Badlands Trust Co. v. First Financial Fund, Inc.

UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BADLANDS TRUST COMPANY, a South 

Dakota corporation, as Trustee for

Lola Brown Trust No. 1B,

Plaintiff-Appellee,

v.  No. 02-2088

FIRST FINANCIAL FUND,

INCORPORATED, a Maryland

corporation,

Defendant-Appellant.



Appeal from the United States District Court

for the District of Maryland, at Baltimore.

J. Frederick Motz, District Judge.

(CA-02-2423-JFM)

Argued: December 6, 2002

Decided: January 30, 2003

Before WILKINS, MICHAEL, and KING, Circuit Judges.

Reversed by unpublished per curiam opinion.

COUNSEL

ARGUED: Jeffrey B. Maletta, KIRKPATRICK & LOCKHART,

L.L.P., Washington, D.C., for Appellant. James Harold Hulme,

ARENT, FOX, KINTNER, PLOTKIN & KAHN, P.L.L.C., Washing-

ton, D.C., for Appellee. ON BRIEF: Donald B. Mitchell, Jr., J. Mar-

2 BADLANDS TRUST CO. v. FIRST FINANCIAL FUND

cus Meeks, ARENT, FOX, KINTNER, PLOTKIN & KAHN,

P.L.L.C., Washington, D.C., for Appellee.

Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

OPINION

PER CURIAM:

Badlands Trust Company (Badlands) sued First Financial Fund,

Inc. (First Financial), seeking an injunction to require First Financial

to seat two Badlands nominees as members of First Financial’s board

of directors. Badlands’ nominees did not receive the number of votes

required for election under First Financial’s relevant bylaw. Badlands,

however, argues that this bylaw violates Maryland corporation law

and that the holdover of incumbent directors violates the federal

Investment Company Act (ICA). The district court ordered First

Financial to seat Badlands’ nominees. Because we conclude that First

Financial’s bylaw is valid under Maryland law and that the practice

of directors holding over does not violate the ICA, we reverse.

I.

Badlands is a large, but minority, shareholder in First Financial,

holding almost forty percent of the shares. At an election for two

directors at the annual meeting of shareholders in August 2002, the

nominees supported by Badlands received almost sixty percent of the

votes cast; the incumbents received roughly forty percent. The Bad-

lands nominees, however, received only forty-seven percent of the

outstanding shares eligible to vote. The incumbents received votes

from roughly thirty-five percent of these outstanding shares. First

Financial determined that under one of its bylaws, which requires that

directors be elected by a majority of shares eligible to vote, no direc-

tors had been elected, resulting in a holdover of the two incumbents.

BADLANDS TRUST CO. v. FIRST FINANCIAL FUND 3

At the time of the annual meeting Badlands had a suit pending

against First Financial in the United States District Court for the Dis-

trict of Maryland; Badlands was seeking information about First

Financial shareholders. Badlands amended its complaint to claim that

the bylaw for electing directors violated Maryland law and that the

holdover violated federal law. Badlands also sought a preliminary

injunction prohibiting the incumbent directors who stood for election

in August 2000 from participating in board meetings. The district

court granted Badlands’ request for a preliminary injunction and

enjoined First Financial from convening a meeting of its board until

the court issued a final order. On September 19, 2002, the district

court granted summary judgment for Badlands and enjoined First

Financial to seat the Badlands nominees as directors. The district

court stayed its final order temporarily, and we granted First Financial

a stay pending appeal.

II.

Badlands argues first that First Financial’s bylaw, requiring direc-

tors to be elected by a majority of shares eligible to vote rather than

a majority of votes cast, violates Maryland corporation law. Maryland

General Corporation Law (MGCL) contains two provisions relevant

to this suit. First, MGCL § 2-404(d) states: "Unless the charter or

bylaws of a corporation provide otherwise, a plurality of all the votes

cast at a meeting at which a quorum is present is sufficient to elect

a director." Md. Code Ann., Corps & Ass’ns § 2-404(d) (1999).

MGCL § 2-506(a) reads in relevant part: "Unless this article or the

charter of a corporation provides otherwise, at a meeting of stock-

holders . . . [a] majority of all the votes cast at a meeting at which a

quorum is present is sufficient to approve any matter which properly

comes before the meeting." Md. Code Ann., Corps & Ass’ns § 2-

506(a) (1999).

