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. 27)*
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)
September 30, 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. 0
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
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1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Ernest Horejsi Trust No. 1B
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2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
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3. SEC Use Only
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4. Source of Funds (See Instructions) WC OO
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5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
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6. Citizenship or Place of Organization South Dakota
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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
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11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,795,100
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12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
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13. Percent of Class Represented by Amount in Row (11) 7.60%
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14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
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1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Lola Brown Trust No. 1B
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2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
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3. SEC Use Only
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4. Source of Funds (See Instructions) WC OO
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5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
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6. Citizenship or Place of Organization South Dakota
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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
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11. Aggregate Amount Beneficially Owned by Each Reporting Person
2,568,200
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12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
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13. Percent of Class Represented by Amount in Row (11) 10.87%
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14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
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1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Mildred B. Horejsi Trust
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2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
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3. SEC Use Only
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4. Source of Funds (See Instructions) WC OO
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5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
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6. Citizenship or Place of Organization New York
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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
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11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,922,400
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12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
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13. Percent of Class Represented by Amount in Row (11) 8.14%
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14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
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1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Stewart R. Horejsi Trust No. 2
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2. Check the Appropriate Box if a Member of a Group (See
Instructions)
(A)
(B)
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3. SEC Use Only
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4. Source of Funds (See Instructions) WC OO
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5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
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6. Citizenship or Place of Organization South Dakota
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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
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11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,697,900
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12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
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13. Percent of Class Represented by Amount in Row (11) 7.19%
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14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
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1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Susan L. Ciciora Trust
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2. Check the Appropriate Box if a Member of a Group (See
Instructions)
(A)
(B)
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3. SEC Use Only
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4. Source of Funds (See Instructions) WC OO
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5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
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6. Citizenship or Place of Organization South Dakota
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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
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11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,359,800
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12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
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13. Percent of Class Represented by Amount in Row (11) 5.76%
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14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
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1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
John S. Horejsi Trust
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2. Check the Appropriate Box if a Member of a Group (See
Instructions)
(A)
(B)
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3. SEC Use Only
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4. Source of Funds (See Instructions) WC OO
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5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
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6. Citizenship or Place of Organization South Dakota
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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
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11. Aggregate Amount Beneficially Owned by Each Reporting Person
100
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12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
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13. Percent of Class Represented by Amount in Row (11) 0.0004%
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14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
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1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Badlands Trust Company
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2. Check the Appropriate Box if a Member of a Group (See
Instructions)
(A)
(B)
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3. SEC Use Only
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4. Source of Funds (See Instructions) WC OO
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5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
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6. Citizenship or Place of Organization South Dakota
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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
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11. Aggregate Amount Beneficially Owned by Each Reporting Person
1,359,900
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12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions)
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13. Percent of Class Represented by Amount in Row (11) 5.76%
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14. Type of Reporting Person (See Instructions) OO
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CUSIP No. 320228 10 9
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1. Names of Reporting Persons.
I.R.S. Identification Nos. of above persons (entities only)
Stewart R. Horejsi
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2. Check the Appropriate Box if a Member of a Group (See Instructions)
(A)
(B)
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3. SEC Use Only
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4. Source of Funds (See Instructions) Not applicable
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5. Check if Disclosure of Legal Proceedings is Required Pursuant to
Items 2(d) or 2(e)
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6. Citizenship or Place of Organization United States
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Number of 7. Sole Voting Power
Shares Bene-
ficially 8. Shared Voting Power
Owned by Each
Reporting 9. Sole Dispositive Power
Person With
10. Shared Dispositive Power
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11. Aggregate Amount Beneficially Owned by Each Reporting Person
0
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12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares
(See Instructions) X
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13. Percent of Class Represented by Amount in Row (11) 0%
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14. Type of Reporting Person (See Instructions) IN
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Amendment No. 27 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, at a hearing
held on September 20, 2002, the United States District Court for the
District of Maryland (the "District Court") stayed the effectiveness of
its September 19, 2002 ruling until October 4, 2002 in connection with
the lawsuit filed against the Company regarding the Company's bylaw
requiring a 50% vote of all outstanding shares in order to elect
directors (the "By-Law Lawsuit"). The District Court further reinstated
the injunction enjoining the Company's Board from holding any meetings
during the pendency of the stay. Judge Motz indicated that he was
granting the stay so as to allow at least one judge of the United States
Court of Appeals for the Fourth Circuit (the "Court of Appeals") time to
review the issue. The two-week stay will expire at 5:00 p.m. on Friday,
October 4, 2002.
On September 30, 2002, Plantiff-Appellee Badland's Trust Company (as
trustee of the Brown Trust) filed an Opposition to Emergency Motion for
Stay Pending Appeal of Defendant-Appellant First Financial Fund, Inc.
("Opposition to Emergency Motion for Stay") with the Court of Appeals,
which is attached to this statement as an exhibit. The Brown Trust
requested the Court of Appeals summarily deny the Company's Emergency
Motion for Stay. The Opposition to Emergency Motion for Stay in the By-
Law Lawsuit is attached hereto as Exhibit 17 and incorporated in this
statement by reference.
..
Item 7. Material to be Filed as Exhibits.
Exhibit 17. Plaintiff-Appellee Badland's Trust Company's
Opposition to Emergency Motion for Stay Pending Appeal of Defendant-
Appellant First Financial Fund, Inc. as filed September 30, 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: October 2, 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 17
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 02-2088
BADLANDS TRUST COMPANY,
as Trustee for
LOLA BROWN TRUST No. 1B,
Plaintiff-Appellee,
v.
FIRST FINANCIAL FUND, INC.
Defendant-Appellant.
On Appeal from the United States District Court
for the District of Maryland
(J. Frederick Motz, District Judge)
Civil Action No. JFM 02-CV-2423
PLAINTIFF-APPELLEE BADLANDS TRUST COMPANY'S OPPOSITION
TO EMERGENCY MOTION FOR STAY PENDING APPEAL OF
DEFENDANT-APPELLANT FIRST FINANCIAL FUND, INC.
James H. Hulme
Donald B. Mitchell, Jr.
