Hill v. Cohen

40 F.4th 101

Vernon W. HILL, II; Brian Tierney; Barry Spevak, Derivatively ON BEHALF OF REPUBLIC FIRST BANCORP INC.

v.Andrew B. COHEN; Lisa Jacobs; Harry Madonna; Harris Wildstein; Republic First Bancorp Inc.,Andrew B. Cohen, Lisa Jacobs, Harry Madonna, Harris Wildstein, Appellants

No. 22-2023

United States Court of Appeals, Third Circuit.

Argued June 28, 2022

Filed: July 6, 2022

Andrew M. Erdlen, John S. Summers, Hangley Aronchick Segal Pudlin & Schiller, One Logan Square, 18th & Cherry Streets, 27th Floor, Philadelphia, PA 19103, Frank Olander, Michael E. Swartz [ARGUED], Schulte Roth & Zabel, 919 Third Avenue, New York, NY 10022, Counsel for Appellants

Amit Agarwal [ARGUED], Holland & Knight, 315 South Calhoun Street, Suite 600, Tallahassee, FL 32301, Tracy Z. Quinn, Carolyn P. Short, Holland & Knight, 2929 Arch Street, Suite 800, Philadelphia, PA 19104, Martin L. Seidel, Holland & Knight, 31 West 52nd Street, 12th Floor, New York, NY 10019, Counsel for Appellees

Before: JORDAN, PORTER, and PHIPPS, Circuit Judges

OPINION OF THE COURT

JORDAN, Circuit Judge.

Under Pennsylvania law, a court has the power to appoint a custodian to take control of a corporation if the corporation's board of directors is deadlocked or if the directors' acts are illegal, oppressive, fraudulent, or wasteful. 15 Pa. Cons. Stat. §§ 1767(a)(3), 1981(a). But that power should be "used sparingly, with caution and circumspection, and only in an extreme case[.]" Tate v. Phila. Transp. Co. , 410 Pa. 490, 190 A.2d 316, 321 (1963).

This is not such an extreme case, though its facts are dramatic. The eight-person Board of Directors of Republic First Bancorp, Inc. ("Republic First" or "FRBK"¹ ) became evenly split into two factions – one led by the current CEO, Vernon W. Hill, II (the "Hill Directors"), and one led by the former CEO, Harry D. Madonna (the "Madonna Directors") – with competing visions for the future of Republic First and its bank subsidiary. The deadlock persisted until May 10, 2022, when one of the Hill Directors died. The Madonna Directors immediately used their newfound numerical advantage to start rearranging the bank's leadership and to take steps to fill the vacancy on the Board with an ally. The Hill Directors sued in the District Court to make them stop.

Within hours of receiving the complaint, the District Court ordered the Madonna Directors to cease their actions while it considered whether to appoint a custodian. Nine days later, without an evidentiary hearing or fact-finding, the Court did appoint a custodian to take control of Republic First and to hold a special shareholders' meeting to fill the vacant Board seat. The following month, the District Court – without prompting from any shareholder or Board member – directed the custodian to add an additional seat to the Board and to fill that seat at the special shareholders' meeting as well.

The District Court's decision to displace the corporate governance structure of a publicly traded company, while no doubt well-intended, did not reflect the required caution, circumspection, or justification for such a drastic step. Republic First's bylaws (the "Bylaws") provide instructions for how the Board should proceed after the death of a director, and, in this case, the Madonna Directors followed those instructions. They were and are entitled to fill the vacancy, thus presumptively giving them a Board majority. The District Court abused its discretion by hastily supplanting the Bylaws with its own process for filling the vacancy. Because the Madonna Directors were acting pursuant to the Bylaws when they took steps to appoint a new director, there was no deadlock, illegality, oppression, or any other ground for appointing a custodian for Republic First. Having expedited consideration of the Madonna Directors' appeal, we will now reverse.

I. BACKGROUND ²

The Board of Republic First is split into two factions that are engaged in a contentious battle over the future of the company. The first faction is led by Hill, current CEO of Republic First. His allies are Brian Tierney and Barry Spevak, and, prior to his passing, also included Theodore Flocco. The other faction is led by Madonna, founder and former CEO of Republic First. Madonna's allies are Andrew Cohen, Lisa Jacobs, and Harris Wildstein. In general, the Hill Directors' vision for Republic First is to press forward with its current strategy, which is focused on expanding its retail banking business and adding new branch locations, while the Madonna Directors have indicated an interest in refinancing or selling the company.

