UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Schedule 13D
(Rule 13d-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT
TO RULE 13d-2(a)
(Amendment No. 24)*
First Financial Fund, Inc.
(Name of Issuer)
Common Stock
(Title of Class of Securities)
320228109
(CUSIP Number)
Stephen C. Miller, Esq.
Krassa & Miller, LLC
1680 38th Street, Suite 800
Boulder, Colorado 80301
(303) 444-5483
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications)
August 23, 2002
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of ss.ss.240.13d-1(e), 240.13d-1(f) or
240.13d-1(g), check the following box.
Note: Schedules filed in paper format shall include a signed original
and five copies of the schedule, including all exhibits. See
ss.240.13d-7 for other parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class
of securities, and for any subsequent amendment containing information
which would alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not
be deemed to be "filed" for the purpose of Section 18 of the Securities
Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of
that section of the Act but shall be subject to all other provisions of
the Act (however, see the Notes).
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CUSIP No. 320228 10 9
1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Ernest Horejsi Trust No. 1B
2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
3. SEC Use Only
4. Source of Funds (See Instructions) WC OO
5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
6. Citizenship or Place of Organization South Dakota
Number of 7. Sole Voting Power 1,795,100
Shares Bene-
ficially 8. Shared Voting Power
Owned by Each
Reporting 9. Sole Dispositive Power 1,795,100
Person With
10. Shared Dispositive Power
11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,795,100
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
13. Percent of Class Represented by Amount in Row (11) 7.60%
14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Lola Brown Trust No. 1B
2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
3. SEC Use Only
4. Source of Funds (See Instructions) WC OO
5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
6. Citizenship or Place of Organization South Dakota
Number of 7. Sole Voting Power 2,568,200
Shares Bene-
ficially 8. Shared Voting Power
Owned by Each
Reporting 9. Sole Dispositive Power 2,568,200
Person With
10. Shared Dispositive Power
11. Aggregate Amount Beneficially Owned by Each Reporting Person
2,568,200
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
13. Percent of Class Represented by Amount in Row (11) 10.87%
14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Mildred B. Horejsi Trust
2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
3. SEC Use Only
4. Source of Funds (See Instructions) WC OO
5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
6. Citizenship or Place of Organization New York
Number of 7. Sole Voting Power 1,922,400
Shares Bene-
ficially 8. Shared Voting Power
Owned by Each
Reporting 9. Sole Dispositive Power 1,922,400
Person With
10. Shared Dispositive Power
11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,922,400
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
13. Percent of Class Represented by Amount in Row (11) 8.14%
14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Stewart R. Horejsi Trust No. 2
2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
3. SEC Use Only
4. Source of Funds (See Instructions) WC OO
5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
6. Citizenship or Place of Organization South Dakota
Number of 7. Sole Voting Power 1,697,900
Shares,Bene-
ficially 8. Shared Voting Power
Owned by Each
Reporting 9. Sole Dispositive Power 1,697,900
Person With
10. Shared Dispositive Power
11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,697,900
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
13. Percent of Class Represented by Amount in Row (11) 7.19%
14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Susan L. Ciciora Trust
2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
3. SEC Use Only
4. Source of Funds (See Instructions) WC OO
5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
6. Citizenship or Place of Organization South Dakota
Number of 7. Sole Voting Power 1,359,800
Shares Bene-
ficially 8. Shared Voting Power
Owned by Each
Reporting 9. Sole Dispositive Power 1,359,800
Person With
10. Shared Dispositive Power
11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,359,800
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
13. Percent of Class Represented by Amount in Row (11) 5.76%
14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
John S. Horejsi Trust
2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
3. SEC Use Only
4. Source of Funds (See Instructions) WC OO
5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
6. Citizenship or Place of Organization South Dakota
Number of 7. Sole Voting Power 100
Shares Bene-
ficially 8. Shared Voting Power
Owned by Each
Reporting 9. Sole Dispositive Power 100
Person With
10. Shared Dispositive Power
11. Aggregate Amount Beneficially Owned by Each Reporting Person
100
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
13. Percent of Class Represented by Amount in Row (11) 0.0004%
14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Badlands Trust Company
2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
3. SEC Use Only
4. Source of Funds (See Instructions) WC OO
5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
6. Citizenship or Place of Organization South Dakota
Number of 7. Sole Voting Power
Shares Bene-
ficially 8. Shared Voting Power 1,359,900
Owned by Each
Reporting 9. Sole Dispositive Power
Person With
10. Shared Dispositive Power 1,359,900
11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,359,900
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
13. Percent of Class Represented by Amount in Row (11) 5.76%
14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Stewart R. Horejsi
2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
3. SEC Use Only
4. Source of Funds (See Instructions) Not applicable
5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
6. Citizenship or Place of Organization United States
Number of 7. Sole Voting Power 0
Shares Bene-
ficially 8. Shared Voting Power 0
Owned by Each
Reporting 9. Sole Dispositive Power 0
Person With
10. Shared Dispositive Power 0
11. Aggregate Amount Beneficially Owned by Each Reporting Person 0
12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions) X
13. Percent of Class Represented by Amount in Row (11) 0%
14. Type of Reporting Person (See Instructions) IN
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Amendment No. 24 to Statement on Schedule 13D
This amended statement on Schedule 13D relates to the Common
Stock, $.001 par value per share (the "Shares"), of First Financial
Fund, Inc., a Maryland corporation (the "Company"). Items 4 and 7 of
this statement, previously filed by the Ernest Horejsi Trust No. 1B (the
"Trust"), the Lola Brown Trust No. 1B (the "Brown Trust"), the Mildred
B. Horejsi Trust (the "Mildred Trust"), the Stewart R. Horejsi Trust No.
2 (the "Stewart Trust"), the John S. Horejsi Trust (the "John Trust"),
and the Susan L. Ciciora Trust (the "Susan Trust") as the direct
beneficial owner of Shares, and Badlands Trust Company ("Badlands") and
Stewart R. Horejsi, by virtue of the relationships described previously
in this statement, are hereby amended as set forth below.
Item 4. Purpose of Transaction.
No change except for the addition of the following:
As previously reported in this statement on Schedule 13D, in connection
with the Company's recent annual meeting of shareholders which was held
on August 12, 2002, the Brown Trust proposed alternative directors, Joel
W. Looney and Dr. Dean Jacobson (the "Trust Candidates"), to those
nominated by the Company's nominating committee (the "Incumbent
Candidates").
In order to communicate with shareholders regarding the Trust
Candidates, the Brown Trust, in accordance with Maryland law, made
written request to the Company for information held by the Company
regarding its record and beneficial stock owners (i.e., a list of non-
objecting beneficial owners or a "NOBO list"). The Company refused to
provide the NOBO list. In order to compel the Company to provide the
NOBO list, on July 22, 2002, the Brown Trust filed a lawsuit for a
temporary restraining order in United States District Court, District of
Maryland (the "NOBO Lawsuit"). The Complaint and Memorandum of Points
and Authorities in Support of the Brown Trust's Motion for Temporary
Restraining Order are attached hereto as Exhibit 10 and incorporated in
this statement by reference. At a hearing held on July 30, 2002, the
Court found in favor of the Brown Trust and issued a Temporary
Restraining Order compelling the Company to provide the NOBO list as
requested.
On July 25, 2002, Stewart R. Horejsi, in his capacity as financial
adviser for the Brown Trust, sent a letter to the Board of Directors of
the Company (the Board") expressing his disappointment that the Board
permitted the Company and its counsel to advance an erroneous position
in refusing to provide the Brown Trust with the NOBO list. The letter
indicates that such actions resulted in otherwise unnecessary
expenditures of time and money by both the Brown Trust and the Company.
The July 25, 2002, letter is attached hereto as Exhibit 11 and
incorporated in this statement by reference.
On August 2, 2002, Stewart R. Horejsi, again in his capacity as
financial adviser for the Brown Trust, sent a letter to the Board taking
exception to and criticizing a provision in the Company's by-laws (the
"Objectionable By-Law") that purports to require a candidate for the
board of directors to receive a majority of the Company's outstanding
shares (i.e., more than 50% of all of the Company's shares) to be
elected to the board (the "August 2nd Letter"). The August 2nd Letter
asked the Board to take formal action to remove the Objectionable By-Law
so as to permit a majority of the voting shares (vis-...-vis the
outstanding shares) to elect directors. The August 2nd Letter is
attached hereto as Exhibit 12 and incorporated in this statement by
reference. On August 9, 2002, Kirkpatrick & Lockhart, LLP, the
Company's counsel, sent a letter rejecting the position taken by
Mr. Horejsi with regard to the Objectionable By-law and indicating that
the Board refused to comply with Mr. Horejsi's request to remove the
provision.
On August 12, 2002, at the Company's annual meeting of shareholders,
according to the final report of the Company's inspector of elections
dated August 20, 2002, the Trust Candidates received support of 47.3
percent of the Fund's outstanding shares, while the Incumbent Candidates
received support of 33.1 percent.
On August 20, 2002, Badlands, the trustee for the Brown Trust, sent a
letter to Thomas T. Mooney, the Company's president and chairman,
stating that, because the Trust Candidates received a majority of the
shares that voted at the meeting, the Trust Candidates were legitimately
elected and were thus duly elected board members of the Company (the
"Badlands Letter"). The Badlands Letter is attached hereto as Exhibit
13 and incorporated in this statement by reference.
On August 21, 2002, Kirkpatrick & Lockhart, responding to the Badlands
Letter, sent a letter purportedly on behalf of the Company stating in
pertinent part as follows:
[The August 9, 2002 letter] made clear that the Board had determined
that the long-standing by-law provision requiring the affirmative vote
of a majority of the [Company's] outstanding shares to elect Directors
is legal. Thus, the Board disputes your contention that the [Trust
Candidates] have been duly elected to the Fund's Board.
.. . .
The Board intends to proceed with the normal business of the Fund with
the [Incumbent Candidates] . . . with the full authority to exercise all
of the rights and powers of members of the [Board], until their
successors are duly elected and qualified.
On August 23, 2002, in order to compel the recognition of the Trust
Candidates as duly elected members of the Board, and to preclude any
substantive or illegal Board actions pending such recognition, the Brown
Trust amended its Complaint in the NOBO Lawsuit and requested a
temporary restraining order in the United States District Court,
District of Maryland (the "By-Law Lawsuit"). The Complaint and
Memorandum in Support of Application for a Temporary Restraining Order
and Motion for Preliminary Injunction filed in the By-Law Lawsuit are
attached hereto as Exhibit 14 and incorporated in this statement by
reference.
At a hearing held on August 28, 2002, the United States District Court
for the District of Maryland found in favor of the Brown Trust in
connection with the By-Law Lawsuit and granted the Brown Trust's Motion
for Temporary Restraining Order, thus preventing the Company from
seating the Incumbent Candidates. In doing so, the Court enjoined the
Board from meeting until the Court considers the Brown Trust's motion
for a preliminary injunction and enjoined enforcement of the
Objectionable By-law. The Court found that the Brown Trust met the
legal standards for the issuance of a Temporary Restraining Order,
including the existence of irreparable harm and the likelihood of
success on the merits. The Brown Trust understands that the Court set
the matter for a Permanent Injunction Hearing on September 10, 2002 at
10:30 a.m.
Item 7. Material to be Filed as Exhibits.
Exhibit 10. Complaint and Memorandum of Points and
Authorities in Support of the Brown Trust's Motion for Temporary
Restraining Order filed on July 22, 2002.
Exhibit 11. July 25, 2002, letter from Stewart R. Horejsi to
the Board of the Company.
Exhibit 12. August 2, 2002, letter from Stewart R. Horejsi
to the Board of the Company.
Exhibit 13. August 20, 2002, letter from Badlands Trust
Company to the Thomas T. Mooney.
Exhibit 14. Complaint and Memorandum in Support of
Application for a Temporary Restraining Order and Motion for Preliminary
Injunction filed on August 23, 2002.
Signature
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true,
complete and correct.
Date: August 29, 2002
/s/ Stewart R. Horejsi
Stewart R. Horejsi
/s/ Stephen C. Miller
Stephen C. Miller, as Vice President of Badlands Trust Company, trustee
of the Ernest Horejsi Trust No. 1B, the Lola Brown Trust No. 1B, the
Mildred B. Horejsi Trust, the Stewart R. Horejsi Trust No. 2, the Susan
L. Ciciora Trust, and the John S. Horejsi Trust.
EXHIBIT 10
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
Southern Division
______________________________________
)
BADLANDS TRUST COMPANY, )
614 Broadway, )
Yankton, South Dakota 57078 )
a South Dakota corporation, )
)
as Trustee for )
)
LOLA BROWN TRUST No. 1B, )
614 Broadway, )
Yankton, South Dakota 57078 )
)
Plaintiff, )
)
v. ) Civil Action No. ___________
)
FIRST FINANCIAL FUND, INC., )
Gateway Center Three, )
100 Mulberry Street, )
Newark, New Jersey 07102, )
a Maryland corporation, )
)
Defendant, )
)
Serve: )
The Corporation Trust Incorporated, )
300 E. Lombard Street, Suite 1400 )
Baltimore, Maryland 21202 )
_______________________________________)
COMPLAINT
Nature of this Action
1. This is an action for injunctive relief seeking inspection of
corporate shareholder records arising under the corporations law of the
State of Maryland, and in particular under Md. Corps. Code Section 2-
512, et seq. The question presented is whether a Maryland corporation
must produce, upon request by a shareholder of 5% or more of its shares,
so-called "NOBO" lists and "CEDE" breakdowns as part of its obligation
to provide lists of stockholders pursuant to Md. Corps. Code Section 2-
513.
The Parties
2. The Plaintiff in this action is Badlands Trust Company
("Badlands"), as trustee for the Lola Brown Trust No. 1B ("Lola Brown
Trust"). Badlands is a South Dakota corporation with its principal
place in business in South Dakota. The Lola Brown Trust is a trust
organized pursuant to South Dakota law by Ms. Lola Brown for the benefit
of her issue. The business address of both Badlands and the Lola Brown
Trust is 614 Broadway, Yankton, South Dakota. All of the beneficiaries
of the Lola Brown Trust are residents of states other than Maryland or
New Jersey. The Lola Brown Trust is the beneficial owner of more than
five percent of the outstanding and issued common stock of the
defendant.
3. The defendant in this action is First Financial Fund, Inc.
("First Financial" or "FF"). First Financial is a Maryland corporation,
which has its primary place of business in Newark, New Jersey. First
Financial is a closed end mutual fund that is part of the Prudential
Financial, Inc. Fund Complex. First Financial is a public company
traded on the New York Stock Exchange under the symbol "FF."
Jurisdiction
4. Subject matter jurisdiction exists in this Court under 28
U.S.C. Section 1332 because the matter in controversy exceeds the sum or
value of $75,000, exclusive of interest and costs and is between
citizens of different states.
5. Personal jurisdiction over the defendant is authorized by,
inter alia, Md. Code Ann., Corps. & Ass'ns Section 1-102 (1999), and Md.
Code Ann., Courts & Jud. Procs. Section 6-102(a) (1998), because the
defendant is a person organized under the laws of the State of Maryland.
"NOBO Lists," "CEDE Breakdowns,"
and Other Basics of Stockholder Information
6. Md. Code Ann., Corps. & Ass'ns Section 2-513 (1999) provides
that a person who holds 5% or more of a Maryland corporation's stock may
acquire "a list of its stockholders."
7. In the modern American economy, by far the majority of shares
in corporations are held in brokerage and other remote accounts in
"street names," i.e., the name of the brokerage firm, instead of in the
name of the beneficial owner or actual investor. For example, a person
could purchase shares of First Financial stock through an account he
holds at, for example, Merrill Lynch.
8. Even Merrill Lynch, however, would not hold those shares in
its own name. Instead, over 200 of the brokerage houses and financial
institutions, including Merrill Lynch, have formed an entity named
Depository Trust Company for the purpose of owning shares held in street
name for the beneficial interest of customers of the brokerage firms and
financial institutions. Depository Trust Company, in turn, has formed a
partnership named "Cede & Co." and utilizes that name to hold shares
owned by Depository Trust Company.