Benjamin I. Fishman
J. Marcus Meeks
Arent Fox Kintner Plotkin & Kahn, PLLC
1050 Connecticut Avenue, NW
Washington, DC 20036-5339
(202) 857-6000
(202) 857-6395 (fax)
Counsel for Plaintiff-Appellee
Badlands Trust Company
TABLE OF CONTENTS
I. STANDARD OF REVIEW 5
II. ARGUMENT 9
A. Management Has Not Made A "Strong Showing" That It Is Likely
To Succeed On The Merits 9
1. The Challenged By-law is Invalid Under the MGCL 9
2. The Challenged By-Law Violates Section 16(a) of the
Investment Company Act 14
B. First Financial Has Not Shown That It Will Be Irreparably
Harmed 16
1. The Incumbent Directors Can Intervene to Preserve Their
Appeal Rights 16
2. There Is No Evidence the Elected Board Will Act
Detrimentally to the Interests of First Financial 17
C. Badlands Will Be Harmed By the Continued Denial Of The Power
Of Its Votes 17
D. The Public Interest Is That The Shareholders' Vote Be Respected 18
III. CONCLUSION 19
TABLE OF AUTHORITIES
Adventure Communs. Inc. v. Ky. Registry of Election Finance, 191
F.3d 429 (4th Cir. 1999) 8
Airport Committee of Forsyth Co. v. Civil Aeronautics Board, 296
F.2d 95 (4th Cir. 1961) 4, 5
Bancroft Convertible Fund, Inc. v. Zico Investment Holdings,
Inc., 825 F.2d 731 (3d Cir. 1987) 15
Blackwelder Furniture Co. v. Seilig Manufacturing Co., 550 F.2d
189 (4th Cir. 1977) 4, 5
Brown v. Eastern States Corp., 181 F.2d 26 (4th Cir. 1950) 15
Brownsburg Area Patrons Affecting Change v. Baldwin, 137 F.3d 503
(7th Cir. 1998) 9
Crown Resource Corp. v. Gold Capital Corp., 650 F. Supp. 985 (D.
Colo. 1987) 17
Dickson v. Morrison, 18 F. Supp. 2d 559 (D. Md. 1998), aff'd,
1999 U.S. App. LEXIS 17795 (4th Cir. 1999) 3
First-Citizens Bank & Trust Co. v. Camp, 432 F.2d 481 (4th Cir.
1970)] 5
Hilton v. Braunskill, 481 U.S. 770 (1987) 4
Horizon Corp. v. Anselmi, 483 F. Supp. 653 (D.D.C. 1980) 17
Houston General Insurance v. Moore, 193 F.3d 838 (4th Cir. 1999) 16
Larkin v. Baltimore Bancorp, 769 F. Supp. 919 (D. Md. 1991),
aff'd mem., 948 F.2d 1281 (4th Cir. 1991) 3, 9, 10
Lessler v. Little, 857 F.2d 866 (1st Cir. 1988) 15
Long v. Robinson, 432 F.2d 977 (4 Cir. 1970) 5
In re ML-Lee Acquisition Fund II, L.P., 848 F. Supp. 527 (D. Del.
1994) 15
Municipal Utilities Board of Albertville v. Alabama Power Co., 21
F.3d 384 (11th Cir. 1994) 9
Phillips v. Chandler, 215 B.R. 684 (E.D. Va. 1997) 9
Prudential Insurance Co. of America, 41 S.E.C. 335 (Jan. 22,
1963), aff'd sub nom Prudential Insurance Co. of America v.
S.E.C., 326 F.2d 383 (3d Cir. 1964) 15
Roosevelt v. E. I. Du Pont de Nemours & Co., 958 F.2d 416 (D.C.
Cir. 1992) 20
Sinclair Refining v. Midland Oil Co., 55 F.2d 42 (4th Cir. 1932) 5
Smoke v. Norton, 252 F.3d 468 (D.C. Cir. 2001) 16
State Bank & Mortgage Co., 1972 S.E.C. No- Act LEXIS 3322 (Aug.
7, 1972) 15
The Fundpack,Inc., 1979 SEC LEXIS 604 (Oct. 2, 1979) 15
STATE CASES
Derry v. State, 358 Md. 325, 748 A.2d 478 (2000) 8
Frankino v. Gleason, 1999 Del. Ch. LEXIS 218 (Nov. 12, 1999),
aff'd mem.
sub nom McNamara v. Frankono, 744 A.2d 988 (Del. 1999) 5-7, 17
Frankino v. Gleason, 1999 Del. Ch. LEXIS 219 (Nov. 5, 1999) 6
Ideal Federal Savings Bank v. Murphy, 339 Md. 446, 663 A.2d 1272
(Md. 1995) 11
Lerner v. Lerner, 306 Md. 771, 511 A.2d 501 (1986) 12
Marsheck v. Trustees, 358 Md. 393, 749 A.2d 774 (2000) 8
Standard Power & Light Corp. v. Investment Associates, Inc., 51
A.2d 572 (Del. 1947) 13
Tucker v. Fireman's Fund Insurance Co., 308 Md. 69, 517 A.2d 730
(1986) 8
Werbowsky v. Collomb, 362 Md. 581, 766 A.2d 123 (2001) 18
Williams v. Mayor & City of Council of Baltimore, 359 Md. 101,
753 A.2d 41 (2000) 9
FEDERAL STATUTES
15 U.S.C. Section 80a-43 (emphasis added) 15
Fed. R. Civ. P. 24(a) 16
H.R. Rep. No. 1341, 96th Cong., 2d Sess. 28-29 (1980), reprinted
in 1980 U.S. Code Cong. & Admin. News 4810-11 15
Investment Company Act of 1940, 15 U.S.C. Section 80a-16(a) 8, 15
STATE STATUTES
Md. Code Ann. Corps. & Ass'ns. Section 2-104(b)(4) 13
Md. Code Ann. Corps. & Ass'ns Section 2-110 13
Md. Code Ann. Corps. & Ass'ns. Section 2-404(d) passim
Md. Code Ann. Corps. & Ass'ns. Section 2-506(a)(2) passim
Md. Code Ann. Corps. & Ass'ns. Section 2-405.3 17
MISCELLANEOUS
Black's Law Dictionary 1224 (6th ed. 1990) 14
H. Brune, Maryland Corporation Law Section 68 (1933 ed.) 9
Adopting a position that the Maryland General Assembly and the
Maryland courts have condemned as "bizarre," the management of
Defendant-Appellant, First Financial Fund, Inc. ("First Financial"),
boldly attempts to retain its two directors in office even though they
lost the August 12, 2002 election. Federal law, Maryland law, and
common sense prohibit the result urged by management. Indeed, Judge
Motz issued temporary, preliminary, and permanent injunctive relief to
insure that the bizarre result urged by First Financial did not come
true. There is no basis to grant an extraordinary stay of Judge
Motz's final ruling on the merits.
