In Seidman v Clifton Savings Bank, S.L.A., (S.Ct. 2011), the NJ Supreme Court affirmed the Appellate Court decision finding that Clifton Savings Bank awards under their Stock Incentive Plan met the Business Judgment Rule and, as such, Seidman’s challenge was denied.

Clifton Savings Bank reorganized in 2004, issuing stock, of which 45% were made available to the public.  Seidman bought some of such stock.  In 2005, Clifton (via holding company Bancorp) issued a notice of the 2005 annual meeting, summarizing a Stock Incentive Plan to be enacted allowing for stock option grants and restricted stock awards to the board of directors and key staff.  The stockholder approved the plan.  

Clifton awarded the full possible amount of awards to its board of directors and key staff.  Seidman filed suit arguing that the incentive were not designed to retain service, left insufficient shares and options to attract new qualified people, were not consistent with any study or survey and constituted an unreasonable portion of Bancorp’s/Clifton’s net earnings. Seidman argued that disclosure of the stock plan was insufficient and that there was corporate waste.

The court held that once a stock incentive plan is approved or ratified by the stockholders, a challenger to the plan bears the burden of proving that the business judgment rule —-no person of sound business judgment would view the consideration furnished by the individual directors a fair exchange for the awards conferred—has not been met.   The distinction between whether an action constitutes corporate waste or is subject to the business judgment rule is one of substance; i.e. in the former case, the court will reverse the decision of the stockholders and, in the latter case, it will not.

Gabrielle L. Strich, Esq.

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