires that these covered financial institutions make annual disclosures to their regulators of all incentive compensation arrangements for covered persons (i.e., executive officers, employees, directors and principal shareholders) as well as an analysis as to why these arrangements do not encourage inappropriate risk by providing excessive                                                                                                                 28  15  U.S.C.  §  78n-­‐1.   29  17  C.F.R.  §  240.10C-­‐1.   30  15  U.S.C.  §  78.  

31  12  U.S.C.  §  5641.   32  75  Fed.  Reg.  36395  (June  10,  2010).  

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compensation or could lead to material financial loss.33 In addition, specific compensation requirements are mandated for covered financial institutions with assets greater than $50 billion and credit unions with assets greater than $10 billion (i.e., enhanced review of incentive compensation practices which could expose the institution to significant loss and mandatory deferrals of at least 50% of incentive-based compensation for at least three years).34   C. FDICIA – Financial Reporting & Related Governance Reforms The savings and loan crisis of the early 1980’s precipitated legislative reform for insured depository institutions and addressed some of the same corporate governance issues that Sarbanes-Oxley would further address twenty years later for all public corporations. Section 112 of the FDICIA addresses the need for accurate financial reporting and management’s responsibility for that reporting in order to facilitate the early identification of needed improvements in financial management. The requirements of Section 112 are codified at Section 36 of the Federal Deposit Insurance Act (the “FDIA”) (“Section 36”)35 and implemented by Part 363 of the FDIC’s regulations.36 Section 36 and Part 363 impose annual audit and reporting requirements on insured depository institutions with $500 million or more in assets. The full range of audit and reporting requirements apply only to FDIC-insured institutions with over $1 billion in total assets, while more limited requirements are applicable to institutions with between $500 million and $1 billion in total assets.37 Nonetheless, the FDIC has made it clear that even if an institution is not subject to the mandatory provisions of Section 36, the provisions remain valuable corporate governance practices that all FDIC-insured institutions, no matter the size, are encouraged to implement to the fullest extent practicable.38 Institutions subject to Section 36 of the FDIA are required to prepare and submit an annual report, sometimes referred to as the Part 363 Annual Report, to the FDIC and the appropriate federal and/or state regulator.39 The report includes annual financial statements prepared in accordance with generally accepted accounting principles and audited annually by an independent public accountant in accordance with generally accepted auditing standards.40 Within the report, the chief executive and chief financial officers must sign a statement that management is responsible for preparation of the financial statements, establishment, maintenance of internal controls and procedures and legal compliance with safety and soundness standards.41 In addition, management is required to assess the institution’s compliance with the safety and soundness laws and regulations and the Part 363 Annual Report must state management’s conclusion as to whether the institution has complied with the laws and                                                                                                                 33  Id.   34  Id.   35  12  U.S.C.  §  1831m.   36  12  C.F.R.  Part  363.  

37  Annual  Independent  Audits  and  Reporting  Requirements,  12  C.F.R.  Part  363;  see  also  FDIC  FIL  33-­‐2009,  

Annual  Audit  and  Reporting  Requirements  (June  23,  2009).   38  FDIC  FIL  96-­‐99,  Interagency  Policy  Statement  on  External  Auditing  Programs  of  Banks  and  Savings   Associations  (Oct.  25,  1999);  FDIC  FIL  21-­‐2003,  Interagency  Policy  Statement  on  the  Internal  Audit  Function   and  its  Outsourcing  (March  17,  2003);  12  C.F.R.  Part  363.   39  12  C.F.R.  §  363.4(a).   40  12  C.F.R.  §§  363.2(a)  &  363.3(a).   41  12  C.F.R.  §  363.2(b)(1).   8

                       

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regulations and must disclose any noncompliance.42 Further, in addition to establishing and maintaining internal controls and procedures, insured depository institutions with total assets of $1 billion or more must assess the effectiveness of their internal controls and procedures, which assessment must be included in the Annual Part 363 Report.43 In addition to annual reporting, institutions subject to Section 36 are generally required to establish an audit committee composed entirely of independent outside directors, if possible, but in no case with less than a majority of independent outside directors.44 For those institutions with between $500 million and $1 billion in assets, an audit committee composed of a majority of outside directors is required unless hardship can be demonstrated.45 For those institutions with total assets of $3 billion or more, the audit committee is required to include members with banking or financial management expertise and to have access to its own outside counsel.46 The requirements of Section 36, and the implications for those institutions not expressly subject to those requirements, are discussed as applicable in the following sections of this Article. D.

Sarbanes-Oxley – Auditor Independence and Related Corporate Governance Reforms

Sarbanes-Oxley applies to public corporations, including insured depository institutions, which have a class of securities registered with the Securities and Exchange Commission (the “SEC”) or the appropriate federal banking agency under Section 12 of the Securities and Exchange Act of 1934. For public corporations that are insured depository institutions, the appropriate federal banking agency implements the requirements of Sarbanes-Oxley.47 Each of the federal banking agencies has incorporated all applicable SEC regulations by reference.48 Similar to Section 36, the key corporate governance provisions of Sarbanes-Oxley include auditor independence, greater corporate responsibility and enhanced financial disclosures (Titles II – IV). The requirements of Sarbanes-Oxley are more fully discussed as applicable in the following sections of this Article.   E.

Other Banking Regulatory Guidance (i)

Interagency Guidance

Several issuances focused on sound corporate governance have been collaboratively developed by the federal banking agencies. In 1995, the federal banking agencies issued “Interagency Guidelines for Establishing Standards for Safety and Soundness.49 Applicable to all insured                                                                                                                 42  12  C.F.R.  §  363.2(b)(2).   43  12  C.F.R.  §  363.2(b)(3).   44  12  U.S.C.  §  1831m(g);  12  CFR  §  363.5(a).   45  12  C.F.R.  §  363.5(a)(2).   46  12  C.F.R.  §  363.5(b).     47  15  U.S.C.  §  78l(i).  

48  See  12  C.F.R.  §§  11.2(a),  197.18(a),  208.36(a)  and  335.101(b).   49  See  12  C.F.R.  Part  30  App.  A,  Part  170  App.  A,  Part  208  App.  D-­‐1  and  Part  364  App.  A.    

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depository institutions, including nonpublic institutions, this guidance sets forth the safety and soundness standards required by section 39 of the FDIA relating to (a) operational and managerial standards and (b) compensation standards. With respect to compensation, the guidelines prohibit excessive compensation as an unsafe and unsound practice and consider compensation excessive where amounts paid are unreasonable or disproportionate to the services performed. The factors to be considered when setting reasonable compensation include: (1) the combined value of all cash and noncash benefits provided to the individual; (2) the compensation history of the individual and other individuals with comparable expertise at the institution; (3) the financial condition of the institution; (4) comparable compensation practices at comparable institutions, based upon such factors as asset size, geographic location, and the complexity of the loan portfolio or other assets; (5) for post-employment benefits, the projected total cost and benefit to the institution; (6) any connection between the individual and any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the institution; and (7) any other factors the agencies determine to be relevant. Any compensation that could lead to material financial loss to an institution is likewise prohibited as an unsafe and unsound practice.50 In October 1999, the federal banking agencies jointly issued an “Interagency Policy Statement on External Auditing Programs of Banks and Savings Associations.” Applicable to all insured depository institutions, including nonpublic institutions, this interagency statement sets forth the agencies’ guidance with respect to safety and soundness and external auditing programs. In March 2003, the agencies’ issued a revised “Interagency Policy Statement on the Internal Audit Function and Its Outsourcing.” Applicable to all insured depository institutions, including nonpublic institutions, the policy statement sets forth the agencies’ guidance on the independence of an accountant who provides both external and internal audit services to an institution as a result of the Sarbanes Oxley auditor independence provisions. In May 2003, the FRB, OCC and former OTS issued a policy statement addressed specifically to nonpublic institutions—“Statement on Application of Recent Corporate Governance Initiatives to Non-Public Banking Organizations” to clarify how the agencies impose the provisions of Sarbanes-Oxley to nonpublic institutions. In June 2010, the federal banking agencies jointly issued “Guidance on Sound Incentive Compensation Policies” designed to ensure that incentive compensation policies at banking organizations, including nonpublic institutions, do not encourage imprudent risk-taking and are consistent with the safety and soundness of the institution. 51   (ii)

Office of the Comptroller of the Currency

Among other things, Dodd Frank continues in effect all OTS interpretations, guidelines, procedures and other advisory materials in effect prior to the dissolution of the OTS until modified, terminated, set aside or superseded by the OCC. Certain OTS guidance related to                                                                                                                 50  Id.  

51  75  Fed.  Reg.  36395  (June  25,  2010).  

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savings institution corporate governance is still in effect, though we can expect this to be reviewed and revised by the OCC as it continues its endeavor to streamline processes for savings institutions and national banks.52 This regulatory guidance applies to federally-chartered savings institutions, both mutual and stock. However, even state-chartered mutuals may wish to consider this guidance as a useful source of corporate governance best practices. Section 310 of the OTS Examination Handbook addresses the corporate governance and oversight responsibilities of the board of directors of a savings institution. Section 330 of the OTS Examination Handbook covers regulatory assessment of savings institution officers. The standards for governance contained in the interagency statements, Sections 310 and 330 of the OTS Examination Handbook are discussed as applicable in the following sections of this Article. (iii)

The FDIC

In 2003, following the enactment of Sarbanes-Oxley, the FDIC issued a Financial Institution’s Letter that addresses the applicability of certain provisions of Sarbanes-Oxley to insured depository institutions and discusses corporate governance practices that the FDIC encourages all insured depository institutions to adopt as a part of a sound corporate governance structure. 53 Two attachments to the letter address the applicability of Sarbanes-Oxley and suggest corporate governance best practices for non-public institutions. The FDIC also addresses standards for corporate governance in its Risk Management Manual of Examination Policies, Section 4.1 – Management. These standards apply directly to state-chartered nonmember banks, but serve as a useful source of corporate governance best practices for all insured depository institutions. These sources of FDIC guidance on corporate governance are discussed as applicable in the following sections of this Article. III.

Evaluating Existing Charter and Bylaws

The charter and bylaws of an institution generally establish the institution’s governance framework by addressing the basics of governance structure. In some cases, the charter and bylaws of an institution are already the result of careful planning and forethought regarding the structures and interrelationships of the various sources of leadership authority for the institution. In others, the charter and bylaws may have been in existence and unchanged for many years, leaving the intentions of the original authors unknown. In either case, it is a valuable exercise to reexamine the provisions of the charter and bylaws in order to determine whether these documents provide for structures and procedures, which, in the best judgment of management, facilitate effective corporate governance that is in line with a best practices approach in the post-financial crisis environment. In addition, many provisions of the charter and bylaws are dictated by the laws or regulations of the chartering                                                                                                                 52  We  note  that,  at  this  time,  the  OTS  Directors’  Responsibilities  Guide  (April  2008)  has  not  been  formally  

rescinded  though  it  is  not  available  on  the  OCC  website.    The  OCC  has  informally  advised  that  the  guide  is  still   sound  guidance  for  federal  savings  institutions  but  that  institutions  also  may  use  the  OCC’s  Director’s  Book   (October  2010)  for  national  banks.   53  Interagency  Statement  on  Application  of  Recent  Corporate  Governance  Initiatives  to  Non-­‐Public  Banking   Organizations  (May  5,  2003).   American Bankers Association

                       

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authority: State laws for state-chartered mutual institutions and OCC regulations for federal mutual institutions, as discussed above in Section II.A. Thus, a review of the charter and bylaws should, as an initial matter, address whether the documents are in compliance with the laws or regulations of the chartering authority. Detail regarding many of the required charter and/or bylaws provisions can be found in the survey of mutual corporate governance provisions attached as Appendix B to this Article. In all cases, the mutual institution should ensure that the provisions of its charter and bylaws are consistent and do not conflict with one another. There are many provisions which a mutual savings institution may include, or is required to include, in its charter and bylaws. This Section will highlight several charter and bylaws issues that should be addressed and/or reviewed by a mutual institution so as to establish corporate governance structures in line with best practices. A.

Amendment of the Charter and Bylaws

A good place to start in a review of the charter and bylaws of a mutual institution is with the process for amending the documents. In order to implement changes, these documents will have to be amended. Amendments to the bylaws of a federally-chartered mutual institution must be approved by majority vote of either the members of the institution or the board of directors.54 Provisions for amendments to the bylaws of state-chartered mutual institutions vary from state to state. Arizona, for example, provides that both the members and the board may amend the bylaws. Iowa and Indiana grant the right to amend the bylaws to the board only, unless the charter provides otherwise. Alabama allows members to amend the bylaws by a majority vote, but the board must have a two-thirds vote to approve bylaws amendments. Michigan provides that the board will propose amendments, which the members adopt by majority vote. Oklahoma does not permit the board to amend the bylaws. Tennessee allows the members to adopt bylaws, which specifically deny the board the right to amend those bylaws. Several states, including California, New Jersey and New York, leave bylaws amendments to determination by the bylaws themselves.55 If, after ensuring that the amendment provisions comply with the legal requirements of its chartering authority, the mutual institution is left with choices as to specifics of the amendment process, it should examine the various options available, and select those that best fit the needs of the institution. Generally, the institution should determine: (i) who initiates recommendations for amendments—members and/or the board; (ii) who votes on the passage of amendments— members and/or the board; and (iii) what the voting requirement for passage will be—a majority or a supermajority (see the discussion of supermajority voting provisions, below). B.

Supermajority Voting Provisions

Most items of business submitted to a vote require approval by a majority of the directors or members. However, mutual savings institutions generally have the option to require the approval of a higher percentage of members on specific questions of their choice. Institutions                                                                                                                 54  12  C.F.R.  §  144.5(b)(15).  

55  Further  detail  and  statutory  citations  are  available  in  Appendix  B  to  this  Article.  

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often implement charter and bylaws provisions that impose higher voting standards for stock offerings and certain merger transactions in which the institution is not the survivor. For example, one institution might require a unanimous vote of the board of directors for a stock offering; another might require an 80% vote of approval by the corporators for a stock offering; and yet another might set a 66% depositor vote threshold for a merger, unless the merger is approved by the board of directors. Both state and federal mutual institutions should consider whether there is reason to consider implementing a supermajority vote requirement for certain extraordinary transactions. C.

Classification of the Board of Directors

There are many issues involved in the election of the members of the board of directors due to the high level of responsibility granted to the board of directors for the management of an insured depository institution. In fact, in the opinion of the FDIC, “the continuing health, viability, and vigor of the bank are dependent upon an interested, informed and vigilant board of directors.”56 It is therefore imperative that a mutual institution attract, elect and retain high quality directors. The corporate governance provisions related to the election of the board of directors should be structured to facilitate this goal. The OCC and many states provide mutual institutions with an alternative for board of director elections—the institution of a classified or staggered board—an approach that can lessen the disruption of board turnover and may encourage more knowledgeable board member participation. A board that is not staggered holds elections for all of the board seats at one time. A staggered board of directors places only a portion of the full board up for election at any particular election. For example, a staggered board might consist of nine directors, of which only three are elected per year. That means that each of the nine directors serves three-year terms. That same board holding non-staggered elections would elect each of the nine directors at the same election. The frequency of the election would determine the term, though often the elections are required to be annual. Federally-chartered mutual institutions are permitted to have a staggered board, provided that directors serve one, two or three year terms and approximately one-third or one-half of the board is elected each year, as appropriate.57 Approximately 32 states either permit or require the board of directors of mutual institutions to be staggered. The remaining states are silent on the issue.58 In considering whether to institute a staggered board, the mutual institution should first confirm whether such a board is required or permitted by law. If left with an option, the mutual institution should carefully consider the impact that a staggered board will have. Choosing to elect only a portion of the board each year can allow for longer terms of service for the members, and possibly less frequent turnover on the board of directors. This could allow for a more stable board and permit board members to build expertise and higher levels of competence in their roles.                                                                                                                

56  FDIC  Risk  Management  Manual  of  Examination  Policies,  Part  II  Section  4.1:  Management.   57  12  C.F.R.  §  144.5(b)(8).   58  Further  detail  and  statutory  citations  are  available  in  Appendix  B  to  this  Article.  

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Another consideration is that a staggered board can limit the likelihood that a professional depositor will gain control of the institution by preventing the depositor from nominating new directors to all or a majority of the board positions in any one year. This is a very real issue as there is a current public company trend of activist investors pressuring companies to de-stagger boards arguing that annual full-board elections provides for improved corporate governance and shareholder value. The counter to this argument is that staggered boards create value by insulating directors from shareholder pressure for short-term gains so that directors can make safe and sound long-term decisions. D.

Special Meetings

The members of a mutual institution generally vote on the election of directors and other corporate matters at an annual meeting of members. In addition to annual meetings, a mutual institution may provide for the possibility of special meetings of members, which are additional meetings beyond the annual meeting of members. A special meeting might be called to elect new directors or to vote on other corporate matters of particular importance ahead of the next scheduled annual meeting. When reviewing its bylaws, a mutual institution should examine whether special meetings are provided for, and if so, who is given the authority to call such a meeting. The board of directors of a federally-chartered mutual institution may call a special meeting of its members. Additionally, the members of a federally-chartered mutual institution have the authority to call a special meeting, provided the members calling the meeting represent at least 10% of the institution’s insured deposits. The procedures for calling the special meeting are to be set out in the institution’s bylaws.59 Most states are either silent as to the authority of mutual institution members to call special meetings or provide that the members may call special meetings as, or if, the bylaws of the institution provide. California, Missouri and Tennessee authorize the members who are the holders of at least 10% of deposits or votes to call a special meeting. Wisconsin grants the right to members holding 20% of the eligible votes. Montana requires members to hold at least 25% of deposits or share accounts before they may call a special meeting.60 In reviewing special meeting provisions, it is important that the charter and bylaws be consistent with the law of an institution’s chartering authority. Additionally, all mutual institutions should grant the board of directors the authority to call a special meeting of the members. As mentioned above, a special meeting of members may be used to facilitate member voting on a corporate issue when it is inconvenient or undesirable to wait for the next scheduled annual meeting of the members. If the institution is chartered by a state that is silent as to special meetings, or that leaves it to determination by the institution in its bylaws, the mutual institution should consider whether it should grant its members the right to call such a meeting, and if so, under what conditions. In making this determination, the mutual institution should consider that a professional depositor might wish to call a special meeting to force a vote on his or her proposed agenda, such as a conversion plan or election of new directors to the board. The                                                                                                                 59  12  C.F.R.  §  144.5(b)(2).  

60  Further  detail  and  statutory  citations  are  available  in  Appendix  B  to  this  Article.  

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institution may generally establish a minimum deposit percentage for eligibility to call a special meeting, such as the ten, twenty or even twenty-five percent minimum set by several states. The bylaws also should set forth the procedure to be followed to call such a meeting. E.

