Vernon Hill, II v. Cohen

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

No. 22-2023

_____________

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

_______________

On Appeal from the United States District Court

For the Eastern District of Pennsylvania

(D.C. No. 2-22-cv-1924)

District Judge: Honorable Paul S. Diamond

_______________

Argued

June 28, 2022

Before: JORDAN, PORTER, and PHIPPS, Circuit Judges

(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

2

Martin L. Seidel

Holland & Knight

31 West 52nd Street, 12th Floor

New York, NY 10019

Counsel for Appellees

_______________

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., 190

A.2d 316, 321 (Pa. 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,

“FRBK” is Republic First’s stock ticker symbol on the

1

NASDAQ.

3

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

4

consideration of the Madonna Directors’ appeal, we will now

reverse.

I. BACKGROUND2

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

2

The following background section is based on the

allegations of the Hill Directors’ complaint and what we

understand to be, from the record provided, undisputed facts.

5

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

6

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

3

The complaint does not identify the entirety of the

compensation committee nor the nature of Madonna’s current

employment agreement.

7

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

8

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 approve external

communications on behalf of Republic First in certain

situations, and remove certain executives from the board of

directors of Republic First’s bank subsidiary. Later that day,

the Madonna Directors published a press release notifying

shareholders of the change in leadership (the “May Press

Release”). On May 16, Madonna called for two more special

board meetings – one on May 17 at 9:30 PM, and the next on

May 18 at 1:00 PM – intending, among other things, to appoint

a new director to fill the vacancy left by Flocco.

In response, the Hill Directors filed this lawsuit on the

afternoon of May 17. Their verified complaint alleged that the

Madonna Directors (a) breached fiduciary duties, (b) violated

section 14(a) of the Securities Exchange Act of 1934, (c)

violated section 13(d) of the Exchange Act, and (d) violated

Republic First’s Bylaws. The complaint requested, among

other forms of relief, the appointment of a custodian to manage

Republic First, pending the outcome of the litigation. The Hill

Directors simultaneously filed a motion for a TRO and

preliminary injunction barring the Madonna Directors from

holding the proposed May 17 or 18 meetings or from making

any further board-level changes. The TRO motion did not,

however, request a custodian.

At 5:30 that same afternoon, the District Court held a

hearing to consider the emergency motion. It denied the TRO

without prejudice and instructed the parties to enter into a

status quo order. The Court noted that it was inclined to find

that the Madonna Directors were violating the Bylaws by

9

conducting business at Board meetings without a proper

quorum. It also suggested that it was strongly considering

appointing a custodian to fix the company’s “big mess,” even

telling the parties that it had “already got one picked out.”

(App. at 185, 190.) After the hearing, the Court directed the

Madonna Directors to submit a brief addressing the Hill

Directors’ request for the appointment of a custodian. The

Madonna Directors filed their brief and an affidavit attaching

multiple news articles and press releases regarding Hill’s

alleged self-dealing, the letters from Driver and the Norcross

Group referenced in the complaint, the March Press Release,

and the May Press Release. Otherwise, there was no

presentation or consideration of evidence beyond the Hill

Directors’ verified complaint and the documents referenced in

it.

On May 26, the Court issued an order which it described

in its accompanying opinion as “appoint[ing] a Custodian to

take control of Republic First.” (App. at 20.) It held that the

Madonna Directors’ actions at the May 13 special board

meeting were likely ultra vires and illegal, because the four

Madonna Directors did not constitute a proper quorum for

transacting official business at Board meetings. It construed

the Bylaws as requiring a majority of the eight-seat Board

– five directors – to form a quorum or to fill a vacancy on the

Board. Since the Madonna Directors were unable to meet that

threshold on their own, and because the Hill Directors refused

to attend any Board meetings called by Madonna, the District

Court concluded that the Board was deadlocked. The Court

also listed other reasons for appointing a custodian, including

that the accusations between the two parties were injuring the

public’s confidence in Republic First.

10

Alfred W. Putnam, an attorney at Faegre Drinker Biddle

& Reath LLP in Philadelphia, was selected by the Court to

serve as Custodian of Republic First. The Court at first gave

him two duties, the first particular and the second very broad

indeed: (1) “Calling and overseeing a Special Shareholders’

Meeting to take place on or before July 10, 2022, at which

Republic First shareholders shall elect a new Director to

replace the late Theodore Flocco”; and (2) “Taking any and all

lawful actions necessary to manage Republic First in its

shareholders’ best interests, including, should the Custodian so

decide, the election of a ninth director[.]” (App. at 27.) The

Madonna Directors immediately appealed the appointment of

the Custodian, and we granted their motion to expedite this

appeal.

