Larkin v. Baltimore Bancorp, Civ. No. JFM-91-1239
| Citation | 769 F. Supp. 919 |
| Decision Date | 21 June 1991 |
| Docket Number | Civ. No. JFM-91-1239,JFM-91-1410. |
| Parties | Barbara S. LARKIN and Edwin F. Hale, Sr., et al. v. BALTIMORE BANCORP. BALTIMORE BANCORP v. BALTIMORE BANCORP STOCKHOLDERS COMMITTEE. |
| Court | U.S. District Court — District of Maryland |
William Hylton, Jr., Hylton and Gonzales, Baltimore, Md., William Bradford Reynolds and Philip S. Friedman, Washington, D.C., for plaintiffs.
David Clarke, Jr. and James D. Mathias, Piper and Marbury, Baltimore, Md., for defendants.
These cases arise from a proxy contest for control of Baltimore Bancorp (the "Bank") between a group of dissident stockholders led by Edwin F. Hale ("Dissidents") and the Bank's current management ("Management"). Under the Bank's existing bylaws six of its eighteen directors were to be elected at the annual stockholders meeting held in May. Dissidents fielded a slate of six candidates for those positions and, in an election whose results are not here challenged, Dissidents' six candidates were elected.
Dissidents also presented proposals for stockholder vote which would, in effect, amend the Bank's bylaws to increase the number of directors from eighteen to twenty-eight and permit the immediate filling of the ten new directorships thus created. In accordance with their proposals, Dissidents presented a slate of ten candidates for the new positions. Management opposed the Dissidents' proposals and did not field any candidates for the ten new positions.
The stockholders have now voted on Dissidents' proposed amendments, and in this action the parties seek declaratory relief on three issues whose resolution will determine the outcome of the vote. These issues are as follows: (1) whether § 7.07 of the Bank's bylaws requiring an 80% stockholder vote to amend the bylaws affected by Dissidents' resolution is valid; (2) whether Management's designees should have been permitted to cast as votes against the proposed amendments proxies which they obtained from stockholders authorizing them to use their discretion in voting on matters which were to come before the annual stockholders meeting; and (3) whether The Corporation Trust Company ("CT") (whom the stockholders elected to count the votes) properly decided two challenges made by Management to the vote count.1
For the reasons stated infra, I find, with respect to the first two issues, that bylaw § 7.07 is not valid but that Management was entitled to vote the proxies as they did. As to the third issue, I find merit in Management's contention that CT erred in deciding to count as abstentions on Dissidents' proposed amendments the approximately one million votes submitted by Independent Election Corporation of America ("IECA") and ADP Financial Information Services, Inc. ("ADP"). However, because I further find that there was an ambiguity in the proxy communications sent by IECA and ADP to their clients which makes it impossible to determine how the one million votes in question were intended to be cast, I will order that a new election be held.
Section 2.02 of the Bank's existing bylaws confers upon the board of directors the power to establish (up to 30) the number of directors. As indicated above, the Bank currently has eighteen director positions. In order to promote stability in management, under both the charter and the bylaws, directors are divided into three classes of equal numbers, one class being elected each year.
Adoption of Dissidents' proposals would effectively repeal § 2.02 and replace it with provisions which would (1) empower the stockholders to set the number of directors, (2) increase the number of directors from eighteen to twenty-eight, and (3) permit the immediate election of the ten new directors.
The threshold question presented is whether a simple majority or an 80% supermajority of stockholder votes is required to adopt Dissidents' proposed amendments. The starting point for resolving this question is § 7.07 of the bylaws, which provides as follows:
Subject to the special provisions of Section 2.02 and except as provided in the next sentence, (a) any and all provisions of these By-Laws may be altered or repealed and new by-laws may be adopted at any annual meeting of the stockholders, or at any special meeting called for that purpose, and (b) the Board of Directors shall have the power, at any regular or special meeting thereof, to make and adopt new by-laws, or to amend, alter or repeal any of the By-Laws of the Corporation. Notwithstanding anything in the Charter or these By-Laws to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all classes of shares entitled to vote in the election of directors shall be required to amend, repeal, or to adopt any provision inconsistent with Sections 2.01 through 2.06 of the By-Laws.