Depositor Communications

Communications among depositors can have a significant impact on the business of a mutual institution. Depositor communications are of particular importance to mutual institutions concerned about the activities of professional depositors, who may make use of depositor communication provisions to further their efforts to bring about significant changes in governance, such as adoption of a conversion plan or election of new leadership to the board of directors. The ability, or lack thereof, of these activist depositors to communicate with other depositors is central to the success or failure of their efforts. This is because communication is vital if the activist depositor is to garner enough votes from other depositors to successfully institute a proposed plan or elect a slate of proposed directors to the board. It also is important where the ability of a lone depositor to nominate a director for election may be restricted, such that the cooperation of additional depositors is required even for nomination.61 Provisions regarding communications between depositors are the mutual institution equivalent of the SEC rules governing the inclusion of security holder proposals in public company proxy materials and nomination of directors for election to the board. Nomination provisions are more specifically addressed in Section IV.A, Nominating Committee, below. Rule 14a-8 of the Securities and Exchange Act requires companies to include any shareholder proposals that would amend, or request an amendment to, a company’s governing documents concerning director nomination procedures or other director nomination disclosure provisions, provided the proposals do not otherwise conflict with SEC proxy rules or applicable law.62 Only shareholders who meet the current eligibility requirements of Rule 14a-8 (which require that the shareholder own at least $2,000 in market value, or 1 percent, whichever is less, of the company’s shares for at least one year) may submit such proposals.63 Rule 14a-8 also sets out deadlines for submission of such proposals.64 Depositor Communications at Federal Mutual Savings Institutions. The OCC rules specifically grant members of federal mutual savings institutions the right to communicate with one another. The requesting member must make a written request to the mutual savings institution, which then has up to 14 days to respond to the request, unless the communication relates to a meeting, in which case less time is allowed. The mutual savings institution must respond with the number of members of the institution and the estimated reasonable cost of mailing, or notify the member that the communication is “improper” and return the materials, along with an explanation of why the materials were “improper.”65

                                                                                                                61  Additional  discussion  of  nomination  of  directors  and  the  nominating  committee  can  be  found  in  Section  

IV.B.,  Nominating  Committee.   62  17 C.F.R. § 240.14a-8   63  Id.   64  Id.   65  12  C.F.R.  §§  144.5(b)(7)  and  144.8.   American Bankers Association

                       

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A communication is considered “improper” if it: (i) is false or misleading as to any material statement or omission; (ii) relates to a personal grievance or seeks to “further the business advantage or personal gain of the depositor;” (iii) relates to any matter not significantly related to the business of the institution, or is out of the control of the mutual savings institution; or (iv) impugns someone’s personal reputation or makes charges concerning improper, illegal, or immoral conduct, or impugns the stability and soundness of the mutual savings institution.66 Note that there is no provision allowing the mutual savings institution to deny distribution of a communication related to “ordinary business” issues, as there is under the SEC rules.67 If the communication is not improper, and the institution has provided the requesting depositor with the number of depositors and estimated cost of mailing, and in return has received the amount of the estimated costs and the appropriate number of copies of the communication, then the mutual savings institution must mail the communication to all members within a specified time period dictated by the type of meeting to which the communication relates, or by some later date, if specified by the requesting member.68 Depositor Communications at State Mutual Institutions. With limited exceptions, communications among depositors of state mutual institutions are governed by state law. Most states are silent on the issue of permissible depositor communications. Among those states that do address depositor communications are California, Michigan, Minnesota, Mississippi, New Jersey, Tennessee, Utah and Virginia. Each of these states requires that the requesting member pay the costs of mailing in any case where the communication is sent to the members. California, Minnesota, Mississippi, Utah and Virginia require that the communication be related to questions pending or to be presented for consideration at a meeting of the members. New Jersey appears to allow member requests on any topic, but will only compel the mutual institution to distribute communications that are made in good faith and not detrimental to the best interests of the institution. The process for member communication in each of these states includes the approval of the communication by the state’s banking commissioner.69 Again, when considering changes to this section of its bylaws, the mutual institution should first ensure that its bylaws are consistent with the provisions of its chartering authority on depositor communications. If the chartering authority has remained silent as to depositor communications, the mutual institution should nonetheless consider addressing the topic in its bylaws, bearing in mind potential professional depositor activism and also best practices employed by the public corporate community. In its rules addressing shareholder proposals, the SEC requires public companies to include certain shareholder proposals in their proxy materials, and to disclose to the SEC any proposal that is excluded, and the reasons for that exclusion.70 In addition, the SEC rules governing nominating procedures require that disclosures must be made as to whether and how stockholders may nominate persons to the board of directors.71 These rules were adopted after the pubic corporate community expressed concern over corporate                                                                                                                 66  12  C.F.R.  §  144.8.   67  See  17  C.F.R.  §  240.14a-­‐8.   68  12  C.F.R.  §  144.8.  

69  Statutory  citations  are  available  in  Appendix  B  to  this  Article.   70  SEC  Rule  14a-­‐8  under  the  Securities  Exchange  Act  of  1934.   71  17  C.F.R.  §§  228,  229,  240  et  al.  

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director accountability and the need for greater access to the nomination process and greater ability for shareholders to exercise their rights and responsibilities.72 Although a mutual institution chartered by a state that neither requires nor prohibits depositor communications might choose to disallow communications altogether or perhaps leave the bylaws, like state law, silent on the matter, this may not be consistent with a best practices approach. SEC rules requiring companies to include shareholder proposals in proxy materials under certain circumstances should cause mutual institutions to hesitate before deciding to prohibit depositor communications altogether. The SEC’s emphasis on disclosure regarding shareholder proposals and the nomination process should encourage mutual institutions to address depositor communications in their bylaws. A clearly articulated policy on the matter will allow the institution to better control the process. Adopting a clear policy regarding depositor communications does not mean that the mutual institution must facilitate, or even permit all or even most proposed communications by its depositors. In establishing its policy on depositor communications, the institution has a range of choices. It may permit communications subject to a process similar to that proscribed by the states that address the issue, that is, permit communications subject to board approval with payment of costs by the requesting depositor. The mutual institution might also allow communications subject to other specific restrictions, such as by topic or minimum depositor interest in the institution. When establishing restrictions by topic, the OCC rules on “improper communications” and the SEC’s enumerated reasons to exclude a shareholder proposal serve as sound guidelines. The mutual institution should also clearly set out the process for proposing a communication that clearly defines deadlines for communication submission. IV.

Committees

The board of directors of an insured depository institution, including a mutual institution, has a wide range of responsibilities, including selecting and retaining competent executive officers, establishing the objectives and strategies of the institution, identifying and assessing risks associated with those objectives and strategies, establishing policies and procedures for those objectives and strategies, monitoring and assessing the progress of operations, and ensuring that the institution is in compliance with applicable laws and regulations.73 In short, the board of directors is ultimately responsible for the oversight of the business of the mutual institution from start to finish. It is not a passive role, but one of active, knowledgeable involvement. Effective board oversight is the central element of a financially sound and well-managed depository institution.74 As a result of the financial crisis and the corporate scandals of the past decade, there is an increased emphasis on the accountability of the board of directors. This necessitates an even higher level of board responsibility and involvement in the business of the institution. The volume and complexity of information and decision-making expected of the boards of mutual                                                                                                                 72  Id.   73  See  Basel  Committee  on  Banking  Supervision:  Principles  for  Enhancing  Corporate  Governance  (October  

2010)  at  13  (“Basel  Principles”).   74  Federal  Reserve  System,  Community  Banking  Connections:  The  Importance  of  Effective  Corporate   Governance  (2012).   American Bankers Association

                       

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institutions can be overwhelming. The establishment of committees is a common approach to dealing with the situation, enabling smaller groups of directors and officers with special expertise to manage and interpret complex information before reporting back to the entire board for consideration.75 In establishing committees, the board should be aware of the risks involved in having a committee entirely composed of inside directors, such as executive officers, former executive officers, principal shareholders and relatives. There is a danger that such committees may filter the information that they are responsible for analyzing and present the performance of the institution in its most favorable light to the full board. For this reason, it is preferable to establish committees composed of a mix of inside and outside directors, as well as executive officers, so that the committee is comprised of both a high level of expertise and independence.76 Where possible, it may be preferable that committee composition be entirely independent. There are various types of committees that an institution may choose to establish. This Article will discuss audit committees and nominating committees, both of which are addressed by Sarbanes-Oxley, as well as compensation committees. A.

Audit Committee

Sarbanes-Oxley Section 301 requires all public companies to have an audit committee composed of independent members of the board of directors.77 The audit committee must be adequately funded by the pubic company and must be able to hire independent counsel and other advisors.78 In addition, the public company must disclose whether the audit committee has at least one member who is a “financial expert.”79 To date, the FRB and the OCC have not taken steps to require nonpublic institutions, including mutual institutions, to comply with the Sarbanes-Oxley audit committee requirements.80 However, nonpublic institutions, including mutual savings institutions, are either required or encouraged, depending on their size, to have an audit committee. Section 36 and the FDIC’s implementing regulations require all insured depository institutions, including nonpublic institutions, to have an audit committee. Only institutions with more than $1 billion in total assets are required by the FDIC to have an audit committee that is entirely independent. Subject to a hardship exception, institutions with total assets between $500 million and $1 billion are required by the FDIC to have an audit committee comprised of outside directors, the majority of whom must be independent. While institutions with total assets under $500 million, including mutual institutions, are not strictly required by law to have an audit committee, they are

                                                                                                                75  See  OCC,  The  Director’s  Book  –  The  Role  of  the  National  Bank  Director  (Oct.  2010).   76  Id.   77  15  U.S.C.  §  78J-­‐1(m)(3).   78  15  U.S.C.  §  78J-­‐1(m)(5)-­‐(m)(6).   79  Id.  15  U.S.C.  §  7265.  

80  See  Statement  on  Application  of  Recent  Corporate  Governance  Initiatives  to  Non-­‐Public  Banking  

Organizations  (May  5,  2003).   18

                       

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encouraged, via FDIC and interagency policy statements, to establish an audit committee that is all or mostly comprised of outside directors.81 An outside director is a director who is not an officer or employee of the institution, its subsidiaries or its affiliates, and who does not have any material business dealings with the institution, its subsidiaries or its affiliates.82 In addition, in light of the Sarbanes-Oxley requirements, the institution should consider appointing at least one director who, if not a “financial expert,” at least has some experience with financial reporting issues. The role of the audit committee primarily involves the supervision of the internal and external audit functions of the institution. Other responsibilities might include: (i) establishing policies and procedures to ensure full and accurate disclosure of the institution’s financial condition; (ii) monitoring management and staff compliance with board policies, laws, and regulations; (iii) measuring the effectiveness of the institution’s compliance management program; (iv) an annual review of the external auditor’s independence; management consultation; (v) seeking an opinion on an accounting issue; and (vi) oversight of the quarterly regulatory process. The audit committee should report any of its findings periodically to the board of directors.83 In fulfilling its role with regard to the external auditing function, the audit committee is responsible for the consideration of and decision on the most appropriate external auditing program for the institution. The audit committee should undertake this effort at least annually. The committee should first identify the institution’s various risk areas. It should then determine the extent of the external auditing program that is needed to evaluate and manage these risk areas, taking into consideration: (i) the size of the institution; (ii) the nature, scope and complexity of its operations; and (iii) the potential benefits of the external auditing programs under consideration. In addition, the audit committee should consider whether a specific external auditing program is warranted for a particular year or period of years due to the existence of high risk areas or areas of special concern.84 Once the decision on the type of external auditing program has been made, the audit committee should communicate and come to an agreement on the objectives and scope of the external audit program with the external auditor. The decision on the external audit program and the reasons for its design and scope should be recorded in the minutes of the audit committee or board of directors.85 The first step in establishing an audit committee is the adoption of a charter for the committee. Appendix C is a sample charter for an audit committee of a mutual institution. The                                                                                                                 81  See  FDIC  FIL  17-­‐2003  Attachment  I,  Applicability  of  Selected  Provisions  of  the  Sarbanes-­‐Oxley  Act  of  2002  to  

FDIC-­‐Supervised  Banks  with  Less  than  $500  Million  in  Total  Assets  That  Are  Not  Public  Companies  (March  5,   2003);  Interagency  Policy  Statement  on  External  Auditing  Programs  of  Banks  and  Savings  Associations  (Oct.  15,   1999);.   82  FDIC  FIL  96-­‐99,  Interagency  Policy  Statement  on  External  Auditing  Programs  of  Banks  and  Savings   Associations  (Oct.  25,  1999).   83  FDIC  FIL  96-­‐99,  Interagency  Policy  Statement  on  External  Auditing  Programs  of  Banks  and  Savings   Associations  (Oct.  25,  1999);  OTS  Examination  Handbook,  Section  310.5:  Management,  Audit  Committee.   84  FDIC  FIL  96-­‐99.   85  Id.   American Bankers Association

                       

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sample is necessarily general in nature; not all provisions included will be appropriate for every institution; and all provisions appropriate or necessary for a particular institution may not be included. The document is meant to provide a drafting starting point in order to achieve a charter that addresses a particular institution’s needs. B.

Nominating Committee

Under Item 407 of Regulation S-K, each publicly traded company must disclose to its stockholders whether or not it has a standing nominating committee (or a committee having similar functions) and, if not, a statement of the reasons why not and the names of the directors who participate in the consideration of director nominees.86 The company must also disclose whether the nominating committee has a charter, and if so whether it can be found on the company’s website.87 The company must also make disclosures as to the independence of the members of the nominating committee based on compliance with the applicable listing standards.88 Disclosures must be made as to whether and how stockholders may nominate persons to the board of directors, along with the qualifications that the nominating committee requires and considers for nominees.89 While these requirements do not apply to nonpublic institutions, including mutual institutions, board nomination policies and procedures are of particular importance to mutual institutions concerned about the activities of professional depositors. It is a common technique for these depositors to bring about significant changes through the election of new leadership to the board of directors. The ability of these activist depositors to nominate themselves or others to the board is central to the success of their efforts. Under OCC regulations, the bylaws of federally-chartered mutual institutions must provide that nominations to the board of directors may be made at the annual meeting by any member and that such nominations will be submitted to a vote.90 However, the institution has the option to require that member nominations be submitted to the secretary of the institution at least 10 days prior to the annual meeting and prominently posted in the institution’s principal place of business.91 Note that if the mutual institution decides to adopt this prior notification requirement, the institution is then required to have a nominating committee. The nominating committee is required to submit nominations to the secretary at least 15 days prior to the annual meeting and prominently post them in the institution’s principal place of business.92 Although the OCC regulations seem to require that all members be given the right to nominate persons for director, this is not necessarily the case. Mutual institution have been permitted to adopt an optional bylaw provision that would restrict the nomination rights of a

                                                                                                                86  17  C.F.R.  §  229.407(c).   87  Id.   88  17  C.F.R.  §  229.407(a)(1)(i).   89  17  C.F.R.  §  229.407(c).  

90  12  C.F.R.  §  144.5(b)(13).   91  Id.   92  Id.  

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person convicted of a crime involving dishonesty or breach of trust, or subject to a cease and desist order by a banking agency for conduct involving dishonesty or breach of trust.93 Most states do not address director nomination in their provisions on mutual corporate governance. Thus, it is left to the mutual institution to set its own nomination rules and procedures in its bylaws, and to establish a nominating committee if it so chooses. There is no required standard communication with members regarding the process for nomination of directors. However, establishment of a nominating committee and communication with members regarding nomination procedures, in line with SEC standards, would provide evidence of best practice corporate governance adoption and support a characterization that the mutual institution is well managed. In addition, while nomination of persons to the board of directors may be a threat to the well-being of the institution if those persons are not qualified or are otherwise inappropriate choices for the institution, the board also has a fiduciary duty to ensure that qualified and worthy candidates for board positions are presented to depositors. The establishment of nominee qualifications, nomination procedures and a nominating committee can clarify in advance the appropriate response to depositor attempts to nominate persons to the board of directors. By following the structure set in place ahead of time, the institution ensures that unqualified nominations are not permitted, while allowing a clear process for the nomination of qualified individuals. There are options for creating policies and procedures for nomination and for the operation of a nominating committee. The institution may choose to permit all members to nominate persons for election to the board. Alternatively, the institution may choose to place restrictions on member nominations by, for example, minimum depositor interest in the institution requirements. The institution also should consider restricting nomination by persons convicted of a crime involving dishonesty or breach of trust, or subject to a cease and desist order by a banking agency for conduct involving dishonesty or breach of trust. In addition, the institution should establish a clear process for nomination, such as submission of the nomination to the nominating committee by a certain number of days prior to the annual meeting. Finally, the nominating committee should set clear director qualification standards, which must be met by any proposed nominee in order for such nomination to be presented for election. The first step in establishing a nominating committee is the adoption of a charter for the committee. Appendix D is a sample nominating committee charter for a mutual institution. Again, the document is necessarily general in nature and not all provisions included will be appropriate for every institution. Similarly, all provisions appropriate or necessary for a particular institution may not be included in the sample. The document is meant to provide a starting point from which the institution can tailor a nominating committee charter to its particular needs. Director Qualifications and Selection. In addition to implementing the nomination process, the nominating committee is responsible for establishing and assessing director qualifications.94 This responsibility is extremely important, given the extent to which the quality                                                                                                                 93  See  OTS  Applications  Handbook:  Charter  &  Bylaw  Amendments  §  410.33  (April  2001);  See  also  66  Fed.  Reg.  

15017  (March  15,  2001);  OTS  Order  No.  2005-­‐13  (March  17,  2005).   94  See  The  Clearing  House  Exposure  Draft:  Guiding  Principles  for  U.S.  Banking  Organization  Corporate   Governance  (March  13,  2012),  at  40  (“TCH  Guiding  Principles”)   American Bankers Association

                       

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of the board of directors impacts the overall success of an institution. Director qualifications may be used not only to ensure that high quality candidates are nominated to the board, but also, conversely, can help to ensure that unqualified individuals are not eligible for nomination. In establishing director qualifications, the nominating committee must first ensure that it complies with any requirements of its chartering authority. OCC regulations require the board of directors of federally-chartered savings institutions to be composed of a majority of directors who are not salaried officers or employees of the institution or any subsidiary thereof.95 In addition, no more than two directors may be members of the same immediate family and no more than one director may be an attorney with a particular law firm.96 State-chartered mutual institutions may also be subject to statutory director qualification requirements. For example, Massachusetts requires: (i) that a majority of the trustees be citizens of the Commonwealth of Massachusetts; (ii) that at least two trustees reside in a city or town where the institution’s main office or a branch is located; and (iii) that all trustees be depositors of the savings bank. Indiana requires that all directors be at least 18 years old.97 Although the OCC director qualification requirements are not applicable to statechartered mutuals, the motivation behind qualifications is relevant to all mutual institutions. The OCC requirements are intended to produce a board of directors that is composed of both inside and outside directors, such that the inside directors are able to “provide internal perspectives for other board members,” while the outside directors “provide unbiased and impartial perspectives on issues brought to the board.”98 As such, regardless of the charter type, a mutual institution’s nominating committee should be conscious of maintaining a balance of inside and outside directors when making nominations. Where state-imposed director qualifications do not apply to a mutual institution, it may nonetheless be useful to incorporate such restrictions into the nominating committee’s director qualifications. A requirement that directors be depositors of the institution can create a stronger tie between the directors and the institution. State citizenship or community residency requirements may operate to support a mutual institution’s community oriented approach to banking. Age requirements imposing minimum limits can serve to encourage the selection of directors with a certain level of experience, while age restrictions setting a required retirement age may be intended to encourage turnover on the board. The decision to adopt these kinds of qualifications rests with the nominating committee and ultimately with the board of directors, which must make the decision, as it makes all decisions, based on what best the particular needs of the institution. In addition to such specific restrictions and requirements, the nominating committee must establish those other qualifications that the institution desires its directors to possess. Among the most important are the skills and experience of the directors. 99 In particular, directors should possess sound business judgment and experience that facilitates an understanding of banking and                                                                                                                 95  12

C.F.R. § 163.33  

96  Id.  

97  MASS.  GEN.  LAWS  ch.  168  §  10;  IND.  CODE  §  28-­‐13-­‐9-­‐2.   98  OTS  Examination  Handbook,  Section  310.19:  Management,  Composition  of  the  Board  of  Directors.   99  FDIC  Risk  Management  Manual  of  Examination  Policies,  Part  II  Section  4.1:  Management.  

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banking problems.100 In fact, the Basel Committee on Bank Supervision recommends that directors of banking organizations have “adequate knowledge and experience relevant to each of the material financial activities the bank intends to pursue in order to enable effective corporate governance.”101 Further, the candidate should also be familiar with the community and trade area that the institution serves, as well as with general economic conditions.102 A working knowledge of the duties and responsibilities of the office of director is very important.103 The nominating committee must also consider certain personal qualities of the proposed nominee. According to the FDIC, “[t]he one fundamental and essential attribute, which all bank directors must possess without exception, is personal integrity.”104 Given the importance of the fiduciary responsibilities of loyalty and care that a director undertakes, to both the institution and its depositors, a director must possess candor, personal honesty and integrity.105 The director must have the ability to recognize and avoid potential conflicts of interest, or even the appearance of a conflict of interest.106 A director should possess the ability to act with objectivity and independence.107 While section 19 of the FDIA prohibits persons who have been convicted of any criminal offense involving dishonesty or a breach of trust from being a director without the prior approval of the FDIC, 108 the nominating committee could impose a blanket prohibition on the nomination of any person convicted of a crime involving dishonesty or a breach of trust, or who has been subject to a cease and desist order by a banking regulator for conduct involving dishonesty or a breach of trust.109 OCC regulations provide an optional bylaw provision which would disqualify such a director.110 Such a policy may be appropriate because “trust is fundamental to the banking industry and the lack of trust in the managers of institutions will adversely affect their businesses.”111 At least one state clearly agrees with this approach; California prohibits any person convicted of a criminal offense involving dishonesty or a breach of trust from serving as a director of a mutual savings institution.112 This type of disqualification is clearly designed to prevent undesirable candidates from being eligible for nomination to the board. C.

