On Appeal from an Order of the United States District Court for the District of New Jersey D.C. No. 96-5435 Argued May 23, 1997
Before: Sloviter, Chief Circuit Judge,* Roth, Circuit Judge, and Pollak, District Judge** *Judge Sloviter was Chief Judge of the Court of Appeals for the Third Circuit at the time this appeal was submitted. Judge Sloviter completed her term as Chief Judge on January 31, 1998. **Honorable Louis H. Pollak, United States District Judge for the Eastern District of Pennsylvania, sitting by designation.
The opinion of the court was delivered by: Pollak, District Judge.
This appeal arises from the district court's final judgment in a suit, seeking inter alia, to enforce certain disclosure provisions of the Securities Exchange Act of 1934, 15 U.S.C. §§ 77b et seq. (the "Exchange Act"). The facts of the case revolve around the efforts of the IBSF Committee to Maximize Shareholder Value ("the Committee")-- a group of shareholders of IBS Financial Corporation ("IBSF"), a New Jersey corporation -- to obtain two seats on IBSF 's seven-member board.
In the summer of 1996, some five months before the expected date of IBSF 's 1996 annual meeting, the incumbent IBSF board reduced the number of board seats from seven to six. The board later rejected the Committee's nominee for the one open seat, citing the Committee's failure to comply with certain provisions of the IBSF Certificate of Incorporation. With a view to getting judicial ratification of the board's course of action, IBSF in the fall of 1996 brought this suit for a declaration that (1) the Committee's "Schedule 13D" statement filed with the Securities and Exchange Commission ("SEC") did not conform to the requirements of 17 C.F.R. § 240.13d-101, and (2) the board properly rejected the Committee's board nominee. Some members of the Committee counterclaimed, seeking an injunction requiring IBSF 's board to reinstate the board seat it had eliminated.*fn1 The district court, in an opinion handed down on January 23, 1997, found in favor of the Committee on each issue, ruling that (1) the Committee's Schedule 13D statement was complete; (2) IBSF was equitably estopped from rejecting the Committee's board nominee; and (3) IBSF acted improperly in reducing the number of board seats. The district court accordingly ordered IBSF to reinstate the eliminated board seat and to place two Committee nominees on the ballot at the upcoming annual meeting. We will reverse the district court's first two determinations, but will affirm the district court's determination that IBSF's reduction of the number of board seats was improper.
Identification of the numerous individuals and entities that make up the IBSF Committee to Maximize Shareholder Value is important to an understanding of the issues in this case, particularly the issue of the completeness of the Committee's Schedule 13D statement. We will borrow (and modestly enlarge, with bracketed inserts) the district court's concise description of the principal players:
[Plaintiff-appellant] IBS Financial Corp. ("IBSF") is a savings and loan holding company owning Interboro Savings & Loan Association ("Interboro"). IBSF 's shares are publicly registered pursuant to the Securities Exchange Act of 1934, 15 U.S.C. SS 77b et seq. (the "Exchange Act"), and actively traded. Defendants together own approximately 8.5% of the outstanding shares of IBSF common stock.
Seidman & Associates, L.L.C. (SAL) is a limited liability company managed by Lawrence B. Seidman ("Seidman"). SAL's members are Seidman, Seidcal & Associates, L.L.C. ("Seidcal"), Sonia Seidman ("Mrs. Seidman"), and two other individuals. . . . Pursuant to SAL's operating agreement, Seidman as managing member has exclusive and broad investment powers. A majority in interest, however, may remove or replace Seidman as managing member with or without cause upon payment of a removal penalty. [A majority in interest also has complete discretion with respect to "ll decisions, consents, authorizations and rights in connection with the business and affairs" of SAL.] Seidcal currently owns a 71.43% interest in SAL but takes no active role in its affairs.