While the appeal was pending, the Custodian filed a

motion to extend the deadline for holding the special

shareholders’ meeting from July 10 to July 29. The Madonna

Directors responded and proposed that Mr. Putnam not

convene a special shareholders’ meeting at all. Their reasoning

was that WilmerHale had informed Republic First that its

investigation would wrap up by the end of July, so audited

financial statements and the necessary securities filings could

be completed in time to hold the company’s annual

shareholders’ meeting in September. Since the shareholders

would be electing three directors at that meeting, including the

director seat made vacant by Flocco’s death, the Madonna

Directors said it would be a waste of time and money to hold a

proxy contest in July – to vote on a director who might only be

in office for two months – and then hold another meeting in

September.

11

The Custodian objected to cancelling the special

shareholders’ meeting, arguing that the Madonna Directors’

timeline was just an optimistic estimate and that the actual

meeting might not be held until October or later. Norcross

supported the Custodian’s plan to hold the special meeting in

July. But Driver agreed with the Madonna Directors’ idea to

defer the election until the annual meeting. Most notably, even

the Hill Directors joined with the Madonna Directors’ request

to dispense with a special meeting in July. They emphasized

that the Custodian’s opinion on the timing of the meeting was

unnecessary because there was no deadlock on this issue. All

the directors agreed that the vote could wait until the regular

shareholders’ meeting. As the Hill Directors put it, “FRBK’s

entire Board has carefully considered the best interests of

FRBK’s shareholders … and provided the Court with a unified

position of FRBK’s Board.” (Dist. Ct. D.I. 44 at 3.)

Despite that, the District Court rejected the Board’s

position and adopted the Custodian’s proposal to hold the

meeting in late July. And then the District Court went even

further. After noting that the two factions “have not come to

any agreement as to how the Company should proceed after the

election” and that the Board will remain deadlocked “[i]f the

Hill Faction’s candidate is elected,” it stated:

To prevent a continuing 4-4 Board split, the

Custodian is directed to conduct that election so

that shareholders will elect both a replacement

for Mr. Flocco and a ninth Director.

(Dist. Ct. D.I. 46 at 1-2.) In short, having earlier given the

Custodian the power and discretion to create a new board seat,

12

the Court now directed the Custodian to do so. That order was

issued on June 24, and we heard oral argument on June 28.

II. DISCUSSION

Before turning to the merits of the District Court’s order

appointing a custodian, we address two jurisdictional

arguments: one made by the Hill Directors challenging our

appellate jurisdiction, and one by the Madonna Directors

challenging the District Court’s subject matter jurisdiction.

Finding neither challenge persuasive, we then turn to the merits

of the District Court’s order and hold that the Court abused its

discretion by appointing a custodian based on a

misinterpretation of the Bylaws and without a more developed

factual record.

A. Appellate Jurisdiction

Our jurisdiction is typically limited to orders finally

disposing of a case, 28 U.S.C. § 1291, but we also have

jurisdiction to hear interlocutory appeals of “orders appointing

receivers, or refusing orders to wind up receiverships or to take

steps to accomplish the purposes thereof, such as directing

sales or other disposals of property[,]” 28 U.S.C. § 1292(a)(2).

The Hill Directors argue that we have no jurisdiction under that

provision here because the District Court appointed a

custodian, not a receiver. We are unconvinced by their fixation

on labels.

The simple fact that the District Court’s appointee was

called a “custodian” is not determinative. “A receiver by any

other name, or by no name, is still a receiver.” In re Pressman-

Gutman Co., 459 F.3d 383, 393 (3d Cir. 2006) (quoting United

13

States v. Sylacauga Props., Inc., 323 F.2d 487, 490 (5th Cir.

1963)). We determine whether an appointee is a receiver under

§ 1292 by considering “the purposes of the receivership and

the extent of the powers possible in the situation.” Id. (citation

omitted).

The Hill Directors highlight the distinct roles of

receivers and custodians under Pennsylvania law. They are

correct that a state statute says a custodian “continue[s] the

business of the corporation” while a receiver “liquidate[s] its

affairs and distribute[s] its assets.” 15 Pa. Cons. Stat.

§ 1767(c). That is consistent with traditional nomenclature in

corporate law. See 3 James D. Cox & Thomas Lee Hazen,

Treatise on the Law of Corporations § 14:15 (3d ed. 2021).