9. Thus, the shareholder records of a corporation will
frequently show "Cede & Co." as the record owner of many, many of its
shares. A stockholder who received a corporation's list of record
stockholders pursuant to Md. Code Ann., Corps. & Ass'ns Section 2-513,
therefore, would learn that Cede & Co. owned many shares, and would not
be able to communicate directly with the beneficial owners of the
shares. (In this case, for example, Cede & Co. owns 22,584,654 shares
of FF, or about 95% of all the shares of FF outstanding.)
10. It is possible for a depository company like Cede & Co.
(there are other such depository companies as well) to identify the
brokerage firms that own shares and the number of shares owned by each.
Such a "breakdown" is generically called a "CEDE list" or a "CEDE
breakdown" (even when one of the other depository companies creates it).
With such a list, the corporation or a competing proxy solicitor can
determine how many of its proxy materials to supply to each brokerage
house for subsequent redistribution to the customers of the brokerage
houses, the beneficial owners.
11. In addition to CEDE lists, which by their nature are still
one step removed from the beneficial owner, there are lists known as
"NOBO lists." NOBO lists ("NOBO" stands for "non-objecting beneficial
owners") are lists of the actual beneficial owners of the shares. NOBO
lists are created by the brokerage houses pursuant to Securities and
Exchange Commission ("SEC") rules that permit the beneficial owner to
determine, i.e., to object or not object, whether that beneficial share
holder wishes his or her name to be disclosed to the corporation for
purposes of receiving corporate communications. The SEC requires
brokers and other record holders of stock in street name to compile a
NOBO list at a corporation's request.
12. Possession of a NOBO list allows direct communication with
those beneficial owners of shares who have indicated that they do not
object to having their names and addresses disclosed so that they might
receive such communications directly.
13. Also relevant to the proxy process are Respondent Bank
Omnibus Proxies and Participants Lists. While complex, the list is
similar to a CEDE breakdown, and essentially identifies a respondent
bank at a level below the brokerage houses that can cause a proxy card
to be issued to the beneficial owner.
Facts Common To All Counts
14. Lola Brown Trust No. 1B was the beneficial owner of 2,568,200
shares of First Financial on May 22, 2002, the record date established
by First Financial for those shares eligible to vote at First
Financial's annual meeting, presently scheduled for August 12, 2002.
15. There were approximately 23,622,382 shares of FF outstanding
as of the record date. Thus, Plaintiff Lola Brown Trust is the
beneficial owner of approximately 10.87% of the outstanding shares of
First Financial.
16. A number of other trusts created by members of Lola Brown's
family also are beneficial owners of shares of First Financial.
Together, these family-related trusts (the "Related Trusts") own
approximately 39.6% of all the outstanding shares of First Financial.
17. The Related Trusts have formed an unincorporated association
known as Shareholders for Tomorrow. The members of Shareholders for
Tomorrow, who control approximately 39.6% of the outstanding shares of
FF, believe that FF would be better managed by election of two new
directors to replace two incumbent directors related to the Prudential
Fund Complex.
18. To that end, Shareholders for Tomorrow seeks to solicit
proxies from other shareholders in order to elect two new directors at
the Annual Meeting on August 12, 2002, to replace the two incumbent
directors related to the Prudential Fund Complex who have been nominated
to be reelected at that Meeting.
19. Obtaining NOBO Lists and CEDE breakdowns in order to identify
the beneficial owners of the shares of First Financial is crucial in
order for the Lola Brown Trust and other members of Shareholders for
Tomorrow to succeed in soliciting proxies for the Annual Meeting.
20. On or about June 5, 2002, Cede & Co., in its capacity as
registered owner of more than 5% of the shares of First Financial,
requested on behalf of the Lola Brown Trust, pursuant to Md. Code Ann.,
Corps. & Ass'ns Section 2-513, a list of First Financial's stockholders
(the "Stockholder List Request"). The Stockholder List Request
specifically requested all NOBO lists, all CEDE breakdowns, all
respondent bank omnibus proxy lists, and all information in the
possession of First Financial concerning the number and identity of the
actual beneficial owners of the common stock of FF. Under Maryland law,
a response was due within 20 days, or by June 26, 2002. See Exhibit 1.
21. The Stockholder List Request was sent by Federal Express
addressed to Arthur J. Brown, First Financial's Secretary, at the
address listed in First Financial's most recent proxy statement filed
with the SEC as the address of FF for purposes of sending shareholder
proposals. First Financial refused to accept the Federal Express
package because Mr. Brown was not physically located at that address.
22. On June 19, 2002, Plaintiff's agent made repeated attempts to
redeliver the Stockholder List Request by hand to the Newark address.
The first attempt was rejected because the package was not addressed to
a specific individual at First Financial. The package was then
addressed to R. Charles Miller, the Assistant Secretary; this second
attempt was rejected because Mr. Miller was not physically present at
the address. The package was then addressed to Thomas Mooney, the
president of FF; this third attempt was rejected because Mr. Mooney was
not physically present at the address. Finally, when the agent
requested the name of some person who was present in the building, he
was told that such information was not permitted to be given out.
23 The Stockholder List Request was finally delivered to Mr.
Brown at his law office in Washington, D.C. on June 20, 2002, with a
request that the stockholder lists, including all NOBO and CEDE
information, be delivered within the 20 day deadline, by June 26, 2002.
See Exhibit 2.
24. On July 8, 2002 - 33 days after the initial stockholder list
demand was made and 19 days after finally receiving the request at his
Washington law office - Mr. Brown, on letterhead bearing First
Financial's name and Newark, New Jersey address, responded to the
Stockholder List Request (the "Response"). The Response stated that
First Financial would provide a stockholder list at the offices of The
Corporation Trust Incorporated in Baltimore, but only after a
confidentiality agreement was executed by representatives of the Lola
Brown Trust. See Exhibit 3. Pursuant to this Response, First Financial
provided the Lola Brown Trust a list of its record holders, which list
includes the names of holders of only 675,535 shares, other than those
shares held in street name.
25. However, First Financial refused to produce a NOBO list of
its beneficial owners, even though such list was in existence, was in
the possession or control of First Financial, and was being used by
First Financial in the proxy contest.
26. On June 21, 2002, a magnetic tape containing the NOBO List
for First Financial was sent to First Financial's agent for proxy
solicitation, Georgeson Shareholder Communications, Inc. ("Georgeson").
See Exhibit 4.
27. First Financial and/or its agent Georgeson possesses a NOBO
list and, despite protest from representatives of the Lola Brown Trust,
has refused to provide it to Plaintiff Lola Brown Trust.
28. Those NOBO lists must be obtained immediately, and each
passing day without their being obtained by the Lola Brown Trust
constitutes irreparable harm, since the Annual Meeting is scheduled for
August 12, 2002.
COUNT I
(Breach of Md. Code, Corps. & Ass'ns Section 2-513)
29. Paragraphs 1 though 28 are incorporated herein as if set
forth here in full and in particular.
30. Plaintiff Lolo Brown Trust made a written request for a list
of the stockholders of First Financial. The Stockholder List Request
included a request for copies of any CEDE breakdowns or NOBO lists.
31. Defendant First Financial or its agents or representatives
are in possession of a NOBO list and have refused to produce pursuant to
the Stockholder List Request.
32. Defendant's failure to produce the NOBO list violates Md.
Code Ann., Corps. & Ass'ns Section 2-513.
WHEREFORE Plaintiff prays that the Court shall issue the following
relief:
1. A temporary restraining order and preliminary injunction
directing First Financial to deliver to Plaintiff by close of business
the day the Order is signed a copy of any and all NOBO lists, all CEDE
breakdowns, and all Respondent Bank Omnibus Proxy Lists, in the
possession of First Financial or its proxy solicitation agents or
representatives, together with such other information as is in the
possession of First Financial that identifies the names, addresses and
telephone numbers of the beneficial owners of shares of common stock in
First Financial; and
2. For such other additional and further relief as the Court deems
just, equitable and appropriate.
Respectfully submitted,
/s/ James H. Hulme
James H. Hulme, Bar No. 00875
Donald B. Mitchell, Jr., Bar No. 22944
Benjamin I. Fishman, Bar No. 13495
ARENT FOX KINTNER PLOTKIN & KAHN
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
T: (202) 857-6000
F: (202) 857-6395
Attorneys for Plaintiff Badlands Trust Company,
as trustee for the Lola Brown Trust No. 1B
Dated: July 22, 2002
TABLE OF CONTENTS
FACTUAL BACKGROUND 3
A. The Showdown at the Annual Meeting 3
B. The Key To Proxy Solicitation Is To Identify The Beneficial Owners
4
C. The Request for Stockholder Information
In the Possession of First Financial 7
D. First Financial's Dilatory Conduct 7
E. First Financial's Further Delay and the Creation of an Uneven
Playing Field 9
LEGAL ARGUMENT 10
A. The Lola Brown Trust Is Suffering and Will Suffer
Irreparable Harm Unless Emergency Relief Is Granted 11
B. First Financial Will Suffer No Harm
From the Requested Injunctive Relief 14
C. The Lola Brown Trust Is Likely To Succeed On
The Merits of Its Complaint Seeking the NOBO Lists -
Indeed, No Court Has Ever Ruled Against
A Shareholder Seeking NOBO Lists 14
1. Maryland's Stockholder Inspection Statute 15
2. The Nationwide Adoption of
Similar Stockholder Inspection Statutes 16
3. The Excuses Made by First Financial
For Not Producing the NOBO Lists are Strained at Best 19
a. Stockholder of Record Information Includes NOBO Lists 20
i. The Maryland Statute Is The Same As
The Delaware and Ohio Statutes 21
ii. Maryland's Statute Includes A Provision
Parallel to the SEC's NOBO List Provision 22
b. Maryland Has Not Narrowly Construed the
Stockholder Information to be Produced Under Section 2-513
23
c. Delaware Law Is Not Irrelevant -
Indeed, Maryland Courts Look to 25
D. The Public Weal Is Greatly Served
By Issuing the Requested Restraining Order 26
CONCLUSION 27
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
Southern Division
______________________________________
)
BADLANDS TRUST COMPANY, )
a South Dakota corporation, )
as Trustee for )
LOLA BROWN TRUST No. 1B, )
)
Plaintiff, )
)
v. ) Civil Action No. ___________
)
FIRST FINANCIAL FUND, INC., )
a Maryland corporation, )
)
Defendant, )
_______________________________________)
MEMORANDUM OF POINTS AND AUTHORITIES
IN SUPPORT OF PLAINTIFF'S MOTION
FOR A TEMPORARY RESTRAINING ORDER
With each passing day, the Lola Brown Trust No. 1B (the "Lola Brown
Trust"), the owner of 10.9% of First Financial Fund, Inc.'s ("First
Financial") stock, suffers irreparable harm, because time is the purest
ally of defendant First Financial. In a matter of weeks, at First
Financial's annual meeting on August 12, an election will be held for
two of the five director positions of this publicly traded company. The
Lola Brown Trust is part of a related group of trusts (the "Related
Trusts") that own nearly 40 percent of First Financial's stock. The
Lola Brown Trust wants to mount a proxy fight regarding the election of
directors at that annual meeting, but First Financial has illegally
withheld from the Lola Brown Trust the only effective means to do so -
the list of who the other beneficial share owners of First Financial
are.
The Lola Brown Trust made a request under Md. Code Ann, Corps. &
Ass'ns ("Md. Corps. Code") Section 2-513 for the information held by
First Financial regarding its record and beneficial stock owners so that
the Related Trusts could communicate their concerns with their fellow
shareholders in time for the upcoming vote. See Complaint
Paragraphs 17-20.1 After engaging in a series of evasive maneuvers to
avoid "officially" receiving this request, see Complaint Paragraphs 21-
22, First Financial only produced a portion of the relevant information
in its possession - withholding what are known as "NOBO lists" and "CEDE
breakdowns," the only lists that identify the actual beneficial owners
of the shares (instead of the brokerage houses where the shares are
deposited). The NOBO and CEDE lists are the absolutely key information
needed to contact the decision-making stock owners.
Every court in the United States that has ever addressed this
question has held that a corporation has an obligation to disclose NOBO
lists and CEDE breakdowns to a shareholder qualified to request
stockholder lists under state law. See generally Shamrock Assoc. v.
Texas American Energy Corp., 517 A.2d 658 (Del. Ch. 1986); Sadler v. NCR
Corp., 928 F.2d 48 (2d Cir. 1991). Disclosure of these lists is,
similarly, required by Md. Corps. Code Section 2-513, which in every
relevant particular is identical to the Delaware statute on this subject
addressed by Shamrock, supra.
If First Financial does not promptly turn over this information,
the Lola Brown Trust will be irreparably harmed because it will not be
able to contact the other stock owners and share its views in time for
the upcoming vote. Every day that goes by without the required
production of this contact data, the Related Trusts' ability to spread
its message in time grows less likely. This harm is not quantifiable
and First Financial's actions are not justifiable. For these reasons
this Court should grant the instant motion and require the immediate
production of the requested data.
FACTUAL BACKGROUND
A. The Showdown at the Annual Meeting
On August 12, 2002, defendant First Financial, a Maryland
corporation publicly traded on the New York Stock Exchange under the
symbol "FF," will hold its annual meeting. During the upcoming annual
meeting, two of these director positions will be filed in an election of
the First Financial shareholders.
On May 22, 2002, the record date established by First Financial for
the Annual Meeting, the Lola Brown Trust was the beneficial owner of
about 10.9% of First Financial's shares. Together with a number of
other related trusts created by the same family, the Related Trusts
control approximately 39.6% of all the outstanding shares of First
Financial. The Related Trusts share a common view on the issues to be
addressed at the upcoming Annual Meeting and have formed an association
known as Shareholders for Tomorrow ("SFT").
First Financial is a member of the Prudential Financial, Inc. Fund
Complex (the "Prudential Complex"), which effectively controls four of
the five current directors. The members of SFT strongly believe that
First Financial would be better managed by the election of new directors
to replace the two incumbent directors, who are related to and being
advanced by the Prudential Complex. To that end, SFT wants to solicit
proxies from other shareholders in order to elect two new directors at
the Annual Meeting who are unaffiliated with the Prudential Complex.
B. The Key To Proxy Solicitation Is To Identify The Beneficial
Owners
Before other beneficial owners of First Financial can be made aware
of SFT's concerns about the Prudential Complex's incumbent director
candidates, SFT must be able to determine the identity of those owners.
Fortunately, under Maryland law, registered owners of more than 5% of a
company's stock are entitled to request the company's list of
stockholder information. Md. Corps. Code Section 2-513.
In the modern American economy, however, by far the majority of
shares in corporations are held in brokerage and other remote accounts
in "street names," i.e., the name of the brokerage firm, instead of in
the name of the beneficial owner or actual investor. For example, a
person could purchase shares of First Financial stock through an account
he holds at, for example, Merrill Lynch.
Even Merrill Lynch, however, would not hold those shares in its own
name or register them on the stockholder books of First Financial in its
name. Instead, over 200 of the brokerage houses and financial
institutions, including Merrill Lynch, have formed an entity named
Depository Trust Company for the purpose of owning shares held in a
'street name' for the beneficial interest of customers of the brokerage
firms and financial institutions. Depository Trust Company, in turn,
has formed a partnership named "Cede & Co." and utilizes that name to
hold shares owned by Depository Trust Company.2
Thus, the shareholder records of a corporation (like First
Financial) will frequently show "Cede & Co." as the record owner of
many, many of its shares.3 Merely knowing that Cede & Co. is a large
stockholder, of course, does not in any way help either the corporation
or a competing proxy solicitor to identify the beneficial owners of that
stock.
It is possible for a depository company like Cede & Co. (there are
other such depository companies as well) to identify the brokerage firms
which have deposited shares with Cede and the number of shares owned by
each. Such a "breakdown" is generically called a "CEDE list" or a "CEDE
breakdown" (even when one of the other depository companies creates it).
With such a list, the corporation or a proxy solicitor can determine how
many of its proxy materials to supply to each brokerage house for
subsequent redistribution to the customers of the brokerage houses, the
beneficial owners.
In addition to CEDE lists, which by their nature are still one step
removed from the beneficial owner, there are lists known as "NOBO
lists." NOBO lists ("NOBO" stands for "non-objecting beneficial
owners") are lists of the actual beneficial owners of the shares who do
not object to their identity as stockholders being known. NOBO lists
are created by the brokerage houses pursuant to Securities and Exchange
Commission ("SEC") rules that permit the beneficial owner to determine,
i.e., to object or not object, whether that beneficial share holder
wishes his or her name to be disclosed to the corporation for purposes
of receiving corporate communications. The SEC requires brokers and
other record holders of stock in street name to compile a NOBO list at a
corporation's request.