Badlands argues that § 2-506(a) essentially caps the number of

votes necessary for approval of a matter at a stockholder meeting,

requiring only a majority of votes cast (assuming the presence of a

quorum). Increasing vote number requirements beyond the statutory

cap, Badlands says, can be achieved in only two ways — by corporate

charter or by statute. Both parties agree that First Financial has not

established a different voting requirement in its charter; its more strin-

4 BADLANDS TRUST CO. v. FIRST FINANCIAL FUND

gent requirement is only included in a bylaw. Badlands recognizes

that § 2-404(d) allows election of directors by a plurality rather than

a majority of votes cast. Section 2-404(d) also permits changes to its

plurality default rule to be made in a corporation’s bylaws as well as

its charter. Badlands urges us, however, to adopt the view of the dis-

trict court and conclude that § 2-404(d) only authorizes alternative

voting requirements that are less stringent than § 2-506(a)’s standard,

thus invalidating First Financial’s more stringent rule.

Badlands makes two primary arguments in support of its claim.

First, it says that § 2-404(d) does not "provide[ ] otherwise" for vote

requirements in director elections, as required by § 2-506(a) to alter

that provision’s default rule. To "provide otherwise," the argument

goes, § 2-404(d) would need to spell out a specific mechanism

through which a corporation could implement a heightened voting

requirement. The only standard explicitly established by § 2-404(d) is

the lower, plurality requirement. The language in § 2-404(d) that

allows a corporation to make changes in voting requirements in its

bylaws, Badlands says, merely permits changes that are consistent

with § 2-506(a) and does not "provide" an alternate voting scheme

requiring more votes than specified under § 2-506(a). Changes in the

bylaws, Badlands concludes, can be used to alter the voting require-

ment to something above (or below) the plurality of votes cast, as

established by § 2-404(d), but such changes cannot be used to

increase the number of votes required to a level above § 2-506(a)’s

majority-of-votes-cast rule. Second, Badlands argues that the legisla-

tive history of § 2-506(a) makes clear that the Maryland legislature

was attempting to cap the number of shareholder votes required for

corporations to act to reduce the chances of failed elections and that

§ 2-404(d) was designed to make election of directors even easier. To

conclude that § 2-404(d) allows corporations to raise the number of

required votes (and thus increase the likelihood of a failed election)

through the relatively easy mechanism of a bylaw change, Badlands

says, would undercut the clear intent behind § 2-506(a) and § 2-

404(d). According to Badlands, the failed election in this case resulted

from the application of precisely the sort of heightened voting

requirement that both provisions were designed to prohibit.

We disagree with Badlands on both accounts. First, § 2-404(d)

does in fact create an exception to § 2-506(a); it does, as § 2-506(a)

BADLANDS TRUST CO. v. FIRST FINANCIAL FUND 5

requires, "provide[ ] otherwise." "Provide" in this context means

merely "to make a proviso or stipulation." Webster’s Third New Inter-

national Dictionary 1827 (1993). A "proviso," in turn, is simply a

"condition, qualification, or limitation." Id. Section 2-404(d) is a con-

dition, qualification, or limitation on § 2-506(a). It adopts a distinct

default voting requirement in elections for directors and authorizes

changes to its default rule to be included in corporate bylaws or cor-

porate charters. It therefore falls within § 2-506(a)’s "provides other-

wise" clause and permits changes in the number of votes required to

elect directors. Nothing in the language of either provision suggests

that changes are limited to those that require fewer votes than the

default number set by statute.

To arrive at their interpretation of the statute, both Badlands and

the district court rely on legislative history. No official committee

report for § 2-404(d) is available, but an explanation included in the

bill file says that the reduction in the number of votes required for

election to a directorship is intended to "essentially eliminate the pos-

sibility" of failed elections and holdover directors. See Explanation of

Senate Bill No. 659 Vote Required to Elect Directors (quoted in Ideal

Fed. Sav. Bank v. Murphy, 663 A.2d 1272, 1277 (Md. 1995)). Bad-

lands and the district court might well be reading the legislative his-

tory accurately, but this is not a case where there is a need to look past

the statutory text. We do not consult legislative history where, as here,

the plain and unambiguous language of the statute answers the ques-

tion. See, e.g., United States v. Gonzales, 520 U.S. 1, 6 (1997). Bad-

lands urges us to look to the legislative history first to determine

whether there is a conflict between the statutory text and the intent of

the legislature. We recognize that there is language in cases decided

by the Court of Appeals of Maryland that would appear to support

this approach. See Adamson v. Corr. Med. Servs., 753 A.2d 501, 508

(Md. 2000) ("[T]he plain-meaning rule is elastic, rather than cast in

stone. If persuasive evidence exists outside the plain text of the stat-

ute, we do not turn a blind eye to it.") (internal citations omitted); Wil-

liams v. Mayor & City Council of Baltimore, 753 A.2d 41, 49 (Md.