At the annual shareholders meeting of First Financial, the
shareholders elected two new Class I directors - Dr. Dean Jacobson and
Joel E. Looney ("Jacobson/Looney"). Jacobson/Looney - the nominees of
Plaintiff-Appellee Badlands Trust Company ("Badlands") - received
about 60 percent of the votes for two open board seats. Management
supported the two incumbents - Robert E. LaBlanc and Eugene C. Dorsey
("LaBlanc/Dorsey"). LaBlanc/Dorsey only received about 40 percent of
the vote. Notwithstanding that outcome, management and its sponsor,
Prudential Funds, refused to seat the new directors, relying on a by-
law - now declared illegal under Maryland law by Judge Motz - that
would require a super-majority vote to seat directors.
By moving for an emergency stay here, the current management of
First Financial simply seeks to undo the election results and Judge
Motz's careful consideration of the issues, his ruling on the merits,
his balancing of the harms, and his consideration of the public
interest. Management seeks to achieve here by a stay what it could
not achieve at the ballot box or in the district court - the "holding
over" of the defeated incumbents for another year, until the next
election. According to management, despite the election results and
despite Judge Motz's findings, "the two incumbents should be permitted
to continue to serve" and "address matters as they arise in the
ordinary course during the pendency of the appeal." Emergency Motion
For Stay Pending Appeal Of Defendant-Appellant First Financial Fund,
Inc. ("FF Stay Motion"), at 18. The stay motion, however, flies
directly in the face of this Court's "stringent standard" regarding
stays pending appeal. Accordingly, the Court should summarily deny
the motion.
Four times now Judge Motz has indicated that the electoral
victors should be seated as directors. Judge Motz has twice entered
preliminary relief, both times finding that management's failure to
seat these nominees caused irreparable harm to Badlands. At the
hearing on Badlands' application for a temporary restraining order,
the Court observed that it did not believe that the defeated incumbent
directors should be holding office. August 28, 2002 Trans. at 29 ("I
think that there is a harm in an investment company ... including in
its directors meeting two directors who ... I do not believe should be
holding office. And so I do think that that is itself a serious harm
being suffered by the plaintiff, [whose] people are entitled to sit in
those positions"). On September 10, 2002, Judge Motz held that
Badlands was "very likely to prevail on the merits" and that
"plaintiff will be harmed by having a board meeting on which it was
not represented when I think it should be because I think it's two
persons who won the voting should be there." Sept. 10, 2002 Trans. at
77, 70. On September 19, the court entered a permanent injunction for
Badlands on the merits and ordered Dr. Jacobson and Mr. Looney seated
as the duly elected directors. And finally, during a September 20
telephonic hearing, Judge Motz stated that "I've ruled as I have and I
think I'm right." Sept. 20, 2002 Trans. at 9.
On the merits management does not present a single argument here
that Judge Motz has not already considered and rejected. Management
claims that Judge Motz "overlooked the plain words of the controlling
statute," that he "ignored the plain and unambiguous words" of the
statute, and that his reading of the statute "produces an illogical
result and eliminates the words 'or bylaws' from the text." See FF
Stay Motion at 7, 9 & 10.
Judge Motz, of course, did not "overlook" or "ignore" anything;
he heard hours of argument on the single statutory construction issue
in the case, received over 100 pages of briefs on the construction of
the pertinent statutory provisions, and issued a detailed written
opinion following two lengthy hearings on that one statutory
construction question. What is worse, management has not shown that
First Financial itself - as opposed to its present officers or its
present sponsor, Prudential Funds - is likely to suffer irreparable
harm. Management simply asserts, in the face of a 60 percent
shareholder vote to the contrary, that its incumbent management is
"best suited" to run First Financial. FF Stay Motion at 18. And
management totally discounts the harm that Badlands suffers every day
its nominees are not seated as directors. Instead, management and its
sponsors simply speculate that control of the Fund by newly elected
independent directors "could" constitute irreparable harm, id. (new
directors "could ... injure the Fund"), an unfounded -not to mention
arrogant - assertion that assumes that only they know what is best for
the corporation and, further, that the 48 percent of all shares who
voted for new directors - representing an investment of some
$145,000,000 - don't know what's best for their own investment.
A stay of a final ruling pending appeal is a truly extraordinary
remedy; more difficult to obtain than temporary or preliminary
injunctive relief. Under this Court's stay pending appeal test, each
of the four factors weighs heavily against the management of First
Financial. Accordingly, the motion for stay should be summarily
denied.
I. STANDARD OF REVIEW
The standard for granting a stay pending appeal is the four-fold
rule adopted by this Court in Airport Comm. of Forsyth Co. v. Civil
Aeronautics Bd., 296 F.2d 95, 96 (4th Cir. 1961):
1) Has the petitioner made a strong showing that it is likely
to prevail upon the merits of its appeal?
2) Has the petitioner shown that without such relief it will be
irreparably injured?
3) Would the issuance of a stay substantially harm other
parties interested in the proceedings?
4) Where lies the public interest?
(Emphasis added.) Accord Hilton v. Braunskill, 481 U.S. 770, 776
(1987) (same four-part test for a stay pending appeal, with its
requirement of a "strong showing" that the appellant is likely to
prevail, applies whether the stay pending appeal is sought in the
district court under F. R. Civ. P. 62(c) or in this Court under
F.R.A.P. 8(a)). The stay standard is not the same as the well-known
"balancing of hardships" standard applied to motions for preliminary
injunction. See Blackwelder Furniture Co. v. Seilig Manufacturing
Co., 550 F.2d 189, 196 (4th Cir. 1977).