Possession of a NOBO list allows a corporation (or a competing
proxy solicitor) to communicate directly with those beneficial owners of
shares who have indicated that they do not object to having their names
and addresses disclosed so that they might receive such communications
directly. While there is no requirement that a corporation obtain
information beyond the names of the stockholders of record (e.g., Cede &
Co.), many do - and First Financial has here.
C. The Request for Stockholder Information
In the Possession of First Financial
On June 5, 2002, the Brown Trust caused Cede & Co., in its capacity
as registered owner of more than 5% of the shares of First Financial, to
issue a request pursuant to Md. Corps. Code Section 2-513 (the
"Stockholder List Request") to First Financial for a list of First
Financial's stockholders. The Stockholder List Request specifically
requested all NOBO lists, all CEDE breakdowns, all omnibus proxy lists,
and other information in the possession of First Financial concerning
the number and identity of the actual beneficial owners of the common
stock of First Financial. Under the Maryland Inspection statute, a
response was due within 20 days, or by June 26, 2002.
D. First Financial's Dilatory Conduct
The Stockholder List Request was sent by Federal Express addressed
to Arthur J. Brown, Secretary of First Financial, at the Newark, New
Jersey, address listed in First Financial's most recent proxy statement
filed with the SEC as the address of First Financial for purposes of
sending shareholder proposals. First Financial, however, refused to
accept the Federal Express package because Mr. Brown was not physically
located at that address.4
On June 19, 2002, plaintiff's agent made repeated attempts to
deliver the Stockholder List Request by hand to the listed Newark
address. The first attempt was rejected because the package was not
addressed to a specific individual at First Financial. The package was
then addressed to R. Charles Miller, the Assistant Secretary; this
second attempt was rejected because Mr. Miller was not physically
present at the address. The package was then addressed to Thomas
Mooney, the president of First Financial; this third attempt was
rejected because Mr. Mooney was not physically present at the address.
Finally, when plaintiff's agent requested the name of some person who
was present in the First Financial offices, he was told that such
information was not permitted to be given out.
The Stockholder List Request was finally delivered to Mr. Brown at
his law office in Washington, D.C. on June 20, 2002, with a request that
the stockholder lists, including all NOBO and CEDE information, be
delivered within the 20 day deadline, by June 26, 2002. On July 8, 2002
- 33 days after the initial stockholder list demand was made and 19 days
after finally receiving the request at his Washington law office - Mr.
Brown, on letterhead bearing First Financial's Newark, New Jersey
address - the same address that refused initial delivery of the initial
request addressed to Mr. Brown - responded to the Stockholder List
Request (the "Response"). The Response stated that First Financial
would provide a stockholder list at the offices of The Corporation Trust
Incorporated in Baltimore, but only after a confidentiality agreement
was executed by representatives of the Brown Trust.
E. First Financial's Further Delay
and the Creation of an Uneven Playing Field
After the confidentiality agreements were signed by the Trust the
very next day, First Financial finally permitted access to its list of
stockholders of record. Of course, ninety-seven percent (97%) of the
entries on this list were the "street name" depository entities. See
Miller Decl. Paragraph 4, attached at Exhibit 5. Tellingly absent from
this production were any NOBO lists or CEDE breakdowns, which one would
have expected a corporation facing a tough proxy battle to have obtained
in order to solicit support for its position.
The plaintiff soon learned, however, that First Financial had, in
fact, acquired a NOBO list and had withheld it from the Lola Brown
Trust. On June 21, 2002, a magnetic tape containing this NOBO List was
sent to First Financial's agent for proxy solicitation, Georgeson
Shareholder Communications, Inc. ("Georgeson"). See Complaint Exhibit
4. On July 10, 2002, counsel for the Lola Brown Trust and SFT
complained to First Financial that it was improper to withhold this NOBO
list and any other stockholder identification in its possession. Two
days later, First Financial replied that it would not provide these
materials, which gave rise to the filing of the instant lawsuit.
LEGAL ARGUMENT
Each day that First Financial impermissibly withholds the NOBO list
increases the irreparable harm suffered by the Lola Brown Trust and SFT
- for it is one less day within which to solicit the beneficial owners
that are being solicited and called by First Financial's proxy
solicitors. The law is well-settled in this Circuit that where, as
here, the plaintiff is facing such irreparable harm a corrective
injunction should be issued under Fed. R. Civ. P. 65.
Under the law in this Circuit, a court must examine the four
traditional factors to determine whether to grant injunctive relief:
(1) the harm to the plaintiff if the injunction is not granted; (2) the
harm to the defendant if the injunction is granted; (3) the plaintiff's
chances of success on the merits; and (4) the public interest. See,
e.g., Intelus Corp. v. Barton, 7 F. Supp. 2d 635, 638-39 (D. Md. 1998).
The first two factors are the most important factors, and a court
must begin its analysis by balancing the likelihood of harm to the
plaintiff against the likelihood of harm to the defendant. See
Blackwelder Furniture Co. of Statesville v. Seilig Manuf. Co., 550 F.2d
189, 194-95 (4th Cir. 1977); Rum Creek Coal Sales, Inc. v. Caperton, 926
F.2d 353, 359 (4th Cir. 1991). If the balance tips in favor of the
plaintiff, then the plaintiff need not prove a "likelihood" of success
on the merits, but instead need only raise "serious, substantial and
difficult" questions that are "fair ground for litigation."
Blackwelder, at 195; Rum Creek, 926 F.2d at 359. Thus, a preliminary
injunction is appropriate where the likely harm to the plaintiff
outweighs the possible harm to the defendant, the plaintiff has raised
serious questions regarding the merits of the case, and granting an
injunction is in the public interest. Id. The case at bar easily
satisfies the standard for issuing the requested injunctive relief.
A. The Lola Brown Trust Is Suffering and Will Suffer
Irreparable Harm Unless Emergency Relief Is Granted
The Lola Brown Trust wants to solicit proxies from the beneficial
shareholders of First Financial in connection with the election of two
directors at the annual meeting of shareholders scheduled for August 12,
2002. In excess of 97% of the outstanding shares of First Financial,
however, are held in so-called 'street name' through brokerage
accounts. See Declaration of Stephen C. Miller, attached hereto as
Exhibit 5, at Paragraph 4. Without the ability to use the NOBO list in
the possession of First Financial, the Lola Brown Trust and SFT will be
unable directly to contact any of the actual stock holders of First
Financial whose stock is held in 'street name' in order to solicit their
votes. See id. at Paragraph 5.
First Financial has had possession and use of the NOBO list since
on or shortly after June 21, 2002. As a result, the incumbent directors
seeking reelection and their proxy solicitation agents have had
exclusive free reign to contact the shareholders on the NOBO list
directly, by way of telephone calls or direct mail. See id. at
Paragraph 6; see also Complaint Exhibit 4. The current and ongoing use
of the NOBO list by the incumbent directors and their agents, without
any competition from Plaintiff and SFT, may permit the incumbent
directors to solicit enough proxies from shareholders of the Fund to
retain their seats for another three years. See Miller Decl.
Paragraph 7.
Only 21 days remain until the annual meeting of shareholders of
First Financial Fund. Because all proxies must be returned by mail and
then tabulated, proxies must be received by Automatic Data Processing,
Inc. (the company which receives and processes all such proxies) no
later than the morning of August 9, 2002 in order to be included in the
vote count. See Miller Decl. Paragraph 9. Due to potential mail
delays, shareholders have no assurance that their proxies will be
received in time unless they mail their proxies to Automatic Data
Processing several days in advance of the Friday, August 9 cutoff - for
example, by Tuesday, August 6, a date only two weeks from tomorrow. As
a result, if the Lola Brown Trust and SFT are to have any chance to
effectively solicit proxies in advance of the Annual Meeting, immediate
action by the Court is required in order to provide Plaintiff with the
use of the NOBO list, the CEDE breakdown, and the omnibus proxy list to
solicit proxies for a period of less than two weeks before the practical
deadline in which shareholders must mail their proxies.
The Fourth Circuit has specifically found that insufficient time
constitutes irreparable harm justifying issuance of a preliminary
injunction in a stock issuance case arising in Maryland. In Dickson v.
Morrison, 1999 U.S. App. Lexis 17795 (4th Cir. 1999) (unpublished),
reported at 187 F.3d 629 (Table)5, this Court issued a preliminary
injunction in favor a shareholder when a Maryland corporation issued a
Notice of Preemptive Rights to minority shareholders but only gave them
two weeks to raise the $4.5 million necessary to exercise the rights.
The Fourth Circuit affirmed the grant of the preliminary injunction:
With regard to the factor of irreparable harm, the district court found
that [plaintiff] would suffer "great harm" if a preliminary injunction
did not issue because the deadline in the Notice did not give her
sufficient time to decide whether to purchase the stock or, had she made
the decision to purchase, to obtain the necessary documents to get the
financing to do so.
1999 U.S. Dist. Lexis 17795, at *21. This Court's finding of "immediate
and 'great' harm" was sufficient to support a finding for plaintiff on
this first element. See also Dan River, Inc. v. Icahn, 701 F.2d 278,
284 (4th Cir. 1983) (discussing importance of "valuable time" in context
of Virginia corporate control fight).
Moreover, the harm to Plaintiff is irreparable. A day that is
passed cannot be recovered. And there is no adequate remedy in damages
for the lost opportunity to solicit proxies.6 Such harm is "neither
remote nor speculative, but actual and imminent," Direx Israel, Ltd. v.
Breakthrough Medical Corp., 952 F.2d 802,812 (4th Cir. 1991), and
supports the issuance of a temporary restraining order.
B. First Financial Will Suffer No Harm
From the Requested Injunctive Relief
Compared to the grievous and irreparable harm the Lola Brown Trust
will suffer, First Financial will suffer absolutely no harm from the
grant of a temporary restraining order directing that the NOBO list be
provided to Plaintiff.
First Financial has no proprietary interest in the list. Indeed,
the very existence of a state statute requiring that shareholder
information be shared is indicative of a legislative finding that the
corporation is benefitted by unfettered, equal, corporate democracy.
See Dan River v. Icahn, supra, 701 F.2d at 287 ("there is little to be
feared, for instance, in permitting Icahn to solicit proxies").
C. The Lola Brown Trust Is Likely To Succeed On
The Merits of Its Complaint Seeking the NOBO Lists -
Indeed, No Court Has Ever Ruled Against
A Shareholder Seeking NOBO Lists
As the preceding sections make clear, absent the requested
injunctive relief, the Lola Brown Trust will be greatly and irreparably
harmed, while the harm to First Financial in complying with such an
injunctive order would be non-existent. Given that the balancing of
these two factors heavily weighs in favor of the plaintiff, the Lola
Brown Trust need only show that its Complaint raises "serious,
substantial and difficult" questions that are "fair ground for
litigation." Blackwelder. 550 F.2d at 195; Rum Creek, 926 F.3d at 359.
But the Lola Brown Trust's entitlement to the NOBO lists and other
stockholder information, however, is far more than just a colorable
claim. Indeed, it is highly likely that Plaintiff will prevail on the
merits. In fact, in every case ever decided under modern corporations
statutes where this question has come up, the courts have held that NOBO
lists must be produced.
1. Maryland's Stockholder Inspection Statute
Md. Corps. Code Section 2-513(a) (the "Inspection Statute")
provides, in relevant part, that "[o]ne or more persons who together are
and for at least six months have been stockholders of record or holders
of voting trust certificates of at least 5 percent of the outstanding
stock of any class of a corporation may ... present to any officer or
resident agent of the corporation a written request for a list of its
stockholders." Subsection (b) of the Inspection Statute makes it
mandatory for the corporation receiving such a request, within 20 days,
to prepare and make available "a list verified under oath by one of its
officers or its stock transfer agent or registrar which sets forth the
name and address of each stockholder and the number of shares of each
class which the stockholder holds."
In response to the Stockholder List Request made by the Lola Brown
Trust, First Financial produced the "street name" record stockholder
information but not any of the other more specific stockholder
information in its possession that was specifically requested by the
Lola Brown Trust. Thus, the "serious and substantial" question
presented in the Lola Brown Trust's action is whether the "list of
stockholders" required to be produced by the Inspection Statute includes
stockholder information in the possession of a corporation that
identifies beneficial owners, or only the limited and useless
information on record stockholders - i.e., how many shares are owned by
Cede & Co. While there is little case law addressing the Maryland
Inspection Statute, and none that specifically goes to the scope of the
stockholder information to be produced by a corporation, there is
fortunately, ample authority from which to determine the question.
2. The Nationwide Adoption of
Similar Stockholder Inspection Statutes
Maryland's Inspection Statute is based, in part, on the American
Bar Association's Model Business Corporations Act. Caspary v. Louisiana
Land and Exploration Co., 707 F.2d 785, 789 n.7 (4th Cir. 1993).
According to the commentary sections in the latest edition of the Model
Act, "every jurisdiction has a provision comparable to Section 16.01(c)
[of the Model Act] requiring a corporation to keep a shareholders' list
or share ledger" and they all also have "have statutes dealing with the
right of shareholders to inspect corporate records." American Bar Ass'n
MODEL BUSINESS CORPORATION ACT ANNOTATED, Sections 16.01 and .02, at 16-
9 and 16-20 (4th ed. 1999). This identity of source explains why most
States' statutes are similar to Maryland's.
Arising from the pool of similarly phrased stockholder inspection
statutes, there are a number of decisions that broadly interpret what is
covered by the statutes' requirement that the corporation must produce
stockholder lists to qualified shareholders who request them. See,
e.g., R.B. Associates v. The Gillette Co., 1988 Del. Ch. Lexis 40, at
*6, 1988 WL 27731, at *3 (Del. Ch. Mar. 22, 1988) (citing cases). The
law is uniform that NOBO lists in the possession of the corporation must
be produced to requesting shareholders.
The general rule is that a corporation is required to furnish a NOBO
list that it has obtained to a shareholder, because the shareholder
should be allowed the same avenue of communication with fellow
shareholders that the corporation enjoys.
Nu Med Health Care, Inc. v. Hospital Staffing Servs., Inc., 664 So. 2d
353, 355 (Fla. App. 1995) (emphasis added).
Indeed, every case that has addressed this issue has reached the
same conclusion. See, e.g., Nu Med Health Care, supra; Shamrock
Associates v. Texas American Energy Corp., 517 A.2d 658, 661 (Del. Ch.
1986) ("Where, as here, the corporation has obtained a NOBO list and is
or will be using it to solicit its stockholders in connection with the
annual meeting, plaintiff should be allowed the same channel of
communication."); Parsons v. Jefferson-Pilot Corp., 426 S.E.2d 685, 690
(N.C. 1993) ("shareholders [must] have access to NOBO lists or other
information which the corporation itself has in its possession.");
Luxottica Group S.P.A. v. United States Shoe Corp., 919 F. Supp. 1091,
1093 (S.D. Ohio 1995) (Ohio law: "If U.S. Shoe possessed the NOBO list,
Avant-Garde would have the right to examine it"); Cenergy Corp. v.
Bryson Oil & Gas PLC, 662 F. Supp. 1144, 1148 (D. Nev. 1987) ("Cenergy
must, however, allow Bryson access to any and all shareholder
information, such as NOBO lists and Cede & Co. breakdowns, which it has
in its possession at this time for the purpose of contacting its
shareholders"); Sadler v. NCR Corp., 928 F.2d 48, 52-53 (2nd Cir. 1991)
(New York law: going one step further and requiring corporation which
did not have a NOBO list to get one and produce it in response to the
shareholder inspection request).7
The Florida court in Nu Med summarized the basic tenet underlying
these decisions, observing that "[t]he rationale expressed by the
majority of these courts is that the goal of fairness and equality is
furthered when the shareholder has the same access to contact
shareholders as the corporation has." 664 So. 2d at 355. The Delaware
Chancery Court's Shamrock decision, the leading case in the United
States and the first to decide the question, is particularly instructive
for purposes of the instant motion.
