PHILADELPHIA – A federal appellate court has ruled that appointing a custodian to oversee the affairs of Republic Bank was not required, even as it also OK’ed the ouster of a member of the bank’s Board of Directors.
In an opinion released on July 6 and authored by Judge Kent A. Jordan, the U.S. Court of Appeals for the Third Circuit found that such a custodial appointment is only necessary in “extreme” cases of illegality or fraud, which it said was not the case here – though it did term the course of events as “dramatic.”
“The eight-person Board of Directors of Republic First Bancorp, Inc. evenly split into two factions – one led by the current CEO Vernon W. Hill II, and one led by the former CEO and founder, Harry D. Madonna – 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 [Theodore Flocco] 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,” Jordan said.
“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.”
Jordan and his colleagues termed 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 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,” Jordan said.
“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.”
Jordan explained there were no “sound grounds for appointing a custodian for Republic First” and that the company’s Bylaws “obligate a majority of the directors in office to fill the vacancy resulting from Flocco’s death, regardless of any quorum requirement.”
“Because the Madonna Directors make up a majority of the directors in office, they ‘shall’ fill the vacancy, and then, with control of a full quorum, they can ratify past acts and transact business on behalf of Republic First – at least until the upcoming annual shareholders’ meeting, where the shareholders will have an opportunity to alter the Board’s composition,” Jordan stated.
“The fact that the Madonna Directors’ current conquest of the Board came about through a sad and unexpected event – rather than through a shareholder vote – does not justify judicial intervention. The Bylaws, duly adopted by Republic First’s shareholders, provide a contingency plan for this exact situation. By jettisoning that contingency plan and appointing a custodian, the District Court abused its discretion. We will therefore reverse and remand for proceedings consistent with this opinion.”
Subsequent to the Third Circuit’s ruling, the now-helmed-by-Madonna Republic First Bank disclosed that it had appointed ex-investment banker Benjamin C. Duster IV to its Board of Directors.
Duster also sits on the Boards of Directors for oil corporations Chesapeake Energy Corporation, Weatherford International Inc. and Diamond Offshore Drilling Inc.
U.S. Court of Appeals for the Third Circuit case 22-2023
U.S. District Court for the Eastern District of Pennsylvania case 2:22-cv-01924
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com