Badlands Trust Co. v. First Financial Fund, Inc.

• Decision Date: 19 September 2002
• Docket Number: No. CIV. JFM-02-2423.,CIV. JFM-02-2423.
• Citation: 224 F.Supp.2d 1033
• Parties: BADLANDS TRUST COMPANY, et al. v. FIRST FINANCIAL FUND, INC.
• Court: U.S. District Court — District of Maryland

224 F.Supp.2d 1033

BADLANDS TRUST COMPANY, et al. v. FIRST FINANCIAL FUND, INC.

No. CIV. JFM-02-2423.

United States District Court, D. Maryland.

September 19, 2002.

James H. Hulme, Donald B. Mitchell, Jr., Benjamin I. Fishman, Arent Fox Kintner Plotkin and Kahn PLLC, Washington, DC, for Plaintiffs.

Jeffrey B. Maletta, Kirkpatrick and Lockhart LLP, Washington, DC, for Defendant.

OPINION

MOTZ, District Judge.

First Financial Fund, Inc. ("Fund") has a bylaw providing that "[d]irectors shall be elected by vote of the holders of a majority of the shares outstanding and entitled to vote thereon." This case presents the question whether the bylaw is valid under the Maryland General Corporation Law (MGCL) and the Investment Company Act of 1940. For the reasons that follow, I find it is invalid under the MGCL. Therefore, I do not reach the question of its validity under the Investment Company Act.

I.

The Fund is a Maryland corporation registered with the U.S. Securities and Exchange Commission as a closed-end investment company. Plaintiff, Badlands Trust Company ("Badlands"), is the trustee of one of several trusts that are controlled or advised by Stewart R. Horejsi. Badlands and other stockholder interests controlled or advised by Horejsi have acquired 30.6% of the outstanding shares of the Fund.

The Fund held its annual meeting on August 12, 2002. The meeting was preceded by a vigorous proxy contest between management and Horejsi. One of the items on the agenda at the meeting was the election of two directors. Management supported Eugene C. Dorsey and Robert E. LaBlanc. Horejsi supported Dean Jacobson and Joel W. Looney. LaBlanc and Dorsey received, respectively, 7,817,386 and 7,812,470 votes. Jacobson and Looney each received 11,174,771 votes.

Jacobson and Looney received 58.84% of the votes cast.¹ However, not all of the Fund's 23,622,382 outstanding shares were voted, and the votes received by Jacobson and Looney constituted only 47.3% of those shares. Therefore, if the Fund's bylaw requiring a director to be elected by "a majority of the shares outstanding and entitled to vote thereon" is valid, Jacobson and Looney did not win seats on the Board. On the other hand, if the bylaw is invalid and Jacobson and Looney were required only to receive a majority of the votes cast at the stockholders' meeting, they were elected as directors.

II.

A.

Section 2-506(a)(2) of the MGCL provides that "[u]nless this article or the charter of a corporation provides otherwise, at a meeting of stockholders ... [a] majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting." It is not disputed that a quorum was present at the Fund's August 12, 2002 stockholders' meeting, that the election of directors was properly before the meeting, and that the Fund's charter does not require a vote greater than "a majority of all the votes cast" for the election of directors. Therefore, unless the MGCL itself "provides otherwise," the Fund's bylaw requiring for the election of directors "a majority vote of the shares outstanding and entitled to vote thereon" is invalid.

The Fund relies upon section 2-404(d) as the source of authority for its bylaw. That section provides that "[u]nless the charter or bylaws of a corporation provide otherwise, a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director." According to the Fund, section 2-404(d) permits a corporation to adopt a bylaw establishing a voting requirement for the election of directors that exceeds not only a plurality but also the presumptive rule of majority of all votes cast established by section 2-506(a)(2).

The Fund's argument is not without superficial appeal, particularly since section 2-506 is of general application while section 2-404 applies particularly to the election of directors. However, the Maryland Court of Appeals has stated that "the paramount goal of statutory interpretation is to identify and effectuate the legislative intent underlying the statute(s) at issue." Derry v. State, 358 Md. 325, 335, 748 A.2d 478, 483 (2000); see also Tucker v. Fireman's Fund Ins. Co., 308 Md. 69, 73, 517 A.2d 730, 731 (1986). Here, the legislative background makes clear that when it enacted section 2-404(d), the Maryland General Assembly did not intend to undermine the mandate of section 2-506(a)(2) that a corporation can establish a supermajority vote requirement for the election of directors only by charter provision.