The plaintiff in Shamrock, a record stockholder of the defendant
Texas American, issued an inspection request for stockholder
information. Exactly like the instant case, the purpose of Shamrock's
request was to solicit proxies in opposition to a slate of directors
nominated by the corporation for election at the upcoming annual
meeting. Texas American refused to provide the NOBO lists in its
possession in response to Shamrock's request. The Delaware Chancery
Court ordered the production of the NOBO list to the plaintiff because
"a stockholder is entitled to the same lists and data relating to
stockholders as is available to the corporation.... To hold otherwise
would be to give the corporation an unfair advantage in a proxy
solicitation battle." Shamrock, 517 A.2d at 661 (emphasis added).
Thus, in the case at bar, the Lola Brown Trust is likewise entitled to
all of the stockholder information in the possession of First Financial.
3. The Excuses Made by First Financial
For Not Producing the NOBO Lists are Strained at Best
The Lola Brown Trust, of course, objected in writing to First
Financial's refusal to produce the requested NOBO and CEDE list
shareholder contact information.8 In response, First Financial made
three evasive and unconvincing excuses.9 First, it claimed that because
Md. Corps. Code Section 1-101(t) defines a "stockholder" as a "record
holder of shares of stock in a corporation," it was only required, under
the Inspection Statute, Md. Corps. Code Section 2-513(b)(2), to produce
a list of record holders - i.e., the useless list showing "Cede & Co."
as owning 95% of First Financial. Next, without citation, it claimed
that Maryland courts "caution against expanding the obligation to
provide information beyond what is disclosed in the statute." Id.
Finally, it asserted, without citation or support, that the Delaware
line of cases that includes Shamrock and RB, supra, was irrelevant
because the underlying Delaware statute provides "broader access to a
corporation's documents." Id. These arguments are simply wrong, and
fail under close scrutiny.
a. Stockholder of Record Information Includes NOBO Lists
The fact that the Maryland Code defines a "shareholder" to mean a
holder of record is far from dispositive of the question at bar.10
Whether Maryland's Inspection Statute speaks in terms of "shareholders"
or "shareholders of record" is an immaterial distinction. While
Maryland has yet to interpret its version of the shareholder Inspection
Statute regarding the production of NOBO list and other beneficial owner
information, the holding from every other court that has addressed the
issue is that lists of shareholders, however the term "shareholder" is
defined in that State, include NOBO lists in the possession of the
corporation.
i. The Maryland Statute Is The
Same As The Delaware and Ohio Statutes
Indeed, both the Delaware and Ohio statutes at issue in Luxottica,
Shamrock and R.B. Associates, supra, employ the same holder of record
definition as is used in the Maryland statute. Ohio Rev. Code Ann.
Section 1701.01, held in Luxottica to require the production of NOBO
lists and other beneficial owner information, defines shareholder - just
like Maryland - as "a person whose name appears on the books of the
corporation as the owner of shares of such corporation." Similarly, the
Delaware shareholder inspection statute, held in Shamrock and RB to
require the production of NOBO lists in the possession of the
corporation, provides directly in the inspection statute that "[a]s used
in this section, 'stockholder' means a stockholder of record." 8 Del.
Code Section 220. Both the Ohio and Delaware statutes, then, define
"shareholder" the same way as the Maryland Inspection Statute and, in
both states, the courts have held that the shareholder lists to be
produced for inspection include NOBO lists.
Thus, First Financial's argument that the Maryland Code's
definition of stockholder to mean a "holder of record" eliminates the
duty of a corporation to produce useful beneficial shareholder contact
information is not well founded. Nor should such an argument be
accepted as consistent with the purposes of the Inspection Statute,
because such a reading would eviscerate the purpose of inspection
statutes like Section 2-513 to create a level playing field between
major (5 percent and greater) stockholders and the corporation in proxy
contests.
ii. Maryland's Statute Includes A Provision
Parallel to the SEC's NOBO List Provision
Indeed, the very next section of Maryland's corporation law, Md.
Corps. Code Section 2-514, indicates that the Maryland Legislature
understood that beneficial owner information was the key information.
The Securities and Exchange Commission's NOBO list rule was not
promulgated and effective until January 1, 1986. See Shamrock, 517 A.2d
at 660. Before that time the corporations themselves often had a
difficult time knowing who the beneficial owners were and how to
communicate with them.
The Maryland Legislature addressed this problem by adding Md.
Corps. Code Section 2-514 in 1976. That section created a procedure by
which the corporation itself could request the brokerage houses and
other registered owners to identify who the actual beneficial owners of
the shares were. And if the corporation chose to make such a request,
"the person specified in the [brokerage house's] certification [as the
beneficial owner] is ... the holder of record of the specified stock in
place of the [brokerage house] who makes the certification."
The Section 2-514 provision created and effectively anticipated the
same NOBO process as later adopted by the SEC. Under Md. Corps. Code
Section 2-514, the corporation could request the brokerage houses to
identify the beneficial owners. And if the corporation did so, the
names of those beneficial owners were substituted for the brokerage
houses on the shareholder lists as the actual owners and would be
disclosed under Section 2-513 even under First Financial's view that
only record owners need be identified. The provision became a dead
letter with the SEC process, which allowed a corporation to ask the
brokerage houses to generate list of beneficial owners (if those owners
had not previously objected to being listed). To suggest, 25 years
after the Maryland Legislature passed Md. Corps. Code Section 2-514
anticipating the NOBO list process by ten years, that Maryland is not
interested in disclosure of actual beneficial owners is to ignore
reality.
b. Maryland Has Not Narrowly Construed the
Stockholder Information to be Produced Under Section 2-
513
First Financial's second argument regarding the interpretation of
Section 2-513 - that the Maryland courts have held that the corporations
statute should be narrowly construed - is both unpersuasive and
misleading. Contrary to First Financial's implication, no Maryland
court has ever limited the information to be disclosed in response to a
proper shareholder request. Several courts have held that if a
shareholder did not have the requisite 5 percent of a corporation's
stock, then it was not entitled to make an inspection request. See,
e.g., Rosengarten v. Buckley, 565 F. Supp. 193, 200 (D. Md. 1982). But
such a requirement is evident on the face of the statute, and can hardly
be viewed as a "narrow construction" of the statute. In fact, these
decisions do no more than credit the fact that Section 2-513 - providing
broad information to 5% shareholders - needs to be read in conjunction
with Section 2-512 - providing little information to less than 5%
shareholders - which together create a "comprehensive statutory scheme."
Caspary v. Louisiana Land and Exploration Co., 560 F. Supp. 855, 857 (D.
Md. 1983), aff'd, 707 F.2d 785 (4th Cir. 1993).
Indeed, the same "narrow reading" or "narrow construction" argument
made by First Financial was raised and rejected by the Nevada federal
court in Cenergy when it ordered production of NOBO lists. In Cenergy,
the defendant corporation was fighting the inclusion of NOBO lists in
the scope of the stockholder information it had to produce in response
to a shareholder inspection request. The Cenergy court held that:
That the supreme court has limited the class of shareholders entitled to
see the stock ledger to only record owners [ or in Maryland, to 5%
record holders] does not mean that the information which those
shareholders will receive is also necessarily limited. The factors to
be taken into consideration are quite different in the two questions.
As regards access to the stock ledger, a court might reasonably conclude
that only record shareholders ought to be allowed access, so as to
simplify corporate record-keeping, and prevent the list from being
distributed wrongly. At the same time, however, a court could also
require that the corporation turn over all information it uses to
contact shareholders along with the stock ledger, in order to facilitate
corporate democracy. A strict reading of the access question does not
therefore necessarily imply a strict reading on the information
question.
662 F. Supp. at 1148.
Just as in the Cenergy case, the limitation by implication argument
simply cannot overcome the broad purpose of the shareholder inspection
request statute at bar.
c. Delaware Law Is Not Irrelevant -
Indeed, Maryland Courts Look to Delaware
First Financial asserts that Delaware law is irrelevant because it
knows that its application would be deadly to its position. In fact,
Delaware law is exactly what this court should look to in this instance.
First Financial's assertion that the two statutes are materially
different is belied by simply reading them side-by-side. Both define
stockholders to be "holders of record." Both permit a qualified
stockholder to request copies or inspection of the "list of
stockholders." Maryland's law further permits requests for a
corporation's "books of account and its stock ledger," Md. Corps. Code
Section 2-513(a)(1), while Delaware's law further permits requests for
"the corporation's stock ledger" and its "other books and records." 8
Del. Code Section 220. The only real difference between the two laws is
that the Delaware version has been construed by the Delaware Chancery
Court with respect to the issue of NOBO lists and the Maryland version
has not. Indeed, this is all the more reason to review and apply the
relevant Delaware authority to this case.
It is well-settled that with respect to "issues on which Maryland
courts have not spoken," resort is made to Delaware authority in the
area of corporate law. Goldstein v. Lincoln Nat'l Convertible Sec.
Fund, Inc., 140 F. Supp. 2d 424, 439, n.12 (E.D. Pa. 2001) (citations
omitted) (Pennsylvania court noting and agreeing with the Maryland Court
of Appeals' policy of following the corporate lead of Delaware where its
own law is silent).11 Indeed, Maryland and Pennsylvania have much
company in this approach. See, e.g., In re Jackpot Sec. Litigation,
1991 U.S. Dist. Lexis 16287 at * 5 (D. Nev. 1991) ("In the past, when no
clear state case law was available on a corporate matter, this court has
opted to follow the rulings of the Delaware courts, the leading
authorities in the nation on matters of corporate law").
Thus, this Court should follow Delaware authority on the issue of
the scope of the information to be produced in response to a stockholder
inspection request. The statutes are virtually identical and they serve
the same purpose. Applying the teachings of those cases - Shamrock and
R.B. Associates - will lead to the conclusion that NOBO lists in the
possession of First Financial are "lists of stockholders" that must be
produced to the Brown Trust in response to its inspection request.
D. The Public Weal Is Greatly Served
By Issuing the Requested Restraining Order
The "public interest" prong of the Fourth Circuit's hardship
balancing test is typically the least considered of the four factors.
See Rum Creek Coal Sales, supra, 926 F.2d at 366 ("the public interest
factor does not appear always to be considered at length in preliminary
injunction analyses"); Dickson v. Morrison, 1999 U.S. App. Lexis 17795,
at *21 (quoting Chief Judge Motz as saying "this is usually a throw-in
factor"). But here, it weighs heavily in favor the Lola Brown Trust.
The United States Congress has determined that there is an over-
riding public interest in effective and informed corporate democracy.
As the D.C. Circuit has noted, Congress's very purpose in the creation
of the proxy solicitation process under Section 14 of the Securities Act
was "to give true vitality to the concept of corporate democracy."
Roosevelt v. E.I. du Pont de Nemours & Co., 958 F.2d 416, 421 (D.C. Cir.
1992) (citations omitted).
The public interest here would be furthered by leveling the playing
field. It is to encourage and ensure a level playing field that the
courts have continually held that when the corporation has a NOBO list
or CEDE breakdown, it must provide it to shareholders who request lists
of stockholders pursuant to state law.
CONCLUSION
Every court that has ever addressed this question has held that a
corporation that possessed a NOBO list must produce it when a qualified
shareholder requests it under a State stockholder list inspection
statute. The courts in Delaware, which Maryland frequently follows on
these questions, have done so. See, e.g., Shamrock. Because the
Maryland and Delaware statutes are virtually identical on this question,
this Court should issue an order requiring First Financial to produce to
the Lola Brown Trust immediately.
Respectfully submitted,
/s/ James H. Hulme
James H. Hulme, Bar No. 00875
Donald B. Mitchell, Jr., Bar No. 22944
Benjamin I. Fishman, Bar No. 13495
ARENT FOX KINTNER PLOTKIN & KAHN
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
T: (202) 857-6000
F: (202) 857-6395
Attorneys for Plaintiff Badlands Trust Company,
as trustee for the Lola Brown Trust No. 1B
EXHIBIT 11
STEWART R. HOREJSI
200 South Santa Fe
Salina , KS 67401
July 25, 2002
To the Board of Directors of First Financial Fund:
As you should be aware by now, the Federal Court in Maryland
ordered the Fund to turn over to Shareholders for Tomorrow ("SFT") the
"NOBO" list and certain other shareholder materials that the Fund
acquired in connection with the upcoming annual shareholders meeting.
As owners of the Fund, SFT is very disappointed with the
conduct of the First Financial board in forcing us to bring this
lawsuit. Every court in every state that considered this issue ruled in
favor of the shareholder and required delivery of the NOBO list. There
was, quite simply, no reasonable basis upon which the Fund could justify
refusing to deliver the list. The Fund's lawyers either knew or should
have known this far in advance. However, instead of acting in a manner
consistent with fundamental fairness, the Fund's Board forced both sides
to spend money on an unnecessary lawsuit, reminiscent of a scorched
Earth defense.
I am sending to each of you for your review, with the hard-
copy of this letter, copies of the briefs filed by both sides in the
case. I urge you to read them. The brief filed by the Fund was without
substance and completely unconvincing. The court certainly thought this
was the case and summarily issued a decision in favor of SFT. This
suggests one of two things: First, that your counsel is acting
unilaterally, without the advice and consent of the Board and in a
manner that is certainly not in the best interest of the owners. Or
second, and more worrisome, that the Board fully understands the legal
issues and has endorsed the actions of its counsel and the Fund's legal
posturing. Nevertheless, I hope you will take the time to read the
briefs. Then, I think you will understand the concern of the Fund's
owners over the Board's conduct in this case.
As Board members you have a fiduciary obligation to
understand the nature of the legal issues involved, and your conduct in
forcing this lawsuit makes me question whether, before you authorized
action by your counsel, you exercised due care in discharging your
duties to the Fund's shareholders and whether you properly analyzed the
underlying legal issues and the question of whether it was appropriate
to rely on the advice of the Fund's counsel.
I also want to raise a separate issue. We believe that the
Fund's bylaw, which requires a 50% vote (rather than a plurality vote)
to elect directors, is fundamentally unfair and hereby request that the
Board amend the bylaws to eliminate it. This is no more than a
provision that entrenches incumbent directors and tilts the playing
field solely in favor of the incumbents. It is an attempt to deny
shareholders the ability to exercise their rights to corporate
democracy. We believe the current bylaw provision is an inappropriate
interpretation of what is permissible under Maryland law, that it is
flatly inconsistent with the legislative history and could result in the
bizarre outcome where a nominee who receives a clear and decisive
majority of voting shares effectively loses the election. In sum, there
can be no justification for this provision, just as there was no
justification for the Board's effort to deny SFT the use of the NOBO
list. We request that the Board immediately remove the provision from
the bylaws in order to avoid the risk of additional and unnecessary
litigation. Please provide a written response as to your intentions
regarding this request no later than Friday, August 2, 2002.
Sincerely,
/s/ Stewart R. Horejsi
Stewart R. Horejsi
SRH/sjk
EXHIBIT 12
STEWART R. HOREJSI
200 South Santa Fe
Salina, KS 67401
August 2, 2002
To the Board of Directors of First Financial Fund, Inc.:
I have previously written you in connection with the Fund's
bylaw provision which requires a 50% vote of shareholders to elect
directors, and requested that the Board of Directors take action to
remove the provision. I requested that you respond by August 2, but
have never received the courtesy of a response. I am reiterating our
request that the board remove the 50% bylaw provision.
The bylaw has a number of defects. First, it permits
incumbent directors to continue in office on a perpetual basis even
after losing an election. Indeed, the bylaw would permit an incumbent
director to continue in office even if that director did not receive a
single vote at the annual shareholders meeting and was opposed by every
single shareholder who voted. An opposing candidate could receive 11.8
million votes from shareholders, and the Fund would simply ignore those
shareholders and retain the incumbent director.
I have heard the bylaw defended on the grounds that it has
been in the Fund's bylaws for a number of years. Frankly I think that
argument entirely misses the point. Errors of omission are equally
offensive as errors of commission. The Board of Directors is fully
empowered to amend the Fund's bylaws and failure to take action simply
because the Fund's lawyers - many years ago - took it upon themselves to
include this bylaw is inexcusable. The only thing that is suggested by
the fact that this provision has been in the Fund's bylaws for many
years is that the Fund may not have complied with SEC guidelines
requiring corporate provisions with an anti-takeover effect be
identified as such to shareholders.
You should also focus on the fact that the Fund's bylaws
prohibit the Fund's shareholders from amending the 50% bylaw without an
80% vote of all outstanding shareholders. You will recall that the Fund
had difficulty achieving a 50% vote a few years ago and had to adjourn
the shareholders' meeting in order to round up a few more votes.