Blackwelder carefully explained the differences between the
preliminary injunction standard and the "stringent" stay pending
appeal standard. There, the trial court had denied a plaintiff's
motion for a preliminary injunction. In doing so, the trial court had
cited the Airport Commission four-part standard, including the "strong
showing that it is likely to prevail" on the merits prong, and applied
the factors separately, without balancing. In reversing this error,
the Blackwelder Court developed this Circuit's now well-known
"balancing of harms" preliminary injunction standard. But while doing
so, the Blackwelder Court reiterated the difference between a
preliminary injunction and a stay pending appeal:
The district court's reliance on the different standards of
Airport Comm'n of Forsyth Co. and [First-Citizens Bank & Trust
Co. v. Camp, 432 F.2d 481, 483 (4th Cir. 1970)] was misplaced
- though understandably so. Even the treatise writers have
mistakenly equated the stringent standards of those cases with
the more flexible rule of Sinclair Refining [v. Midland Oil
Co., 55 F.2d 42 (4th Cir. 1932), applicable to preliminary
injunctions]. . . . But there is a difference. The cases
relied upon by the district court deal with the question of
the issuance vel non of an appellate stay pending review of an
administrative order or a trial court decision that dealt with
the merits of a controversy....
In cases like Airport and Camp a judicial or quasi-judicial
body has already passed upon the merits of a question and
typically has also denied a discretionary stay of its
decision; only then is the motion made for an appellate stay.
For a stay to issue under such circumstances, we adopted in
Airport Comm'n of Forsyth, supra, 296 F.2d at 96, the
requirement ... that a "strong showing" of probable success on
appeal be made, for otherwise there is "no justification for
the [appellate] court's intrusion into the ordinary processes
of administrative and judicial review."
Likewise, Long v. Robinson, 432 F.2d 977 (4 Cir. 1970),
another "strong showing" case from this circuit, involved a
stay-pending-appeal situation, in which the district court had
fully considered the merits of the controversy, rendered its
final decree, and refused the request for an interim stay.
Judge Winter explained in Long that the petitioner's burden in
seeking injunctive relief is substantially greater on appeal.
432 F.2d at 979. . . . And this is especially so where the
lower court has adversely determined the merits of the
controversy.
Blackwelder, 550 F.2d at 193-94 (footnotes and citations omitted; bold
emphasis added).
The command of Blackwelder is clear: the preliminary injunction
"balance of hardship" test is deliberately weaker than the "stringent"
test to be applied to a motion for stay pending appeal. In the latter
case, "where the lower court has adversely determined the merits of
the controversy," like here, an appellant must make "a strong showing
that it is likely to prevail upon the merits" in order to obtain a
stay. Mere balancing and "serious questions" will not suffice.
The Delaware courts have denied stays pending appeal in cases
involving a contested election of directors. See Frankino v. Gleason,
1999 Del. Ch. Lexis 218 (Nov. 12, 1999) (released for publication),
aff'd mem. sub nom McNamara v. Frankino, 744 A.2d 988 (Del. 1999).
There, Frankino cast his votes to elect new directors of the company.
The incumbent Board resisted Frankino, relying on a company by-law
which required a super-majority to effect the change Frankino sought.
Frankino sued to invalidate the by-law and the Delaware Court of
Chancery ruled in his favor.
The incumbent directors sought a stay pending appeal. The court
denied the stay, rejecting arguments just like those made by First
Financial here, because - regardless of the merits - it found that
"all three" of the hardship factors militated against the stay. The
court specifically rejected arguments, like those made here by First
Financial, that refusing to enter a stay would, as a practical matter,
defeat the appealability of the judgment and permit the election
winners to make changes in the operations of the company during the
appeal:
Defendants argue that if Frankino presently asserts control
over the Company, their ability to vigorously prosecute an
appeal will be impeded. . . . Frankino intimates that the
only harm defendants have in mind is that they will no longer
have access to the company purse strings to fund the costs of
an appeal. If this is indeed the reason for defendants'
inability to prosecute an appeal, it is not even cognizable
harm much less irreparable. ... Finally, defendants claim
that they will suffer irreparable harm if a stay is not
granted because Frankino will alter the business plan they
were implementing. This argument, obviously, cuts both ways,
as Frankino would surely make the same claim if I grant the
stay.
1999 Del Ch. Lexis 218, at *4-*5.
The court also rejected the incumbent directors' argument, again
just like that made by First Financial here, that the election winners
would suffer no harm during the pendency of the appeal if the
incumbent Board continued to act without the participation of the
election winner's nominees:
Defendants make no effort to demonstrate that Frankino will
not suffer substantial harm if the Court stays the judgment.
They simply assert that a stay will preserve the [pre-
judgment] Status Quo Order already entered in this case. This
conclusion fails to consider that this Court has ruled that
Frankino and his designees were rightfully elected to NAC's
board of directors several months ago and that there is no way
to adequately compensate them for the further delay of their
rights.
Id. at *5. Finally, the court found that the true public interest was
in vindicating the election results:
The only public interest issue at stake in this case is the
need to expeditiously complete and effectuate Section 225 actions.
This policy cuts in favor of immediately entering the
judgment.
Id. at *5-*6. A similar result is required here.
II. ARGUMENT
A. Management Has Not Made A "Strong Showing" That It Is Likely
To Succeed On The Merits
Judge Motz considered and rejected management's arguments on
three separate occasions, and each rejection was premised on the same
ground - that First Financial's by-law III.3 (the "Challenged By-
Law") was invalid under section 2-506(a)(2) and 2-404(d) of the
Maryland General Corporation Law ("MGCL"). See Aug. 28, 2002 Trans.
at 29-34; Sept 10, 2002 Trans. at 72-77; Opinion at 3-8.
In the court below, and now in this Court, First Financial
management argues for an interpretation of the MGCL that is contrary
to the language and history of these provisions, and contrary to the
structure of the statute as a whole. First Financial's argument seeks
exactly the "bizarre" result that the Maryland General Assembly
specifically identified as the result it was trying to avoid when in
passed MGCL Section 2-404(d). Nothing in First Financial's present motion
indicates that Judge Motz, an expert on Maryland corporate law,
reached an incorrect interpretation of the MGCL.