Seidman & Associates II, L.L.C. ("SAL II") is also a limited liability company managed by Seidman. SAL II's members are Mrs. Seidman and Seidcal. . . . SAL II's operating agreement grants Seidman as manager exclusive and broad investment powers. A majority in interest, however, may remove or replace Seidman as manager with or without cause. [As with SAL, a majority in interest has complete discretion with respect to "ll decisions, consents, authorizations and rights in connection with the business and affairs" of SAL II.] At present, Seidcal owns a 75% interest in SAL II but takes no active role in its affairs.
Federal Holdings, L.L.C. ("Federal") is a limited liability company managed in part by Seidman. Federal's members are Charisma Partners, L.P. ("Charisma") and nine individuals. [Charisma in turn has one general partner, 8th Floor Realty Corp. ("8th Floor"), whose Vice President is Kevin Moore.] Under Federal's operating agreement, Seidman is investment manager and enjoys exclusive and complete power to buy, sell, and vote Federal's stock. The operating agreement names Kevin Moore ("Moore") administrative manager and clothes him with the authority to make non-investment decisions and remove Seidman as investment manager for cause [until June 13, 1997, and to remove Seidman for any reason thereafter. The agreement makes no provision for removing Moore as administrative manager.] Neither Charisma, 8th Floor, nor Moore takes an active role in Federal's investment affairs.
Seidcal is composed of several members of the Cali family. Brant B. Cali is Seidcal's administrative manager, but Seidcal's operating agreement provides that a majority in interest shall manage and conduct Seidcal's business affairs. According to Brant Cali, the lion's share of Seidcal's funding probably derives from three Cali family "seniors," namely John J. Cali, Angelo Cali, and Ed Leshowitz, who are not themselves Seidcal members but whose children are Seidcal members.
Defendants SAL, SAL II, Federal, . . . Seidman, [among others] . . . comprise an unincorporated entity known as the "IBSF Committee to Maximize Shareholder Value" (the "Committee"). As the name suggests, the Committee aims to maximize the value of their IBSF shares.
IBS Financial Corp. v. Seidman & Associates, L.L.C., 954 F. Supp. 980, 983-84 (D.N.J. 1997) (citations omitted).
The facts relating to the three dominant issues, and the district court's ruling on each of these issues, may be summarized as follows:
A. Schedule 13D statement: In September 1995, the Committee filed a "Schedule 13D" statement with IBSF and the SEC. The Securities Exchange Act of 1934 requires the filing of a Schedule 13D statement by "any person who . . . is directly or indirectly the beneficial owner of more than 5 per centum" of a class of equity securities, including a syndicate or group acting for the purpose of acquiring such ownership, 15 U.S.C. § 78m(d)(3), within ten days of acquiring such ownership, id. § 78m(d)(1). The SEC's implementing regulations also require, via Instruction C, information regarding "each person controlling" a member of a group filing a Schedule 13D statement. 17 C.F.R. § 240.13d-101 Instruction C.
The Committee amended its initial Schedule 13D statement nine times, with the ninth amendment filed December 3, 1996, some three weeks after this litigation was commenced. As amended, the Committee's Schedule 13D statement provides the information required by the SEC's regulations, 17 C.F.R. §§ 240.13d-1 to -101, with respect to SAL, SAL II, and Federal, and with respect to Seidman as a "person controlling" SAL, SAL II, and Federal. However, no information was provided with respect to Seidcal, Charisma, 8th Floor, Moore, or those who may be perceived as "controlling" Seidcal, Charisma, 8th Floor, and Moore.
The district court, in its January 23, 1997 opinion, ruled that the Committee's Schedule 13D recitals were complete, because Seidman managed SAL, SAL II, and Federal without consulting others, and, indeed, the very purpose of establishing each of the three funds was "to create a fund for Seidman to invest in financial institutions at his discretion." IBS Financial Corp., 954 F. Supp. at 988. "Looking to the realities of each organization," the district court concluded "that Seidman and not Seidcal controls both SAL and SAL II within the meaning of Instruction C." Id. at 987. Moreover, "Seidman makes all of Federal's investment decisions without consulting Moore or other investors . . . . Nor has IBSF alleged that Moore intends to remove Seidman or that he uses his ...