Needless to say, a requirement for an 80% vote is, quite simply,
impossible to achieve and is intended to be impossible by the drafters
of the provision. This restriction on the ability to amend the bylaw
simply confirms that the Fund's bylaws are being used to build a
fortress around the incumbent directors and officers.
Interestingly, I have not heard the bylaw defended on
grounds of fairness and no one seems to be arguing that the bylaw
ensures a fair election process. In meeting its fiduciary
responsibility to shareholders, the board should not be distracted from
this fundamental issue. The board cannot avoid its obligation to set
fair election rules by hiding behind the fact that the bylaws were
around before this board came into office.
We are convinced that the bylaw, if it must be tested in
court, will be overthrown. The Fund is using the authority granted by
Maryland's statute to accomplish a result that is precisely a result the
Maryland legislature sought to avoid when it passed the current version
of the statute. Indeed, the legislative history describes such results
as 'bizarre.' Their words, not mine, but I think the characterization
is the right one. If no director nominee receives 50% of the outstanding
vote at the Fund's annual meeting, the Fund's bylaw will create
questions concerning the legitimacy of the Fund's board under both
Maryland law and federal securities laws, and these questions will have
to be resolved in court, casting a cloud over the Fund.
Already the incumbent directors have a legacy at the Fund
that is tarnished by unnecessary costs of a proxy contest and more
unnecessary costs for a court case to defend a losing position on the
NOBO list. In the end I am puzzled that a director of the Fund would be
willing to further tarnish his legacy as a Fund director by making the
Fund pay for litigation so the director can cling to office even after
losing an election.
So far the only result of the board's pathway over the last
few months has been to enrich lawyers at the expense of the Fund's
shareholders. If the board continues to take this approach, I can
promise you that the Fund's shareholders will hold the board personally
responsible for the results of their action.
I look forward to your reply at your earliest convenience.
Sincerely,
/s/ Stewart R. Horejsi
Stewart R. Horejsi
SRH/sjk
EXHIBIT 13
BADLANDS TRUST COMPANY
614 Broadway
PO Box 801
Yankton, South Dakota 57078
Telephone: (605) 665-9401
Facsimile: (605) 665-9418
August 20, 2002
VIA FACSIMILE (716-263-3659), EMAIL AND
CERTIFIED MAIL, RETURN RECEIPT REQUESTED
Mr. Thomas Mooney, Director
First Financial Fund, Inc.
C/o Greater Rochester Chamber of Commerce
55 St. Paul Street
Rochester, NY 14604
Dear Mr. Mooney:
As you know, Badlands Trust Company serves as the trustee of several of
the Horejsi Trusts that are shareholders of First Financial Fund, Inc.
("First Financial"). I am writing to you in connection with the August
12, 2002 shareholders' meeting and the vote for the election of two
directors of First Financial.
We just received the Final Report of the Inspector of Election. It
establishes that Dr. Jacobson and Mr. Looney - the nominees proposed by
the Horejsi Trusts - received a significant majority of the shares voted
in the recent election for First Financial. Indeed, the Trusts'
candidates polled almost 60% of the votes cast. As our candidates
received a majority of the votes in the election, our candidates have
been legitimately elected and thus are now duly elected board members of
First Financial.
To the extent that you are relying on the Fund's 50%-of-shareholders
bylaw to allege that there has been no election of directors this year
and, therefore, the incumbents continue to serve by virtue of holding
over from their expired terms, please be advised that the 50%-of-
shareholders bylaw is an illegal provision. It is void ab initio.
As Mr. Looney and Dr. Jacobson - together with incumbent board member
Richard I. Barr - now constitute a majority of the directors of the
Fund, they have indicated that they would like to hold the next board of
directors meeting - currently scheduled for September 4, 2002 - in
Phoenix, Arizona. Please let me know, no later than the end of the day
on Wednesday, August 21, 2002, whether you, as chairman of the Board,
will recognize Mr. Looney and Dr. Jacobson as the Fund's new directors
for that meeting and will honor their request to hold the meeting in
Phoenix. If we do not receive a response to this letter by such time,
we will take that to mean that you have rejected the position taken by
the Trusts and will proceed accordingly.
I look forward to your response.
Sincerely yours,
/s/ Stephen C. Miller
Stephen C. Miller, President
SCM/sjk
EXHIBIT 14
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
Northern Division
______________________________________
)
BADLANDS TRUST COMPANY, )
a South Dakota corporation, )
as Trustee for )
)
LOLA BROWN TRUST No. 1B, )
)
Plaintiff, )
)
v. ) Civil Action No. JFM 02-CV-2423
)
FIRST FINANCIAL FUND, INC., )
a Maryland corporation, )
)
Defendant, )
______________________________________)
FIRST AMENDED COMPLAINT1
Nature of this Action
1. This is an action for injunctive relief seeking inspection
of corporate shareholder records arising under the corporations law of
the State of Maryland, and in particular under Md. Corps. Code Section
2-512, et seq. The question presented is whether a Maryland corporation
must produce, upon request by a shareholder of 5% or more of its shares,
so-called "NOBO" lists and "CEDE" breakdowns as part of its obligation
to provide lists of stockholders pursuant to Md. Corps. Code Section 2-
513.
. As amended, this action also seeks a declaratory judgment and
injunctive relief. First, Plaintiff seeks a declaration that Section
III.3 of the By-Laws of First Financial Fund, Inc., which purports to
require a majority of all shares outstanding and eligible to vote in
order to elect a director, instead of a majority of those present and
voting, is not authorized by and is inconsistent with the Maryland
Corporations Code. Second, Plaintiff seeks a declaration that the two
directors nominated by Plaintiff, who received 58.8% of the votes cast
at the Shareholders' Meeting on August 12, 2002, are duly elected under
the provisions of Md. Corps. Code Sections 2-506 and 2-404(d). Third,
Plaintiff seeks a preliminary injunction, while or if the declaratory
judgment sought above is still pending, barring Defendant from holding
a scheduled meeting of the Board of Directors on September 4, at which
meeting Defendant would recognize the votes of the two incumbents who
were not elected at the Shareholders' Meeting of August 12, 2002.
The Parties
2. The Plaintiff in this action is Badlands Trust Company
("Badlands"), as trustee for the Lola Brown Trust No. 1B ("Lola Brown
Trust"). Badlands is a South Dakota corporation with its principal
place in business in South Dakota. The Lola Brown Trust is a trust
organized pursuant to South Dakota law by Ms. Lola Brown for the benefit
of her issue. The business address of both Badlands and the Lola Brown
Trust is 614 Broadway, Yankton, South Dakota. All of the beneficiaries
of the Lola Brown Trust are residents of states other than Maryland or
New Jersey. The Lola Brown Trust is the beneficial owner of more than
five percent of the outstanding and issued common stock of the
defendant.
3. The defendant in this action is First Financial Fund, Inc.
("First Financial" or "FF"). First Financial is a Maryland corporation,
which has its primary place of business in Newark, New Jersey. First
Financial is a closed end mutual fund that is part of the Prudential
Financial, Inc. Fund Complex. First Financial is a public company
traded on the New York Stock Exchange under the symbol "FF."
Jurisdiction
4. Subject matter jurisdiction exists in this Court under 28
U.S.C. Section 1332 because the matter in controversy exceeds the sum or
value of $75,000, exclusive of interest and costs and is between
citizens of different states.
5. Personal jurisdiction over the defendant is authorized by,
inter alia, Md. Code Ann., Corps. & Ass'ns Section 1-102 (1999), and Md.
Code Ann., Courts & Jud. Procs. Section 6-102(a) (1998), because the
defendant is a person organized under the laws of the State of Maryland.
"NOBO Lists," "CEDE Breakdowns,"
and Other Basics of Stockholder Information
6. Md. Code Ann., Corps. & Ass'ns Section 2-513 (1999)
provides that a person who holds 5% or more of a Maryland corporation's
stock may acquire "a list of its stockholders."
7. In the modern American economy, by far the majority of
shares in corporations are held in brokerage and other remote accounts
in "street names," i.e., the name of the brokerage firm, instead of in
the name of the beneficial owner or actual investor. For example, a
person could purchase shares of First Financial stock through an account
he holds at, for example, Merrill Lynch.
8. Even Merrill Lynch, however, would not hold those shares
in its own name. Instead, over 200 of the brokerage houses and
financial institutions, including Merrill Lynch, have formed an entity
named Depository Trust Company for the purpose of owning shares held in
street name for the beneficial interest of customers of the brokerage
firms and financial institutions. Depository Trust Company, in turn,
has formed a partnership named "Cede & Co." and utilizes that name to
hold shares owned by Depository Trust Company.
9. Thus, the shareholder records of a corporation will
frequently show "Cede & Co." as the record owner of many, many of its
shares. A stockholder who received a corporation's list of record
stockholders pursuant to Md. Code Ann., Corps. & Ass'ns Section 2-513,
therefore, would learn that Cede & Co. owned many shares, and would not
be able to communicate directly with the beneficial owners of the
shares. (In this case, for example, Cede & Co. owns 22,584,654 shares
of FF, or about 95% of all the shares of FF outstanding.)
10. It is possible for a depository company like Cede & Co.
(there are other such depository companies as well) to identify the
brokerage firms that own shares and the number of shares owned by each.
Such a "breakdown" is generically called a "CEDE list" or a "CEDE
breakdown" (even when one of the other depository companies creates it).
With such a list, the corporation or a competing proxy solicitor can
determine how many of its proxy materials to supply to each brokerage
house for subsequent redistribution to the customers of the brokerage
houses, the beneficial owners.
11. In addition to CEDE lists, which by their nature are
still one step removed from the beneficial owner, there are lists known
as "NOBO lists." NOBO lists ("NOBO" stands for "non-objecting
beneficial owners") are lists of the actual beneficial owners of the
shares. NOBO lists are created by the brokerage houses pursuant to
Securities and Exchange Commission ("SEC") rules that permit the
beneficial owner to determine, i.e., to object or not object, whether
that beneficial share holder wishes his or her name to be disclosed to
the corporation for purposes of receiving corporate communications. The
SEC requires brokers and other record holders of stock in street name to
compile a NOBO list at a corporation's request.
12. Possession of a NOBO list allows direct communication
with those beneficial owners of shares who have indicated that they do
not object to having their names and addresses disclosed so that they
might receive such communications directly.
13. Also relevant to the proxy process are Respondent Bank
Omnibus Proxies and Participants Lists. While complex, the list is
similar to a CEDE breakdown, and essentially identifies a respondent
bank at a level below the brokerage houses that can cause a proxy card
to be issued to the beneficial owner.
Facts Common To All Counts
14. Lola Brown Trust No. 1B was the beneficial owner of
2,568,200 shares of First Financial on May 22, 2002, the record date
established by First Financial for those shares eligible to vote at
First Financial's annual meeting, presently scheduled for August 12,
2002.
15. There were approximately 23,622,382 shares of FF
outstanding as of the record date. Thus, Plaintiff Lola Brown Trust is
the beneficial owner of approximately 10.87% of the outstanding shares
of First Financial.
16. A number of other trusts created by members of Lola
Brown's family also are beneficial owners of shares of First Financial.
Together, these family-related trusts (the "Related Trusts") own
approximately 39.6% of all the outstanding shares of First Financial.
17. The Related Trusts have formed an unincorporated
association known as Shareholders for Tomorrow. The members of
Shareholders for Tomorrow, who control approximately 39.6% of the
outstanding shares of FF, believe that FF would be better managed by
election of two new directors to replace two incumbent directors related
to the Prudential Fund Complex.
18. To that end, Shareholders for Tomorrow seeks to solicit
proxies from other shareholders in order to elect two new directors at
the Annual Meeting on August 12, 2002, to replace the two incumbent
directors related to the Prudential Fund Complex who have been nominated
to be reelected at that Meeting.
Facts Relevant to Count I
19. Obtaining NOBO Lists and CEDE breakdowns in order to
identify the beneficial owners of the shares of First Financial is
crucial in order for the Lola Brown Trust and other members of
Shareholders for Tomorrow to succeed in soliciting proxies for the
Annual Meeting.
20. On or about June 5, 2002, Cede & Co., in its capacity as
registered owner of more than 5% of the shares of First Financial,
requested on behalf of the Lola Brown Trust, pursuant to Md. Code Ann.,
Corps. & Ass'ns Section 2-513, a list of First Financial's stockholders
(the "Stockholder List Request"). The Stockholder List Request
specifically requested all NOBO lists, all CEDE breakdowns, all
respondent bank omnibus proxy lists, and all information in the
possession of First Financial concerning the number and identity of the
actual beneficial owners of the common stock of FF. Under Maryland law,
a response was due within 20 days, or by June 26, 2002. See Exhibit 1.
21. The Stockholder List Request was sent by Federal Express
addressed to Arthur J. Brown, First Financial's Secretary, at the
address listed in First Financial's most recent proxy statement filed
with the SEC as the address of FF for purposes of sending shareholder
proposals. First Financial refused to accept the Federal Express
package because Mr. Brown was not physically located at that address.
22. On June 19, 2002, Plaintiff's agent made repeated
attempts to redeliver the Stockholder List Request by hand to the Newark
address. The first attempt was rejected because the package was not
addressed to a specific individual at First Financial. The package was
then addressed to R. Charles Miller, the Assistant Secretary; this
second attempt was rejected because Mr. Miller was not physically
present at the address. The package was then addressed to Thomas
Mooney, the president of FF; this third attempt was rejected because Mr.
Mooney was not physically present at the address. Finally, when the
agent requested the name of some person who was present in the building,
he was told that such information was not permitted to be given out.
23. The Stockholder List Request was finally delivered to Mr.
Brown at his law office in Washington, D.C. on June 20, 2002, with a
request that the stockholder lists, including all NOBO and CEDE
information, be delivered within the 20 day deadline, by June 26, 2002.
See Exhibit 2.
24. On July 8, 2002 - 33 days after the initial stockholder
list demand was made and 19 days after finally receiving the request at
his Washington law office - Mr. Brown, on letterhead bearing First
Financial's name and Newark, New Jersey address, responded to the
Stockholder List Request (the "Response"). The Response stated that
First Financial would provide a stockholder list at the offices of The
Corporation Trust Incorporated in Baltimore, but only after a
confidentiality agreement was executed by representatives of the Lola
Brown Trust. See Exhibit 3. Pursuant to this Response, First Financial
provided the Lola Brown Trust a list of its record holders, which list
includes the names of holders of only 675,535 shares, other than those
shares held in street name.
25. However, First Financial refused to produce a NOBO list
of its beneficial owners, even though such list was in existence, was in
the possession or control of First Financial, and was being used by
First Financial in the proxy contest.
26. On June 21, 2002, a magnetic tape containing the NOBO
List for First Financial was sent to First Financial's agent for proxy
solicitation, Georgeson Shareholder Communications, Inc. ("Georgeson").
See Exhibit 4.
27. First Financial and/or its agent Georgeson possesses a
NOBO list and, despite protest from representatives of the Lola Brown
Trust, has refused to provide it to Plaintiff Lola Brown Trust.
28. Those NOBO lists must be obtained immediately, and each
passing day without their being obtained by the Lola Brown Trust
constitutes irreparable harm, since the Annual Meeting is scheduled for
August 12, 2002.
Facts Relevant to Counts II through IV
29. Defendant First Financial is an investment company
subject to the Investment Company Act of 1940 and subject to that Act's
requirements regarding boards of directors.
30. First Financial's Board of Directors has five members.
Pursuant to First Financial By-Law Section III.2 (second paragraph)
those directors are divided into three classes, composed of two members,
two members, and one member, respectively, who serve staggered terms.
Each term is for three years. Each year the term of office of one class
of directors expires and successors to the class of directors whose term
expires at that Annual Meeting are elected for a three-year term.
31. Following this Court's grant of the temporary restraining
order on July 24, 2002, Plaintiff received the NOBO lists and engaged in
a concerted proxy campaign. That campaign involved, inter alia, the
sending of nine "fight letters" seeking proxies to the beneficial owners
of First Financial by the two sides. ("Fight letters" are letters
describing the contest, its importance, and seeking proxies.) Both
parties made numerous phone calls to beneficial shareowners, again
seeking proxies.
32. The Shareholder Meeting was held on Monday, August 12,
2002.