But what the word “receiver” means in § 1292, and hence

whether we have appellate jurisdiction, is a matter of federal,

not state, law.

Federal courts have held that a variety of duties and

responsibilities will qualify someone as a “receiver” under

§ 1292. Most clearly, a person who is appointed to liquidate a

company is a receiver. E.g., Sriram v. Preferred Income Fund

III Ltd. P’ship, 22 F.3d 498, 501 (2d Cir. 1994). But receivers

are not only those operating in a liquidation context. A person

appointed to “take[] possession of and preserve[], pendente

lite, and for the benefit of the party ultimately entitled to it, the

fund or property in litigation” is also a receiver – specifically,

a receiver pendente lite. E.g., F.T.C. v. World Wide Factors,

Ltd., 882 F.2d 344, 348 (9th Cir. 1989). And receivers are also

not limited to possessing and preserving assets. Section 1292’s

use of “receiver” also covers individuals appointed to

“manage, operate, and control” a corporation during the

pendency of a legal proceeding. E.g., Chase Manhattan Bank,

14

N. A. v. Turabo Shopping Ctr., Inc., 683 F.2d 25, 26 (1st Cir.

1982); accord, e.g., Lyman v. Spain, 774 F.2d 495, 497 (D.C.

Cir. 1985). Having an ability to control the assets or

corporation can in fact be a defining characteristic of a

receiver. In In re Pressman-Gutman, the district court

appointed a guardian ad litem to replace the administrators of

an ERISA benefits plan for the limited purpose of prosecuting

an ERISA lawsuit against those administrators. 459 F.3d at

390. Distinguishing that guardian ad litem from a receiver, we

emphasized that the guardian ad litem only had control over

the lawsuit and not the “myriad duties, functions and

responsibilities related to managing the Plan’s assets.” Id. at

394 & n.10; see also Hewlett-Packard Co. v. Quanta Storage,

Inc., 961 F.3d 731, 741 n.6 (5th Cir. 2020) (holding that a

constable who merely receives assets is not a “receiver”).

When looking beyond labels to consider what the

Custodian’s actual purpose and powers are here, he looks much

like a receiver pendente lite. See 15 Pa. Cons. Stat. § 1767(c)

(granting a custodian “all the power and title of a receiver”

other than to liquidate and distribute assets). He was appointed

pursuant to the Hill Directors’ request for a custodian “to

manage the affairs of FRBK pending the outcome of this

litigation.” (App. at 102.) The District Court found that a

custodian was necessary because the infighting was harming

Republic First’s assets, and a custodian would preserve “public

confidence in the institution” and “provide reassurance to

shareholders and the trading public that fraudulent conduct will

not occur.” (App. at 18-19.) The Court gave the Custodian the

power to “[take] any and all lawful actions necessary to

manage Republic First in its shareholders’ best interests.”

(App. at 27.) In other words, the Custodian was appointed to

manage and control Republic First to preserve its value during

15

the course of this lawsuit. That makes him a “receiver” under

§ 1292.

Furthermore, to consider the Custodian a receiver under

§ 1292 is consistent with the purpose of that jurisdictional

statute. “Congress decided to make interlocutory orders

appointing receivers appealable under § 1292(a)(2) because

they curtail property rights in a way that may cause great

harm.” United States v. Solco I, LLC, 962 F.3d 1244, 1250

(10th Cir. 2020) (internal quotation marks omitted). That great

harm is a result of the receivership order “foreclosing

independent action and decision in irreparable ways.” 16

Charles Alan Wright & Arthur R. Miller, Federal Practice and

Procedure § 3925 (3d ed. 2015). The appointment of the

Custodian for Republic First threatens precisely that type of

harm. It is no slur upon Mr. Putnam, a litigator well-known

and respected in our legal community, to say that his

appointment foreclosed the method established by the Bylaws

for filling the vacancy on the Board with an interim director.

The election of a ninth director – which was never requested

by any director or shareholder – likewise would undermine the

independence of Republic First to make its own corporate

governance decisions. To construe § 1292(a)(2) as not

allowing appellate review where a custodian’s powers go

beyond just possessing and preserving the company – which

would itself justify appellate jurisdiction – would defeat the

purpose of the provision. We have jurisdiction over this appeal

pursuant to § 1292(a)(2), and we will exercise it.

16

B. Subject Matter Jurisdiction

The Madonna Directors contend on appeal that the

District Court could not have appointed a custodian because it

lacked subject matter jurisdiction. We disagree.