Judge Motz also ruled at the preliminary injunction hearing that
the by-law is invalid under section 16(a) of the federal Investment
Company Act of 1940, 15 U.S.C. Section 80a-16(a). Sept 10, 2002 Trans. at
72. Although Judge Motz did not reach the Investment Company Act
question in issuing the permanent injunction, management's violation
of the Act is an independent grounds for affirming Judge Motz's
decision. In order to obtain a stay here, then, management must also
make a strong showing that it is likely to prevail on the Investment
Company Act as well. But management has not even addressed the
invalidity of the Challenged By-law under that Act.
1. THE CHALLENGED BY-LAW IS INVALID UNDER THE MGCL
The Maryland Court of Appeals has stated that in "construing the
meaning of a word in a statute, the cardinal rule is to ascertain and
carry out the real legislative intent." Tucker v. Fireman's Fund Ins.
Co., 308 Md. 69, 73, 517 A.2d 730, 731 (1986) (emphasis added).
Stated another way, "the paramount goal of statutory interpretation is
to identify and effectuate the legislative intent underlying the
statute(s) at issue." Derry v. State, 358 Md. 325, 336, 748 A.2d 478,
483 (2000). In applying the "cardinal rule," the Maryland Court of
Appeals looks to both the statute as a whole and, where appropriate,
legislative history:
[O]ur interpretation of the statute and the legislature's
intent must be examined by looking to the statutory scheme in
its entirety rather than segmenting the statute and analyzing
only its individual parts. . By such an analytical approach,
we seek to avoid illogical and unreasonable results that defy
common sense.
Marsheck v. Trustees, 358 Md. 393, 403, 749 A.2d 774, 779 (2000)
(citations omitted).
[W]hen we pursue the context of statutory language, we are not
limited to the words of the statute as they are printed. ...
We may and often must consider other "external manifestations"
or "persuasive evidence," including a bill's title and
function paragraphs, amendments that occurred as it passed
through the legislature, its relationship to earlier and
subsequent legislation, and other material that fairly bears
on the fundamental issue of legislative purpose or goal, which
becomes the context within which we read the particular
language before us in a given case.
Williams v. Mayor & City of Council of Baltimore, 359 Md. 101, 116,
753 A.2d 41, 49 (2000) (emphasis added).
Management states that Judge Motz improperly followed these rules
of statutory construction in reaching his holding. FF Stay Motion at
9. But Judge Motz's analysis was entirely proper - a federal court
interpreting a state statute must employ that state's rules of
statutory construction. See Brownsburg Area Patrons Affecting Change
v. Baldwin, 137 F.3d 503, 507 (7th Cir. 1998); Municipal Utils. Bd. of
Albertville v. Alabama Power Co., 21 F.3d 384, 387 (11th Cir. 1994);
Phillips v. Chandler, 215 B.R. 684, 688 (E.D. Va. 1997).
The manifest and real legislative intent of the Maryland General
Assembly is that any super-majority voting requirement, such as the
Challenged By-Law, must be specified in the corporate charter on file
with the State or in the MGCL itself.
A. THE HISTORY OF MGCL SECTIONS 2-506(A)(2) AND 2-404(D)
Prior to 1951, both the corporate charter and the by-laws of a
Maryland corporation could contain a provision that "require[s] for
any purpose a proportionate vote greater than that required by statute
for such purpose." See H. Brune, Maryland Corporation Law Section 68
(1933 ed.); accord Larkin v. Baltimore Bancorp, 769 F. Supp. 919, 922 n.2
(D. Md. 1991).
In a major rewrite of Maryland law, the Maryland General Assembly
altered this rule in 1951 when it amended the MGCL to permit such
provisions only in the corporate charter:
[T]he only substantive change which has been made is that any
provision authorizing action to be taken by a corporation with
a greater or a smaller portion of votes than required by the
statute must be contained in the charter, whereas under
present law such a provision may be included either in the
charter or in the by-laws.
Larkin, 769 F. Supp. at 922 n.2 (quoting Reporters Notes to 1951
changes to MGCL). The 1951 change resulted in what is today Section 2-
506(a)(2) of the MGCL, which sets forth what is titled the "General
rule" in Maryland:
Unless this article or the charter of a corporation provides
otherwise ... [a] majority of all the votes cast at a
meeting ... is sufficient to approve any matter which
properly comes before the meeting.
Md. Code Ann. Corps. & Ass'ns. Section 2-506(a)(2). The 1951 revisions to
the MGCL represented a major, substantive revision to the law that has
never been equaled or repealed. The legislative history at the time
so indicated. Indeed, Judge Motz has previously ruled that section 2-
506(a)(2) is a "ban against super-majority votes." Larkin, 769 F.
Supp. at 924.
Signficantly, therefore, from 1951 on, any provision for a vote
greater than a majority of votes cast can only appear in two places -
the MGCL itself or the charter of a corporation. The management of
First Financial cannot - and does not - dispute that this has been the
Maryland law for over fifty years. And management cannot dispute that
the Challenged By-Law is illegal under the General Rule of section 2-
506(a)(2).
Instead, and quite ironically, First Financial's sole legal
argument rests on section 2-404(d) of the MGCL - a provision that was
enacted in 1981 specifically to ease the voting requirements for
directors' elections. As Judge Motz found, because the General
Assembly was concerned about the potential for failed directors'
elections even under the "majority of the votes cast" General Rule of
section 2-506(b)(2), it adopted section 2-404(d) of the MGCL to ease the
General Rule that requirement and to permit the election of directors
by a plurality of votes cast:
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.
Md. Code Ann. Corps. & Ass'ns. Section 2-404(d).
Section 2-404(d) was passed by the General Assembly in 1981 as
"'an exception to Section 2-506.'" Ideal Fed. Sav. Bank v. Murphy,
339 Md. 446, 457, 663 A.2d 1272, 1277-78 (Md. 1995) (quoting
Explanation of Senate Bill No. 659 Vote Required to Elect Directors
("Senate Bill No. 659 Explanation")). According to the legislative
history, the "purpose of the Bill is to provide that corporate
directors may be elected by a plurality of the votes cast if a quorum
is present." Id. at 1277. Indeed, section 2-404(d) established what
First Financial's own counsel has called the Maryland "public policy
in favor of plurality elections" for directors. J. Hanks, MARYLAND
CORPORATION LAW, Section 6.4, p. 158 (2001).