2000) (noting that even where the court did not "describe any of the

statutes involved . . . as ambiguous or uncertain, [it] did search for

legislative purpose or meaning") (internal quotations omitted); Tucker

v. Fireman’s Fund Ins. Co., 517 A.2d 730, 731 (Md. 1986). Neverthe-

less, these same cases begin with the traditional rule that where there

6 BADLANDS TRUST CO. v. FIRST FINANCIAL FUND

is no ambiguity in the plain language of the statute, a court does not

look to the legislative history. Adamson, 753 A.2d at 508 ("If the leg-

islature’s intentions are evident from the text of the statute, our

inquiry normally will cease and the plain meaning of the statute will

govern."); Williams, 753 A.2d at 49 ("Where the statutory language

is plain and free from ambiguity, and expresses a definite and simple

meaning, courts normally do not look beyond the words of the statute

to determine legislative intent."); Tucker, 517 A.2d at 732 ("[W]here

statutory provisions are clear and unambiguous, no construction or

clarification is needed or permitted, it being the rule that a plainly

worded statute must be construed without forced or subtle interpreta-

tions designed to extend or limit the scope of its operation."). We read

these cases to mean that in Maryland, as elsewhere, when the text of

the statute itself is not ambiguous, we do not look to the legislative

history to create ambiguities.

We are left, then, with the clear commands of the statutes. Section

2-506(a) allows alterations in the voting requirement (from a majority

of the votes cast) only if provided in the corporate charter or in article

2 of the MGCL. Although First Financial does not have such a provi-

sion in its charter, a provision in article 2 of the statute provides other-

wise. Section 2-404(d) adopts an even lower voting requirement for

the election of directors, but permits a different requirement to be

established by charter or bylaw. First Financial’s bylaws plainly

establish a higher voting requirement for the election of new direc-

tors; they must be elected by a majority of the shares eligible to vote.

Because First Financial’s bylaw "provides otherwise," its bylaw is

lawful and controls the outcome of this election.

Badlands’ final argument also fails. Badlands notes that MGCL

§ 2-104(b)(4) explicitly allows corporations to include in their char-

ters provisions raising the voting requirement above that provided by

statute; § 2-110, which governs bylaws, contains no such provision.

See Md. Code Ann., Corps & Ass’ns § 2-104(b)(4) & 2-110 (1999).

Thus, Badlands argues, heightened voting requirements can only be

included in corporate charters, not bylaws. This argument ignores the

language of § 2-110, which does not provide a closed list of permissi-

ble subjects for bylaws, but instead specifically states that bylaws

"may contain any provisions not inconsistent with law or the charter

of the corporation." Md. Code Ann., Corps & Ass’ns § 2-110 (1999).

BADLANDS TRUST CO. v. FIRST FINANCIAL FUND 7

Because a heightened voting requirement is not inconsistent with law

or First Financial’s charter, it can be included in the bylaws.

We conclude, therefore, that First Financial’s bylaw requiring

directors to be elected by a majority of eligible votes is valid under

Maryland law. Because Badlands’ nominees did not receive the

required number of votes, its nominees cannot be seated as members

of First Financial’s Board of Directors.

III.

Because the district court found for Badlands on the state law ques-

tion, it did not reach the issue of whether the holdover of directors

violates the Investment Company Act of 1940 (ICA). Because we

have concluded that the Badlands nominees were not validly elected

under Maryland law, we must consider the federal law issue.

The Investment Company Act of 1940 (ICA) mandates, among

other things, that "[n]o person shall serve as a director of a registered

investment company unless elected to that office." 15 U.S.C. § 80a-

16(a). It also permits corporations to divide directors into classes, but

it requires that the term of at least one class expire every year. Id.

Badlands asserts that it has an implied private right of action to

enforce violations of this statute and that First Financial’s holdover of

directors violates the statute in two ways. First, it suggests that

because the incumbent directors are holding over, they were not

"elected to that office" as required by § 80a-16(a). Second, it argues

that even if the directors were elected, some portion of the board —

one class — must step down from the board every year.