Compensation  Committee  

There  are  no  current  regulatory  requirements  for  banking  organizations  to  establish   compensation   committees.     However,   with   the   long-­‐standing   Interagency   Guidelines   Establishing   Standards   for   Safety   and   Soundness,   of   which   compensation   is   a   critical                                                                                                                   100  Id.  

101  Basel  Principles,  at  10.   102  Id.   103  Id.   104  Id.   105  Id.   106  Id.   107  Id.   108  12  U.S.C.  §  1829.  

   

110  See  OTS  Applications  Handbook:  Charter  and  Bylaw  Amendments  §  410.33  (April  2001).   111  66  Fed.  Reg.  15017,  15019  (March  15,  2001).   112  CAL.  FIN.  CODE  §  6151.  

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component,   the   more   recent   Interagency   Guidance   on   Sound   Incentive   Compensation   Policies   and   the   current   focus   on   incentive   compensation,   establishing   a   compensation   committee  is  something  mutual  savings  institutions  should  seriously  consider.       The   compensation   committee   oversees   the   compensation   system’s   design   and   operation   and   ensures   that   compensation   is   appropriate   and   consistent   with   the   institution’s   culture,   long-­‐term   business   and   risk   strategy,   performance   and   control   environment,  any  legal  or  regulatory  requirements  and  the  institution’s  need  to  attract  and   retain   qualified   management   and   employees.113     As   a   result,   the federal banking agencies encourage compensation committees to “have, or have access to, a level of expertise and experience in risk management and compensation practices in the financial services sector that is appropriate for the nature, scope and complexity of the organization’s activities.”114   Independence   also   is   a   required   consideration   with   respect   to   compensation   committee   membership.     For   large   banking   organizations,   the   federal   banking   agencies   generally   encourage   the   establishment   of   a   compensation   committee   composed   solely   or   predominantly   of   non-­‐executive   directors   that   reports   to   the   full   board.115   Public companies are generally required to have compensation committees composed entirely of independent directors.116 Dodd-Frank requires all compensation committee members of listed companies to be independent under a new definition of “independence” to be determined by the national securities exchanges.117 While these rules have yet to be developed and would not apply directly to nonpublic institutions, the concept of an independent (or largely independent) compensation committee may be seen as a best practice. In setting requirements for compensation committee membership, mutual institutions should consider that independence may be based upon whether the director (i) is or has been a member of management, (ii) serves or is compensated in any capacity other than as director of the institution, (iii) is a relative of an officer or other employee of the institution, or (iv) has any outstanding extensions of credit from the institution. Where a compensation committee is not entirely independent, it should meet independently of the executives for whom compensation is being discussed and should have free access to all relevant information. The setting of compensation committee agendas and other discussion items should be established by the compensation committee itself and its advisors using management as a resource (rather than having discussions directed by members of management). In order to ensure the opportunity for careful and deliberate review, materials should be sent to all compensation committee members in advance of regular meetings. The compensation committee should generally meet at least quarterly (or on a regular basis that is appropriate for smaller companies) and detailed minutes should be kept for all meetings (i.e., not just time, place, date and actions taken but also records of length of meetings, substance of discussion and copies of any materials considered by the compensation committee). The keeping of accurate records will enable the board to defend its decisions by showing that the                                                                                                                 113  Basel  Principles  at  13;  THC  Guiding  Principles  at  45.   114  75  Fed.  Reg.  at  36402.   115  75  Fed.  Reg.  at  36413.   116  See  NYSE  Manual,  Section  303A.05;  NASDAQ  Rules,  Section  5605(d)(1)(B).   117  15  U.S.C.  §  78j-­‐3.  

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compensation committee made its recommendations based upon deliberate discussions of all relevant materials. Generally, the compensation committee will brief the board on its decisions as well as the basis for such decisions and ask for ratification by the full board’s disinterested members where appropriate. It is ultimately the responsibility of the board to ensure that the powers delegated to the compensation committee are being properly exercised so it is essential for board members to be fully briefed on the actions of the compensation committee even if ratification of the full board is not sought for a particular action. While it is both necessary and appropriate for the compensation committee to seek the input of executive management in its decisions (and to rely on factual information supplied by members of management), it is crucial for the compensation committee to maintain its independence and run its meetings in executive session without the presence of management when debating topics and making final determinations. The compensation committee should have a charter which outlines the role and duties of the compensation committee as expected by the board. The charter will assist the compensation committee in understanding what its obligations are in relation to both the full board and management. This also serves to highlight that while certain tasks can be delegated to management, it is ultimately the responsibility of the compensation committee and board to monitor management’s execution of delegated functions (e.g., administrative matters related to 401(k) plans are often delegated to management, but the ultimate fiduciary responsibility will rest with the board). Once a charter is adopted, it should be carefully followed in order to avoid any risk of increased liability. Appendix E is a sample charter for a compensation committee of a mutual institution. The sample is necessarily general in nature and not all provisions included will be appropriate for every institution. Similarly, all provisions appropriate or necessary for a particular institution may not be included in the sample. The document is meant to provide a starting point from which the institution can fit a compensation committee charter to its particular needs. V.

Policies and Procedures

As discussed above in Section III, the charter and bylaws of an institution generally establish the governance framework within which the institution will operate, addressing basics of governance such as number of directors, procedures for election of directors, policies for meetings of members, roles of officers and methods of election of officers, and other such matters. Although well-structured bylaws are essential to effective corporate governance, in today’s corporate atmosphere, they are not sufficient. In response to increased standards in governance, and in some cases, legal requirements, many institutions are choosing to set out additional governance structures in written policies and procedures. These types of governance polices operate as an adjunct to the bylaws, complementing and providing further guidance to the framework established by the bylaws. By setting out governance policies and procedures in writing, the board of directors not only defines its expectations for itself, but it is able to clearly convey its expectations regarding specific governance issues to its officers, employees, members, and even its customers. Written policies are a means to commit to sound governance and to communicate that commitment both inside the institution and to the community and depositors it serves. American Bankers Association

                       

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Further, policies and procedures provide concrete governance guidance to an institution’s leadership without the inflexibility of bylaws. For example, amendments to the bylaws of a federally-chartered mutual institution must be approved by majority vote of either the members of the institution or the board of directors.118 Provisions for amendments to the bylaws of statechartered mutual institutions vary from state to state. While some states grant members the right to amend the bylaws; others leave it up to the institution to determine its bylaws. Still others restrict the right of the board of directors to amend the bylaws.119 Amendments to the policies and procedures of a mutual institution are not generally subject to such restrictions. For example, the OCC guidance requires only that all major policies be approved by the board of directors.120 There are various types of policies and procedures that an institution may choose to adopt. The three that have received heightened attention are the following. A.

Code of Ethics

Mutual institutions are not required under federal law to have a code of ethics. Section 406 of Sarbanes-Oxley requires publicly traded institutions to disclose whether they have adopted a code of ethics for senior officers and, if not, to explain the decision not to adopt such a code.121 Disclosure of any changes or waivers of the code of ethics is also required.122 Notwithstanding the lack of formal requirements, there are many good reasons for a mutual institution to adopt a written code of ethics. First, the FDIC, the FRB and the OCC expressly encourage mutual institutions to do so.123 In addition there are many practical benefits for institutions that choose to adopt a written code of ethics. As with all written policies, a written code of conduct effectively establishes the board’s expectations for itself, and communicates those expectations throughout the institution. It sets the tone for a firm commitment to honest and ethical conduct, accountability and compliance with the law. In developing a code of ethics, a mutual institution would be well advised to review FDIC guidance on the topic contained in Financial Institution Letter 105-2005, Corporate Codes of Conduct: Guidance on Implementing an Effective Ethics Program.124 According to the FDIC, issues that should be addressed in an institution’s ethics policy include the following: (i) safeguarding confidential information; (ii) ensuring the integrity of records; (iii) providing strong internal controls over assets; (iv) providing candor in dealing with auditors, examiners and legal counsel; (v) avoiding self-dealings and acceptance of gifts or favors; (vi) observing applicable laws; (vii) implementing appropriate background checks; (viii) involving internal auditor in monitoring the policy; (ix) providing a mechanism to report questionable activity; (x)                                                                                                                 118  12  C.F.R  §  144.5.  

119  Further  detail  and  statutory  citations  are  available  in  Appendix  B  to  this  Article.   120  See  OTS  Examination  Handbook,  Section  310.10:  Management,  Policies  and  Procedures.     121  15  U.S.C.  §  7264;  17  CFR  §  229.406.   122  Id.   123  FDIC  FIL  17-­‐2003,  Corporate  Governance,  Audits,  and  Reporting  Requirements  (March  5,  2003);  Interagency  

Statement  on  Application  of  Recent  Corporate  Governance  Initiatives  to  Non-­‐Public  Banking  Organizations  (May   5,  2003).     124  FDIC  FIL  105-­‐2005,  Corporate  Codes  of  Conduct:  Guidance  on  Implementing  an  Effective  Ethics  Program   (Oct.  21,  2005).   26

                       

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outlining penalties for a breach of the policy; (xi) providing periodic training and acknowledgment of the policy; and (xii) periodically updating the policy. The complete FDIC issuance is attached as Appendix F. Additionally, mutual institutions should also consider the FDIC’s “Guidelines for Compliance with the Federal Bank Bribery Law” issued in 1987.125 This issuance encourages all insured institutions to adopt internal codes of conduct, or amend their current code of conduct, so that it includes an explanation of the general provisions of the bank bribery law, and prohibits certain actions by bank officials, primarily self dealing and acceptance of gifts or favors. Appendix G is a sample Code of Ethics to be used as a drafting starting point. The sample is necessarily general in nature and not all provisions included will be appropriate for every institution. Similarly, all provisions appropriate or necessary for a particular institution may not be included in the sample. B.

Conflicts of Interest

Conflicts of interest are similar, yet different from the code of ethics and have received increased attention as an issue unto themselves, particularly as a result of the requirements of Section 402 of Sarbanes-Oxley, which addresses extensions of credit by public companies to their directors and officers.126 As with the code of ethics provisions of Sarbanes-Oxley, mutual institutions are not subject to Section 402. However, institutions subject to regulation by the FRB, OCC or FDIC are required to comply with the requirements of the FRB’s Regulation O, dealing with loans to directors, officers and principal shareholders of an insured depository institution.127 It is important to remember that avoiding conflicts of interest is a fundamental responsibility of a director or officer of a mutual institution. As discussed above in Section I. A, directors and officers owe a fiduciary duty of loyalty to the institution. This duty includes the duty to avoid conflicts of interest; that is, the director or officer has a duty to carry out all aspects of his or her responsibilities in keeping with the best interests of the institution. The officer or director may never advance his or her personal interests, or the interests of family or associates, at the expense of the institution. Avoiding conflicts protects management and the institution from liability and adverse regulatory action. Additionally, the avoidance of conflicts, or even the appearance of conflicts, protects the reputation of the institution. Establishing a written conflicts of interest policy brings with it all of the general advantages of having written policies: clear communication of expectations within and without the institution. Additionally, adoption of a conflicts of interest

                                                                                                                125  Guidelines  for  Compliance  with  the  Federal  Bank  Bribery  Law,  52  Fed.  Reg.  43,941  (Nov.  17,  1987).    See  

also  FDIC  FIL  17-­‐2003,  Corporate  Governance,  Audits,  and  Reporting  Requirements  (March  5,  2003).   126  15  U.S.C.  §  78m(k).   127  12  C.F.R.  §§  163.43  and  337.3;  12  C.F.R.  Part  215.    The  FRB’s  Compliance  Guide  for  Small  Entities,   Regulation  O,  provides  an  overview  of  the  requirements  of  the  regulation  and  is  available  at   http://www.federareserve.gov/regulations/cg/regocg.htm.   American Bankers Association

                       

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policy is itself an aspect of fulfilling the duty to avoid conflicts, and any appearance of conflicts.128 A mutual institution’s written policy on conflicts of interest should identify areas where such conflicts could arise. These include: transactions with affiliates; transactions with insiders, including directors, officers, employees, shareholders and anyone with influence over the policies and procedures or actions of the institution; loans to insiders, as mentioned above; and usurpation of corporate opportunities. The policy should identify controls that the institution maintains to avoid conflicts and the procedures for dealing with policy violations. The policy should also identify business activities in which the members of management are active and business activities that the institution is permitted to conduct by law.129 The main function of the policy is to establish a general plan and a process for dealing with actual and potential conflicts of interest. The plan should ensure that management and the institution will comply with applicable law whenever a conflict or potential conflict arises. In particular, the plan should reference the requirements of Sections 23A and 23B of the Federal Reserve Act, addressing affiliated transactions and Regulation O. In general, whenever a conflict or potential conflict of interest arises, the individual involved should make full disclosure to the board of directors, refrain from participating in any board discussion of the matter and recuse him or herself from voting on the matter. In addition, the institution should fully document all disclosure, discussion and voting regarding any conflict or potential conflict of interest.130 Appendix H is a sample Conflicts of Interest policy that provides a starting point for each institution to tailor the provisions to meet its particular needs and concerns. The sample is necessarily general in nature and not all provisions included will be appropriate for every institution. Similarly, all provisions appropriate or necessary for a particular institution may not be included in the sample. C.

Confidentiality

Confidentiality and privacy protection in connection with the personal information of financial institution customers continues to be a topic of concern to the financial industry and the general public. Congress responded to this concern through the passage of the Gramm-LeachBliley Act (the “GLBA”) in November, 1999. Section 501 of the GLBA, “Protection of Nonpublic Personal Information,” applicable to all FDIC-insured institutions, aims to: (i) ensure the security and confidentiality of customer records and information; (ii) protect against any anticipated threats or hazards to the security or integrity of such records; and (iii) protect against                                                                                                                

128  For  example,  when  conducting  an  examination,  savings  institution  examiners  are  directed  specifically  to  

review  the  institution’s  conflicts  policy,  and  management’s  compliance  therewith.    OTS  Examination   Handbook,  Section  330.11:  Management  Assessment,  Avoidance  of  Conflicts  of  Interest.   129  See  OTS  Examination  Handbook,  Section  330.11:  Management  Assessment,  Avoidance  of  Conflicts  of   Interest;  FDIC  Risk  Management  Manual  of  Examination  Policies,  Part  II  Section  4.1:  Management:  Avoiding   Self  Serving  Practices  and  Conflicts  of  Interest;  See  also  Basel  Principles  at  14.   130  See  OTS  Examination  Handbook,  Section  310.22:  Management,  Conflicts  of  Interest.    Additionally,  note  that   the  FDIC’s  “Guidelines  for  Compliance  with  the  Federal  Bank  Bribery  Law”  also  contains  requirements   regarding  conflicts  of  interest.  See  Guidelines  for  Compliance  with  the  Federal  Bank  Bribery  Law.     28

                       

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unauthorized access to or use of such records or information that would result in substantial harm or inconvenience to any customer. The FRB, OCC and FDIC have implemented the goals of Section 501 of the GLBA through interagency guidelines.131 The primary standard is the implementation of a comprehensive written customer information protection program, the objectives of which are the same as those of Section 501 of the GLBA. The board of directors or a committee of the board is responsible for the development, implementation and maintenance of the program, which responsibilities include assigning specific responsibility to officers for implementation and maintenance. The board of directors should review officers’ reports on the program, describing overall status and compliance, at least annually. In this case, adoption of a written policy is mandated for all mutual institutions regulated by the FRB, OCC or FDIC. However, compliance with the requirements of the GLBA is not the only reason to adopt a written policy addressing confidentiality of customer information. In order to effectively protect customer information, and thereby prevent financial losses to its customers and itself, and protect the reputation of the institution with its customers and the general public, a written confidentiality policy is essential. The day-to-day business of a financial institution requires extensive use of sensitive customer information at virtually all levels of the institution. In order to effectively implement a confidentiality policy, the board must clearly and effectively communicate the goals and procedures of a program throughout the institution. Because a comprehensive written program is required under the GLBA, specific guidance regarding the structure and content of confidentiality policies is available. First, the policy should establish that the program must include administrative, technical and physical safeguards for customer information, as appropriate to the size and complexity of the institution, and the nature and scope of its activities. The program must provide for risk assessment, followed by management and control of identified risks. In addition, the policy must provide for a response program to address incidents of unauthorized access to customer information. The program should provide for identification of the information or information systems accessed or misused, possible notification of the institution’s primary regulator, compliance with Suspicious Activity Report requirements, where applicable, containment and control to prevent further access or misuse, and possible customer notification.132 A number of states have enacted legislation on this issue that may add more specific notification requirements among others. Additionally Appendix J is a sample confidentiality policy, again designed to provide a starting point for customization to reflect the particulars of a given institution. It is important to resist adopting generic policies as they will not reflect the actual policies and procedures put into practice.

                                                                                                                131  The  guidelines  are  published  in  the  regulations  of  each  agency.  For  FRB,  12  C.F.R.  Parts  208,  211,  225  and  

263;  for  FDIC,  12  C.F.R.  Part  364;  for  OCC,  12  C.F.R.  Parts  168  and  170.  Attached  as  Appendix  I  are  the   guidelines  as  promulgated  by  the  FDIC.     132  Appendix  I,  “Supplement  A  to  Appendix  B  to  Part  364  Interagency  Guidance  on  Response  Programs  for   Unauthorized  Access  to  Customer  Information  and  Customer  Notice.”   American Bankers Association

                       

29

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VI.

Conclusion

There are benefits to corporate governance procedures that reflect the best practices of all industries—smoother operation of the institution and its board, clear guidance to directors and potential directors, and comfort in a well-earned reputation for integrity and ethical conduct. There are ancillary benefits as well—control and predictability in the selection of directors and judicial recognition of decisions made in a best practices environment. It also complies with regulator expectations and statutory guidance. These are all good reasons for boards of directors and management to invest the time to develop those practices and procedures that will allow their institutions to continue to grow and serve their communities.

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Appendix

A

Court Decisions

SlJPERIOR COURT OF NEW JERSEY

   

  MARGARET MARY MCVEIGH, PJ. CH

COURTHOUSE PATERSON, NEW JERSEY ff'505

 

     

NOT FOR PUBLICATION WITHOUT APPROVAL OF THE COMMITTEE ON OPINIONS

 

   

March 4, 2013

 

     

 

Peter R. Bray, Esq. Bray & Bray Ivy Corporate Park I 00 Misty Lane Parsippany, New Jersey 07054-2710 RE:

Helen Davis Chaitman, Esq. Becker & Poliakoff, LLP 45 Broadway gth Floor New York, New York 10006

Seidman vs. Spencer Savings Bank Docket No.: C96-10

 

 

 

 

 

Counsel: On February 8, 2013 this Court heard oral argument on Plaintiffs Motion for Reconsideration of the Court's Final Judgment rendered in this matter on December 19, 2012 and Defendant's cross motion. Plaintiff asks this Court to reconsider its Final Judgment with reference to the following three issues: 1) The Court unilaterally established a nomination By Law requiring that 10% of the defendant Spencer Savings Bank members nominate candidates for election to the Board; 2) The Court denied the request for fees and expenses; and 3) The Court failed to specifically rule and determine that Director defendants had breached their fiduciary duties. Defendant's cross motion seeks: 1) to preserve the 15% threshold of By Law 31; 2) dismissal of plaintiffs complaint; and 3) awarding ddcndants their full attorney's fees and expenses on their counterclaim and as sanction for Seidman's spoliation of evidence. 4:49-2. Motion to Alter or Amend a Judgment or Order, states Except as otherwise provided by R. 1:13-1 (clerical errors) a motion for rehearing or reconsideration seeking to alter or amend a judgment or order shall be served not later than 20 days after service of the judgment or order upon all parties by the party obtaining it. The motion shall state with specificity the basis on which it is made, including a statement of the matters or controlling decisions which counsel believes the court has overlooked or as to which it has erred.