It is manifest, and Judge Motz so found, that the legislative
intent in 1981 was to make it easier to elect directors, not more
difficult, and to reduce the number of failed elections. See Opinion
at 5. The legislative history, cited by Judge Motz with approval, see
Opinion 4-5, is clear on this point:
It is also possible that no nominees would receive a majority
of the votes cast, in which case there would be no election
and the current directors could continue to serve until the
next annual meeting of stockholders. The Bill would
essentially eliminate the possibility of these bizarre
occurrences.
Senate Bill No. 659 Explanation (quoted in Ideal, 339 Md. at 458, 663
A.2d at 1277-78) (emphasis added). The entire purpose of the Bill
was to minimize the possibility that no election of directors would
occur because of an insufficiency of votes - the very result advocated
by First Financial's current management using Section 2-404(d).
When it enacted Section 2-404(d), the General Assembly certainly
did not intend to revert to the pre-1951 situation of permitting
super-majority provisions to appear in corporate by-laws. Section 2-
404(d) was a limited change in Maryland law to facilitate the election
of corporate directors. First Financial's arguments certainly do not
constitute a "strong showing" that Judge Motz was wrong on his
interpretation of the statute.
The reference to "by-laws" in Section 2-404(d) is neither surplusage
nor otherwise inexplicable, as management claims. Section 2-404(d)
sets the default rule for the election of directors to a plurality
instead of the General Rule of a majority of votes cast. It is
perfectly consistent with the legislative intent and the literal
language of the MGCL, and Judge Motz so found, Opinion p. 4, to permit
a corporation, through a by-law, to increase its director voting
requirement back to the General Rule of majority voting or to some
standard between a plurality and a majority of the votes cast (for
example, a plurality, but no less than 40% of the votes cast). But
when a corporation wants to exceed the General Rule it must place the
change in the charter, as specifically required by Section 2-506. This
reading of Section 2-404(d) is literal, consistent with the legislative
history, consistent with section 2-506, and consistent with the
Maryland public policy favoring liberal standards for the election of
directors.
This is particularly apparent when the importance of the General
Rule - that the majority of votes cast wins - is considered. The
General Rule is "[o]utstanding among the democratic processes
concerning corporate elections...." Standard Power & Light Corp. v.
Investment Assocs., Inc., 51 A.2d 572, 576 (Del. 1947). The General
Rule is so fundamental that the court in Standard Power went on to
hold that if the rule were not to be followed, then the exception
"must not be couched in ambiguous language, rather the language
employed must be positive, explicit, clear and readily understandable
and susceptible to but one reasonable interpretation, which would
indicate beyond doubt that the rule was intended to be abrogated."
Id. Of course, MGCL Section 2-404(d) does no such thing. To the contrary,
as found by Judge Motz, the section is subject to the General Rule
that prohibits a Maryland corporation from having a by-law requiring a
vote greater than a majority of votes cast - a rule that has been a
fundamental tenet of Maryland law since 1951.
B. THE STATUTORY STRUCTURE
Management's reading of the MGCL law exalts Section 2-404(d) - one
sentence in the entire article - over all other provisions. The
entire MGCL, when read as a whole, refutes management's argument and
makes clear Maryland's public policy that any restriction on the
General Rule must be placed in the corporate charter. MGCL section 2-
104(b) identifies provisions that may be included in the 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." Md. Code Ann. Corps. & Ass'ns. Section 2-104(b)(4). There
is no comparable section allowing such a voting provision to appear in
the by-laws. Compare Md. Code Ann. Corps. & Ass'ns Section 2-110 (by-laws
subservient to charter).
As noted above, Section 2-506(a)(2) provides that "[u]nless this
article or the charter of a corporation provides otherwise" a majority
of all the votes cast at a shareholders meeting is sufficient to
approve any matter which properly comes before the meeting. (Emphasis
added.) Management does not claim that First Financial's Charter
"provides otherwise" for the election of directors. Thus, directors
of First Financial are to be elected by a majority of votes cast at a
meeting, unless the MGCL itself provides otherwise. It does not. At
most, section 2-404(d), on its face, permits a voting standard for
directors, different from the plurality standard preferred under
Maryland public policy, to be set forth in the charter or by-laws.
It does not provide for the greater voting standard.
This reading, of course, makes both sections consistent with each
other. It does not read the fundamental and "outstanding" General
Rule of Section 2-506 out of the MGCL when it comes to directors'
elections, as management would do. It is consistent with the
legislative history and Maryland public policy. Finally, it makes
common sense and avoids the illogical and bizarre result advocated by
First Financial's current management.
2. THE CHALLENGED BY-LAW VIOLATES SECTION 16(A) OF THE
INVESTMENTCOMPANY ACT
First Financial is a registered investment company under the
Investment Company Act of 1940 (the "ICA" or "the Act") and must
comply with the rules and regulations of same, including Section
16(a). Section 16(a) of the ICA 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 [or] by-laws . 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); see also 1 T. Lemke, et al., REGULATION OF INVESTMENT COMPANIES
Section 6.03[2] (2000).
The plain language of section 16(a) governs. Starting at the
end, the section states that when the directors are divided into
classes, the term of one such class "share expire" each year. The
terms of management's directors "expire[d]" this year. Returning to
the beginning of the statute, it provides that "[n]o person shall
serve as a director . unless elected . at an annual meeting.." As
Judge Motz found, management's directors were not elected. See
September 10, 2002 Trans. at 72 ("Unquestionably, the two directors
nominated and supported by defendant were not elected at the last
meeting. That much we definitely know."). Thus, they "shall [not]
serve."
The Act requires that directors be elected at annual or special
meetings, especially when the directors are divided into classes.
Here, management is attempting to retain control by declaring that no
directors' election occurred and that, therefore, the incumbents
continue in office. That scheme, however, is flatly prohibited by the
ICA. Management is not likely to succeed on the merits of this issue.
B. First Financial Has Not Shown That It Will Be Irreparably
Harmed
Current management has failed to show any harm to First Financial
- as opposed to itself - if management's motion for a stay is denied.
The "harm" that the motion really seeks to prevent is "harm" to
current management arising from the potentiality that the new board
will change management. That, however, is demonstrably not harm to
First Financial itself.