Prior to 1951, when section 2-506(a)(2) was enacted, bylaws could "require for any purpose a proportionate vote greater than that required by statute for such purpose." See H. Brune, Maryland Corporation Law § 68 (1933 ed.). Section 2-506(a)(2) changed that rule to permit a vote requirement higher than a vote by a majority of votes cast for a matter properly brought before a stockholders' meeting at which a quorum was present only if that requirement is contained in the corporation's charter or in the MGCL itself. Reporter's Notes to the 1951 Revisions of the MGCL (quoted in Larkin v. Baltimore Bancorp., 769 F.Supp. 919, 922 n. 2 (D.Md.1991)). The change was an important one for the effectuation of the principle of corporate democracy. It prevented directors from establishing, by bylaw, supermajority voting requirements that would transfer from the stockholders to themselves the power to make critical corporate decisions.

The general rule established by section 2-506(a)(2) has remained intact for over half a century. However, in the years following its enactment a problem arose which the General Assembly addressed in 1981 by enacting section 2-404(d). As explained in a statement accompanying the bill from which the section was derived, experience under section 2-506(a)(2) had taught that "[i]t is ... possible that no nominees would receive a majority of the votes cast, in which case there would be no election and the current directors could continue to serve until the next annual meeting of stockholders. The Bill would essentially eliminate the possibility of these bizarre circumstances." Explanation of Senate Bill No. 659 Vote Required to Elect Directors (quoted in Ideal Fed. Sav. Bank v. Murphy, 339 Md. 446, 458, 663 A.2d 1272, 1277-78 (1995)). The express purpose of the bill was to cure this problem by "provid[ing] that corporate directors may be elected by a plurality of the votes cast if a quorum is present." Id. at 457, 663 A.2d at 1277.²

In other words, section 2-404(d) was intended to make it easier to elect directors and to reduce the number of failed elections. The Fund's interpretation of the section would defeat the accomplishment of that intent by authorizing directors to adopt bylaws that would — through the establishment of a supermajority requirement — make it harder to elect directors and increase the number of failed elections. The Fund would also attribute to the Maryland General Assembly the paradoxical intent of choosing to reverse offhandedly — through the enactment of a statutory provision designed to make directorship elections more democratic — a major policy decision it had made in favor of shareholder democracy thirty years before. The very reason the Fund interprets section 2-404(d) as it does is to entrench the former directors in their positions by enabling them to continue to serve as directors holding over for a year, see MGCL § 2-405, and to make their opponents' challenge at the next election unappealing to unaligned stockholders who would be faced with the prospect of the Fund's dissolution in the event of another failed election. See MGCL § 3-413.

B.

Since the intent of the General Assembly in enacting section 2-404(d) is clear, the only remaining question is whether the language of section 2-404(d) or of section 2-506(a)(2) is so plain and unambiguous as to preclude inquiry into the legislature's intended meaning. Williams v. Mayor & City Council of Baltimore, 359 Md. 101, 115, 753 A.2d 41, 49 (2000); Marriott Employees Fed. Credit Union v. Motor Vehicle Admin., 346 Md. 437, 444, 697 A.2d 455, 458 (1997). The language of neither statute has that effect.

Section 2-404(d) is unambiguous only in establishing a default plurality vote rule for the election of directors in the absence of a contrary charter or bylaw provision. Beyond that, the section is opaque. It might mean (as the Fund argues) that a corporation may set any voting requirement it wants for the election of directors by charter or by bylaw.³ On the other hand, it might mean (as Badlands contends) that whatever action the corporation takes under section 2-404(d) is subject to the rest of the MGCL, specifically the presumptive majority of votes cast rule established by section 2-506(a)(2). Since section 2-404(d) is thus susceptible to two different readings, its language is not so plain as to defeat "the paramount goal of statutory interpretation" of gleaning the legislative intent. Derry, 358 Md. at 335, 748 A.2d at 483.

Just as section 2-404(d) clearly establishes a default plurality vote rule for the election of directors, so too does section 2-506(a)(2) clearly establish a presumptive majority of votes cast rule for all matters properly before a stockholders' meeting where a quorum is present. However, like section 2-404(d), section 2-506(a)(2)'s clarity stops there. The issue presented in this case concerns the meaning of the verb "provide[s]" in the initial clause of the section which makes the presumptive rule applicable "[u]nless this article ... provide[s] otherwise."⁴ Again, the word is susceptible to two different readings. It might mean (as the Fund argues) "permits," "allows," "authorizes," or "specifies the means through which the corporation may specify its own requirement." On the other hand, it might mean (as Badlands posits) "prescribes a specific voting requirement." If the first interpretation is...