Whether Badlands has an implied right of action under § 80a-16(a)

is an interesting and debatable question. Compare Lessler v. Little,

857 F.2d 866, 871-73 (1st Cir. 1988) (allowing a private right of

action under § 80a-17(a)(2) of the ICA), with Olmstead v. Pruco Life

Ins. Co., 283 F.3d 429, 436 (2d Cir. 2002) (concluding that §§ 80a-

26(f) and 80a-27(i) of the ICA did not create private rights of action).

Even if § 80a-16 does provide a private right of action, Badlands

would still be unable to prevail because the holdover of the incumbent

8 BADLANDS TRUST CO. v. FIRST FINANCIAL FUND

directors does not violate the ICA. We agree with First Financial that

the incumbents were elected within the meaning of the ICA. Section

80a-16 states that "[n]o person shall serve as a director of a registered

investment company unless elected to that office by holders of the

outstanding voting securities of such company, at an annual or a spe-

cial meeting duly called for that purpose." 15 U.S.C. § 80a-16(a). The

incumbents were in fact elected by shareholders at such a meeting,

although not the most recent meeting. The ICA was passed to ensure

that investment companies were not managed by insiders for personal

profit. See Sheldon A. Jones et al., The Massachusetts Business Trust

and Registered Investment Companies, 13 Del. J. Corp. L. 421, 450

(1988). Section 80a-16(a)’s requirement that directors be elected by

shareholders provides further assurances that "those having funds at

risk in the equity securities of an investment fund elect its directors."

Prudential Ins. Co. of Am., 41 S.E.C. 335, 351 (Jan. 22, 1963). The

election of the two incumbents here at a prior shareholder meeting

satisfies the plain language of § 80a-16(a). Shareholders, not corpo-

rate insiders, are responsible for their presence on the board even

though they are now holding over.

Moreover, state laws that do not directly conflict with the ICA or

its policies are not displaced by the ICA, see Burks v. Lasker, 441

U.S. 471, 479-80 (1979), and the use of holdover directors does not

create such a conflict. The ICA requires that when directors are

divided into classes, the term of at least one class of directors must

expire each year. 15 U.S.C. § 80a-16(a). No one disputes that the

terms of two incumbents have expired, but the ICA is silent about

what to do in a failed election. In this case, the incumbents have

remained in place, serving as holdover directors pending a valid elec-

tion of replacements. See Md. Code Ann., Corps. & Ass’ns § 2-405

(1999). Because the ICA is silent on this point, the use of holdovers,

authorized by Maryland law, does not directly conflict with federal

law. Nor does their use violate policies of the ICA. The Securities and

Exchange Commission has explained that § 80a-16(a) is designed to

ensure that substantial changes in the composition of a board of direc-

tors are not made without the knowledge or approval of shareholders.

See John Nuveen & Co., 1986 SEC No-Act. LEXIS 2943 (Nov. 18,

1986); State Bank & Mortgage Co., 1972 SEC No-Act. LEXIS 3322

(Aug. 7, 1972). The holdover situation here was the result of a failed

election at a regular shareholder meeting; it did not stem from a back

BADLANDS TRUST CO. v. FIRST FINANCIAL FUND 9

room deal kept secret from investors. Moreover, the measure is only

temporary. The holdover directors can be replaced when successors

are validly elected. Furthermore, provisions allowing holdovers are

common in state law as well as model corporation codes. See, e.g.,

Md. Code Ann., Corps & Ass’ns § 2-405 (1999); see also 2 Victoria

A. Braucher et al., Fletcher Cyclopedia of the Law of Private Corpo-

rations § 344 (2d ed. 1998). This widely used, stopgap measure pro-

vides for the smooth functioning of corporate governance and gives

time for shareholders to hold new elections. If holdovers are not per-

mitted, the only recourse in failed elections would be dissolution of

the corporation. Nothing in the ICA suggests that this would be a

preferable remedy. See also Levine v. Beem, 608 So. 2d 373, 375

(Ala. 1992) (concluding that holdovers are preferable to dissolution).

Because the incumbents were elected by shareholders and because the

use of holdovers is not in conflict with the ICA or its policies, we see

no violation of the ICA.

The decision of the district court is therefore

REVERSED.