1. THE INCUMBENT DIRECTORS CAN INTERVENE TO PRESERVE THEIR APPEAL
RIGHTS
Current management is patently wrong when it claims that "the
Fund will lose its right to de novo review in this Court." FF Stay
Motion at 17. The real parties in interest on this appeal are the two
management directors who lost the election. If ability to seek review
were the real issue motivating the instant motion for a stay, those
defeated directors could seek intervention to pursue the appeal under
Fed. R. Civ. P. 24(a). See Smoke v. Norton, 252 F.3d 468, 471 (D.C.
Cir. 2001) (intervention permitted to preserve right of appeal); see
also Houston General Ins. v. Moore, 193 F.3d 838, 840 (4th Cir. 1999)
(intervention on appeal timely if within appeal period). Indeed,
courts have allowed such intervention in identical contexts, see
Horizon Corp. v. Anselmi, 483 F. Supp. 653, 661 (D.D.C. 1980), and
refused to find irreparable harm merely because incumbent directors
who lost an election would lose the ability to fund their legal
challenge to the election results. See id.; Crown Resource Corp. v.
Gold Capital Corp., 650 F. Supp. 985, 988 (D. Colo. 1987); Frankino,
1999 Del. Ch. Lexis 218, at *4-5. And the losing directors in this
case have no worry concerning costs because counsel for First
Financial's management has offered to pursue their appeal free of
charge. See Sept. 20, 2002 Trans. at 6. Thus, there is no foundation
to management's argument that the appeal rights of the real parties in
interest will not be preserved if its motion is denied.
2. THERE IS NO EVIDENCE THE ELECTED BOARD WILL ACT DETRIMENTALLY TO THE
INTERESTS OF FIRST FINANCIAL
Management also ignores entirely the law applicable to directors
and the exercise of their duties under Maryland law. Under the MGCL,
the two newly elected directors are "independent and disinterested
when making any determination or taking any action as a director"
under the Investment Company Act of 1940. Md. Code Ann. Section 2-405.3.
And though not acknowledged by current management's motion, a
director, including the new directors, is charged with the duty to act
in "good faith," in "a manner he reasonably believes to be in the best
interests of the corporation," and with "the care that an ordinarily
prudent person in a like position would use under similar
circumstances." MGCL Section 2-405.1(a).
Management does not claim that the directors will violate any of
these duties. Indeed, management's motion is notable in that it does
not even allege that a decision to forego an appeal would be a breach
of the directors' fiduciary duty to the corporation and a violation of
the business judgment rule. That omission is telling. It reveals
that the motion is really an effort by management to maintain
management's position, even if the directors elected by a majority of
the voting shares were to decide to the contrary.
C. Badlands Will Be Harmed By the Continued Denial Of The Power
Of Its Votes
The real harm here is to Badlands, not movant. Current
management is so bold as to argue that unelected holdover directors
should continue to direct the affairs of First Financial during the
pendency of an entire appeal:
The incumbent directors . are best suited to protect the Fund
and its stockholders while the appeal is pending. The Court
should therefore stay the district court's Order and allow the
current directors to meet to address matters as they arise in
the ordinary course during the pendency of the appeal.
FF Stay Motion at 18 (emphasis added). First, such an argument
ignores the will of the voters, who decided that new directors were
"best suited to protect the Fund and its stockholders." That
argument, moreover, ignores the serious harm to Badlands (and to First
Financial itself), which Judge Motz noted on several occasions:
[T]here is a harm in an investment company essentially being
directed by two directors, including in its directors meeting
two directors who I think, as I will say in a moment, I do not
believe should be holding office. And so I do think that that
is itself a serious harm being suffered by the plaintiffs . .
..
August 28, 2002 Trans. at 29-30. And, on September 10, 2002:
I do believe that the plaintiff will be harmed by having a
board meeting on which it was not represented when I think it
should be, because I think its two persons who won the voting
should be there.
September 10, 2002 Trans. at 70.
Yet, management's motion proposes just this event - allow the
expired directors to sit in place of duly elected and valid directors,
in contravention of the wishes of sixty percent of the voting shares
of First Financial. This would irreparably harm Badlands and would
irreparably harm the shareholders of First Financial. Indeed, it
would irreparably harm First Financial itself.
D. The Public Interest Is That The Shareholders' Vote Be
Respected
The public interest is best served by respecting the
shareholders' vote. As the District Court recognized early on, the
best indicator of the public interest is the language and policy of
Section 16 of the Investment Company Act that directors of investment
companies should be elected and that directors whose terms have
expired "shall not serve."
First Financial's speculation that Judge Motz's ruling will have
a "substantially unsettling impact" on Maryland corporations, FF Stay
Motion at 19, is just that - speculation. The legal question here is
not difficult, and does not appear to have broad effect, since it
has been known since 1951 that a corporation cannot do in its by-laws
what First Financial is trying to do. The public interest requires
that the shareholder vote be respected and implemented.
III. CONCLUSION
First Financial management has not made a "strong showing" that
it is "likely" to prevail on the merits. Management's argument would
both violate the General Rule of majority voting and result in the
very "bizarre occurrence" that the Maryland General Assembly was
attempting to avoid when it enacted MGCL Section 2-404(d).
Management has also not shown that First Financial itself will be
irreparably harmed if the stay is not granted. And if the stay is
granted, management's scheme to thwart the will of the shareholders
will continue, irreparably harming Badlands. We ask the Court 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),
and deny First Financial's motion.
Respectfully submitted,
/s/ James H. Hulme
James H. Hulme
Donald B. Mitchell, Jr.
Benjamin I. Fishman
J. Marcus Meeks
ARENT FOX KINTNER PLOTKIN & KAHN, PLLC
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
Telephone: (202) 857-6144
Counsel for Plaintiff-Appellee, Badlands
Trust Company
FOOTNOTES:
1. The transcripts of each hearing in the District Court are attached
at Appendix A.
2. Judge Motz is no stranger to the very sections of the Maryland
corporate law at issue. In past cases, he has demonstrated a cogent
understanding of Maryland corporation law - a law that he has been working
with for at least ten years on the bench. See, e.g., Larkin v.