Those competing visions created tension on the Board and began playing out in public ahead of this year's upcoming annual shareholders' meeting, at which the seats of three Hill Directors, including Hill himself, are up for election. The first indication that the upcoming Board election would be unusually eventful came in October 2021, when Driver Opportunity Partners I, LP ("Driver"), a shareholder of Republic First, sent a letter to the Board criticizing Hill's leadership and the retail-expansion business strategy. Driver called for the removal of Hill from the Board and from his position as CEO. A month later, Driver submitted a slate of three Board candidates to replace Hill and two of Hill's allies, Spevak and Flocco.

Driver is not the only activist investor interested in the upcoming Board election. In January 2022, a group of shareholders consisting of Phillip Norcross, Gregory Braca, and the Avery Conner Capital Trust (collectively, the "Norcross Group") sent a letter to the Board proposing several business strategy changes and suggesting that Hill be replaced as CEO. The Norcross Group wanted to meet with the Board about its proposals, but "Hill indicated no interest on his part in any discussions[.]" (App. at 73.) That prompted the Norcross Group to announce that it intended to solicit proxies in opposition to the incumbent directors.

Around this same time, the Madonna Directors began signaling their interest in a sale of Republic First. On multiple occasions, they "proposed to vote, and voted, in favor of entertaining inquiries and possible offers for the sale of FRBK and have vigorously advocated for a sale to the Norcross Group[.]" (App. at 73.) The Hill Directors opposed a sale, arguing that the company is still in the middle of its expansion strategy and that the recent market conditions for bank stocks would result in unfavorable deal terms.

Despite the divergent views on the merits of a sale, the Board unanimously nominated Hill, Spevak, and Flocco for re-election as Republic First's slate of candidates at the annual shareholders' meeting. That cooperation quickly unraveled, however, when the Board's compensation committee (which included Spevak and Flocco) voted to not renew Madonna's employment agreement with Republic First.³

The next week, on March 4, 2022, the Madonna Directors issued a press release accusing the Hill Directors of self-dealing and mismanagement (the "March Press Release"). Captioned "Concerned Republic First Bancorp Directors Oppose Potential Harmful Actions by Other Company Board Members," the press release raised three "concerns":

1. the "[e]xtension of a contract to have a company owned by Hill's wife ... handle architecture, interior design and related services for the bank's branches";

2. "[a]greements obligating the incurring [of] expenses related to the opening of new branches and the renovation of existing ones"; and

3. "proposed amendments to certain employment contracts that would provide significantly augmented severance payments to, and risk retention of, key executives should Hill be voted off the company's board at the upcoming annual meeting or cease to serve as CEO."

(App. at 75.) The March Press Release garnered significant press coverage. Days later, the Norcross Group filed a lawsuit in Pennsylvania state court against Republic First and the Hill Directors, based entirely on the allegations in the March Press Release. Almost simultaneously, the Norcross Group offered an investment of at least $50 million in exchange for a 51% stake in Republic First, the right to nominate at least two members to the Board, and the resignation of Hill as chairman and CEO. The lawsuit was later withdrawn, and the Board has not acted on the offer, despite interest from the Madonna Directors.

The March Press Release also led Republic First's independent auditor, Crowe LLP, to express concern about the forthcoming audit of Republic First's financial statements for the 2021 fiscal year. Crowe asked each director to sign a letter representing that there was no substance to the concerns expressed in the March Press Release. When the Madonna Directors and the Hill Directors failed to agree on the contents and conditions of such a letter, Crowe notified them that it would not certify Republic First's financial statements until an independent investigation of the company had been completed. The two Board factions agreed to hire Wilmer Cutler Pickering Hale and Dorr LLP ("WilmerHale") as independent legal counsel to conduct that investigation. In the meantime, however, Republic First would have no audited financial statements, leaving it unable to file its Form 10-K for the 2021 fiscal year or solicit proxies for its proposed slate of directors. The Board anticipated that it would have to delay its annual shareholders' meeting until after it could file the 10-K. During this time, Driver continued to solicit proxy votes for its slate of Board candidates.

The unexpected upheaval leading directly to this suit arrived on May 10, when Flocco, one of the Hill Directors, passed away. Two days later, Madonna called a special meeting of the Board for May 13. The Hill Directors did not attend that meeting, but the Madonna Directors, pressing forward with a new 4-to-3 majority on the Board, proceeded to remove Hill as Chairman of the Board, install Madonna as Interim Chairman, authorize Madonna to...