Dissidents contend that the super-majority vote requirement for stockholder amendment of bylaw §§ 2.01 through 2.06 violates Md.Corps. & Ass'ns Code Ann. § 2-506(a)(2) (hereinafter "GCL § 2-506(a)(2)"). That section provides:
Unless this article or the charter of a corporation provides otherwise, ... 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.
Management, pointing to the "unless this article ... provides otherwise" clause in this section, counters by arguing that another section of Maryland's Corporation and Associations Code, § 2-109(b) (hereinafter "GCL 2-109(b)"), does "provide otherwise." Section 2-109(b) states:
After the organization meeting of the board of directors, the power to adopt, alter, and repeal the bylaws of the corporation is vested in the stockholders except to the extent that the charter or bylaws vest it in the board of directors.
Management reads GCL § 2-109(b) as meaning that the power to amend bylaws resides in the first instance in the stockholders but that this power may by bylaw provision be vested entirely in the directors. Thus, according to Management, bylaw § 7.07 could have been written to completely divest the stockholders of the power to amend bylaw §§ 2.01 through 2.06. The power to do the greater necessarily includes the power to do the lesser, reasons Management. Therefore, Management concludes, the imposition of an 80% super-majority requirement (which is less severe than total divestment of shareholder voting power) is authorized by GCL § 2-109(b) and excluded (by virtue of the "provides otherwise" clause of GCL § 2-506(a)) from the general statutory ban against super-majority requirements.
Dissidents interpret GCL § 2-109(b) differently. They start from the premise that the power to amend bylaws is an inherent right of the stockholders and that it cannot be infringed absent a charter or statutory provision to the contrary. In their view GCL § 2-109(b) is not such a provision; it merely authorizes the adoption of bylaws which vest in the directors a power to amend bylaws which is concurrent to that of the stockholders.2
Resolution of this question is not clear.3 The parties' respective contentions contain echoes of constitutional debates held more than two centuries ago. Management, playing the role of the Federalists, would have me hold that the law necessarily grants to those in positions of corporate authority sufficient power to exercise their authority responsibly. Dissidents, like Jeffersonians jealous of the rights of the people, posit that any grant of power in derogation of the rights of the populace of stockholders must be direct and express.
If I deemed it necessary to decide the question, I would rule in favor of Management, albeit on the more mundane ground of statutory construction. Dissidents' interpretation of GCL § 2-109(b) depends upon their reading into the statute an implicit premise that the stockholders' power to amend is not only primary but also inviolate. When the legislature has spoken, however, there is no reason to assume that its meaning lies in what it has left unsaid. It is mere conjecture to suppose that when enacting GCL § 2-109(b) the General Assembly proceeded from Dissidents' silent premise and intended to mandate that bylaws can never confer exclusive amendment power upon the directors. To the contrary, as Management argues, the "vested in the stockholders except to the extent ... vested ... in the board of directors" language suggests that the General Assembly contemplated that there might be a transfer of power from the stockholders to the directors.
The reason I do not consider it necessary to decide the question, however, is that I believe bylaw § 7.07 to be invalid even if Management's construction of GCL §§ 2-109(b) and 2-506(a)(2) is correct. Because my analysis depends upon a close reading of the language of the bylaw, I will quote it again.
Subject to the special provisions of Section 2.02 and except as provided in the next sentence, (a) any and all provisions of these By-Laws may be altered or repealed and new by-laws may be adopted at any annual meeting of the stockholders, or at any special meeting called for that purpose, and (b) the Board of Directors shall have the power, at any regular or special meeting thereof, to make and adopt new by-laws, or to amend, alter or repeal any of the By-Laws of the Corporation. Notwithstanding anything in the Charter or these By-Laws to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all classes of shares entitled to vote in the election of directors shall be required to amend, repeal, or to adopt any provision inconsistent with Sections 2.01 through 2.06 of the By-Laws.
Management interprets this language as authorizing the directors, as well as 80% of the shareholders, to amend §§ 2.01 through 2.06. I simply do not agree. The first sentence of the section confers concurrent power to amend in the stockholders and the directors "except as provided in the next sentence." The next sentence...
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