33. Section III.3 of the By-Laws of First Financial states:
Section 3. Election. Directors shall be elected by vote of the holders
of a majority of the shares of common stock outstanding and entitled to
vote thereupon.
34. Under Section III.3 of the By-Laws, First Financial takes
the position that no director is duly elected unless that director, at
the Meeting, receives one more than 50% of the total number of shares
outstanding in the hands of the public ("50% of the eligible shares").
35. As a matter of arithmetic, First Financial's position
means that at any Shareholders' Meeting where less than 100% of all
shares outstanding in the hands of the public are present, no director
will be elected unless he or she receives some number greater than 50%
of the number of votes cast at the meeting. For example, if 95% of the
eligible shares are present, victory will require 52.7% of the votes
cast at the meeting (50.1/95). If 80% of the eligible shares are
present, victory will require 62.6% of the votes cast at the meeting
(50.1/80). If 65% of the eligible shares are present, victory will
require 77.1% of the votes cast at the meeting (50.1/65). And if a mere
quorum (50.1%) is present, victory will require 100% of the votes cast
in order to be elected (50.1/50.1).
36. In fact, it is extremely rare for even 80% of the
eligible shareholders of a closed- end mutual fund company to vote at an
Annual Meeting.
37. At the August 12, 2002, First Financial meeting, for
example, despite a hotly-contested proxy contest and nine "fight
letters," only about 80.4% of the shares were effectively voted. When
this number of shares are voted, and if First Financial's By-Law III.3
is given effect, it takes 62.3%, or about 5/8, of the shares in order to
elect a director (50.1/80.4).
38. The number of shares eligible to vote at the
Shareholders' Meeting on August 12, 2002, was 23,622,382. One more than
half of that number is 11,811,192.
39. At the First Financial Shareholders' Meeting on August
12, 2002, Plaintiff's nominees (Jacobson and Looney) each received
11,174,771 votes and First Financial's incumbent nominees, LaBlanc and
Dorsey, received 7,817,386 and 7,812,470 votes, respectively. There
were 339,382 votes "withheld" and some 118,737 other votes which were
defective or unresolved; these votes do not count as "votes cast."
40. Thus, Plaintiff's nominees received 58.84% of the votes
cast (11,174,771/18,993,157)- well over a "majority of the votes cast" -
while Defendant's incumbent nominees received approximately 41.1% of the
votes cast.
41. On August 20, 2002, Plaintiff wrote to the Chairman of
the Board of First Financial, Mr. Thomas Mooney. A copy of that letter
is attached as Exhibit 5. That letter stated, in part:
As our candidates received a majority of the votes in the election, our
candidates have been legitimately elected and thus are now duly elected
board members of First Financial.
To the extent that you are relying on the Fund's 50%-of-shareholders
bylaw to allege that there has been no election of directors this year
and, therefore, the incumbents continue to serve by virtue of holding
over from their expired terms, please be advised that the 50%-of-
shareholders bylaw is an illegal provision. It is void ab initio.
.... Please let me know, no later than the end of the day on Wednesday,
August 21, 2002, whether you, as chairman of the Board, will recognize
Mr. Looney and Dr. Jacobson as the Fund's new directors for that
meeting.... If we do not receive a response to this letter by such
time, we will take that to mean that you have rejected the position
taken by the Trusts and will proceed accordingly.
42. On August 21, 2002, Defendant First Financial sent
Plaintiff a letter rejecting Plaintiff's claim that its nominees were
elected. That letter is attached as Exhibit 6. That letter states:
The Board believes that its position is consistent with the plain
language of the Maryland corporate statute and the Fund's By-laws. The
Board intends to proceed with the normal business of the Fund with the
incumbent Class I Directors, Messrs. Dorsey and La Blanc, continuing to
serve as Directors, with the full authority to exercise all of the
rights and powers of members of the Fund's Board, until their successors
are duly elected and qualified
Defendant issued a Press Release making the same statement. See Exhibit
7.
43. First Financial has declared that, despite receiving a
majority of the votes cast, Plaintiff's nominees are not elected because
they did not receive 11,811,192 votes.
44. Instead, Defendant First Financial intends to continue
with a Board of Directors containing the three remaining duly elected
directors and the two non-elected incumbents who did not receive even a
plurality of the votes cast. First Financial proposes to do this
pursuant to its By-Law III.2, which provides, in part:
Section 2. Number and Term. The Board of Directors shall consist of
not fewer than three nor more than eleven Directors.... All acts done
by any meeting of the Directors or by any persons acting as a Director,
so long as his successor shall not have been duly elected or appointed,
shall, notwithstanding that it be afterwards discovered that there was
some defect in the election of the Directors or of such persons acting
as aforesaid or that they or any of them were disqualified, be as valid
as if the Directors or such other person, as the case may be, had been
duly elected and were or was qualified to be Directors....
(Emphasis added.)
45. A meeting of the First Financial Board of Directors, at
which the non-elected incumbents intend to participate, is scheduled for
Wednesday, September 4, 2002, at Newark, New Jersey.
COUNT I
(Breach of Md. Code, Corps. & Ass'ns Section 2-513)
Paragraphs 1 though __ are incorporated herein as if set forth here
in full and in particular.
46. Plaintiff Lolo Brown Trust made a written request for a
list of the stockholders of First Financial. The Stockholder List
Request included a request for copies of any CEDE breakdowns or NOBO
lists.
47. Defendant First Financial or its agents or
representatives are in possession of a NOBO list and have refused to
produce pursuant to the Stockholder List Request.
48. Defendant's failure to produce the NOBO list violates Md.
Code Ann., Corps. & Ass'ns Section 2-513.
WHEREFORE Plaintiff prays that the Court shall issue the following
relief:
1. A temporary restraining order and preliminary injunction
directing First Financial to deliver to Plaintiff by close of business
the day the Order is signed a copy of any and all NOBO lists, all CEDE
breakdowns, and all Respondent Bank Omnibus Proxy Lists, in the
possession of First Financial or its proxy solicitation agents or
representatives, together with such other information as is in the
possession of First Financial that identifies the names, addresses and
telephone numbers of the beneficial owners of shares of common stock in
First Financial.
COUNT II
(Declaratory Judgment That By-Law III.3 Is Invalid)
Paragraphs 1 though 49 are incorporated herein as if set forth here
in full and in particular.
49. Md. Corps. & Ass'ns Code Section 2-506(a) provides:
Section 2-506. Quorum; voting.
(a) General rule. - Unless this article or the charter of a corporation
provides otherwise, at a meeting of stockholders:
(1) The presence in person or by proxy of stockholders entitled to
cast a majority of all the votes entitled to be cast at the meeting
constitutes a quorum; and
(2) 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.
This Code section establishes the "general rule" that at a meeting of
the stockholders a "majority of all the votes cast" shall be sufficient
to approve any matter.
50. There is no provision in "this article" of the Maryland
Corps. Code or in the Charter (or Articles of Incorporation) of First
Financial that alters the "general rule" that a majority of the votes
cast is sufficient to elect a director.
51. Maryland Corps. & Ass'ns Code Section 2-404(d) provides:
Section 2-404. election and tenure of directors.
(d) Plurality vote. - Unless 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.
52. The Charter of First Financial does not provide otherwise
than that the plurality of votes cast shall be sufficient to elect a
director.
53. First Financial By-Laws Section III.3 is not authorized
by Md. Corps. Code Section 2-404(d), because Section 2-404(d) only
authorizes the bylaws of a corporation to retain the simple majority
general rule of Section 2-506(a)(2) as an alternative to a plurality.
WHEREFORE Plaintiff prays that the Court shall issue the following
relief:
1. That First Financial By-Law Section III.3 shall be declared
void as inconsistent with or unauthorized by Md. Corps. Code Sections 2-
506(a)(2) and 2-404(d);
2. For such other additional and further relief as the Court
deems just, equitable and appropriate.
COUNT III
(Declaratory Judgment that Plaintiff's Directors Are Elected)
Paragraphs 1 though 54 are incorporated herein as if set forth here
in full and in particular.
54. Md. Corps. Code Sections 2-506(a)(2) and 2-404(d) provide
that, unless a corporation's charter or bylaws includes a requirement
that election of a director shall require a majority of all votes cast,
the winner of a plurality of the votes shall be elected director.
55. Plaintiff's nominees won both a plurality and a majority
of the votes case at the First Financial annual meeting.
56. Defendant has nonetheless refused to certify Plaintiff's
nominees as the elected directors.
WHEREFORE Plaintiff prays that the Court shall issue the following
relief:
1. That Plaintiff's nominees shall be declared to have prevailed
at the annual Shareholders' Meeting and to have been duly elected as
directors under Maryland law;
2. For a temporary restraining order and a preliminary and
permanent injunction restraining and enjoining Messrs. LaBlanc and
Dorsey from participating in any future meeting of the First Financial
Board of Directors;
3. For such other additional and further relief as the Court
deems just, equitable and appropriate.
COUNT IV
(Investment Company Act of 1940)
Paragraphs 1 though 57 are incorporated herein as if set forth here
in full and in particular.
57. Under Section 16(a) of the Investment Company Act of
1940, 15 U.S.C. Section 80a-16(a) (the "Investment Company Act"), "[n]o
person shall serve as a director of a registered investment company
unless elected to that office by the holders of the outstanding voting
securities of such company, at an annual meeting...."
58. Further, under Section 16(a) the Investment Company Act,
when directors are divided into classes, like First Financial's, "the
term of at least one class shall expire each year."
59. Messrs. LaBlanc and Dorsey, the former incumbent
directors renominated by First Financial's management, were members of a
class of directors whose terms "expired" in 2002.
60. Under the Investment Company Act, "[n]o person shall
serve as director" unless elected to that office at the annual meeting.
61. The terms of Messrs. LaBlanc and Dorsey have expired and
they have not been elected. Therefore, First Financial's position that
they may continue to serve as directors violates 15 U.S.C. Section 80a-
16(a).
WHEREFORE Plaintiff prays that the Court shall issue the following
relief:
1. That the Court shall enter a declaratory judgment pursuant to
Section 16(a) of the Investment Company Act that Messrs. LaBlanc and
Dorsey "shall not serve" as directors;
2. For a temporary restraining order and a preliminary and
permanent injunction restraining and enjoining Messrs. LaBlanc and
Dorsey from participating in any future meeting of the First Financial
Board of Directors; and
3. For such other additional and further relief as the Court
deems just, equitable and appropriate.
Respectfully submitted,
/s/ James H. Hulme
James H. Hulme, Bar No. 00875
Donald B. Mitchell, Jr., Bar No. 22944
Benjamin I. Fishman, Bar No. 13495
J. Marcus Meeks, Bar No. 15191
ARENT FOX KINTNER PLOTKIN & KAHN
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
T: (202) 857-6000
F: (202) 857-6395
Attorneys for Plaintiff Badlands Trust
Company,
as trustee for the Lola Brown Trust No. 1B
Dated: August 23, 2002
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
Northern Division
BADLANDS TRUST COMPANY,
A SOUTH DAKOTA CORPORATION,
AS TRUSTEE FOR
LOLA BROWN TRUST NO. 1B
Plaintiff,
v.
FIRST FINANCIAL FUND, INC.
A MARYLAND CORPORATION,Defendant.
Civil Action No. JFM 02-CV-2423
PLAINTIFF'S MEMORANDUM IN SUPPORT OF
APPLICATION FOR A TEMPORARY RESTRAINING ORDER AND
MOTION FOR PRELIMINARY INJUNCTION
Adopting a position that the Maryland Legislature and the courts
have condemned as "bizarre," First Financial Fund, Inc. ("First
Financial") has now decided to retain its two management directors in
office even though they lost the election. Federal law, Maryland law,
and common sense prohibit such a result. This Court should issue
temporary and preliminary injunctive relief to insure that the bizarre
result urged by First Financial does not come true.
On August 12, 2002, First Financial held its annual shareholders
meeting. The main item on the agenda was the election of two of the
five directors of the corporation- the "Class I" directors. Management
of First Financial supported the two Class I incumbents - Robert E.
LaBlanc and Eugene C. Dorsey ("LaBlanc/Dorsey"). Badlands Trust
Company, acting as trustee for several trusts that are significant
shareholders of First Financial, supported two alternative candidates -
Dr. Dean Jacobson and Joel E. Looney ("Jacobson/Looney").
Jacobson/Looney won. A majority of the voting shares- indeed,
almost 60% - voted for the Badlands slate of Jacobson/Looney. Under
Maryland law (and notions of plain common sense), Jacobson/Looney were
elected as directors.
First Financial, however, has refused to recognize Jacobson/Looney
as the winners and has determined to continue LaBlanc/Dorsey as "hold
over" directors, even though they lost by a substantial margin.
Instead, First Financial has declared that no directors were elected at
the meeting because Badlands' nominees did not receive an absolute
majority of the shares of common stock outstanding and entitled to vote:
[N]o nominee has been duly elected as a Director at the Meeting. In
accordance with Maryland law and the Fund's By-laws, the incumbents,
Messrs. Dorsey and La Blanc, will remain in office until their
successors are duly elected and qualified.
First Financial Fund, Inc. Press Release, August 21, 2002. See Exhibit
D to Declaration of Badlands Vice President Stephen Miller. (The Miller
Declaration is attached hereto as Exhibit 1.)
In refusing to give effect to the overwhelming shareholder vote
mandate, First Financial relies on section III.3 of its By-Laws (the
"Challenged By-law"). The Challenged By-law provides that "[d]irectors
shall be elected by vote of the holders of a majority of the shares of
common stock outstanding and entitled to vote thereupon" - as opposed
to a majority of the shares voted at the meeting.
First Financial's position directly contradicts the requirements
of Section 16(a) of the federal Investment Company Act of 1940. That
statute states that "no person shall serve" as a director unless he has
been elected and provides that the term of a director "expires" at the
Annual Meeting. Further, Maryland Corporations Code Section 2-506(a)
forbids such a result. This code section establishes a default rule -
called the "General rule" in the statute - that all corporate elections
are decided by a majority of the shares voting "[u]nless this article
[of the Maryland Code] or the charter of a corporation provides
otherwise...." (emphasis added). Md. Corps. & Ass'ns Code Section 2-
506(a)(1). Under this statute, a mere by-law is insufficient to
overcome Maryland's default rule requiring only a simple majority of the
shares voted at the meeting to approve a matter. The Challenged By-law
represents an unlawful attempt to change this statutory rule. First
Financial's refusal to recognize the winners of the election is
improper.
The will of the majority should stand. Jacobson/Looney should be
seated as the Class I directors of First Financial forthwith. For the
reasons set forth below, the Court should issue temporary and
preliminary injunctive relief barring First Financial from seating
LaBlanc/Dorsey as directors and compelling First Financial to recognize
the election victory of Jacobson/Looney.
Legal Argument
Badlands Is Entitled to Temporary and Preliminary Injunctive Relief To
Enforce The Majority Vote Of The Shareholders.
The next meeting of First Financial directors is scheduled for
September 4, 2002. Acting at the request of Jacobson/Looney, Badlands
wrote to First Financial and requested:
As Mr. Looney and Dr. Jacobson - together with incumbent board member
Richard I. Barr - now constitute a majority of the directors of the
Fund, they have indicated that they would like to hold the next board of
directors meeting - currently scheduled for September 4, 2002 - in
Phoenix, Arizona.
Letter, Stephen C. Miller to Thomas T. Mooney, August 20, 2002 (attached
as Exhibit B to Miller Declaration). First Financial rejected this
request and advised:
The Board intends to proceed with the normal business of the Fund with
the incumbent Class I Directors, Messrs. Dorsey and La Blanc, continuing
to serve as Directors, with the full authority to exercise all of the
rights and powers of members of the Fund's Board, until their successors
are duly elected and qualified.
Letter, Arthur J. Brown to Stephen C. Miller, August 21, 2002 (attached
as Exhibit C to Miller Declaration).
Badlands will be irreparably harmed if First Financial proceeds
with its directors' meeting, seating the two incumbents who lost the
election. That decision illegally entrenches management because
management will continue to have four of the five directors aligned with
it, rather than having three of the five directors aligned with Badlands
- which is what the majority of voting shareholders wanted when the
voted for Jacobson/Looney.
Badlands will prevail on the merits under both federal and
Maryland law. The federal Investment Company Act of 1940 prohibits the
type of director entrenchment that First Financial is attempting here.