 

 

 

 

Motions for reconsideration are appropriate where: ( 1) the Court has expressed its decision based upon a palpably incorrect or irrational basis, or (2) it is obvious that the Court did not consider, or failed to appreciate the significance of probative, competent evidence. Cummings v. Bahr, 295 N.J. Super. 34, 384 (App.Div.1996), (citing D'Atria v. D' Atria, 242 NJ.Super 392, 401-02 (Ch.Div.1990)). A plaintiff is not entitled to a reconsideration of that decision based on an argument which has previously been raised. Fusco v. Bd, of Educ. of the City of Newark, 349 N.J. Super. 455, 463 (App.Div. 2002). Furthermore, in State v. Fitzsimmons, 286 N.J. Super. 141, 147 (App. Div. 1995), the Appellate Division stated that "the purpose of R. 4:49-2 is not to reargue the motion that has already been heard for the purpose of taking the proverbial second bite at the apple. Rather, its purpose is to allow the losing party to make 'a statement of matters or controlling decisions which counsel believes the Court has overlooked or as to which it has erred."' "Reconsideration under R. 4:49-2 is a matter within the sound discretion of the court and is to be exercised 'for good cause shown and in the service of the ultimate goal of substantial justice."' Casino Reinvestment Dev. Auth. v. Teller, 384 N.J. Super. 408, 413 (App. Div. 2006). In this case, Plaintiff argues that the Court has clearly overlooked: 1) the rejection of attorneys' fees; 2) the failure to deal with the breach of fiduciary duty claim; and 3) the imposition of a ten percent nomination barrier. Plaintiff argues, relying on The Green Party of New Jersey v. Hartz Mountain Industries, 164 N.J. 127 (2000), that the Court erred by substituting its views for those of Spencer's Board when it decided to reinstate the 10% barrier. Plaintiff notes that no members of the Savings and Loan were aware of, nor did anyone ever evaluate the ten percent barrier during the time it was in place. The court in the previous litigation found that a mailing cost of $70,000 to solicit nominations and a threshold requiring the nomination by 6,000 members were invalid. Plaintiffs counsel contends that a 10% threshold might actually re-impose the 6,000 signature requirement and the lowered percentage barrier will not halt the expense of nominations from continuing to skyrocket. Plaintiff urges that Final Judgment should be amended to eliminate By Law 31 and leave Spencer in the same position as every other mutual: with every member having the right to nominate candidates. The issue with regard to the 10% threshold was never fully explored before this Court. The threshold existed prior to Spencer Savings and Loan's decision to increase the percentage threshold to 20% in or about 2004. The issues were fully litigated and this Court remanded to Spencer's By Law Committee a review of that By Law Amendment in 2007. Spencer's Board in their revisiting of the By Law amended the By Law to establish 15% as the percentage threshold. This Court heard no testimony with regard to the viability or the reasonableness of the 10% threshold with the exception of testimony that indicated at the time that By Law was enacted the membership was not informed of the enactment by the Board. As set forth in the Court's opinion, that By Law remained unchallenged until such time as the Board chose to enhance the requirement. This Court did not substitute its judgment for that of Spencer Savings and Loan; in fact, this Court

 

 

 

   

merely reinstated the previously existing By Law that had governed nominations to the Board of Directors from its enactment in 1995. Nowhere in any of the Court's opinions nor the opinions of the Appellate Division with regard to these litigants has a threshold percentage nomination been found to be, in and of itself, unwarranted, unreasonable, or contrary to public policy. In discussing the validation of the various By Laws by the Commissioner of the Department of Banking and Mr. Seidman's challenge to that, the Appellate Division commented: We consider plaintiffs position in this regard to be an exaggeration of the amendment's consequence, without proper regard for the DOBI's superintendence of financial institutions such as Spencer. Furthermore, we deem plaintiff's stance against any percentage requirement as a prerequisite to a directorship nomination as without provenance in New Jersey law. Out of state authorities bear little resemblance to the special needs and concerns of our home grown mutual savings and loan associations. We also view the DOBJ's analysis of the pertinent decisions of the Office of Thrift Supervision (OTS) unexceptionable and within the orbit of the Commissioner's delegated authority. In Columbia Bank (Order No. 2008-34, September 26, 2008) and Clifton MHC (Order No. 2008-47, December 5, 2008) the OTS rejected by law adjustments that imposed severe conditions upon the nomination of directorial candidates. Seidman argues that these decisions by the federal financial regulatory agency compel comity-like application by the DOB! pursuant to the parity provisions of N.J.S.A. 17:1-25(c). We disagree, based upon the thorough analysis of the substantive differences between Spencer's threshold requirement for directorate nominations and the outright perpetual disqualification of being nominated for a director's position in the two OTS cases. We do not view our Legislature's policy of "facilitate[ing] a uniform approach to regulatory oversight of all financial institutions and promot[ing] consistency in efficient and effective regulatory enforcement", N.J.S.A. l 7:1-25(c), as an administrative straightjacket. Seidman v. Spencer Sav. Bank, S.L.A., 2010 N.J. Super. Unpub. LEXIS 1783, 28-30 (App.Div. July 27, 2010) While this Court recognizes that the Appellate Division's language in that decision was directed towards the conduct of the Commission of the Department of

 

 

 

 

 

Banking Institution, it is a clear indication that the concept of the threshold itself is not per se objectionable. The Appellate Division found that review of a threshold by a Chancery Court was a proper procedure, but did not establish such threshold as void. This Court agrees that with the growing number of members of Spencer Savings and Loan the 10% figure may rise to the level of both the 20% and the 15% thresholds, but those facts were not presented to this Court. With the exception of Mr. Seidman, every other expert witness and independent witness testified that thresholds for nomination serve a particular purpose in guaranteeing the continuity of operations of the Savings and Loan's Board of Directors. This Court's opinion did not find a threshold as per se objectionable but found the conduct of the Board in reaching the 15% threshold to be objectionable. The Board was directed to revisit this By Law and provide sound governance reasons for the enactment of any change in the By Law. As previously articulated, the testimony of the Board of Directors, their attorneys and their experts did not convince this Court that they had revisited the By Law with the proper perspective. Instead, without fully investigating their own circumstances, the Board's expert and the Board's members focused on Mr. Seidman, his business associates, and his business record. At the time the By Law was enacted there was no proof presented to this Court that there was an analysis of exactly how many members of Spencer Savings and Loan in fact were professional investors who could alter the direction of the Bank such that it required the Bank to act as it did. The facts at trial evidenced a substantial number of running proxies. The running proxies provide the Board with some guarantee that interested and knowledgeable votes will be cast at the annual meeting. Mr. Seidman needs to be aware that the Appellate Division, in affirming this Court's decision, also indicated that there needed to be quantification of the impact of the By Law threshold. Specifically, the Appellate Division indicated there needed to be empirical evidence. Mr. Seidman has chosen not to proffer a slate of candidates nor promote his own name to that of the Board because of a perception that it would invite Spencer Savings and Loan to pursue litigation against him individually. Again, that fails to demonstrate quantifiable data. The facts at trial simply established that the Board failed to look at all of the circumstances surrounding its membership and elections. In fact, the testimony provided proof of ongoing entrenchment by Mr. Guerrero in the subsequent elections of members to the Board of Trustee, as testified to by various parties. The next issue raised by Mr. Seidman is whether or not this Court failed to properly identify the Board's conduct as a breach of fiduciary duty. This Court previously found in Seidman l that the Board of Directors individually had breached their fiduciary duties towards the members of Spencer Savings and Loan, having failed to understand both the purpose and/or impact of By Law 31 and the role of their actions in entrenching the then-constituted Board of Trustees. This Court's findings were upheld by the Appellate Division based upon the record at trial. Plaintiff argues that, in this matter, the conduct of the Directors is much worse than their previous actions and does

 

 

 

nothing more than continue to serve their own entrenchment as well as Mr. Guerrero's. In the instant matter, the Board of Directors sought the advice of counsel and an expert who provided his own independent research with regard to the activities of Mr. Seidman. It is clear that if any member of this Board did not know who Lawrence Seidman was, by the time they concluded reading the memos that were provided, they would be uninformed. While it is always good to know as much about someone you perceive to be an enemy as possible, it is equally important that you understand and know all of the facts involving your own team and/or territory; that was this Court's directive when the matter was remanded to the By Law Committee in 2007. The Board was directed to evaluate all the circumstances and determine whether or not it was necessary to change the nomination threshold from the existing I 0%, unchallenged theretofore. There was no testimony provided to this Court that the Board ever did that. Various Board members testified they could not tell this Court what percentage of Spencer Savings and Loan members were what has been characterized as "professional investors." Not once was that number discussed during the discussion to amend the By Law. It was not until this matter was tried throughout 2012 that any of the members of the Board could tell this Court who or how many professional investors sought to destroy Spencer Savings and Loan. Again, the testimony made it clear that the only way to obtain a nomination and/or be elected to the Board of Directors of Spencer Savings and Loan was to be identified by Jose Guerrero or to pass his own personal selection process. The Court did not overlook that that conduct may in fact constitute a breach of fiduciary duty. The entire focus of the Defendants' testimony was on conversion, the fear of conversion, and the ability of Lawrence Seidman singlehandedly to have conversion occur by the nomination of members to the Board of Directors. This Court could not determine whether or not those various Board members voted for the By Law with any understanding of the impact on Spencer's membership. Did they view the percentage provided for in the By Law as the proverbial "house made of bricks" in a struggle to maintain the integrity of the Bank's structure, or had they constructed a "house of straw" to preserve their own positions against the Big Bad Wolt'? What was clear to this Court was that the current Board of Directors believes that governance requires some type of a threshold in order to ensure that member-initiated nomination produces individuals who are seriously dedicated to the best interests of Spencer Savings and Loan and not their own financial gain. Additionally, it was clear to the court that various members of the Board of Directors were very concerned about ensuring that this Court believed that they "did what they were instructed to do," whether or not they agreed with the Court's decision. Because those two goals are in equipoise based upon the proofs, this Court could not directly call the conduct by this Board a breach of fiduciary duty. Nor could this Court find that the individuals had in fact breached their fiduciary duty. The Board as a whole sought out advice, reviewed memoranda that were prepared for them, and individually reached decisions based upon a plethora of reasons for the action they took. While the action in and of itself does not serve the members of Spencer Savings and Loan, it does continue the disenfranchisement of those individual members. The facts simply raise an inference of impropriety rather than establishing a clear breach of fiduciary duty. This

 

 

 

 

     

 

 

   

     

 

Court has determined that the way to address this problem was simply to reinstate the Board's previous By Law at the 10% nomination requirement. All parties are now back to where they were before the distinctly inappropriate modification took place in 2004. While it is true that Mr. Seidman has conferred what has been referred to as an "intangible benefit" on all of its members by his challenge to both By Law 31 and By Law 46, the court initially determined that there was insufficient factual support to reallocate the fees and costs from the Plaintiffs own responsibility to that of the individual members of the Board of Directors. It is a discretionary choice for the Court and the Court must consider a number of factors when making a determination to reallocate attorneys' fees. Rule 4:42-9(a)(2) is an exception to the American Rule that parties are responsible for payment of their own attorney's fees unless otherwise authorized by statute, court rule, or contract. 1 Porreca v. City of Millville, 419 N .J. Super. 212, 224 (App.Div. 2011). As the court noted in Trimarco v. Trimarco, the" 'fund in court'" exception generally applies '"when it would be unfair to saddle the full cost upon the litigant for the reason that the litigant is doing more than merely advancing his own interests."' 396 N.J. Super. 207, 215-216 (App.Div. 2007); Henderson v. Camden County Mun. Util. Auth., 176 N.J. 554, 564, 826 A.2d 615 (2003). As the Trimarco court stated, "when litigants through court intercession create, protect or increase a fund for the benefit of a class of which they are members, in good conscience the cost of the proceedings should be visited in proper proportion upon all such assets." Id; see also Sarner v. Sarner, 38 N.J. 463, 469, l 85 A.2d 851 (1962).

1

L. Civ. R. 54.2(a) reads:

In all actions in which a counsel fee is allowed by the Court or permitted by statute, an attorney seeking compensation for services or reimbursement of necessary expenses shall file with the Court an affidavit within 30 days of the entry of judgment or order, unless extended by the Court, setting forth the following: (I) the nature of the services rendered, the amount of the estate or fund in court, if any, the responsibility assumed, the results obtained, any particular novelty or difficulty about the matter, and other factors pertinent to the evaluation of the services rendered;

(2) a record of the dates of services rendered; (3) a description of the services rendered on each of such dates by each person of that firm including the identity of the person rendering the service and a brief description of that person's professional experience;

(4)the time spent in rendering each of such services; and (5) the normal billing rate for each of such persons for the type of work performed. The time spent by each individual performing services shall be totaled at the end of the affidavit. Computerized time sheets, to the extent that they reflect the above, may be utilized and attached to any such affidavit showing the time units expended. Sokoloff v. General Nutrition Cos., 200 I U.S. Dist. LEXIS 6654 (D.N.J. May 21, 200 I)

 

 

 

 

A "fund in court" applies generally where a party's actions have "created, preserved or increased property to the benefit of a class of which he is a member." Sunset Beach Amusement Corp., 33 N.J. at 168-69. Thus, the Trimarco court found, "the Rule's exception allows attorney fee awards when a shareholder's derivative action results in the conferral of benefits, whether of a pecuniary or non-pecuniary nature, upon the defendant, that the defendant may, in the exercise of the court's equitable discretion, be required to yield in the form of an award of attorney's fees." Trimarco, 396 N.J. Super. at 215-2 l 6; Sarner, supra, 38 N.J. at 467-68. 2 In this case, Plaintiffs decision to bring this action benefitted the membership, but it also clearly benefitted him. Historically, this has not stood in the way of a court upholding a reallocation of fees. However, it is this Court's view that there are insufficient grounds on which to reallocate fees in this matter, with the exception of certain fees discussed below. It is not clear to this Court that Defendants' most recent efforts leading up to this litigation were exercised in bad faith or even in breach of their fiduciary duty of care. 3 As previously noted, the Board sought counsel, reviewed the memoranda that was prepared for them, and individually reached decisions based on articulable reasons for the action they took. Moreover, the Court is without sufiicient information at hand pursuant to court rules to calculate an award of fees. For all of the above reasons this Court is going to deny Plaintiffs motion for reconsideration, with one exception. The trial days that were spent on the "l 04 Hearing" were unreasonable. As set forth in the court's original opinion, this was an attempt to conduct discovery the Defendant represented it did not need before trial. The procedures utilized were dilatory and not focused on the real issues in dispute. Despite this attempt to demonize him, Mr. Seidman was able to demonstrate the non-governance purposes of the By Laws. Therefore, Mr. Bray will submit a Certification of Services for these days and payments received. With regard to Defendant's motion for reconsideration, the motion and the proofs provided by the Defendants are wholly unsupported by the trial record. The Defendants failed to establish any basis for the change in the percentage of member-initiated nominations from l 0% to any higher number with the exception of the fact that Larry Seidman has a record of investing in mutuals and attempting to gain a profit. Mr.

 

 

In re Doric Apt. Corp., Inc., 2010 Bankr. LEXIS 124 (Bankr. D.N.J. Jan. 8, 2010): "The court in Trimarco described the tangible benefits of the shareholders derivative action before it, which did include "unquantifiable savings from elimination of past mismanagement and misconduct." This statement is an acknowledgment of the facts as presented in that case and describes one of the beneficial results of

plaintiffs Litigation. By no means can this statement be construed as a holding that a finding of bad faith is a necessary component for an award of counsel fees from a fund in court ..." 3 A director violates the duty of procedural due care to a corporation and its shareholders when the director makes uninformed or nondeliberated decisions on behalf of the corporation. Grobow v. Perot, 539 A.2d 180, 189 (Del. Supr. 1988); Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. Supr. 1985). In addition, a director violates the duty of substantive due care where the terms of a transaction approved by the director on behalf of the corporation are "so inadequate ... that no person of ordinary, sound business judgment" would assent to them. Grobow, 539 A.2d at 189.

;  

 

Seidman certainly prevailed in not only establishing a prima facie case but convinced this Court that this By Law and By Law 46 did not address significant governance issues and served to disenfranchise its members. Further, Defendants failed to establish, even by a preponderance of the evidence, that Mr. Seidman had participated in spoliation of evidence either intentionally or accidentally. This Court is going to deny Defendants' motion for reconsideration. Vcry truly yours,

 

/11M m'1) Margare£.Mary Mt Vei MMM:rlg

/

SUPERIOR COURT OF NEW JERSEY

 

     

MARGARET MARY MC VEIGH, PJ. CH

COURTHOUSE PATERSON, NEW JERSEY 07505

FILED DEC 1 201Z ry1 11&taJ 6iufty

     

  Helen Davis Chaitman, Esq. Becker Poliakoff, LLP 45 Broadway, gth Floor New York New York 10006  

RE:  

 

 

 

Peter R. Bray, Esq. Bray & Bray Ivy Corporate Park 100 Misty Lane Parsippany, New Jersey 07054-2710

Seidman vs. Spencer Savings Bank Docket No.: C-96-10

Counsel: In August of2004, Lawrence Seidman filed a Complaint against Spencer Savings and Loan alleging· breach of its fiduciary duty to its members. The focus of that litigation was the adoption of an amendment to Bylaw 31, which required an increase of the percentage necessary to nominate a member for a position on the Board of Directors. There were other allegations in that Complaint; however, for purposes of this Opinion, the Court needs only to comment on that allegation. On April 13, 2007, after applications to the Appellate Division and a full trial, this Court rendered an Opinion and issued an Order that required that the Board of Directors and Bylaw Committee re-visit Bylaw 31 to "examine their need to amend the I 0% requirement previously in place and set forth the reasons for changes recommended or past." (Opinion in this Court pg.9) On or about September 2, 20 l 0 Lawrence Seidman filed a Complaint in Passaic County against Spencer Bank, SLA, its Board of Trustees and By-Law Committee, Jose B. Guerrero, Peter Hayes, Nicholas Lorusso, Robert Motta, Barry C. Minkin, Albert D. Chamberlain and John S. Sturges alleging that, through the adoption of a revised Bylaw 31 and the enactment of Bylaw 46, Defendants breached their fiduciary duty to their members by creating an insurmountable barrier to members wishing to nominate individuals to serve on the Board of Directors. After months of discovery and motion practice, this matter came back to the Court for trial on the issues of Bylaw 31 and the new Bylaw 46 concerning ·the governance of Spencer Savings and Loan. This matter was tried before this Court over the course of eleven (11) days beginning on December 5, 2011 and concluding on June 5, 2012. The parties were given extensive time to prepare

 

 

 

 

 

 

 

 

 

and provide to the Court Proposed Findings of Fact and Conclusions of Law which were received by this Court in late August of 2012. This Court has reviewed its extensive trial notes and those Proposed Findings of Fact and Conclusions of Law, as well as documented evidence in excess of 100 documents. 1 The Defendants' counterclaim in this matter alleges that Mr. Seidman is not an appropriate party to bring these issues to the Cowi, and that he had breached his fiduciary duties to fellow members by causing Spencer to incur the expense of this litigation. Two themes were clearly present during trial and in the summation documents presented to the Court: 1.) the personal animosity between Mr. Seidman and Jose Guerrera and 2.) the specter of conversion of the bank. These two (2) issues severely overshadowed the issue of fairness or reasonableness of the percentage of members' signatures necessary to nominate a member to the Board of Directors. The Defendants' entire case, including their defense to Mr. Seidman's application and their counterclaim, was focused on the battle against the professional investor and the evils of conversion. Despite the Court's daily request to focus on the Bylaws and the Board's action in July 2007, the evidence addressed the business practice of Mr. Seidman and his professional investor "wolf pack." The Court has had to determine if the revised Bylaw was an action to continue the entrenchment of the existing Board and its mind set, or a legitimate exercise of corporate governance. This Court could very simply go back to its April 2007 opinion and the subsequent opinion issued by the Appellate Division in July 2010, and attach those two opinions to an Order to have a resolution in this current litigation. Such an action would not be helpful to the parties or to a reviewing authority or to the members of Spencer Savings and Loan. Therefore, this Court will attempt to go through, for the record, the salient facts that were presented to this Court during trial. On or about July 19, 2007 the Spencer Board of Directors and Officers met with the Law Firm of McCarter & English and Graham Jones, corporation counsel, to discuss how they were going to address the issue of Bylaw 31. At two meetings that were held on July 26, 2007 they received professional input by a memo that had been drafted on July 23, 2007, and a conversation with these professionals that addressed Spencer's strategic plan, the issues involving the requirement of a percentage of members for nominations to the Board, and the articulated desire of the Board to hold off the professional investor. At that July 26, 2007 meeting the Board of Directors in fact enacted a revised Bylaw 31 which provides: No Director shall be eligible for election unless he shall have been nominated in writing by a majority of the Board or by members representing fifteen percent (15%) or more of the votes entitled to be cast by members, and the nominations are filed with the Secretary at 1 The document number is an understatement as each party marked and introduced into evidence extensive documentation.

