Seidman v. Clifton Savings Bank, S.L.A., A-100 September Term 2009; Supreme Court; opinion by Rivera-Soto, J.; decided March 16, 2011. On certification to the Appellate Division. [Sat below: Judges Fuentes, Gilroy and Chambers in the Appellate Division.] DDS No. 06-1-1350 [48 pp.]

The Court considers a challenge to a corporate management stock incentive plan, and determines whether the stockholders’ approval of the plan was vitiated by a claimed failure to fully and completely disclose that the maximum stock option grants and restricted stock awards allowable to the entity’s board of directors, in fact, would be made.

Clifton Savings Bank, S.L.A., was reorganized in 2004 from a mutual savings and loan association to a stock savings and loan association under a mutual holding company structure. The bank’s issued and outstanding stock was held by Clifton Savings Bancorp Inc. Approximately 45 percent of Bancorp’s stock was sold to the public; the remainder was held by Clifton MHC. Plaintiff Lawrence Seidman became a stockholder of Bancorp during the reorganization.

In anticipation of its 2005 annual stockholders meeting, Bancorp issued to the stockholders a notice of the meeting and a proxy statement. The notice advised that the stockholders would be asked to consider and approve Bancorp’s 2005 Equity Incentive Plan. The proxy statement, which was subject to filing with and examination by the Securities and Exchange Commission prior to its issuance, summarized the plan and explained that Bancorp’s board of directors had adopted it subject to stockholder approval. A copy of the plan was attached.

The plan’s stated purposes included attracting and retaining qualified personnel in key positions; providing officers, employees and nonemployee directors of Bancorp and the bank with an incentive to contribute to Bancorp’s success; and rewarding employees for outstanding performance. The proxy statement noted that the plan would be administered by a compensation committee, which would select the individuals to receive stock incentives and determine the amount and type of incentive. The proxy statement’s summary description of the plan explained that there were limits on the awards and that, if the stockholders approved the plan, the compensation committee would consider all necessary information in determining the awards, including individual job performances and surveys of grants awarded by similarly situated companies. The proxy statement also noted that Clifton MHC, whose directors were the same individuals as the directors of Bancorp, owned approximately 55 percent of the shares of common stock and would be voting “for” the plan, but approval would require the affirmative vote of a majority of the votes excluding the shares held by Clifton MHC. Finally, the plan made clear that it would comply with federal regulations governing stock awards.

The stockholders approved the plan. The compensation committee issued grants of stock options to Bancorp’s board of directors and to 22 other employees of the bank, and it issued restricted stock awards to Bancorp’s board members and to 42 bank employees.

Seidman sued the bank, Bancorp and the directors, alleging that it was a foregone conclusion that the compensation committee was going to issue the maximum amount of stock option grants and restricted stock awards to the members of Bancorp’s board of directors, and that the failure to make that disclosure vitiated any stockholder approval received.

The Chancery Court applied the business-judgment rule and the doctrine of corporate waste and dismissed Seidman’s claims for failure to meet the burden of proof. The Appellate Division affirmed.

The Supreme Court granted Seidman’s petition for certification.

Held: Plaintiff failed to satisfy his burden to overcome the effect of the business-judgment rule and to demonstrate that the stock option grants and restricted stock awards given to the directors of defendant under the 2005 equity incentive plan constituted corporate waste.

As set forth in Eliasberg v. Standard Oil Co. , the business-judgment rule provides that, once the shareholders approve or ratify a proposed corporate action, a court’s scope of review of the transaction is limited: “the court will look into the transaction only far enough to see whether the terms are so unequal as to amount to waste, or whether on the other hand the question is such a close one as to call for the exercise of what is commonly called ‘business judgment.’” The distinction between whether an action constitutes corporate waste or is subject to the business-judgment rule is one of substance: “In the former case, the court will reverse the decision of the stockholders; in the latter, it will not.”

Under the business-judgment rule, stockholder-approved or -ratified corporate actions are presumed correct and the presumption may be rebutted only if the challenged corporate actions are so far from the norm of responsible corporate behavior as to be unconscionable or constitute a fraud, impermissible self-dealing or corporate waste. Here, the Court rejects Seidman’s argument that Bancorp is not entitled to the benefit of the business-judgment rule because the 2005 plan did not specifically advise that the compensation committee would issue to the directors the full measure of stock incentives allowable under the relevant federal regulations. The disclosures made to the stockholders sufficiently placed them on notice that there were regulatory limits governing who was eligible to receive stock under the plan and in what amounts, and the plan and proxy statement explained in detail how the decisions would be made. Additionally, no stockholder who voted for the plan testified that he or she was misled, and the proxy was filed with the SEC. Plaintiff failed to satisfy his burden to overcome the effect of the business-judgment rule.

Seidman also failed to demonstrate that the stock option grants and restricted stock awards given to the directors under the 2005 plan constituted corporate waste. Even though rewarding Bancorp’s directors, who were long-term, well-compensated employees, did not align with a stated purpose of the plan to attract new blood and retain existing personnel, the Chancery Court properly found that the other stated purposes of the plan were satisfied by the stock option grants and restricted stock awards given to the directors.

Chief Justice Rabner and Justices Long , LaVecchia , Albin and Hoens , and Judge Stern (temporarily assigned), join in Justice Rivera-Soto ‘s opinion.

— By Debra McLoughlin

For appellants — Peter R. Bray (Bray, Miller & Bray; Pashman Stein of counsel). For respondents — Richard A. Beran (McCarter & English; Michael M. Horn of counsel; Beran and Steven A. Beckelman on the briefs).