Moreover, Maryland law provides that the majority of voting shares
should prevail in these circumstances. The law is well-settled in this
Circuit that where, as here, the plaintiff is facing such irreparable
harm and a likelihood of success on the merits, a corrective injunction
should be issued under Fed. R. Civ. P. 65.
The Lola Brown Trust Will Suffer Irreparable Harm Unless Emergency
Relief is Granted.
In deciding whether to issue a preliminary injunction, the court
must consider four factors: (1) the likelihood of irreparable harm to
plaintiff without the injunction; (2) the likelihood of harm to the
defendant with the injunction; (3) plaintiff's likelihood of success on
the merits; and (4) the public interest. Blackwelder Furniture Co. v.
Seilig Mfg. Co., 550 F.2d 189, 193-96 (4th Cir. 1977); see, e.g.,
Intelus Corp. v. Barton, 7 F. Supp. 2d 635, 638-39 (D. Md. 1998).
These four factors are to be weighed flexibly based on a sliding-
scale approach; a strong showing by a party with regard to one factor
reduces the need for that party to make a strong showing concerning
other factors. Dan River, Inc. v. Icahn, 701 F.2d 278, 283 (4th Cir.
1983) (citing North Carolina State Ports Auth. v. Dart Containerline
Co., 592 F.2d 749, 750 (4th Cir. 1979)). The first two factors are the
most important factors, and a court must begin its analysis by balancing
the likelihood of harm to the plaintiff against the likelihood of harm
to the defendant. See Blackwelder, 550 F.2d at 194-95; Rum Creek Coal
Sales, Inc. v. Caperton, 926 F.2d 353, 359 (4th Cir. 1991). If the
balance tips in favor of the plaintiff, then the plaintiff need not
prove a "likelihood" of success on the merits, but instead need only
raise "serious, substantial and difficult" questions that are "fair
ground for litigation." Blackwelder, at 195; Rum Creek, 926 F.2d at
359. In the case at bar, it is clear that the likely harm to the
plaintiff outweighs the possible harm to the defendant.2
At the annual shareholder's meeting held on August 12, 2002, the
plaintiff's nominees for First Financial's Board of Directors received
almost 60% of the votes cast. However, First Financial has refused to
allow plaintiff's nominees to assume their roles on the Board by
declaring, in essence, a failed election. First Financial has decided
instead to retain the incumbent directors in direct defiance of the
shareholder election.
The cases make clear that a stockholder's right to vote for the
board of directors is not only a "valuable and vested property right"
but one of the "most important rights incident to stock ownership and
should not be annulled for purely technical reasons." Smith v. Koerber,
352 F. Supp. 591, 595 (D. Md. 1972), aff'd, 479 F.2d 1043 (4th Cir.
1973) (per curiam); Dynamics Corp. of America v. CTS Corp., 643 F. Supp.
215, 219 (N.D. Ill. 1986); Blasius Indus. Inc. v. Atlas Corp., 564 A.2d
651, 659 (Del. Ch. 1988) ("The stockholders' franchise is the
ideological underpinning upon which the legitimacy of directorial power
rests.").
Unwilling to transfer control to the newly elected directors,
First Financial has devised a novel interpretation of Maryland law in an
attempt to annul First Financial's shareholder's most valuable and
vested property right. Such an invasion of shareholder interest clearly
rises to the level of irreparable harm. Ocilla Indus., Inc. v. Katz,
677 F. Supp. 1291, 1301 (E.D.N.Y. 1987) (shareholder disenfranchisement
creates serious risk of irreparable harm); Horizon Corp. v. Anselmi,
483 F. Supp. 653, 659-60 (D.D.C. 1980) (shareholder group harmed by not
seating duly elected slate of directors).
The case law clearly vests shareholders with the vigilantly
protected right to elect directors. Concord Group, Inc. v. Tri-State
Motor Transit Co., 567 A.2d 1, 5 (Del. Ch. 1989). First Financial's
actions amount to an improper denial of plaintiff's vested right to
select directors of First Financial. Therefore, the balance of harm
tips decidedly in favor of the plaintiffs who duly elected Dr. Jacobson
and Mr. Looney as board members of First Financial.
First Financial Will Not Suffer Irreparable Harm If Emergency Relief is
Granted.
Just as Badlands will be irreparably harmed through the denial of
its right to have its shareholders' vote recognized and implemented,
First Financial will not be irreparably harmed by having the two
directors who received a majority of votes seated on the board. The
balance of harms clearly tips in favor of having the expressed will of
the majority recognized and implemented.
The Majority Vote Of The Shareholders Must Be Implemented Under Both
Federal And Maryland Law; Thus, Badlands Is Likely To Succeed On The
Merits.
CONTINUING THE INCUMBENT CLASS I DIRECTORS WHO LOST THE VOTE IS A
VIOLATION OF SECTION 16(A) OF THE INVESTMENT COMPANY ACT.
The Investment Company Act of 1940 (the Act) regulates any company
that "holds itself out as being engaged primarily, or proposes to engage
primarily, in the business of investing, reinvesting or trading in
securities." 15 U.S.C. Section 80a-3(a)(1)(A) (1997). First Financial
is a registered investment company under the Act and must comply with
the rules and regulations of same, including Section 16(a).
THE PLAIN LANGUAGE OF SECTION 16(A).
Section 16(a) of the Act states in relevant part as follows:
(a) Election of directors. No person shall serve as a director of a
registered investment company unless elected to that office by the
holders of the outstanding voting securities of such company, at an
annual or a special meeting duly called for that purpose..
Nothing herein shall, however, preclude a registered investment company
from dividing its directors into classes if its charter, certificate of
incorporation, articles of association, by-laws, trust indenture, or
other instrument or the law under which it is organized, so provides and
prescribes the tenure of the office of the several classes: Provided,
That no class shall be elected for a shorter period than one year or for
a longer period than five years and the term of office of at least one
class shall expire each year.
15 U.S.C. Section 80a-16(a) (emphasis added). Section 16(a) has been
described as the "very essence of the Act." Prudential Ins. Co. of Am.,
41 S.E.C. 335, 350 (Jan. 22, 1963), aff'd sub nom., Prudential Ins. Co.
of Am. v. S.E.C., 326 F.2d 383 (3d Cir. 1964).
Section 16(a) was enacted to protect the shareholders' right to
elect the Board of Directors by preventing Board Members from
transferring or retaining control without the approval of the
shareholders. State Bank & Mortgage Co., 1972 SEC No-Act LEXIS 3322
(Aug. 7, 1972); The Fundpack, Inc., 1979 SEC LEXIS 604, at *5 (Oct. 2,
1979) ("Section 16(a) of the Act in part provides that except for
filling of certain vacancies on a board of directors, no person can
serve as a director of an investment company unless elected by
shareholders); see also 1 THOMAS P. LEMKE, et al., Regulation of
Investment Companies Section 6.03[2] (2000).
The plain language of Section 16(a) governs. Starting at the end,
section 16 states that when the directors are divided into classes, the
term of one such class "share expire" each year. The terms of LaBlanc/
Dorsey "expire[d]" this year. Returning to the beginning of Section
16(a), the statute provides that "[n]o person shall serve as a director
.. unless elected . at an annual meeting.." Messrs. LaBlac and Dorsey
were not elected and thus "shall [not] serve."
MARYLAND'S CORPORATE LAW DOES NOT AUTHORIZE WHAT SECTION 16 FORBIDS.
Despite the fact that plaintiff's nominees for the expired
director seats received 59% of the shares voted and the incumbent (and
expired term) directors received 41% of the shares voted, First
Financial has declared that no directors were elected at the annual
shareholders meeting. In refusing to give effect to the overwhelming
shareholder vote, First Financial relies on the Challenged By-law, which
provides that "[d]irectors shall be elected by vote of the holders of a
majority of the shares of common stock outstanding and entitled to vote
thereupon." Furthermore, First Financial has relied on the Challenged
By-law to reinstate the incumbent directors without any authorization
from the shareholders. This action is a patently egregious violation of
Section 16(a) of the Act.
First Financial does not have the power to subvert the
requirements of Section 16(a). "State law and corporate by-laws could
not, of course, authorize procedures directly contrary to the specific
provisions of Section 16(a) with respect to the election of directors of
registered investment companies under the Act." Securities Corp. Gen.,
40 S.E.C. 427, 431 n.9 (Dec. 23, 1960). See also Burks v. Lasker, 441
U.S. 471, 479 (1979) (Investment Company Act displaces state law where
"state laws permit action prohibited by the Acts"). First Financial's
reliance on the Challenged By-law to retain expired term directors
without the authorization of the shareholders is an act expressly
prohibited by Section 16(a).
Moreover, by allowing the incumbent directors to retain control,
First Financial has violated that portion of Section 16(a) requiring
"that no class shall be elected for a shorter period than one year or
for a longer period than five years and the term of office of at least
one class shall expire each year." By permitting Messrs. LaBlanc and
Dorsey to remain in office, First Financial is allowing their terms of
office to continue without expiration in violation of Section 16(a).
First Financial's actions are contrary to the plain language of Section
16(a) and the clear purpose of the law -- to ensure that the owners of
investment companies have the power to select management. The Trust
Fund Sponsored By the Scholarship Club Inc., 43 S.E.C. 917, 924 (Oct.
25, 1968). First Financial's inequitable conduct cannot continue.
Even without reference to the Maryland Corporations Code, it is
patent the First Financial's conduct is in violation of the Investment
Company Act. The Act requires that directors be elected at annual or
special meetings, especially when the directors are divided into
classes. Here, First Financial management is attempting to retain
control by declaring that no directors' election occurred and that,
therefore, the incumbents continue in office under Maryland law. That
scheme, however, is flatly prohibited by the Act. First Financial is
not likely to succeed on the merits of this issue. Temporary and
preliminary injunctive relief should be issued to bar First Financial's
violation of the Act.
CONTINUING THE INCUMBENT CLASS I DIRECTORS WHO LOST THE ELECTION IS A
VIOLATION OF THE MARYLAND CORPORATE LAW.
MARYLAND'S DEFAULT RULE IS THAT ELECTIONS ARE DECIDED BY A MAJORITY OF
VOTES CAST AT A MEETING.
First Financial does not fair any better under Maryland law. The
Corporations and Associations Article of the Maryland Code is an
integrated series of laws that, among other matters, governs the
percentage of shares needed to approve various matters in a shareholder
vote.
Section 2-506(a)(2) of the Maryland Corporations Code states that
"[u]nless this article [of the Code] 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."3 (Emphasis added.) This Court has
directly ruled that section 2-506(a)(2) is a "ban against super-majority
votes." Larkin v. Baltimore Bancorp, 769 F. Supp. 919, 924 (D. Md.),
aff'd mem. 948 F.2d 1281 (4th Cir. 1991).
It is undisputed that the Jacobson/Looney slate received the
majority of votes cast at the August 12, 2002 meeting. Thus, under this
section, the shareholders approved Jacobson/Looney as the Class I
directors. Yet, First Financial refuses to recognize the
Jacobson/Looney victory despite the command of section 2-506(a)(2).
Instead, First Financial claims that only a super-majority can elect a
director when less than all shareholders vote. Because shareholders'
meetings of public corporations never produce a 100 percent turnout,4
First Financial's position converts the vote needed to elect a director
(or, in this case, to replace a management director) into a super-
majority vote requirement.5
The Maryland General Assembly has already labeled as a "bizarre
occurrence" the situation urged by First Financial here - that because
no nominee received a majority of shares, there was no election, and the
incumbents -- who actually got the least votes -- continue in office for
another three years! See Explanation of Senate Bill No. 659 Vote
Required to Elect Directors, a true and correct copy of which is
attached as Exhibit 2. This result is directly contrary to section 2-
506(a)(2). That section simply does not allow the Challenged By-law.
The Challenged By-law cannot stand to defeat the will of the majority of
voting shares of First Financial.
SECTION 2-404 DOES NOT AUTHORIZE THE CHALLENGED BY-LAW.
In announcing the results of the August 12, 2002 meeting, First
Financial has said:
The Fund's By-laws provide that a nominee for Director can only be
elected by a vote of the holders of a majority of the Fund's shares
outstanding and entitled to vote thereon. Consequently, no nominee has
been duly elected as a Director at the Meeting.
Exhibit D to Miller Declaration. Of course, as seen above, section 2-
506 does not permit such a super-majority voting requirement to be
established by a mere by-law. Rather, that section requires that such a
provision be set forth in the corporate charter.
Indeed, when it comes to the election of directors, Maryland law
prefers that a mere plurality of voting shares be declared sufficient to
elect a director. Under the sub-heading of "Plurality vote," section 2-
404(d) states:
Unless 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.6
(emphasis in the original).
The legislative sequence and history of this provision is crucial
to a proper understanding of this case. At the time section 2-404(d)
was passed in 1981, Md. Corps Code Section 2-506 provided -- as it does
today -- the "general rule" in favor of a simple majority vote. The
Maryland Legislature was concerned that Section 2-506 was too strict and
that too many corporate elections were resulting in no election of
directors, and so passed Section 2-404(d) to provide for a more relaxed
standard of simple plurality voting.
The Maryland courts have recognized this history. Section 2-
404(d) was passed by the Legislature in 1981 as "an exception to section
2-506." Ideal Fed. Sav. Bank v. Murphy, 663 A.2d at 1277 (Md. 1995)
(quoting Explanation of Senate Bill No. 659 Vote Required to Elect
Directors). Section 2-404(d) creates an exception to the general
default rule of simple majority voting approval. Indeed, the Court in
Ideal Federal v. Murphy specifically held that the Maryland legislature
created section 2-404(d) to "provide an exception to Section 2-506 of
the Corporations and Associations Article which requires a majority of
all votes cast to approve any matter." Id. at 457. The Court further
found that the purpose of creating this exception was, in part, to avoid
the "bizarre occurrence" in which "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." Id. at 457-58.
Section 2-404(d) does provide that a plurality shall be sufficient
"[u]nless the charter or bylaws of a corporation provide otherwise.."
But it does not stand to reason that the Legislature's inclusion of this
provision was intended to allow a corporation to require more than the
simple majority that was sufficient under Maryland law at the time 2-
404(d) was passed. A legislature that was so concerned about "bizarre
occurrences" that it passed a statute to address them cannot be said to
have, at the same time, permitted an interpretation of its act that
would permit a corporation -- in its by-laws and not its Articles of
Incorporation, no less -- to insert a super-majority provision that
would assure such "bizarre" results. But this is exactly the position
taken by First Financial in arguing that the Challenged By-Law permits
the results of the recent election.
THE OPT-OUT PROVISION OF SECTION 2-404 CANNOT SUPPORT THE CHALLENGED BY-
LAW.
By relying on the Challenged By-Law that an absolute majority of
shares is needed to elect a director, First Financial has indicated this
super-majority by-law is permitted under the opt-out provision of
section 2-404(d). Such an argument, however, impermissibly ignores the
substance of both section 2-404 and section 2-506.
Section 2-404 is an exception to the general simple majority
voting rule because it allows a plurality of voting shares to elect
directors. The Maryland Legislature recognized that some corporations
may not be comfortable electing directors on the basis of less than a
majority of voting shares, so it permitted such companies to opt out of
this exception through either its bylaws or its charter. Certainly, the
Challenged By-law could be viewed as opting out of a plurality election
of directors. But passing a By-Law opting out of the 2-404(d) exception
does not also "opt" a corporation out of the 2-506 simple majority
"general rule." If it did, there would have been no reason for the
Legislature to limit the ability to opt out of Md. Corps. Code
Section 2-506 to provisions made in charters.7
Section 2-506(a) expressly mandates that its "general rule" simple
majority provision can only be circumvented by a corporation through its
charter. Moreover, in such circumstances, courts pay careful attention
to the distinction between by-laws and the charter as the corporate
vehicle employed to alter the voting percentage rules. It is well-
settled that where a state's corporate code requires super-majority
provisions to be set forth in the corporate charter, and a corporation
provides for such super-majority voting in its by-laws only, any such
by-law is void. See, e.g., Roach v. Bynum, 403 So. 2d 187, 192-93 (Ala.
1981); Model, Roland & Co. v. Industrial Acoustics Co., 209 N.E.2d 553,
553 (N.Y. 1965).
