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Traher v. Republic First Bancorp, Inc.

United States District Court, E.D. Pennsylvania

January 13, 2020

DOUG TRAHER, Plaintiff,



         This is an action brought by a shareholder of a publicly traded corporation alleging that it breached its articles of incorporation by improperly conducting a vote on a proposed amendment that would double the corporation's shares. The irregularity at the center of the case was the corporation's failure to follow the rules for counting the votes as set forth in the proxy statement for the vote. Plaintiff contends that its failure to follow the announced rules constitutes a breach of the articles of incorporation, which he has a contractual right to enforce.

         Although courts have frequently described articles of incorporation as a form of contract, they most often have done so in the context of determining how those articles should be construed. The bounds of corporate governance are largely prescribed by statute, and shareholders have various well-established remedies to cure their injuries. But no provision of Pennsylvania's Business Corporation Law, see 15 Pa. C.S. § 101 et seq., and no case interpreting that law recognizes a direct cause of action in contract, enforceable by an individual shareholder, for breach of a corporation's articles of incorporation. In any case, even if one assumes the existence of such a remedy, Plaintiff here is hard-pressed to establish a literal breach of the corporation's articles. Instead, the injury of which Plaintiff complains arises out of the corporation's failure to conduct the vote in accordance with the procedure outlined in the proxy statement. I therefore conclude that Plaintiff has failed to state a claim for breach of contract under Pennsylvania law. Plaintiff also claims to have been “aggrieved” by the corporation's alleged miscounting of votes. See 15 Pa. C.S. § 1793. Although I have serious questions on the record as it stands whether Plaintiff has been aggrieved in the sense Pennsylvania law intends, making such a determination at the motion to dismiss stage is inappropriate. Defendant's Motion to Dismiss will therefore be granted in part and denied in part.

         I. Factual Allegations

         In early 2016, the Board of Directors of Defendant Republic First Bancorp, Inc. (“Republic”) proposed to Republic's shareholders to amend the corporation's Articles of Incorporation (“Articles”). The amendment, known as the Authorized Shares Amendment, proposed doubling the amount of authorized common stock Republic could issue, from 50 million to 100 million shares. Compl. ¶ 1. Plaintiff Doug Traher was a Republic shareholder at the time of the vote on the Authorized Shares Amendment.

         In advance of the meeting at which the Authorized Shares Amendment would be voted on, Republic filed with the Securities Exchange Commission a Schedule 14A Definitive Proxy Statement. Compl. ¶ 14. In the Proxy Statement, Republic disclosed that shareholders would be asked to consider four proposals. Compl. ¶ 18. Proposal 1 sought the reelection of two directors. Proposal 2 sought shareholder approval of the Authorized Shares Amendment. Proposal 3 sought shareholder approval to adjourn or postpone the 2016 Annual Meeting if there were not enough votes to constitute a quorum or to approve Proposal 2. Proposal 4 sought shareholder ratification of the appointment of an accounting firm.

         The 2016 Proxy Statement also detailed the voting procedures for Proposal 2, the Authorized Shares Amendment. Pursuant to Schedule 14A, a company must disclose in its proxy statement “the method by which votes will be counted, including the treatment and effect of abstentions and broker non-votes under applicable state law as well as registrant charter and by-law provisions.” SEC Schedule 14A, 17 C.F.R. § 240.14a-101 (Item 21(b)). Republic's Proxy Statement acknowledged that “[p]ursuant to an express provision in our articles of incorporation, Proposal 2 to amend the articles of incorporation to increase the authorized number of shares of common stock will be approved if at least sixty percent (60%) of the votes entitled to be cast are voted FOR the proposal.” Compl. ¶ 19 (citing 2016 Proxy Statement). The “express provision” in Republic's Articles of Incorporation permitted the Articles to be amended “only by the affirmative vote of holders of outstanding shares representing at least sixty percent (60%) of the votes entitled to be cast for that purpose.” Compl., Ex. 1 (Republic Articles of Incorporation).

         Further, the 2016 Proxy Statement instructed how shares held in “street name” would be counted. In the United States, most public company shareholders hold their shares in “street name, ” that is, the investor, known as the “beneficial owner, ” holds shares through an intermediary, like a broker, known as the “nominee” or “record holder.”[1] Street name ownership of stock adds complexity to shareholder voting. Generally, if the beneficial owner provides voting instructions to the broker in advance of the shareholder meeting, the broker is obliged to follow the owner's instructions. But if the beneficial owner does not provide the broker voting instructions, the broker's authority to vote those uninstructed shares depends on the nature of the action for which the corporation seeks approval. New York Stock Exchange rules permit brokers to vote uninstructed shares only on “routine” matters. On more significant, “non-routine” matters, however, without voting instructions from the beneficial owner, the broker is not permitted to vote shares held in street name.[2] When the broker does not receive instructions for how to vote shares on a non-routine issue, such a vote cannot be counted and a “broker non-vote” on that issue results.

         As relevant here, the 2016 Proxy Statement informed shareholders that if a beneficial owner failed or declined to provide voting instructions to the broker, “the brokers would not have authority to cast a vote and a ‘broker non-vote' would occur.” Compl. ¶ 21. The 2016 Proxy Statement went on to explain the implications of a broker non-vote. It stated that “[b]ecause the vote necessary for approval [of the Authorized Shares Amendment] is based on the number of votes entitled to be cast, and not the number of actual votes cast at the annual meeting, abstentions and broker non-votes will effectively be votes against the proposal to increase the authorized number of shares of common stock.” Compl. ¶ 22.

         The 2016 Annual Meeting was held on April 26, 2016. Compl. ¶¶ 24-25. Two days later, Republic filed an 8-K with the SEC and disclosed that the Authorized Shares Amendment had passed. ECF 3, at Ex. 3. No. “broker non-votes” were recorded for the Authorized Shares Amendment, Compl. ¶ 25, even though a substantial number of shareholders purportedly withheld voting instructions from their brokers, id. ¶ 3, and the Amendment passed when it otherwise would have failed. Id. ¶ 5.

         Plaintiff does not specifically plead damages or other injury. Instead, he alleges in general terms that he and “the Class Members are being, and will continue to be, harmed.” Compl. ¶¶ 47, 53. By way of relief, he seeks attorneys' fees, as well as declarations that (i) the Authorized Shares Amendment did not properly pass, and (ii) all shares sold by Republic pursuant to the Shares Amendment “are unlawful, invalid and void.” Compl., at 12.

         II. Standard of Review

         In this Circuit, motions to dismiss under Federal Rule of Civil Procedure 12(b)(6) are governed by the well-established standard set forth in Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir. 2009).

         III. Discussion

         A. Plaintiff does not plead any literal breach of the ...

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