 

 

 

 

 

 

 

least thirty days before the annual meeting of members at which the nomination is to be voted upon, and a member shall not nominate a greater number of candidates than the number to be elected. The Secretary shall, upon request, inform a member of the number of signatures of members necessary to nominate a director in accordance with the following: Commencing on the first business day after the preceding annual meeting, a member may request in vvriting that the Secretary provide to the member an estimate of the number of member signatures required to nominate a director at the next annual meeting. The Secretary shall respond to such requests within ten days following such requests with an estimated number based upon the number of holders eligible to vote as of the last business day of the month preceding the date of the request from such member. Commencing on the first day of November of any year, a member may request in writing that the Secretary provide to the member the actual number of signatures required to nominate a director as of the record date. The Secretary shall respond to such request within ten (l0) days after the record date for the annual meeting or, if the request is made more than ten (1)) days after the record date, within three (3) days of the receipt of such written request. The signatures of the members wishing to nominate a candidate for the Board shall be presented to the secretary in a manner than allows the association to reasonably verify whether such persons are members entitled to vote at the annual meeting and the signature is that of the member. No person 75 years of age shall be eligible for election, reelection, appointment, or reappointment to the Board. No Director shall serve as such beyond the conclusion of the year in which he attains the age of 75. These age limitations do not apply to a Director serving on June 1, 2004. Any Director who has served as a Director for at least two full terms is entitled to annual retirement benefits in accordance with the Association's retirement policies in effect as of the date of the Director's retirement. All Directors must be permanent resident of the State of new Jersey. The residency requirement does not apply to a Director serving on June I, 2004. and Bylaw 46 which provides: In determining whether a candidate for the Board has been nominated by the necessary number of members, no signature of a

 

 

 

 

     

member shall be counted if that member is acting in concert with any other member or members who individually or together constitute a company. In determining whether a candidate is eligible for nomination to the Board or for service as a director of the Board, no member shall be eligible if that member or any person nominating that member is acting in concert with any other member or members who individually or together constitute a company. A company shall mean any corporation, partnership, trust, joint stock company, or similar organization but does not include the Federal Deposit Insurance Corporation, any Federal Home Loan Bank, or any company the majority of shares which is owned by the United States or any State or instrumentality of the United States or any State. Action in concert shall have the same meaning as defined in Section 574.2(c) of the OTS Acquisition of Control of Savings Association Regulations 12 CFR Section 574.2(c) or such successor regulation. The articulated reasons for enacting this amendment, which now sets a 15% requirement for the number of members who must sign a nominating petition, were: 1.) the desire to balance the average members' needs versus protection against the professional investor; 2.) provide a manageable mechanism to garner support for a candidate; 3.) provide a mechanism that was necessary due to the fact that there was low attendance at annual meetings; 4.) to protect Spencer against a disruption caused by a small minority of members attending those annual meetings; and 5.) to have a procedure that would only require one mailing to establish communications with all of those members, thus alleviating the Court's concern about expense. 2 The Board considered that in August of2004 when the Bylaw was amended to require 20% of membership, they were concerned by the rise of professional investors and the impact that those investors could have on an average Spencer member who had no interest in converting the bank. The testimony would show the Board was advised that the threshold for nomination was clearly appropriate and attainable. Each of the Directors testified as to their concerns in a very similar fashion on every point including fear of the professional investor, the quality of a community bank versus a commercial bank, and the balancing of fairness in the process. Before this Court was able to hear from the Directors, or even hear from Plaintiff with regard to the substance of his allegations, the Court conducted a 104 Hearing with regard to approximately 40 subpoenas that had been issued by defense counsel just days before the trial was scheduled to begin. It should be noted for the record that as the Court approached the trial date in this matter, trial counsel was substituted for the defendant Spencer Savings and Loan. Becker & Poliakoff, LLP was substituted for McCarter and English, and Helen Davis Chaitman, Esq. became designated trial counsel in place of Mr. Beron and his associates.

2

The Statute requires that an applicant be responsible for the cost of mailing.

 

 

 

 

 

This Court was assured that there would be no delay in moving to trial as a result of this substitution and there would be no request for additional discovery. Unfortunately, the additional discovery that was not needed pre-trial, was sought by way of trial-subpoenaed testimony. The majority of the individuals subpoenaed never had been named as witnesses prior to the subpoenas having been issued. Many of the individuals were business associates of Mr. Seidman, members of Spencer who had not previously been identified, and included Peter Bray, Esq., counsel for Mr. Seidman. In order to determine whether or not the subpoenas would be quashed or honored during the course of the trial, the Court conducted the 104 Hearing and took testimony from a limited number of those individuals identified by Ms. Chaitman. All of the fifteen subpoenaed witnesses, including Mr. Bray, Mr. Baumkirchner (who has been identified as a potential Seidman candidate for the Board), and Raymond Vanaria, among others, had accounts at Spencer. They were either a client or a business associate of Mr. Seidman or had met Mr. Seidman at some point in their lives. One witness (Robert Dennis), spent eighteen months in prison for wrongful conduct with regard to the conversion of another bank. None of the individuals confirmed any specific obligation to Mr. Seidman and this Court's notes indicate many, if not all, of them indicated that becoming a member of the Savings and Loan was always a good idea because it provided an opportunity for investment in the future. After almost two full days of testimony from these individuals this Court ended the I 04 Hearing. It was clear to this Court at the end of that testimony that Spencer Savings and Loan does have members: 1.) who may be improper members pursuant to their own Bylaws; or 2.) who may have wished to benefit from a conversion at some point in time; and 3.) who know Mr. Seidman. Those factors alone did not give rise to this Court believing that their testimony or the testimony of the other 25 individuals would be relevant to the determination of the appropriateness of the Bylaw or the Defendants' counterclaim. However, the Court did preserve that testimony in the event that the proofs revealed a pattern of depositor as a sustainable issue and reason for the Court to consider the viability of Bylaw 31. What was very clear from their testimony was that while Spencer has Bylaw provisions prohibiting out of state depositors and very. specific rules with regard to who may be a depositor or borrower, Spencer does not necessarily police its own accounts on a regular basis. In fact, Spencer had not policed their accounts up until shortly before the trial in this matter. The Comt then heard from various Board members during Plaintiffs presentation of his case. First to testify was Albert Chamberlain. Mr. Chamberlain has been on the Board since 2006. He was asked by Mr. Guerrero to serve, was nominated by the Board to stand for election, and was on the Board in 2007 when Bylaw 31 was revisited. He firmly believed that the 20% did not have an adverse effect on the average depositor and felt that it was perfectly legitimate to stand in place. However, because of the Comt Order and his own past experiences with conversion and banking institutions, he felt that the 15% requirement achieved all the results that were presented by the professional

 

 

 

 

 

experts hired by the Board to advise them.. His vote for the 15% was simply out of deference to the Court having ruled against the 20%. Mr. Chamberlain did not even consider what the cost to the members would be in order to comply with the Bylaw modification nor was he aware of the numbers of members of the bank at the time either Bylaw revision had been struck or at the time they voted on the new provision. Mr. Chamberlain had no recollection that the Court found the 6,000-member signature requirement to be prohibitive. He simply thought that the Court was objecting to the number of 20%. Neither Bylaw requires that the individual who is submitting their name commit to mutuality; both, however, were necessary to prevent groups of professional investors from taking control of Spencer. Despite his reasons, he was not aware of any mutual, either in New Jersey or across the country, that had been involuntarily converted by a group of members. He had a vague understanding of the steps that were necessary for a mutual to be converted. Mr. Chamberlain had been an employee of the bank for several years, and so he was asked about annual meetings and the bank's procedures. Mr. Chamberlain informed the Court that the Board does not mail notices of the annual meetings to its members because of the cost. After all, there are over 40,000 members! The notices of meetings are published in the Legal Notices section, but he had never been concerned or asked whether or not the members had seen those notices published in the paper nor whether they had any particular view about how the bank was operating. Just as Mr. Chamberlain had been suggested to the Board by Mr. Guerrero, Mr. Chamberlain had indicated that Mr. Sturges, who is a current Board member, had also been suggested to the Board by Mr. Guerrero. Mr. Sturges had indicated an interest and had asked to be considered when a position was available. Mr. Guerrero submitted his name and the Board subsequently nominated him to join them. Mr. Chamberlain testified to the Court that the Board had never disagreed with any of the recommendations that Mr. Guerrero had ever made to be on the Board. Mr. Chamberlain was fully familiar with the minutes of the Board and was familiar with Dl29 (Evidence) which is the memo from Corporation Counsel. He balanced all of the information that was provided by the experts and his own experience regarding conversion from mutual to stock organization and reached a decision that the Bylaw amendments were precedent and necessary. He said that after a conversion, the focus of a Board and employees goes from the community to value per share. It was his desire to keep the focus on the community and not on the value per share. Further, his experience told him that employees would be fired and the community ignored by a "value per share bank." Mr. Chamberlain relied very strongly on the opinions of the expert that 20% was achievable, so, clearly, the 15% was achievable as well. Also, he accepted the general opinion that there was an increasing number of professional investors. It was clear to him that the average Spencer member was happy with the way the bank was proceeding because they did not come to meetings or file any complaint. Other than Mr. Seidman, no one has ever nominated anyone for the Board. His belief was that, in order to offer

  low competitive rates of interest on lending and competitive rates of interest on savings as well as an ability to serve the community, it was necessary to maintain the concept of mutuality as well in its identity for this bank. He believes the members are only concerned that their deposits are safe and that their bank has a face in the community, makes charitable contributions, works with individuals who fall behind and face foreclosure and is protected against those professional investors who only seek to enhance their personal well being.

 

 

 

 

 

Mr. Chamberlain indicated however, that he had only learned before his testimony that there were maybe a dozen or more professional investors. In July 2007 he had no idea how many professional investors were depositors and members at Spencer. Mr. Chamberlain was aware of the fact that Spencer held 603 running proxies that they could exercise at the annual meeting. While he was an advocate of having the member who wishes to run for the Board use social media and the internet, he also felt that those activist members were aided by that technology to group and re-group and reach out to as many people as possible. Barry Minkin 3 testified that the amendment to the Bylaw 31, requiring 15% of the members to nominate, was to strike a balance between the average member and a professional investor. Mr. Minkin felt there needed to be a requirement about nominations because one could not deal with the bedlam that would ensue at an annual meeting if members could nominate from the floor or only require a single nomination and vote. He has been a member of the Board since 2005. He is also an associate of Mr. Guerrero whom he had known for a period of time. He had worked with the Board in developing their benefits plan and, after that project was completed, he was asked if he would be interested in serving on the Board. Mr. Minkin had never been a director with any institution before, although he did know that Directors were paid a salary. As previously noted, his primary concern was the low turn-out at annual meetings and the one-member quorum requirement at those meetings. While he was aware of that problem, he never brought up at the meeting in 2007 the possibility of increasing the quorum in order to address the very same concerns that be believes have been addressed by Bylaw 31. Mr. Minkin was aware of the process necessary for conversion and knew Larry Seidman and his business partners. He was not aware of any situation in which Mr. Seidman or anyone else had forced a mutual to convert. He was not aware that no other mutual had a minimum percentage requirement for nomination by members other than nominations by the Board. Mr. Minkin said that the whole idea of a minimum requirement for nomination was to address those institutional professional investors who are more than likely to be the ones nominating members not approved or suggested by the Board. A typical member was not really his concern because he did not believe that it was likely that an individual member could achieve that type of percentage for nomination. He also felt that 25% was a viable and valid number, but,in order to show good faith to the Court, was 3

Member of the Board

  willing to reduce that amount to 15%. He disagreed with the Court's mlings but understood the necessity to comply.

 

Through Mr. Minkin's testimony with regard to Bylaw 46, it is clear that the Bylaw is directed at the professional investor, those out-of-state people who come in to deposit simply because they have personal interest in financial gain. Spencer's policy requirement of New Jersey residence is not in writing, nor was Mr. Minkin sure that they make depositors aware of that when they open accounts.

 

 

 

Mr. Minkin did not see Bylaw 46 as prohibiting individuals from talking about nominations among themselves. His understanding was that the Bylaw was directed at groups or companies that would join together in order to effect a takeover. Mr. Minkin additionally was not aware that Bylaw 31 continued to require the 6,000-membcr number that the Court found prohibitive. He focused primarily on his concerns about chaos and bedlam at annual meetings if there were not a large percentage nomination requirement. Despite all of his concerns about chaos and bedlam, Mr. Minkin could not provide this Court with an indication that there had in fact been chaos historically at Spencer. The 10% requirement that was in effect before all of this litigation commenced in 2004 was only enacted in 1995. Mr. Minkin was very clear that if it were not for Mr. Guerrero this Board would not have many candidates for the Board of Trustees because very few people have ever expressed an interest. He indicated that if Mr. Guerrero had not asked him, or told him that he would support him, he would not have pursued membership on the Board. Mr. Nicholas Lorusso 4 testified that, to his knowledge, there has been no one other than Larry Seidman who has sought nomination to the Board outside of those candidates the Board itself has endorsed. Mr. Lorusso has been affiliated or associated with Spencer since 1964. He has moved from one section of the Bank to another and has been on the Board since 1984. In 1994 the Board was faced with the realization that so many other mutuals had moved to stock corporations by way of conversion. The Board at the time wanted to prevent that type of a situation for Spencer, so the Bylaw was put in place requiring l 0% of members for a nomination. Mr. Lorusso also felt that the initial jump to 20% and then to the 15% was designed to maintain mutuality and make it difficult for someone like Mr. Seidman to get a seat on the Board. While he acknowledges that every member has a right to a position on the Board, no one other than Seidman ever was interested. The Bylaw was never intended to hurt the average depositor, but was meant to deter the professional investor. Mr. LaRusso provided this Court with the information that the members had never been told that the threshold for nomination was going up to 10% and that they had not been advised about the move to the 20% or 15% threshold either. He was very pleased with the professional advice he was given and the way the new Bylaw was worded so that a member could begin the day after the annual meeting to obtain information about membership and what was needed to get elected.

 

   

4

Member of the Board.

 

 

 

 

 

 

The Court then heard from Mr. Jose Guerrero, who appears to be the key to Spencer's pursuit of its cunent position. He has been Chairman on the Board since 1999 and serves as Chairman of the Board and CEO. He has been a strong proponent of the threshold percentage for nominating so "as to prevent the disenfranchisement of the average depositor." He also echoed the concern about chaos at the meetings. He is aware of the steps an institution must take in order to move for conversion, i.e., the approval by the Board, and the bank regulators, including the requirement that the majority of the Board and two thirds of the members are necessary for approval. He is also a very strong advocate of Bylaw 46. In talking about annual meetings and the Bylaw threshold, Mr. Guerrero said the last annual meeting was in January 2011. If one counts the employees as well as the members that were present at that meeting, there were approximately thirty people present. He confirmed Mr. Chamberlain's position that there is no mailing of the notice of the annual meeting. A threshold is critical, he believes, based upon his experience at this bank and banking in general, as well as the advice that the Board received at the July 2007 meeting. At that meeting, there was considerable discussion about the professional investors as well as the cost that was required to obtain a 15% threshold. Mr. Guerrero was not sure as to how many professional investors Spencer has as members now or had in 2007. He did know that Mr. Seidman was a professional and advised that Spencer was reviewing their membership list to determine how many others there might be. Mr. GueITero said Mr. Seidman has a very clear public record of his work. He is an investor in bank stocks and other business entities. Mr. Guerrero considers the professional investors to be the minority of the membership at Spencer and, because of their expertise, it was necessary to adopt a threshold such as Bylaw 31 to protect the majority of average members. The Bylaws were not enacted to keep Spencer as a mutual forever but rather to prevent chaos and, as he articulated earlier, to keep the minority from disenfranchising the majority of average members. Mr. Guerrero said his reading of the Court's opinion did not indicate that the number of signatures that were necessary was the issue. He believed the Court objected to the process itself. His testimony may have been "the judge took down the process not the numbers." Mr. Guerrero saw Bylaw 46 as an additional measure to eliminate the vote of the professional companies who act in concert to disenfranchise the average investment. He was aware that there are several statutes that keep corporations from acting in concert, but this bylaw specifically addresses that the vote would be disqualified. He could not explain Bylaw 46 any more than that because he advised the Court that this is a legal question and the lawyers would have to figure all of that out. He saw no incongruity or conflict in the two Bylaws. Mr. Guerrero was asked directly about the reasonableness of all this work and litigation to simply stop Mr. Seidman. He responded that no one member should have the right to influence the right of the average member or the majority of the members.

 

 

 

 

 

Mr. Guerrero again asserted his belief in the viability of the 20% but that it was impo1iant to show good faith and respect for the Court. Accordingly the 20% was reduced to the 15%. The Court then heard from John Sturges. Mr. Sturges was one of the most interesting witnesses that this Court had in the entire litigation. Mr. Sturges is a member of the Board of Directors. When he became interested in serving on the Board, he approached Jose Guerrero and asked him if he could be considered when there was an opening. Very soon thereafter, he was the Board's nominee for a seat on the Board. He does not possess any special skill or talent for bank management nor was his memory shown to be exceptional. He first told this Court that conversion was not a concern for the Board when they reviewed Bylaw 31. Unfortunately, during his deposition he indicated that in fact it was a concern. He was only aware of one professional depositor at Spencer: Mr. Seidman. He was not certain as to whether or not the By-Law was enacted as a reaction to professional investors nor did he know how it could be used to unseat Directors who were not properly performing. He told the Court that the threshold was intended to provide a logical process to unseat a member of the Board. It was reasonable they had to get 6,000 other members to support a nominee. He does not agree this threshold is a barrier nor that it made it more difficult for members to participate. He never considered the impact of the cost of the mailing on an average member because he never believed the average member would be interested in seeking nomination by mail. He, as with his colleagues on the Board, was not aware that the Court felt that the 6,000member threshold was prohibitive. He understood the Court's decision that the original process to amend in 2004 was not rational when they voted on the 20%. With regard to Bylaw 46, Mr. Sturges simply saw it as a mechanism to ensure that Federal Law had not been violated. He was not concerned about how it would be put into place because it was not for the Board but for legal counsel to determine. Peter Hayes was the last Board member to testify. He advised this Court that every member has a right to nominate someone for the Board of Directors and that the Board walks a fine line between understanding the core value of the Bank and what the depositor expects from them. Bylaw 31 was enacted to stop activists from coming in and taking over, and Bylaw 46 addresses that design even better. Mr. Hayes has absolutely no problem with 15% as the proper threshold because, after three to four meetings with four different lawyers, it was believed that even 25% was an achievable number for someone seeking a Board seat. He pointed out to the Court that public companies have a 30% requirement for nomination. Mr. Hayes is also of the opinion that with the low number turn-out at annual meetings and the low quorum requirement, without a threshold for nomination there would not be a barrier to people like Larry Seidman. He believes that the Board had a tremendous amount of professional advice about how to protect the bank's interest. The 15% threshold was a good number, and this would show good faith to the Court.