Maryland Corporations Code sections 2-104(b)(4) and 2-506(a)(2),
when read together, make clear that Maryland's public policy requires
that any restriction on the general shareholder voting rule - that a
simple majority of shareholder votes cast at a meeting is sufficient to
approve any matter - must be placed in the articles of incorporation.8
Section 2-104(b) identifies provisions that may be included in the
articles of incorporation or charter. Among the listed provisions is:
"Any provision which requires for any purpose the concurrence of a
greater proportion of the votes ... of any class of stock than the
proportion required by this article for that purpose."
FIRST FINANCIAL'S CHARTER DOES NOT AUTHORIZE THE CHALLENGED BY-LAW.
Thus, only a charter provision can circumvent Maryland's policy
that majority of votes cast at a meeting is sufficient to elect
directors. But First Financial's corporate charter does not contain
such a provision. Article Nine is the only provision of the First
Financial Charter that addresses voting issues:
Notwithstanding any provision of the Maryland General Corporation Law
requiring a greater proportion than a majority of the votes entitled to
be cast in order to take or authorize any action, any such action may be
taken or authorized upon the concurrence of at least a majority of the
aggregate number of votes entitled to be cast thereon . . . .
Articles of Incorporation of First Financial Fund, Inc., Article Nine
(emphasis added) (a true and correct copy of which is attached as
Exhibit 3).
This provision is addressed only to a situation where a Maryland
statute requires something more than an absolute majority - greater than
50% of shares entitled to vote. Nothing in Article Nine displaces
section 2-506's general rule of simple majority voting. Nor should it
be extended to defeat the voting will of the majority absent a positive
and clear legislative intent to do so. See Larkin, 769 F. Supp. at 923
(invalidating a by-law requiring an 80% super-majority vote as not
authorized by Sections 2-109 and 2-506, based "upon a close reading of
the language of the by-law"); Standard Power & Light Corp. v. Investment
Assoc., Inc., 51 A.2d 572, 576 (Del. 1947) (any charter provision that
seeks to abrogate Delaware's former general rule requiring only a simple
majority to elect directors must be "positive, clear, and readily
understandable and susceptible to but one reasonable interpretation,
which would indicate beyond doubt that the rule was intended to be
abrogated"); Centaur Partners, IV v. National Intergroup, Inc., 582 A.2d
923, 926-27 (Del. 1990) (a charter or by-law provision attempting to
abrogate Delaware's statutory rule that a plurality of votes is
sufficient to elect a director must be "clear, unambiguous and
unequivocal").
Here, of course, the General Assembly has condemned the super-
majority requirement (and resulting non-election of directors) advocated
by First Financial as "bizarre." Thus, the clear and unambiguous
legislative intent is against the Challenged By-law and the result it
would produce. Under Maryland law - as under federal law - Plaintiff
has demonstrated an overwhelming likelihood of success on the merits.
The Court should, therefore, issue the temporary and preliminary
injunctive relief barring enforcement of the Challenged By-law.
The Public Interest Weights Heavily In Favor Of Implementing The Will Of
The Majority.
The "public interest" prong of the Fourth Circuit's hardship
balancing test is typically the least considered of the four factors.
See Rum Creek Coal Sales, 926 F.2d at 366 ("the public interest factor
does not appear always to be considered at length in preliminary
injunction analyses"); Dickson v. Morrison, 1999 U.S. App. LEXIS 17795,
at *21 (4th Cir. 1999) (quoting Chief Judge Motz as saying "this is
usually a throw-in factor"). But here, it weighs heavily in favor of
Plaintiff.
The United States Congress has determined that there is an over-
riding public interest in effective and informed corporate democracy.
As the D.C. Circuit has noted, Congress's very purpose in the creation
of the proxy solicitation process under Section 14 of the Securities Act
was "to give true vitality to the concept of corporate democracy."
Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416, 421 (D.C. Cir.
1992) (citations omitted). Likewise, this Court has stated that the
franchise right of stockholder's is a "vested and valuable property
right" and "one of the most important rights incident to stock
ownership." Koerber, 352 F. Supp. at 595.
First Financial has repudiated corporate democracy and has
annulled the franchise right of First Financial's shareholders by
seeking to entrench management directors through minority veto. At a
time when shareholders and Congress are calling for greater corporate
accountability, First Financial takes the position that an entrenched
minority has the right to thwart the express will of First Financial
shareholders. That position is contrary to the public interest, which
weighs heavily in favor of granting the temporary and preliminary
injunctive relief sought by Plaintiff.
CONCLUSION
All four factors for temporary and preliminary injunctive relief
weigh heavily in favor of Badlands. The Challenged By-law is invalid
under the Investment Company Act and Maryland law. It cannot stand.
Badlands' interest as a voting shareholder will be irreparably injured
unless the requested injunctive relief is issued. The Court should
enforce the will of the voting majority and avoid the "bizarre" result
urged by First Financial management. The public interest requires no
less.
Respectfully submitted,
/s/ James H. Hulme
James H. Hulme, Esquire, Bar No. 323014
Donald B. Mitchell, Jr., Bar No. 22944
Benjamin I. Fishman, Bar No. 13495
J. Marcus Meeks, Bar No. 15191
ARENT FOX KINTNER PLOTKIN & KAHN, PLLC
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Telephone: (202) 857-6144
Counsel for Plaintiff, Badlands Trust Company
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
Northern Division
BADLANDS TRUST COMPANY,
A SOUTH DAKOTA CORPORATION,
AS TRUSTEE FOR
LOLA BROWN TRUST NO. 1B
Plaintiff,
v.
FIRST FINANCIAL FUND, INC.
A MARYLAND CORPORATION,Defendant.
Civil Action No. JFM 02-CV-2423
MOTION FOR A
PRELIMINARY INJUNCTION
Pursuant to Rule 65(b) of the Federal Rules of Civil Procedure and
in accord with Md. Code Ann., Corps. & Ass'ns Section 2-506, Plaintiff
Badlands Trust Company, as Trustee for Lola Brown Trust No. 1B ("Lola
Brown Trust"), moves for a preliminary injunction prohibiting defendant
First Financial Fund, Inc. ("First Financial") from implementing By-Law
III.3 of its corporate by-laws and requiring First Financial to seat
Dean Jacobson and Joel E. Looney as directors of First Financial, until
further order of this Court.
As alleged in the Amended Complaint filed on August 23, 2002, an
election for two director positions was held at the First Financial
annual shareholders meeting on August 12, 2002. Two candidates
supported by Plaintiff and related trusts ran on a slate against two
incumbent directors supported by First Financial management. The
candidates supported by Plaintiff won by a sizeable majority -- 58.8
percent of the shares voted at the meeting were cast for Plaintiff's
candidates. Under Maryland law, this result constitutes a proper
election and the Lola Brown Trust's candidates should have replaced the
two incumbent directors.
First Financial, however, has declared that no directors were
elected at the meeting because Plaintiff's nominees did not receive an
absolute majority of "the shares of common stock outstanding and
entitled to vote...." In refusing to give effect to the mandate of its
shareholders, First Financial relies on section III.3 of its By-Laws,
which provides that "[d]irectors shall be elected by vote of the holders
of a majority of the shares of common stock outstanding and entitled to
vote thereupon" - as opposed to a majority of the shares voted at the
meeting. First Financial's position is contrary to Maryland law, and a
preliminary injunction should issue to prevent the First Financial board
of directors from meeting until the present dispute is resolved.
Plaintiff meets all of the requirements for the issuance of a
preliminary injunction.
First, there is a substantial likelihood that the Lola Brown Trust
will succeed on the merits of its Complaint. First Financial's position
directly contradicts the requirements of Section 16(a) of the federal
Investment Company Act of 1940. That statute states that "no person
shall serve" as a director unless he has been elected and provides that
the term of a director "expires" at the Annual Meeting. Defendant's
actions are also a violation of Maryland law. Maryland Corporations
Code Section 2-506(a) requires that the candidates supported by
Plaintiff be seated on the First Financial board of directors. Under
Md. Corps. Code Section 2-506 all corporate elections are decided by a
majority of the shares voting "[u]nless this article [of the Maryland
Code] or the charter of a corporation provides otherwise...." Under
this statute, a mere by-law is insufficient to overcome Maryland's rule
requiring only a simple majority of the shares voted at the meeting to
approve a matter. First Financial's position is improper and the
majority vote at the election should stand.
Second, not granting injunctive relief will irreparably harm
Plaintiff. The shareholders of First Financial have chosen the Lola
Brown Trust's candidates to sit on the board of directors, but First
Financial refuses to recognize the will of the shareholders. Instead,
First Financial has seated the incumbent directors who the shareholders
rejected. By seating the incumbent directors, First Financial has
disfranchised its shareholders, including the Lola Brown Trust, and is
denying the Lola Brown Trust the right to have its candidates seated on
the board of directors.
Third, First Financial will not be harmed if an injunction is
granted because the company can continue to operate while the proper
board of directors is determined.
Finally, because the public has strong interests in the promotion
of corporate democracy, as exemplified in the very existence of the
Maryland statute providing for majority voting at meetings of
shareholders, the public interests will be best served by the issuance
of a preliminary injunction.
The Court's attention is respectfully invited to the Memorandum of
Points and Authorities in Support of the Temporary Restraining Order
filed August 23, 2002, which is incorporated herein by reference.
Respectfully submitted,
/s/ James H. Hulme
James H. Hulme, Bar No. 00875
Donald B. Mitchell, Jr., Bar No. 22944
Benjamin I. Fishman, Bar No. 13495
J. Marcus Meeks, Bar No. 15191
ARENT FOX KINTNER PLOTKIN & KAHN
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
T: (202) 857-6000
F: (202) 857-6395
Attorneys for Plaintiff Badlands Trust Company,
as trustee for the Lola Brown Trust No. 1B
Dated: August 23, 2002
END NOTES:
1Md. Code Ann., Corps. & Ass'ns Section 2-513 (1999), provides that
a person who holds 5% or more of a Maryland corporation's stock may
acquire "a list of its stockholders."
2This is apparently done to ease the transaction and registration
process and thereby increase liquidity. If, for example, a customer of
Merrill Lynch owned shares of First Financial and wanted to sell them,
it is possible that they might be bought by a customer of Morgan
Stanley. Since both brokerages are members of Depository Trust Company/
Cede & Co., rather than change the registration of the stock at First
Financial, the registration at First Financial can remain "Cede & Co,"
and, instead, Depository Trust would simply change its books to transfer
the dollars and shares from Merrill Lynch to Morgan Stanley.
3In fact, the books of First Financial show that as of the record
date (May 22, 2002) Cede & Co. holds 22,584,654 shares of FF - about 95%
of the outstanding shares.
4Mr. Brown is a lawyer, whose office is in Washington, D.C.
5Under Fourth Circuit Rule 36(c), unpublished opinions may be cited
by counsel "if counsel believes ... that an unpublished disposition of
any court has precedential value in relation to material issue in a case
and that there is no published opinion that would serve as well...."
Dickson fits this test, as it is the only recent federal preliminary
injunction case involving Maryland corporations law of which we are
aware.
6The only other possible remedy would be to postpone the Annual
Meeting, a possible remedy that the Plaintiff does not waive.
7Indeed, Sadler involved a Maryland corporation. New York's
corporation law has a provision allowing New York residents who are
shareholders of foreign corporations that do business in New York to
request stockholder lists from those corporations and to sue in New York
if they do not provide them. Under Sadler, then, if the Lola Brown
Trust were located in New York, it could have brought this case in
federal court in New York under New York law against First Financial,
and would have had controlling precedent in its favor that it was
entitled to the NOBO lists at issue.
8See July 10, 2002 letter from Polly S. Swartzfager, Esq.,
representing the Lola Brown Trust, to Arthur J. Brown of First
Financial, attached as Exhibit 6.
9See July 12, 2002 letter from Arthur J. Brown of First Financial
to Polly S. Swartzfager, Esq., representing the Lola Brown Trust at 2-3,
attached as Exhibit 7.
10This definition of "stockholder" is fairly new - the "record
holder" language was added to the Md. Corps. Code Section 1-101(t)
definition in 2000, as part of Chapter 642 of the Maryland Acts of 2000.
Previously, the definition simply stated that a stockholder was "a
person who holders shares of stock in a corporation...." The
legislative history of this alteration makes clear that it was a
"technical change" designed to align the definition with the common
understanding of the term, not to make any substantive changes in the
law. See Economic Matters Committee Floor Report for Maryland House
Bill 851 (describing amendment of shareholder definition as
"technical"). Indeed, the Maryland courts had long held that a
"shareholder" is one "of record," and so the definitional change made no
change in long-settled Maryland law. See Magruder v. Colston, 44 Md.
349, 356 (1876). Moreover, the Maryland State Bar Association's
Explanation of House Bill 851 located in the Maryland General Assembly
Bill files, states that "the [p]roposed amendment simply clarifies
existing case law that a 'stockholder' of a corporation is the person
who is named in the records of the corporation and that, therefore, a
corporation may rely on its records in determining who its stockholders
are." Copies of these legislative materials are attached hereto as
Exhibit 8.
11See also Pittman v. American Metal Forming Corp., 336 Md. 517,
524, 649 A.2d 356 (1994); Independent Distrs., Inc. v. Katz, 99 Md. App.
441, 457, 637 A.2d 886 (1994).
1 / The allegations added by the Amended Complaint are set forth in
italics.
2 The U.S. District Court for the Northern District of Illinois has
held, in a case with similar facts, that where the harms are difficult
to quantify and are best described as offsetting, "the chief inquiry is
which party is more likely to prevail at a full trial." Dynamics Corp.
of Am. v. CTS Corp., 643 F. Supp. 215, 217 (N.D. Ill. 1986).
3 A quorum is defined as "[t]he presence in person or by proxy of
stockholders entitled to cast a majority of all the votes entitled to be
cast at the meeting...." Md. Corps. & Ass'ns Code Section 2-506(a)(1).
A quorum was present at the August 12, 2002 shareholder meeting.
4 Approximately 80 percent of First Financial shares entitled to vote
in fact cast votes at the August 12 shareholder meeting. See Am. Compl.
Paragraph 38.
5 An example helps to highlight the import of this statute in
relation to the Challenged By-law. Consider that corporation X, which
had 100 shares of stock that were entitled to cast a vote, held a
shareholders meeting in order to elect one new director from among two
candidates. If 55 shares appeared at the meeting, thus fulfilling the
quorum requirement, a candidate would need at least 28 of those 55
shares (which is 51% of the votes cast, also referred to as a "simple
majority") to be elected under the general rule set forth in section 2-
506 of the Maryland Corporations Code. On the other hand, if the
Challenged By-law were to govern, a candidate would need 51 of
Corporation X's 100 shares entitled to vote in order to be elected.
Thus, under the First Financial view, 51 of the 55 shares appearing at
the shareholder meeting would have to vote for one of the candidates in
order for that candidate to be elected. That equals 93% of the votes
cast. Indeed, in any election in which all of the shareholders were not
present and voting, such an absolute majority requirement would, as a
matter of mathematics, constitute a requirement of a super-majority of
those voting.
6 In interpreting this statute, the Maryland Court of Appeals adopted
the following definition of "plurality":
The excess of votes cast for one candidate over those cast for any
other. Where there are only two candidates, he who receives the greater
number of the votes cast is said to have a majority; when there are
more than two competitors for the same office, the person who receives
the greatest number of votes has a plurality, but he has not a majority
unless he receives a greater number of votes than those cast for all his
competitors combined, or, in other words, more than one-half of the
total number of votes cast.
Ideal Fed. Sav. Bank v. Murphy, 663 A.2d 1272, 1278 (1995).
7 Maryland's Corporations Code, read as whole and with few
exceptions, generally requires any restriction on shareholder voting
rights to appear in the corporate charter. It is well established that
a statute should be interpreted as a whole, Copiers Typewriters
Calculators, Inc. v. Toshiba Corp., 576 F. Supp. 312, 323 (D. Md. 1983),
and that the various parts of a statutory scheme must be read together
and harmonized so as to give each portion of the scheme meaning.
Liverpool v. Baltimore Diamond Exch., Inc., 799 A.2d 1264, 1271 (Md.
2002).
8 This public policy applies to shareholder voting only, not voting
by the directors. Compare, e.g., Sections 2-104(b)(4); 2-505(b) and 2-
506 (governing shareholder voting) with, e.g., Sections 2-408(a) and 2-
413(a) (governing voting by directors).