Even if dissident shareholders win their suit in U.S. District Court to take over Baltimore Bancorp, they probably will have to wait until appeals are exhausted before taking control of bank, according to Judge J. Frederick Motz.
At the end of a hearing yesterday, Motz said if he finds in favor of the dissidents, he probably will stay the order to prevent them from taking over the bank and dropping all litigation.
Lawyers for the dissidents had discussed the possibility that if Motz ruled in their favor their clients could take over the bank and short-circuit the legal battle.
"If our directors are sitting, I wouldn't be surprised if they voted to dismiss the litigation," Dennis Gingold, an attorney for the dissidents said in a previous interview.
Baltimore Bancorp, the parent company of the Bank of Baltimore, is the fifth largest banking operation in Maryland. The dissident group is led by Edwin F. Hale Sr., who owns the Baltimore Blast soccer team as well as trucking and barging businesses.
In a proxy fight, a group tries to persuade shareholders to support its slate of candidates by casting votes at a company's annual meeting.
Yesterday's hearing before Motz came a week after a preliminary count of shareholder ballots showed that 16 dissident nominees won a majority of the total votes cast.
Unless Motz overturns it, the vote means that at least six of the opposition candidates will sit on the board. The dissidents also won a majority on a motion to enlarge the board of directors from 18 to 28. If that motion is upheld by Motz, the Hale group would have a majority of the board.
A final report on the count was issued by Corporation Trust Co. yesterday, confirming that Hale candidates won by a margin of 5.5 million to 3.8 million. On the issue of enlarging the board, the vote was 5.2 million for, 4.2 million against and another 1.1 million ruled as abstaining.
After the vote was confirmed, Hale yesterday sent a letter to Harry Robinson, chairman and chief executive officer of Baltimore Bancorp, saying that he and five other opposition candidates are ready to assume their positions at the next scheduled board meeting on Tuesday.
Jerome Baroch, senior executive vice president of Baltimore Bancorp, said he did not know if the bank has made any decision on whether Hale and the other five candidates will be allowed to attend the meeting on Tuesday.
Baroch said legal action is still pending and the 1.1 million abstaining votes will be contested by the bank holding company.
The issues of what constituted shareholder votes and what bylaws and regulations were in effect at the time were the focus of the hearing yesterday.
Motz was skeptical of arguments presented by both sides. "I don't know if there are angels on either side of this case," he said one point. Motz said he would have a decision as soon as possible.
A key issue is whether the dissidents need a 50 percent vote or an 80 percent vote to expand the board of directors from 18 to 28 members.
Since only a third of the 18 members were up for election, the Hale group's strategy to take over the board included expanding the board to 28 members and then electing 16 members. But the company's bylaws require an 80 percent vote to change the size of the board -- which the Hale group did not achieve.
William Bradford Reynolds, an attorney for the Hale group, argued that a Maryland law requires that such a super-majority requirement be in the company's charter. "The shareholders have a right to amend," he told Motz.
However, David Clarke, an attorney for Baltimore Bancorp, said other state laws allow corporations to set super-majority requirements in their bylaws on other issues, such as the election of directors.
He also questioned whether the dissident shareholders even had a majority of the shareholder votes to enlarge the board.
Clarke pointed out that in the vote to enlarge the board 5.2 million shares were voted for the provision out of a total of 10.5 million cast.
While only 4.2 million votes have been officially counted a opposed to enlarging the board, Clarke contended that 1.1 million votes that were counted as abstentions should have counted in management's favor. The bank will bring suit to challenge the designation of those votes as abstentions, Clarke said.
Motz said he found Clarke's argument about dissidents no gaining a majority on the enlargement issue significant. "That's the knife that cuts the Gordian knot," he said.
The contested 1.1 million votes were "beneficially" voted by company on behalf of individual shareholders and companies. Under these situations, proxies are sent to a central company, which sends one form stating how the proxies were voted. Baltimore Bancorp contends it should have the right to vote these shares on its behalf, as if the proxies were sent to the bank directly.
However, Corporation Trust, the firm that counted the proxies, decided to count the votes as abstentions, Clarke said.
The whole issue of whether the bank could use its discretionary right to vote shares was also an issue at the hearing, with Reynolds saying other discretionary votes should be cut out.
He said that if discretionary votes were not counted it would cut
off another 2 million votes from the company's total.
Under normal circumstances, shareholders who send in their proxies before a meeting give management the right to vote their shares on matters that come before the meeting. In this case, the company used these discretionary votes against the proposal to increase the size of the board.
The Hale group contends that the discretionary power can not be used in this case because a specific shareholder proposal was presented before the annual meeting on May 22 and management should have solicited authority from the shareholders to vote against it.
But, noting that the Hale group issued its proxy materials only seven days before the annual meeting, Motz questioned whether the Hale group intentionally timed the effort to challenge the discretionary votes
"As a matter of strategy and gamesmanship, that is the way to do that," Motz said to Reynolds. "You don't want to set a precedent to encourage late filings," he said.
However, Reynolds said if the shareholders supporting the Hale group had to send in new proxies, those supporting management should have had to do the same. "If some of the shareholders have to make that call, all of the shareholders should have to," he said.
The Hale group also objected to the extension of voting from the end of the annual meeting on May 22 to noon on May 28. However, Motz questioned whether the company had a choice, since the request for the extension came from the Securities and Exchange Commission, the federal agency that regulates security matters.
But Reynolds insisted that the company should have gotten permission from its shareholders, as required in the company's bylaws." If your are going to have an adjourment,you have to do it according to the bylaws," he said.
Counting the votes as of either May 22 or May 28,Hale's group won a majority