 

 

 

 

 

Mr. Seidman then presented his position to this Court. Mr. Seidman believes that the requirement to obtain 6,000 signatures is a plan to protect the Board and advance the entrenchment of that management. It is a provision that is unheard of at any other company; further, Mr. Seidman believes that conversion is an excuse for the advocacy of that entrenchment. Mr. Seidman strenuously indicated to the Coui1 that regulatory policy and provisions, as well as the law, provide an oversight that Bylaw 31 could never even address. This current Bylaw is no different than the 20% that the Court struck down in 2007, a decision that the Appellate Division affirmed. This new number, based upon the current number of members, requires closer to 7,000 than the 6,000 that was previously required and is now even more onerous. He strenuously testified that it is an affront to the Court. Mr. Seidman saw Bylaw 46 as simply a back door way to achieve the same thing that bank attempted in filing the federal litigation against him. See Spencer Bank v. Seidman, 528 F, Supp. 2d 494 (D.N.J. 2008). In that action, the court found that the bank had no standing to pursue the cause of action because it was a federally-granted right, not a right given to the bank. He believes that if one complies with Bylaw 31 one violates Bylaw 46. In the federal litigation, and now in this litigation, Mr. Seidman is accused of having a "wolf pack." He has never seen nor is he aware of any mutual that was forced to conve11 outside of its own interest and concerns. Mr. Seidman told this Court that Spencer argues to the Court that he has control over some of the individuals, i.e., his "wolf pack", and yet they failed to acknowledge the impact of their running proxies. This proxy is signed when an individual opens an account and gives the bank the right to vote on any issue that arises without notice to the member. P4 indicates in 2004 Spencer had 603 running proxies. It indicates that the Board starts any election process with 603 votes. P 11 was Spencer's responsive conespondence to Mr. Seidman when he requested information concerning his intent to nominate individuals in 2007. The level of animosity and hostility that existed between the parties in this case was quite challenging for the Court. During one day of testimony, the Court returned from the break and Ms. Chaitman began her cross examination of Mr. Seidman by questioning him about his behavior during the break. While the parties and witnesses were present in the waiting room, he yelled at her using a derogatory term. The Court continued to be very troubled throughout the trial that the parties and counsel were unable to separate their individual hostilities from the overriding issues before this Court. There are an excess of forty-four thousand members at Spencer whose interests shall be determined by this Court's decision. There was never a sincere focus on those forty-four thousand individuals. Instead, the focus was on the Board's attempt to prevent Larry Seidman from having any ability to address bank governance and banking policies in the context of the Board of Directors. No less troubling is Mr. Seidman's personal animosity toward Mr. Guenero and the Board.

 

 

 

 

   

On cross examination, Mr. Seidman indicated that while he had discussed the possible conversion of Spencer he had never pursued conversion because he considered it a regulatory impossibility. His discussions took place with Mr. Guererro and Mr. Bedrin prior to the 2004 litigation at a time when he was advised by Mr. Guererro that they (the Board) intended to take the company public within twelve to eighteen months. Mr. Seidman has not actively taken any action to either re-nominate or comply with the requests of Spencer in their 2007 correspondence responding to the request that the package be mailed to members. Mr. Seidman indicated he has spoken with various analysts, lawyers who specialize in this field as well aswith people who have deposits at Spencer Savings Bank. When challenged by Ms. Chaitman on this issue and whether or not he knew people with accounts at Spencer, Mr. Seidman indicated that he had no idea who had accounts at Spencer until Ms. Chaitman subpoenaed them. Having learned that they were subpoenaed, he had conversations with them. Following this exchange and a ruling by this Court on the issue of Mr. Seidman's breach of fiduciary duty, Ms. Chaitman walked Mr. Seidman through various documents reflecting his economic and financial holdings and companies in which he owns an interest. For example, 039, for identification, is part of a schedule attached to a 130 for Southern Connecticut Bank Corp. filed in March of2009. Mr. Axelrod was one of the individuals subpoenaed by Ms. Chaitman who has an account at Spencer and a business contact of Mr. Seidman whose name appears on that 130.5 Mr. Seidman identified 044 for identification as well. 045 which was an agreement with Broad Park and Michael Mandelbaum. 046 references Center Bank Corp. Inc. in which Mr. Seidman nominated Peter Bray, Esq., to be on the Board of Center Bank Corp. Mr. Seidman evasively indicated that he has been involved in over 45 proxy contests and was not 100% sure in what his role was in any particular one. Mr. Seidman was questioned about his relationship with Clark Estates, a Michael Hamer, Jack Zakim, Center Bank Corp. and Bench Mark & Associates. He was questioned as to whether or not he had sought regulator permission for some of his activity, although his response was that the OTS was still in control of the processing and, as long as he did not seek greater than one third of the Board, there was no approval necessary. It is his position that the OTS and the Federal Reserve have a much stricter view of collusion and, even if one wanted to nominate more than one individual, they consider that to be a change in control and therefore subject to regulation. With regard to the 35 or 45 proxy contests Mr. Seidman has been involved with in his life, he indicated that: 1.) he usually brings in an expert to assist him; 2.) he has actually only won 10% of those contests; and 3.) they were all public company contests. Pressed again as to why he did not comply with making a request for a mailing by Spencer Savings and Loan, Mr. Seidman's position was that it would be an act of futility s. Mr. Seidman and Mr. Axelrod have a long relationship. Mr. Seidman indicates that Mr. Axelrod is not an employee but in fact does accounting work for him. Mr. Seidman and Mr. Axelrod also have business dealings with the Israeli Sports Exchange. Mr. Seidman is the President of the Israeli Sports Exchange which additionally has an account at Spencers.

  to go forward. It was clear to him that they passed the two Bylaws to effectively prohibit him from having any role with Spencer. Mr. Seidman said the cost required for each of the 35 proxy contests he was involved with was around $40,000.00 to $50,000.00 total. He felt that the cost to challenge the actions of Spencer would have been close to $200,000.00 and would have been an absurd action on his part.

 

He is fully aware that provision of the Savings and Loan Act establishes the cost of mailings on the member, 6 but there is nothing in that requirement that says that the Board has to establish the threshold of signatures to nominate a person for the Board. He sent the letter asking for information about nominating members because he was considering nominations to the Board. It was sent to prove a point and, if he had done otherwise, he would have been in violation of Bylaw 46. Mr. Seidman believed that any letter he would have issued or petition he had the Bank mail for him would have subjected him to the filing of a suit against him by Spencer.

 

 

 

 

Unlike his own actions Mr. Seidman feels that the Board continues to operate in a frivolous fashion. Particularly with regard to this litigation, he is being challenged as having control of large members of professional investor votes when actually "there really are only five votes that I control and those would be me and family members' votes." The people that signed petitions for him in the first attempt he made to nominate individuals to the Board are some of the people that the Defendants subpoenaed to the Comt in this case. This has a chilling effect on people who are willing to sign petitions, in which their willingness to do so results in them being dragged into Court. The focus then shifted back as to why Mr. Seidman had not attempted to follow tlu·ough on his plan to nominate individuals to the Board of Directors. After all, there are other methods besides mailing that he can use to gamer support and signatures. It was pointed out to Mr. Seidman that he uses a computer, a Blackberry and emails. He also knows how to use a company to help him with proxy statements. He was asked about starting a blog or other internet social media forms of communication. Counsel asked Mr. Seidman why he could not have just as well started a public awareness group to advertise his desire to run himself or a candidate for the Board. Mr. Seidman's response was that was not what he wanted to do. It was pointed out to him that he does have a web site and could have set up a site for members since he had another operational website. Again, Mr. Seidman was questioned about conversations about merging Spencer, converting Spencer, his understanding of the nature of the depositors at Spencer and their interests in the banks future. Mr. Seidman has been associated with various individuals including Mark Risto, who is under investigation by the Federal Government, and he is also associated with many other individuals who have opened accounts at Spencer Savings since Mr. Seidman got involved. His response to all these allegations was that in 1970 Peter Lynch wrote an article telling people that if you opened accounts in mutuals when they went to convert and go public, that individuals had the opportunity to make a profit on an investment. In response to a challenge that members may not be able to afford a stock purchase, he 6

N.J. Stat,§ l7:12B-I20

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flippantly proposed that he would give away stock to member depositors for free. When challenged that he had put a rather large investment in this litigation Mr. Seidman responded with the fact that he had no interest at this time in Spencer converting; he is concerned about the way this bank is governed and stated "I abhor the corporate governance of this bank." Richard Grabaugh was presented by Mr. Seidman as an expert with regard to the cost of mailing and the procedures for the nomination under the Bylaws. Mr. Grabaugh 's opinion was that an individual member would not be able to comply with the procedures set forth by Spencer's Bylaw 31. It was highly improbable that a single member would be able to solicit the numbers necessary to gain a nomination. Based upon his experience in returns by shareholders in public offerings done by mailing, the type of return sought here was almost an impossibility. Mr. Grabaugh had never been involved in the solicitation to mutual members, nor was he aware of a contest to convert mutuals. His data on consumer shareholders comes from a company called Broad Ridge, which conducts most of the public company contests. Broad Ridge is recognized and relied upon in the industry. It is Broad Ridge who tracks voting results through public companies and it was his position that, based upon the statistics, only about 15.4% of all shareholders vote. In those contests the individual can vote by mail, phone or internet and can be contacted openly. None of those options is available under Bylaw 31. Additionally, he was concerned about the time of year that the mailings would have to go out for a nomination to Spencer because of their January meetings. All of the mailing would be done during the holiday period, which he claims is a slower period for mail delivery. The process of gaining signed returns is even more difficult, because they are seeking nominations and not even a voting opportunity. Itjust does not have the appeal an actual vote does. Mr. Grabaugh has participated in approximately a dozen proxy solicitations with Mr. Seidman over the years. He has no recollection of those institutions with which he was involved. Mr. Grabaugh's memory with regard to numbers and particular information was not very clear and, although he does have some convincing computer expertise, his inability to provide anything clearly as an avenue for Mr. Seidman to use was not helpful. Cross examination of this witness really challenged the fact that without an actual attempt to test the probabilities in this case, this Court does not have probative information to determine whether or not the threshold as enacted is reasonable. Mr. Grabaugh obviously is a very bright man with tremendous experience, but he does not have at his fingertips factual or empirical data that explains the apathy in this type of election. His ideas and his philosophy are excellent, but there does not seem to be a connection to the situation and the facts at hand. Out of turn, this Court permitted Defendant to present Jane Ray. Ms. Ray is a Vice President with Spencer Savings. Her experience at Spencer Savings is extensive. She was aware of OTS involvement with the Spencer Board seeking a change in the composition of the Board. Ms. Ray identified D18 through 139 and Dl25, all of which address the road map for the bank and its strategic plan. She described Spencer as

 

community-driven, not fee-driven, and the lending activity is kept and managed by the bank in the local community. They do not lose contact with the customers with whom they are engaged. Ms. Ray, like many of the witnesses that followed her for Spencer Savings & Loan, focused on the commitment to being involved in the community. Officers are encouraged to join and belong to various local groups, to get on community boards, to develop grants and to obtain donations for various organizations. She recited the standard of "time, talent and treasure" recognition in social giving.

 

Ms. Ray has been involved with Spencer for the last eighteen years. She is not personally in favor of conversion. While she would personally profit she does not see conversion as a good option for the community. Ms. Ray has become aware of the growing involvement in Spencer of professional investors. Those are individuals who opened accounts in violation of the bank's policy for the simple purpose of future financial gain. They misrepresent their residency, use others to contrive and even have participated fraudulently. It is her position that there are a group of people from out of state working with in-state people to open accounts and defraud the bank. She identified · various schemes utilized to frustrate the bank. 7 It was Ms. Ray who identified the Complaint filed against Mark Risto in September 2007 and the two pieces of correspondence indicating a connection between Mr. Risto and Mr. Seidman.

 

 

 

 

 

Interestingly, this policy of having to be a New Jersey citizen is reduced to writing somewhere, but is not necessarily given to all new depositors. The information about this problem of out-of-state depositors only came to the attention of the bank last year. At the same time, she also became aware of the criminal information about Mr. Risto. Some of the information that has caused her to be concerned may have been known during the 2004 litigation and some of it actually became known within the time that the trial in this matter commenced. Ms. Ray assured the Court that they did not just start hunting for these accounts as a result of this litigation, but it appears that there was no prior scrutiny applied to the bank accounts before this case became active. Just in the last month she indicated they began to close accounts and send money back to depositors who do not comply with Spencer Savings' rules. Ms. Ray was an extremely credible witness. She struggled with the fact that many of the irregularities should have been discovered by the bank many years ago, but demonstrated genuine interest and concern about the future of Spencer Savings Bank. While she had expressed concern about the danger that conversion presents to community involvement, it was a bit disingenuous to indicate that commercial banks do not engage in community activities or encourage community volunteerism. 7

Two individuals opened an account and remove the name of the New Jersey resident allowing the out of state person who now has a post office box to continue to be the depositor. Marked for identification was DI I 2 which shows documents opening an account for an Alan Greene who was a resident of Plainfield for five trust accounts in 2006. The beneficiaries were all Wisconsin residents and within months of opening U1ose accounts Alan Greene was removed and the trust with the out of state individuals continued to be deposited.

 

 

 

 

 

 

Defendants' expert was Thomas Cronin, who is a partner with Phoenix Advising Group, a proxy consulting firm. He has been involved in evaluating proxy contests and working on proxy contests for approximately thirty years. His focus has been primarily on banks and he has seen approximately 150 mutuals that were converted. He did work with Larry Seidman some twenty to twenty-five years ago. Mr. Cronin described that an average shareholder in a public company is much more knowledgeable about what goes on in that particular company than the member of a mutual, such as Spencer, who really is not interested in governance. These members do not become involved in any of the governance events, and most of whom will not buy stock if the mutual does in fact convert. It is his experience, in a conversion, that most of the stock is purchased by the professional invest depositor. These investor/depositors are identified as people from all over the country who open the accounts in banks they believe have the potential for conversion and future profit. Mr. Cronin did review Pl2, which was the complaint that was filed by Spencer against Mr. Seidman in the Federal District Cow1. He reviewed Spencer's Bylaws and is familiar with the New Jersey Savings & Loan Act. It is his obligation in a proxy contest to understand all the documents necessary to the process.· He also reviewed the postal reports for the area to evaluate timing and cost. Mr. Cronin does believe that the 15% threshold for nominations is obtainable; however, he did say that it was not easily done. He opined one could see as much as a 25% to a 30% response after a first mailing, but that is impacted by what the solicitation has to offer. For example, depending on whether or not it contains an opportunity to buy stock, or if a nomination was someone of importance, then one could expect a higher response. Because of Mr. Seidman' s comment about "giving away shares of stock" through an offering, Mr. Cronin opined that depositors that would probably become more involved with that type of an offer and one mailing would be more than sufficient. Mr. Cronin described many of the less expensive ways of cultivating support for a nominee in today's current environment. He pointed out that the initial Jetter could contain an email address, one could use newspaper articles, or put a telephone number in that original mailing. He is a proponent of Facebook and other electronic social media. When Counsel asked about using biogs and websites to reach people, Mr. Cronin indicated that those would also be appropriate ways. One of the biggest proxy sites that he recalls was with Bank of America, which put all of their information on the internet. Interestingly Mr. Cronin, who was aware of Mr. Seidman and his history, indicated that Mr. Seidman' s main use of communication is through direct telephone calls and mailing. He has not seen him use any web-based programs. Mr. Cronin felt that during the holidays, mail is usually much quicker to be delivered and that the Bylaws' indication that one can begin mailing in February adds to its ease of use. Mr. Cronin was involved with Mr. Seidman in the l 980's. He indicated that at the time his boss did not particularly like working with Mr. Seidman because Mr. Seidman was very proactive in the process. Mr. Cronin himself has not ever been

 

 

 

 

 

 

involved in a conversion of a mutual. He has been a professional investor in numerous thrifts that went through conversions, however. Mr. Cronin talked about his experience with Mr. Seidman. He has not known Mr. Seidman to be involved in not-for-profit organizations or investments that did not involve financial gain. While he does attempt to engage in direct conversation activity, he and his associates normally work behind the scenes. They use one bank to buy another bank or push for sale for conversion. Mr. Cronin indicated that Mr. Seidman has a number of associates; they are his investors and the individuals he recommends to buy stock in certain institutions. Mr. Cronin's opinion is that Bylaw 31 treats every group fairly, professional depositors as well as the average depositor and family members. It is his opinion that professionals will certainly be the first to sign a petition or vote in any type of contest. In his career, he has never seen a non-professional investor nominate an individual for a mutual Board seat. Mr. Cronin was also familiar with the names of various Seidman associates. He was aware that many of these are individuals who are a part of what he classified as the 13D Group, those that appear on many of those documents. It was his professional opinion that the professional investor in this setting would dilute the impact of any average depositor because those depositors are small depositors not concentrating on what occurs and the professionals are focused on the investment itself. On cross examination Mr. Cronin admitted that the cost to achieve the 15% threshold would be anywhere between $50,000.00 and $80,000:00. He has neve been involved in a proxy for a nomination. Most of his work is in the conversion area. He has never seen a conversion forced by a professional investor. He has seen credit unions and insurance companies use quorum requirements to control as a quality remedy as opposed to a threshold for nomination. When looking at Spencer, Mr. Cronin had not actually looked at Spencer's website and did not know that they had a commercial real estate portfolio. He did believe that there was a possibility that those average members might be more sophisticated than what was previously expected or discussed. The Cotui then heard from John Fitzpatrick, Sr., Vice President of Retail Banking at Spencer. He reports directly to Jane Ray and has been at Spencer for 12 years. Before that, he worked in commercial banks for 21 years. Mr. Fitzpatrick is not a fan of commercial banks. He told the Court that in commercial banking it was all about meeting quotas, hitting goals for the quarter, and at Spencer they have no quotas or goals. They simply have the opportunity to sit and listen to customers ·and to find a service or a product that meets their individual needs. He loves working at this type of a bank. He is focused on it being a community bank. They provide services not because they are mandated by the bottom line but, in fact, because they enjoy what they are doing. He said that Spencer is a very unique bank because it is an old bank. He refers to them as "senior boomers." They banked at Spencer with their parents depositing their weekly allowance, and Spencer focuses on the people that have worked in the area for

 

 

 

 

 

 

 

 

 

years. These individuals are marked by having equity in their homes and passbook savings accounts. There is no pressure to generate fees or incomes, unlike the commercial banks that rely on the fees charged on overdrafts, for example. The Court then heard from a number of Spencer employees, all of whom described Spencer community involvement, the goodness of Mr. Guererro, and the negative implications of conve11ing the bank. Employees Robert Peacock, Allison Dancheck, and William Callahan all testified. Mr. Callahan in fact had worked at Crest Mount Savings when control of the company changed to Mr. Seidman. It was his testimony that branches were closed and the bank declined. He indicated that the difference between the mutual and commercial banks was that commercial banks were all about cutting costs and making money rather than the customers. Mr. Callihan had to admit on cross examination that Mr. Seidman's control at Crest Mount occurred after Crest Mount was converted. The Court also then heard from Marzena Czachor and Edward Kurbansade as to their experiences with the numbers-driven bank as opposed to Spencer where their efforts are spent establishing loyalty between the customers and the bank. Finally, the Court heard from Ronald Janis. Mr. Janis is a lawyer at Day Pitney LLP in New York. He specializes in banking law, regulatory work, institutions and corporate law. He has known Larry Seidman since 1986 when he was "going after Hudson United." Since then, Mr. Janis has followed Mr. Seidman on a regular basis by reading his 13D filing to see what he is doing. Mr. Janis was retained by Spencer to work on Bylaw 31. He worked with the Directors on reviewing the Court's Opinion, Bylaw 31, and goals that they needed to set. It is primarily Mr. Janis who describes Mr. Seidman and his "wolf pack" to the Board. He explained how Mr. Seidman does business and the kind of people associated with him. While Mr. Janis disagrees with this Court's 2007 opinion, stating that the Court relied to heavily on corporate law, he did have to admit that the original action to amend Bylaw 31 had not been given sufficient due diligence. Mr. Janis is another individual who feels this threshold is necessary to ensure there is no chaos at the annual meeting and commented that " Greek democracy" did not always work. While individuals engaged in this process had thought about a larger quorum as being helpful on an actual voting date, it was determined that a larger quorum would not be a logical response. The Board was clear that they wanted a threshold for nominations. They were not going to go with a "no threshold" under any circumstances. There was a goal to make the mailing less expensive. The idea of giving permission to begin this effort in February was a way to avoid two mailings and reduce those costs. D3 l is actually a memo from Michael Horn in the McCarter litigation group describing the prior litigation and the Directors. The inferences here are that Mr.