Baltimore Bancorp, 769 F. Supp. 919 (D. Md. 1991) (Motz, J.), aff'd mem.,
948 F.2d 1281 (4th Cir. 1991); Dickson v. Morrison, 18 F. Supp. 2d 559
(D. Md. 1998) (Motz, C.J.), aff'd, 1999 U.S. App. Lexis 17795 (4th Cir.
1999) (unpublished), reported at 187 F.3d 629 (Table).
3. The facts are described in the Chancery Court's opinion on the
merits, Frankino v. Gleason, 1999 Del. Ch. Lexis 219 (Nov. 5, 1999).
4. The Delaware standard for a stay pending appeal is, in some ways,
similar to this Court's, except weaker. It contains the same four factors,
but provides that if the court finds that all three of the "hardship
factors" (factors two through four) strongly favor relief, then the court
may grant a stay "'if the petitioner has presented a serious legal question
that raises a fair ground for litigation.'" 1999 Del. Ch. Lexis 218, at *3
(quoting Kirpat, Inc. v. Delaware Alcoholic Beverage Control Comm., 741 A.2d
356 (Del. Super. 1998)).
5. The Challenged By-law reads: "[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." (Emphsis added.)
6. An appellate court may affirm a lower court ruling on any legal and
actual basis fairly presented in the district court. Adventure Communs. Inc.
v. Ky. Registry of Election Fin., 191 F.3d 429, 439 (4th Cir. 1999).
7. Out of necessity, but not very artfully, First Financial attempts
to demean this legislative history as a "document of unknown origin or
authorship.." FF Stay Motion at 7. Notwithstanding First Financial's
views, the document is from the official legislative history and has been
used by the Maryland Court of Appeals in interpreting section 2-404(d).
While the legislative history may be inconvenient to First Financial - not
to mention fatal to its legal argument - it remains the prime evidence of
the legislative intent underlying section 2-404(d).
8. As Judge Motz recognized, an important reason to minimize and avoid
failed elections is to avoid putting an investment company on the path to
dissolution. See Sept. 10, 2002 Trans. at 77; Opinion, p 5-6. First
Financial's current management, however, would apparently rather the
company dissolve than proceed under new directors. They urge this Court not
to worry about a failed election because the incumbent directors will simply
"hold over" for a year until the next election, and if the stockholders
again are unable to elect new directors they could petition to dissolve
the corporation. See Stay Motion at 17. But dissolution, especially of
a publicly traded corporation, is draconian and should not be encouraged.
Cf., Lerner v. Lerner, 306 Md. 771, 511 A.2d 501, 510-11 (1986) (dissolution
an "extreme remedy" with "drastic consequences" (citations and quotations
omitted). Judge Motz refused to read MGCL Section 2-404(d) in a manner
that would encourage such drastic action, as should this Court.
9. "Provide" means "to arrange for or stipulate beforehand, as by a
provision or proviso." Webster's Unabridged Dictionary, law def (4), at
1557 (2d ed. Random House 1997). "Provided by law" means "prescribed or
provided by some statute." Black's Law Dictionary 1224 (6th ed. 1990). As
noted by Judge Motz, at least eight other sections of the MGCL "provide" for
a shareholder vote greater than a majority of votes cast at a meeting. See
Opinion at 8 (citing sections 2-306(b)(4), 2-309(b)(5)(ii), 2-604(e),
3-105(e), 3-403(d), 3-501(d). 3-602(b), and 3-702(a)). Each of those
sections provide the greater voting standard itself - with specificity -
and establish it as the voting standard for the action being taken. Not
one of them simply permits the greater voting standard to be contained in
the by-laws.
10. "Permit" means "to allow to do something." Webster's, supra, at 1443.
Section 2-404(d) may allow for a departure from the plurality voting standard
to appear in the charter or by-laws. It does not, however, "provide" such
a standard.
11. A private right of action to enforce Section 16(a) exists under the ICA.
Section 43 of the statute vests in federal district courts jurisdiction over
"all suits in equity and actions at law brought to enforce any liability or
duty created by, or to enjoin any violation of, this subchapter." 15 U.S.C.
Section80a-43 (emphasis added). Thus, if a company subject to the act
violates one of its provisions, an injunction action can be brought to
enforce adherence to the provision. This Court has specifically relied
on section 43 in finding that a private right of action exists under the
ICA. See Brown v. Eastern States Corp., 181 F.2d 26, 28 (4th Cir. 1950).
In addition to the text, the legislative history also compels the
conclusion that a private right of action exists under Section 16(a). The
Third Circuit has described ICA legislative history as "disclos[ing]
congressional enthusiasm for private enforcement." Bancroft Convertible
Fund, Inc. v. Zico Inv. Holdings, Inc., 825 F.2d 731, 733-36 (3d Cir. 1987).
And the congressional mandate could not be clearer:
The Committee wishes to make plain that it expects the courts to imply
private rights of action under this legislation, where the plaintiff
falls within the class of persons protected by the statutory provision
in question.
See id. (quoting H.R. Rep. No. 1341, 96th Cong., 2d Sess. 28-29 (1980),
reprinted in 1980 U.S. Code Cong. & Admin. News 4810-11) (emphasis added).
Congress made this statement to ensure that Supreme Court decisions strictly
construing statutory language to determine congressional intent did not stop
courts from finding private causes of action under the ICA. See id.
Accordingly, courts have continued to find private rights of action under
ttheICA. See, e.g., Lessler v. Little, 857 F.2d 866, 870-74 (1st Cir.
1988); In re ML-Lee Acquisition Fund II, L.P., 848 F. Supp. 527, 538-39
(D. Del. 1994).
12. Nor would requiring the real parties in interest to pursue this appeal
limit the remedies available to this Court; if the Court were to reverse
Judge Motz, the incumbent directors could be reseated on the First Financial
Board. See Crown Resource Corp., 650 F. Supp. at 988 ("[T]he court can
always set aside the results of the election, if warranted, or grant other
necessary relief.").
13. Under Maryland law, "any exercise of the corporate power to institute
litigation and the control of any litigation to which the corporation becomes
a party rests with the directors or, by delegation, the officers they
appoint." Werbowsky v. Collomb, 362 Md. 581, 599, 766 A.2d 123, 133 (2001).
14. Notably absent from management's brief, again, is any citation to even
one Maryland investment company that has a bylaw similar to First Financial's.