 

 

 

 

 

Seidman' s true goal in this litigation directed at Spencer was to move the bank toward conversion. The Board's concerns were consistent with Janis' experience and he supp011ed their desire to avoid that unrest. At the meeting that he attended he walked the Board through all of the issues and Court's Opinion. He wanted to make it clear to them that they needed to consider and understand the reasons for what they were doing and that there was no hard and fast line established in the law. He told the Board the decision the Court had made invalidating the 20% threshold was focused on the lack of factors and reasons to support that change. Mr. Janis was quite clear that once one makes the determinations there has to be a threshold he has created an obstacle to the average members' ability to nominate. Therefore, the reasons for that percentage needed to be established. On cross examination Mr. Janis articulated the fact that the minutes were not comprehensive. "They are limited in form and omit certain things that were discussed." For example, there is no discussion in the minutes on the topic of the chaos at the Annual Meeting. Nor was the concern about chaos articulated in any of the memos that were provided to the Board. Mr. Janis indicated that most of the discussions really took place at the morning meeting where they walked through the Court's opinion, case law, and memoranda supplied to the Board of Directors by the attorneys that had been retained. They also talked about Mr. Seidman's pattern, his history and the Board of Directors' concern about stopping him. The second meeting was where they actually .voted. Mr. Janis then testified that during all of the discussions there never was a comment made or an inference raised that they wanted a threshold to protect their individual jobs. They needed to rely on the bank regulators to take whatever action was necessary to remove incompetent directors. In this setting, Mr. Janis felt it was important to be concerned about those members who never voice any concerns or take any actions on their own. He again pointed out that no one before Mr. Seidman has ever attempted to nominate someone to get on the Board. The Court. then heard from Graham Jones, who has been general counsel for Spencer Savings for the last forty years. Mr. Jones was personally involved in all of the litigation. He was aware of the complaint that was filed in March 2007 in the Federal District Court and is fully aware of Mr. Seidman and how he engages in business practices. Mr. Jones was present when the Board adopted Bylaw 31 and participated in discussions, as previously testified to by other parties. On cross-examination however, it was clear at the time the Bylaw was enacted the Board had not actually identified any number of "confederates" of Mr. Seidman. The Board was concerned that there were a number of Mr. Seidman's confederates on the Board, but there was no calculation as to whether or not the number of professional investors/confederates of Mr. Seidman outnumbered the number of running proxies that the Board held. He did note that there were over 630 running proxies at the time the Bylaw was enacted.

 

 

 

 

   

The Defendants actually called Mr. Seidman on their case and proceeded again to go through some of his history and his business practices. There was an attempt to begin again to talk about the 2004 litigation and the attempt by Mr. Seidman to nominate individuals to the Board. The Court terminated that testimony because that matter had been thoroughly litigated and the prior actions of Mr. Seidman in his attempt to gain access to the Board were not the subject of this particular litigation. 'D1is litigation is focused specifically on the latest modification to Bylaw 31 and the creation of Bylaw 46. Mr. Seidman was shown various documents including D 152 through D 156. He was then shown D 150 (which is actually Pl I), which reflects the begitming of the attempt to nominate people in 2010. Mr. Seidman testified it was his view that whatever he did, he was sure that Spencer was going to sue him. While he had individuals he wanted to nominate to the Board, he seriously believed he would be sued if he responded to their co1Tespondence about the form of his nomination petition. He had forwarded the resumes of the individuals he wanted to nominate because they were left out of the initial mailing. Mr. Seidman became very agitated when asked if the true reason he did not follow through on his attempt to nominate individuals was that he was afraid of being sued by the Federal Agencies as opposed to the bank. His demeanor was extraordinarily hostile at that point, and he proceeded to scream his answer at counsel. It was clear through the remainder of his testimony that he believed that various individuals associated with Spencer and Spencer's litigation have personal animus towards him. Specifically, he had an issue with Mr. Fawcett whom he described as having threatened to ruin him and put him out of business. It is undisputed that Mr. Seidman did not maintain any of the documents that had been on his personal computer from the 2004 litigation or anything in the interim period between that litigation and the commencement of this litigation that may have been relevant. He also took no steps to preserve any documents. However, Defendants never made it clear to this Court how any of those records or documents could assist in the findings of facts in this litigation.

Mr. Seidman made it very clear that he filed this lawsuit because he believes that the Spencer Bylaw is illegal and he is challenging its illegality. He is also concerned because, originally, Mr. Bedrin had come to his office and told him about all of the expensive trips and the salaries that were being paid to the Board. When he made inquiries to Jose Guenero about these expenses, it was Mr. Seidman's sense that Mr. Guererro felt that this was his bank and he could do whatever he wanted to do. This litigation, Mr. Seidman said, is not about conversion. He does not really care if the bank goes public; his concern is the way this particular Board and Jose Guen-ero are acting towards bank governance. He feels that "everyone should be answerable to someone." Barry Minkin was called as a defense witness and simply repeated the concerns of the bank about the actions of professional investors and professional investment groups. After reviewing all of the testimony and evidentiary documentation, this Court now has to once again look at this Bylaw in light of the Appellate Division's decision

 

 

 

 

 

affirming this Court's 2007 decision. When this Court rendered its decision in 2007 the Court was significantly disturbed by the lack of understanding by the Board members of the purpose and the effect of the Bylaw. However, the Court was more concerned about the entrenchment of the incumbent Board of Directors. This Court found "this amendment bears absolutely no rational relationship to any of the issues involving bank governance or operation. While it is touted as a way to keep out unwelcome wealthy outsiders, this amendment has a deleterious effect on the efforts of the common day depositor to gain a seat for themselves on the Board of Directors if they are unknown to the current nominating committee." I started this opinion some five years after that decision rendered in 2007 and, twelve days of testimony later, this Court is still not sure that this Bylaw has any more concrete relationship to corporate governance. Each and every Director testified to the fact that the Board attempted to balance the rights and the needs of the average Spencer member against those of the professional investor. The testimony and the documentation clearly establishes that this Board had no idea how many professional investors, as they were defined, had accounts at Spencer Savings and Loan. The only professional investor that this Board was aware of specifically was Lawrence Seidman. In the meetings with their corporate counsel and special outside counsel, they were made aware of all of the various individuals that showed up on 130 filings by Mr. Seidman and his various companies. But those filings and those documents were all public record that anyone could obtain at any particular point in time. While it was clear from the testimony that during trial preparation the bank began to review its member lists and those individuals who had accounts, this was not done in preparation for the meeting to approve the Bylaw. Mr. Seidman's proofs establish that Spencer's Board of Directors did not comprehend that I 5% was the same as 20% when one considered the actual number of members of Spencer Savings Loan. Mr. Seidman's proofs establish that unless one was known to and or liked by Jose Guererro she had no possibility of having her name submitted to the members as a potential member of the Board of Directors. Of the last two Board of Directors members elected, one individual was clearly approached and recommended by Jose Guerrero to the Board as a potential nominee, and the other- Mr. Sturges- expressed direct desire to be a member of the Board of Directors to Jose Guerrero. Mr. Seidman's proofs demonstrate by clear and convincing evidence that obtaining a seat on the Board by the average Spencer member is almost impossible. This Court acknowledges that the New Jersey Statutes require that the cost of communication be imposed upon the nominee. As stated in N.J. Stat.§ 17:12B-120: If the application is to enable the member to communicate with other members of the State association, and if the State association grants the application, the State association shall prepare and mail copies of the communication or communication, submitted with such application, to all of its members as soon as the applicant

   

 

 

 

has paid to the State association all of the costs and expenses involved in such preparation and mailing. Id.

It is also true from the facts produced at trial that the Board hired the best and the brightest attorneys to provide advice on fashioning of the Bylaw. Even taking that action, this Board continues to fail to do the basic leg work that is necessary to determine the extent of the risk and impact to its members. The entire focus of the legal presentation to this Board was Mr. Seidman's 13D associates. There was no proof to make a correlation as to whether or not those people were a part of the Spencer membership in sufficient number to impact voting. There was no evaluation as to whether or not there were sufficient numbers of the "wolf pack" to overcome the number of running proxies that the Board had for the annual meeting. There was no proof that the professional investors would be able to create "chaos" at an annual meeting. One inquiry New Jersey courts undertake in applying the business judgment rule focuses on whether a corporation's board "acted in good faith and with due care in investigating the merits" of litigation. Jn re PSE & G Shareholder Litigation, 173 N.J. 258, 291 (N.J. 2002). As the Court in Jn re PSE&G noted: [T]he Court's inquiry is not into the substantive decision of the board, but rather is into the procedures employed by the board in making its determination." In that regard, there is "no prescribed procedure that the board must follow." Nonetheless, the process should be such that a reviewing court can look to it and conclude confidently that it reflects a corporation's earnest attempt to investigate a shareholder's complaint. Stated differently, the inquiry is whether the "investigation has been so restricted ln scope, so shallow in execution, or otherwise pro forma or halfhearted as to constitute a pretext or sham. Id. at 291-292. The Defendants never provided any proof to this Court that the Board took a look at the prior 10% threshold to determine whether or not it was logical, or rationally sufficient to remain as the threshold. The record is full of testimony by individuals including Directors, Officers and Counsel that no one other than Mr. Seidman has ever sought to nominate a candidate for the Board other than a candidate designated by the Board. The I 0% threshold itself arose out of fear created in the 1990s when many mutuals were being sought after for conversion and profit-taking. But nowhere in the testimony did this Court hear that the Board, in going through their numbers and membership list, and in light of the information about Mr. Seidman's associates, determined that more than a 10% threshold was necessary. While Spencer argues that Mr. Seidman has not provided "empirical numbers" with regard to the difficulty and the expense to an individual member, both sides' experts agree that a minimum cost to mail petitions for nominations is in excess of $50,000.00.

 

 

What was present in almost every Board member's testimony was the fact that they recognized their need to placate the trial judge. As the Appellate Division said in reviewing this Court's 2007 opinion:

 

Bylaws are also made to establish and protect the rights and specify the duties of the organization's members and its management. We fully understand that once fashioned, an association cannot be so immune from change to cement management for its own sake. Members are entitled to facilitate a change to the entity's board of directors through the selection of new contestants for directorate elections. By laws that make it unreasonably difficult to obtain candidates other than board sponsored nominees can be scrutinized for that effect by our courts. Seidman v. Spencer Sav. Bank, S.l.A., 2010 N.J. Super. Unpub. LEXIS 1783 (App.Div. July 27, 2010)

 

 

   

 

This Board's investigation into the appropriateness of this Bylaw was so thorough that they were not even aware that the current status of the membership put their 15% at almost the same number that their 20% was in 2007 when this Court found both the procedure and the number to be prohibitive. Director after Director testified that they did not even look at the number. Director after Director also indicated that they have never rejected a suggested nominee to the Board from Mr. Guererro. Mr. Sturges, who indicated that he wanted to get on the Board, did not attempt to gain nomination as a simple member, but went to Mr. Guerrero directly to indicate his wishes to be on the Board. Mr. Seidman has been telling this Board that this amendment, and its unreasonable barrier to member participation, is improper. This Board was directed in this Court's prior ruling to revisit the need for a change in the 10% threshold. The only clearly defined and identified professional investor in 2007 when this Bylaw was revisited is Seidman. Instead of researching what the proper number is to protect the individual members and approach a nominating threshold or process that protects that interest as well as protecting the majority from disenfranchisement by the minority, the Board simply enhanced its anti-Seidman position by educating itself about Mr. Seidman's business practices and his associates. Instead of identifying parties of interest and deposing individuals during the course of discovery, Spencer attempted to boot strap a defense for the Bylaw by subpoenaing in excess of 40 individuals at the time of trial in order to gain their discovery at the expense of the Court's time. They, in essence, tore down all the laws to reach the devil and stop him. 8 Bylaw 31, as currently written with a 15% threshold, is void. Spencer Savings is directed to reinstate their 10% threshold, retaining the language facilitating a one mailing process.

8

Spencer waited until sometime in 2011 and early 2012 to go through their membership and determine whether or not their members were complying with the institutional roles. The defense of their By Law was based in the evil spector of forced conversion even while they could provide no factual basis for that ever having occurred. With apologies to Robert Bolt's "A Man for All Season."

 

'.

   

Spencer Savings and Loan's counterclaim against Larry Seidman for breach of fiduciary duty in filing this litigation is Dismissed with Prejudice. Despite Mr. Seidman's business interest, he has again pointed out to the Court during the trial a lack of serious investigation as to the best way to protect the interest of the individual members of Spencer Savings and the further entrenchment of the Board that is hand picked by Jose Guerrero. Discussion of bank governance has been effectively stifled by the slogan "we are the community" without having anyone vested with the ability to look specifically at the actions of the Board.

 

The Defendant Spencer Savings' last minute allegations of spoliation of evidence by Mr. Seidman are likewise Dismissed with Prejudice.

 

Mr. Seidman's demeanor throughout this trial towards defense counsel was clearly uncivil. It is alleged that outside the Court's presence he was hostile and crude. Many times during the trial this Court observed him being dismissive, dilatory and rude towards defense counsel. However, defense counsel also demonstrated a pattern of leading and passive/aggressive demeanor that is unnecessary, particularly out of the presence of a jury. Both sides were warned throughout the trial that the Court would consider sanctions if the environment in the courtroom did not change.

 

As before, this Court is not ruling or deciding upon which business approach is preferable.

 

The Court is also going to grant Mr. Seidman's request to.declare void Bylaw 46. Spencer Savings has attempted to cloak itself with the authority that is reserved for the Federal Government and Regulators in addressing the behavior of those individuals associated in business practices. Whether it became a Bylaw that simply repeated the federal statutory provisions or not, would not create a better cause of action for Spencer than they had in 2007 when they filed the Federal District Court action against Mr. Seidman. Spencer Bank v. Seidman, 528 F. Supp. 2d 494 (declining to infer a federal right of action); see also Cal. v. Sierra Club, 451 U.S. 287, 293-294 (U.S. 1981) (statutes [that] focus on the person regulated rather than the individuals protected [they] create 'no implication of an intent to confer rights on a particular class of persons.'). 9 In fact, the

 

                   

9

ln Spencer Bank v. Seidman filed in 2007, Spencer alleged that Seidman noel a group of mutually interested and associated individuals known as his ·'confederates," had targeted and acquired interests in several institutions employing menacing tactics, initiated lawsuits, and induced tender offers to influence the boards of directors of the savings institutions in which they held interests into seeking to merge with or to be acquired by another institution. However, the court concluded that Spencer was not one of the class for whose especial benefit§ 1467a(h)(I) wns enacted nnd did not create a fc:dernl right in favor of Spencer. The court found the focus of§ I 467a(h)( I) wns upon savings and 101111 holding companies, not savings associations which were mutual associations. 528 F. Supp. 2d 494.

 

 

 

evidence showed that in conjunction with Bylaw 31 Bylaw 46 inherently causes a conflict and a violation of both Bylaws. This Court has considered all issues raised by the parties and is satisfied the above decision reflects the evidence presented.

     

Very truly yours,

·':·:?r_, M;,', V·

IV\ w \

Margaret

   

MMM:rlg

)

P .J.ch.

   

Case 2:07-cv-01337-WHW-MCA

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SUPERIOR COURT OF NEW JERSEY

 

       

MARGARET MARY MCVEIGH,  

P.J.

CH

               

 

Richard A. Beran, Esq. McCarter & English Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102-4056 RE:

Peter R. Bray, Esq. Bray, Chiocca & Miller Lanidex Executive Center 100 Misty Lane Parsippany, New Jersey 07054

Seidman v. Spencer Savings Bank DocketNo.: C-190-04

 

 

 

Counsel: In August of 2004, Lawrence Seidman brought allegations concerning Spencer Savings and Loan to this Court by way of a Verified Complaint and Order to Show Cause, seeking a declaration that the bank had 1) breached its fiduciary duty to its members by adopting by- law amendment 31; 2) a declaration that the bank breached its fiduciary duty by engaging a corporate waste relating to the compensation of the Boards President and Chief Executive Officer and a Board retreat in Spain; 3) a request for counsel fees and costs. Mr. Seidman requested the Court schedule the defendant's 2005 annual meeting, and in fact supervise that meeting.

   

 

   

The Court on the return date of the Order to Show Cause denied the restraints and the injunctive relief: The court also denied defendants' request to dismiss the Complaint. The defendant Spencer Savings and Loan challenged this Court's jurisdiction to address the issues surrounding the by law amendment. Further, defendants alleged that Seidman failed to comply with R. 4:32-3, which requires in a derivative action, a member must state a claim for which relief can be granted with specificity.

The plaintiff and defendant each appealed this Court's decision for different reasons. I an opinion dated March 23, 2006, the Appellate Division affirmed the Trial Court's decision setting the stage for discovery and the trial that commenced in . this matter on January 22, 2007.

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Plaintiff has abandoned their excess compensation claim against CEO Jose B. Guerrero, but asks this Court to find that the bank and its Board of Directors breached their fiduciary duty to their membership by the amendment of by- law 31 increasing the percentage of members necessary on a petition to nominate from 10% to 20%; that the director breached their fiduciary duty and committed waste in the bank paying for the Corporate Retreat in Spain; and lastly seek the individual directors repay the bank for those Spain expenses and plaintiff's attorney fees.

The defendants' challenge to Seidman's ability to bring this derivative action also has survived for resolution by the Court.

 

   

This Court took testimony over the course of two (2) days.· The Court heard from plaintiff Mr. Seidman, as well as from members of the Spencer Savings and Loan Board of Directors. The facts in this matter are really not in dispute as demonstrated by that testimony. The dispute arises from the perception of the plaintiff that Spencer Savings and Loan is governed and managed by an entrenched establishment, fostered by Mr. Guerrero and supported by his fellow members of the Board of Directors and the competing perception by the Spencer Savings and Loan Board of Directors that they govern and manage a contented institution. The institution as seen by the Board sees, values a quiet community environment, with no challenges to the Board of Directors and their policies and no desire to move their little bank away from its status as a Mutual Savings and Loan to become an institution identified by stock ownership and shareholder involvement.  

   

 

Spencer Savings and Loan is a mutual bank governed by N.J.S.A. l 7:12b et seq. It is an institution owned by its depositors, however they have no enfranchised right to participate in the management or operation. Mr. Seidman unabashedly admits that he is an investor in bank stocks. He invests his own funds as well as the funds that others invest with him and trust him to manage. In 1990, he became a depositor in Spencer Savings· and Loan. At that time he had a conversation with some of the Directors about the bank's future. He continued to be interested in the bank's affairs.

   

Again, in 2004 Mr. Seidman had a discussion with Mr. Bedrin when he learned he had become a Director. He expressed concern because he learned about the Directors' trip to Spain. Mr. Seidman felt it was an abuse of their positions to "take a vacation camouflaged as a meeting." He asked about Mr. Guerrero's compehsation (one million dollars) and when the bank was going public. He then sent correspondence to the Savings and Loan about these issues asking for justification for those expenses. When Mr. Seidman received no response, he had a telephone conference with Mr. Guerrero. Mr. Seidman told this Court that Mr.Guerrero gave him no answer other than the bank would probably go public in 16-18 months.

 

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Mr. Seidman decided that the only way to address this was to seek a nomination to the Board from the depositors as the Board would not consider him as a candidate. He initially believed this nomination would take 10% of those depositors signing his petition pursuant to his old copy of the by- laws. However, he subsequently learned that there had been a recent amendment to the by- laws increasing the percentage necessary to 20%. Mr. Seidman testified that for the 23 years that he has been involved in the banking industry and the 30 contests to the Board of Directors th t he had been involved with he has never seen a procedure like the one at Spencer Savings and Loan. The Board of Directors refused to send out his petition for nomination with his reasons for seeking • nomm ah•ons. I ·

 

 

Mr. Seidman candidly admits his desire to see Spencer Savings and Loan become a public company and has had conversation with various people about that issue. He sees no harm in that interest. He sees no harm in individuals or companies becoming depositors in Spencer Savings and Loan with a view toward long term investment successes. This process of investing in a bank by becoming a depositor is reasonable and puts him in no better or worse position than any other depositor in the Savings and Loan if and when it did go public.

   

Mr. Seidman testified his desire to go on the Board was motivated by director abuse of their roles (travel, excess compensation) and was shocked at the process for gaining a nomination to Directors to the Board. He testified that statutorily, the Savings and Loan would be responsible for sending out any information about an individual seeking nomination. While it would be the responsibility of the Savings and Loan to perform the meeting it would be the cost of the person seeking the position.  

   

   

This Court heard from various members of the Board of Directors of Spencer Savings and Loan. Mildred Damiano, Joseph D'Autorio and Nicholas LoRusso have been members of the Board of Directors for an extensive period of time. Ms. Damiano came on in 1992, Mr. D'Autorio in 1993 and Mr. LoRusso in 1984. Ms. Damiano did not take the. trip to Spain with the other Directors but did in fact vote for the amendment to increase the percentage of signatures necessary for nomination to the Board. Her testimony was that in all the time she has been on the Board no one had ever been nominated from the general community and that all nominations came from the Board. She was a believer that in fact 20% was not enough and it should be a 2/3 vote that would be required to gain a nomination to the Board. A rather feisty individual, Ms. Damiano was at the heart of the deadlock that resulted in the Office of Thrift Supervision appointing or requiring Spencer to appoint three new directors. At the time she and a number of other directors object to the way Mr. Guerrero was managing the bank. Mr. D' Autorio came onto the Board in 1993 on an interim basis and remained on the Board 1

Those issues were addressed by the Commissioner of Banking.

3

 

 

 

       

 

   

 

   

 

   

   

 

until 2006. He also indicated that the deadlock with regards to the Board was as a result of Mr. Guerrero's role and how the bank:was being managed. He provided this Court with insight that there was a clear dissatisfaction.with Mr. Guerrero,s management myle. Mr. LoRusso who interestingly enough was responsible for both Ms. Damiano and Mr. D'Autorio joining the Board of Directors for Spencer was a business associate of Mr. Guerrero's. Mr. LoRusso and Mr. Guerrero had business associations outside of their Board of Directors positions. All of this information was disclosed to the regulators and no dispute was found with regard to that issue. Mr. LoRusso provided this Court with some insight on trips taken by the Board of Directors for retreat type events in the past indi ating that the Spain trip was not the first time the Board of Directors had taken a trip outside the ontinental United States, paid for by Spencer Savings and Loan.

Mr. D,Autorio is one of the Board of Directors who testified he did not vote for the amendment to increase the percentage necessary for nomination to the Board. He testified that the Board was not given any information as to why 20% was necessary nor how many depositors would compromise 20%, The amendment appeared to be directed against unwelcome Directors -those individuals who did not have the Qank' s best interest at heart but were seeking their own personal advantage. The testimony of the various Directors made it very clear to this Court that there was a concern there were individuals who had positions as depositors who might . want to push the bank in a different direction. Mr. LoRusso knew a great deal about the plaintiff Mr. Seidman as a result of attendance at various meetings. He described him as ,an individual who opened accounts in many banks looking to convert them to a public stock. Mr. LoRusso also echoed the sentiments of the other Directors that the trip to Spain was a good thing for the Board of Directors because it gave them an opportunity to get to know the "three new kids" that were being added to the Board. Although they had an opportunity to interact at vari us board meetings the ability to actually know the individuals in a setting different from a board meeting was important to those who testified before this Court. Gerald M. Bedrin was one of the Directors who came on to the Board in 2002 as a result of the recommendations of the Office of Thrift Supervision. Some of the most important testimony in this case however, came from Raymond Baumkirschner Mr. Bawnkirschner is an individual with extensive experience in the financial world. His 30 years working in the financial world and various public cotporations was a fresh view on the situation that existed and exists at Spencer Savings and Loan. It can best be described as rather parochial. He was very aware that he came on to this Board to ·break up a dead lock. His initial view was that there was just too rinich emotion and not enough business perspective with the Board. Mr. Baumkirschner felt the bank was well capitalized. but one of the things that was necessary for this bank

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was a succession plan and an upgrade of management. He recognized Mr. Guerrero was a flash point among the various members of the Board. He had been told he was terrible to work with and strong willed but he had been in the role for an extended_period of time. He and Mr. Guerrero had a discussion about what to do to introduce everyone and develop a plan for not only the Board but for the Bank Management Mr. Guerrero mentioned the idea of a retreat. Previously there had been a retreat out of the country. Mr. Baumkirschner felt this was an excellent idea as it would give an opportunity to see how everyone worked with each other and how they could get along and it inspired creativity. Although it was an expense, it provided distance from the environment that was causing problems. Mr. Baumkirschner felt it gave him a better opportunity to move forward in his role because he was more comfortable not only with the directors but with the bank managers. He advised the Court that while he realized there may have been cheaper places to go on retreat that this type of a retreat had the ability to eliminate cell phone-interruptions (not many people had international service) and took everyone out of their normal environment.

Mr. Baumkirschner was also one of the individuals who opposed the increase in the percentage of signatures necessary for a nomination for the Board of . Directors. While the minutes (he discovered) indicate that he abstained, his testimony was that this was inaccurate as he voted against it. This amendment was part of a package that you were required to vote in favor of all or vote against all. This was an inappropriate way to conduct a vote. Additionally, there was no basis given that would explain the need to increase the number of individuals necessary to vote. This Court then heard from Mr. Guerrero who may have without realizing it-become the focal point of the dispute in this matter. Mr. Guerero in essence, has grown up with Spencer Savings and Loan. He joined the bank in 1979 and worked hi way up through the ranks. It is clear from his testimony that he is committed to Spencer Savings and Loan. Mr. Guerrero did not attempt to keep from this Court the intent of the amendment to By- Law 31. Mr. Guerrero testified very clearly and without regret that the amendment was his idea and that he did it to protect "his Savings and Loan from investors who_ want to rape my bank- take it public, convert and sell." He provided no other basis for the purpose of the amendment other than to block applications from the those type of investors. His testimony was consistent. He knew who Mr. Seidman was there had been attempted interaction between Mr. Seidman and himself with regard to what was going on at Spencer Savings and Loan, and that he was uncomfortable with Mr. Seidman's interest in the bank's management. The testimony was not clear on the specifics of those discussions but the Court has inferred that he believed Mr: Seidman wanted to merge Spencer Savings and Loan with Interchange Bank.

   

The amendment to By-Law 31 was just part of a regular review of the bylaws performed by Mr. Guerrero with corporation counsel, the Board as well as other managers. This was an opportunity to take the action necessary to protect the bank's

 

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interest. Mr. Guerrero however, could not provide this Court with a rationale basis as to why the 20% figure was necessary when the bank already had in place a 10% signature requirement. The only reason he provided the Court was "... more was better.

Mr. Guerrero saw Mr. Seidman and his consulting group as a threat to the institution. While he reviewed many of the documents that were marked into evidence, Mr. Guerrero could not provide any specific information he gathered from any particular document or set of documents. "I am not a student of details" is how Mr. Guerrero classified himself. His lack of knowledge of details was even more apparent in his testimony about Spencers' depositor. He had no idea how many accounts and/or depositors there were at Spencer Savings Loan nor did he have any idea how that calculation could be accomplished. Even with this Courtgiving the defendant the opportunity to supplement the record with Mr. Guerrero's certification, this Court is still not satisfied that Spencer Savings and Loan has any idea how many depositors it would take to comprise 20% of those depositors in order for an individual to gain a nomination for the Board of Directors.

   

 

This Court has canvassed the testimony of the witnesses who were present in Court, those deposition portions submitted by various counsel and the exhibits marked ·by both plaintiff and defendant as evidence. Both plaintiff and defendants submitted written summations to this Court and this Court is satisfied it has a complete and full record in order to make a decision in this matter.

   

 

Initially, this Court will address the defendants' position that Mr. Seidman lacks standing and fails as a representative member of the class depositors. The defendants allege Mr. Seidman has failed to meet his burden pursuant to R. 4:32-3 to specify the nature of his derivative claims or that he even had the right to bring this as a derivative action.

   

"The derivative action may not be maintained if it appears that the plaintiff does not fairly represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association." R. 4:32-3. This Court is satisfied that Mr. Seidman both in his initial pleadings and in the proofs that were presented on plaintiff's case established the two claims that were the focus of this trial i.e., waste involved in the Spain retreat and breach of fiduciary duty by depositor disenfranchisement are in fact actions that are subject to a derivative claim. In Strasenburgh v. Straubenmuller, the Supreme Court has established that wrong committed by a fiduciary become a wrong against all individuals with an interest in the institution. Strasenburgh v ..Straubenmuller, 146 N.J. 527, 551-53 (1996). While the Strasenburgh case dealt with the rights of shareholders, it is clear that the idea of fiduciary responsibilities and the derivative right of any one member to that institution has the right to bring this action. The allegations raised by Mr. Seidman with regard to

 

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waste and member disfranchisement are the types of issues that our court has consistently recognized as being derivative. See e.g. Inre PSE & G Shareholder Litigation, 173 N.J. 258, 281 (2002) (finding that "[o]ne recognized infringement on director autonomy is the shareholder derivative action. As the name implies, '[a] shareholder derivative action permits a shareholder to bring suit against wrongdoers on behalf of the corporation, and it forces those wrongdoers to compensate the corporation for the injury they have caused"').

   

 

   

One of the most troubling bits of testimony this Court heard concerned the rapidly declining member participation at annual meetings and votes. All of the directors testified to the declining attendance at those annual meetings and the declining participation in actions the Savings and Loan took. What the Board of Directors sees as contentment, this Court sees as apathy and Mr. Seidman sees as entrenchment. Based upon all of the above this Court is denying the defendants' claim for dismissal of the action on the basis of failure to state a derivative claim.

 

   

 

With regard to Mr. Seidman's issue that the corporate retreat to Spain and those expenses in excess of $90,000.00, this Court is unable to find or to classify that retreat as corporate waste. "Directors are guilty of corporate waste, only when they authorize an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration. If reasonable, informed minds might disagree on the question, then in order to preserve the wide domain over which knowledgeable business judgment may safely act, a reviewing court will not attempt to itself evaluate the wisdom of the bargain or the adequacy of the consideration." Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. Div. 1993). The deposition transcript and the testimony presented to this Court establish a reasonable basis for the directors' decision to even involve themselves in a retreat and even more so to do it in a fashion that they felt would be helpful to them. This may not have been a location that the Court would have chosen for a directors' retreat for a local Passaic County Savings and Loan, but it is not appropriate for this Court to substitute its judgment for that of an experienced Board of Directors. There has been no proof presented to this Court that a retreat at a resort anywhere in the United States or a conference center anywhere in the United States would necessarily have been less expensive or more productive in reaching the set goal of a evaluating corporate management, getting to know new members of the Board of Directors and providing an atmosphere to operate the bank going forward. Plaintiff has failed to meet its burden to establish for the Court at the time of trial that this trip constituted waste and was not based on good faith principles. However, throughout this litigation that expenditure and that trip was suspect to this Court. While this Court cannot sustain a finding of waste from the evidence presented to it, the Court does find that it was unwise.

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Case 2:07-cv-01337-WHW-MCA

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The final issue before this Court is the allegation that the amendment to the bylaw to increase the required percentage of signatures to gain nomination to the Board of Directors to 20% constituted entrenchment and breach of fiduciary duty. It has been established that "a board may take certain steps ...that have the effect of defeating a threatened change in corporate control, when those steps are taken advisedly, in good faith pursuit of a corporate interest, and are reasonable in relation to a threat to legitimate corporate interests posed by the proposed change in control." Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651, 659 (Del. Ch. Div. 1988). Here, the facts on the issue are simply not in dispute. With the exception of Mr. Guerrero there was not a single member of the Board who was 100% clear as to the reason or the necessity for the increase in this percentage of signatmes. Ms. Damiano testified that there ha,d never been an attempt by anyone to nominate someone to the Board if the Board Directors themselves had not nominated the person for Directorship. Mr. D'Autorio, Mr. Bedrin and Mr. Baumkirschner had no idea why there was a need to increase the percentage from 10 to 20%. In fact Mr. D'Autorio and Mr. Baumkirschner both testified that they lacked sufficient information on this issue to vote in favor of it. Mr. D'Autorio, when he testified finally admitted that he was told that the reason the amendment was being proposed was to keep unwelcome outsiders off the Board of Directors. Mr. Guerrero was very direct that the amendment was drafted in order to block any attempt on the behalf of Mr. Seidman to gain a seat on the. Board of Directors.

   

 

Most troubling to this Court was the testimony from each and every Director that there was no idea of how many votes would comprise the 20% because there had never been a calculation as to how many depositors (not accounts but depositors) there were at the bank. As a result of the Court's questions about the number of depositors and the defendants' inability to calculate the numbers necessary, Mr. Guerrero subsequently had to prepare a certification to advise the Court there were mechanisms through the banks computer system to calculate the number of depositors.

   

This am ndment bears absolutely no rationale relationship to any of the issues involving bank governance or operation. While it is touted as a way to keep out un-welcomed wealthy outsiders, this amendment has a deleterious affect on the efforts of the common, every day depositor to gain a seat for themselves on the Board of Directors if they are unknown to the current nominating committee. Whether it was 10% or 20% of the depositors to gain a nomination, investors such as Lawrence Seidman would not hesitate to seek seats on the Board. It would be a business-decision for them. Investors at that level had access to whatever funds or resources are necessary to mount a challenge. There was absolutely no consideration given to how an amendment of this type would impact the regular depositor looking for an opportunjty to serve on the Board. Faced with the task of soliciting anywhere from 6 to 6,000 depositors is an intimidating prospect for a homeowner or small business person looking to become involved in the governance of this mutual company.

 

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Filed 06/0112007

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This Court finds that the Board has breached their fiduciary duty to their depositors in their paternalistic attempt to keep "outside investors" from gaining participation on the Board of Directors in order to maintain their own positions. Whether one approves or disapproves of Mr. Seidman and his investment strategies the Boar Rcgu!alion & E!ftrnin otipne > Laytt & BogtJtabOOfi >FDIC LIW, Regul1Uon1, Related Attl

FDIC Law,Regulations , Related Acts

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2000 • Rules and Regulations

Appendix B to Part 364-lnteragency Guidelines Establishing Informatio n Security Standards Table of Contents I. Introduction

A Scope B. Preservation of Existing Authority C. Definitions II. Standards for Safeguarding Customer Information A Information Security Program B. Objectives Ill. Development and Implementation of Customer Information Security Program A. Involve the Board of Directors B. Assess Risk C. Manage and Control Risk

,D. Oversee Service Provider Arrangements E. Adjust the Program F. Report to the Board G. Implement the Standards

I.Introduction The lnteragency Guidelines Establishing Information Security Standards (Guidelines) set forth standards pursuant to section 39 of the Federal Deposit Insurance Act, 12 U.S.C. 1831P--1, and sections 501and505(b) , 15 U.S.C. 6801and6805{b), of the Gramm-Leach-Bliley Act.These Guidelines address standards for developing and implementing administrative, technical, and physical safeguards to protect the security, confidentiality, and integrity of customer information. These Guidelines also address standards with respect to the proper disposal of consumer information pursuant to sections 621 and 628 of the Fair Credit Reporting Act (15 U.S.C. 1681s and 1681w).

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  A. Scope. The Guidelines apply to customer information maintained by or on

 

 

behalf of, and to the disposal of consumer information by or on the behalf of, entities over which the Federal Deposit Insurance Corporation (FDIC) has authority. Such entities, referred to as"the bank" are banks insured by the FDIC (other than members of the Federal Reserve System) , insured state branches of foreign banks, and any subsidiaries of such entities (except brokers, dealers, persons providing insurance, investment companies, and investment advisers). B. Preservation of Existing Authority . Neither section 39 nor these Guidelines in any way limit the authority of the FDIC to address unsafe or unsound practices, violations of law, unsafe or unsound conditions, or other practices. The FDIC may take action under section 39 and these Guidelines independently of, in conjunction with , or in addition to, any other enforcement action available to the FDIC. C. Definitions . 1. Except as modified in the Guidelines, or unless the context otherwise requires, the terms used ·in these Guidelines have the same meanings as set forth in sections 3 and 39 of the Federal Deposit Insurance Act (

 

 

   

   

 

 

 

   

1.l U.S.C. 1813 and1831p;--1). 2. For purposes of the Guidelines, the foHowing definitions apply : a. Boarc/ of directors, in the case of a branch or agency of a foreign bank, means the rl],anaging official in charge of the branch or agency. b. Consumer Information means any record about an individual, whether in paper, electron·ic, or othe:r form, that is a consumer report or is derived from a consumer report and that Is maintained or otherwise possessed by or on behalf of the bank for a business purpose. Consumer information also means a compilation of such records. The term does not include any record that does not personally identify an individual. i. examples: ( 1) Consumer information includes: (A) A consumer report that a bank obtains; (B) information from a consumer report that the bank obtains from its affiliate after the consumer has been given a notice and has elected not to opt out of that sharing; (C) information from a consumer report that the bank obtains about an individual, who appUes for but does not eceive a loan, including any loan sought by an individual for a business purpose; (D) information from a consume r report that the bank obtains a'bout an individua 11 who guarantees a loan (including a loan to a business entity); or (E) information from a consumer report that the bank obtains about an employee or prospect ive employee. (2) Consumer information does not include:

 

(A) aggregate information, S> Uch as the mean score, derived from a group of consumer reports; or  

   

(B) blind data, such as payment history on accounts that are not personally identifiable, that may be used for developing credit scoring models or for other purposes. c. Consumer report has the same meaning as set forth in the Fair Credit Reporting Act, 15 U.S.C. 1681a(d). d. Customer means any customer of the bank as defined in§ 332.3(h) of this chapter.

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e. Customer information means any record containing nonpubljc personal information, as defined in § 332.3(n) of this chapter, about a customer, whether in papeir, electronic, or other form, that is maintained by or on behalf of the bank. f. Customer infonnation systems means any methods used to access, collect, store, use, transmit, protect, or dispose of customer information. 1

 

 

g. Service provider means any person or entity that maintains, processes, or otherwise is permitted access to customer information or consumer information through its provision of services directly to the bank.

II. Standards for lnfo rmation Security 1

 

 

     

 

A. Information Security Program. Each bank shall implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the size and complexity of the bank and the nature and scope of its activities.While all parts of the bank are not required to implement a uniform set of policies, all elements of the information security program must be coordinated. B. Oo}ectives. A bank's information security program shall be designed to: 1. Ensure the security and confidentiality of customer information; 2. Protect against any anticipated threats or hazards to the security or integrity of such infortnatiOn; 3. Protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer; and 4 Ensure the proper disposa 1 of customer information and ·consumer information. 1

 

 

 

 

Ill. Development and Implementation of Information Security Program

A. Involve the Board of Directors. The board of directors or an appropriate committee of the board of each bank shall: 1. Approve the bank's written information security program; and 2. Oversee the development, implementation, and maintenance of the bank's information security program, including assigning specific responsibility for its implementation and reviewing reports from management.

   

 

   

   

 

 

B. Assess Risk. Each 'bank shall: 1. lde.ntify reasoinably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of customer information or customer information systems. 2. Assess the lil