In general, the District Court has federal question

jurisdiction over all claims arising under federal law. 28

U.S.C. § 1331. In very limited circumstances, a purported

federal claim will not create subject matter jurisdiction because

it “clearly appears to be immaterial and made solely for the

purpose of obtaining jurisdiction or where such a claim is

wholly insubstantial and frivolous.” Steel Co. v. Citizens for a

Better Env’t, 523 U.S. 83, 89 (1998) (citation omitted). The

standard for dismissing a federal claim as wholly insubstantial

is “especially high[.]” Davis v. U.S. Sentencing Comm’n, 716

F.3d 660, 666 (D.C. Cir. 2013). Jurisdiction is not defeated

merely because “the averments might fail to state a cause of

action on which [the plaintiff] could actually recover,” Steel

Co., 523 U.S. at 89 (citation omitted), nor because “the legal

theory alleged is probably false[,]” Davis v. Wells Fargo, 824

F.3d 333, 350 (3d Cir. 2016) (citation omitted). Instead, we

will dismiss a federal claim for lack of subject matter

jurisdiction only when the claim is “so insubstantial,

implausible, foreclosed by prior decisions of [the Supreme]

Court, or otherwise completely devoid of merit as not to

involve a federal controversy.” Wells Fargo, 824 F.3d at 350

(citation omitted).

The Hill Directors asserted two claims under the

Exchange Act, and, without prejudging them, those federal

claims are not wholly insubstantial. The Hill Directors’ first

federal claim arises under section 13(d), which requires the

17

disclosure of detailed information “[w]hen two or more

persons agree to act together for the purposes of acquiring,

holding, or voting equity securities of an issuer[.]” 17 C.F.R.

§ 240.13d-5(b)(1). Indicators of such a group can include a

common objective or coordinated action. Hallwood Realty

Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 618 (2d

Cir. 2002); Morales v. Quintel Ent., Inc., 249 F.3d 115, 127 (2d

Cir. 2001). Here, the Hill Directors allege that the Madonna

Directors formed a group with Driver and the Norcross Group

to oppose the re-election of three Hill Directors at the

upcoming shareholders’ meeting and to instead elect directors

who would support a sale of the company. Specifically, they

alleged that such a group is evidenced by the Madonna

Directors’ efforts to entertain acquisition offers from the

Norcross Group, the Madonna Directors issuing the March

Press Release, and the Norcross Group filing a corresponding

lawsuit days later. They also point to one of the Madonna

Directors serving on the board of a company where a candidate

on Driver’s slate also works. That evidence supports at least a

colorable argument that the Madonna Directors formed a group

with Driver and the Norcross Group for the purpose of voting

Republic First shares at the shareholder meeting. If that

argument holds up, the Madonna Directors will have violated

section 13(d) by not making the required disclosures.

The Hill Directors’ second federal claim arises under

section 14(a) of the Exchange Act, which, through follow-on

regulations, imposes procedural and substantive requirements

on proxy solicitations. 17 C.F.R. §§ 240.14a-3, -6, -9. The

regulations define a “solicitation” as, among other things,

“[t]he furnishing of … other communication to security

holders under circumstances reasonably calculated to result in

the procurement, withholding or revocation of a proxy[.]” Id.

18

§ 240.14a-1(l)(1)(iii). Some courts take an expansive view of

what communications qualify as solicitations. E.g., Long

Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d Cir.

1985) (applying the proxy solicitation rules to press releases

that “constitute a step in a chain of communications designed

ultimately to [request the furnishing of proxies]”). Here, the

Hill Directors allege that the March Press Release and May

Press Release were proxy solicitations that violated the

securities requirements. That claim is not insubstantial or

frivolous. Although the Madonna Directors challenge whether

the press releases were proxy solicitations, the contents and

timing of the announcements can at least plausibly be

characterized as meant to sway shareholders to vote against the

Hill Directors who were standing for re-election. Under an

expansive view of the regulations, there is a colorable claim

that they are a step in a chain of communications with the goal

of achieving that outcome.

The Hill Directors’ Exchange Act claims are thus not

so “wholly insubstantial” that they fail to create federal

question jurisdiction. Steel Co., 523 U.S. at 89. And because

the state law claim to appoint a custodian shares “a common

nucleus of operative fact” with the federal claims, it is

amenable to supplemental jurisdiction. United Mine Workers

v. Gibbs, 383 U.S. 715, 725 (1966); 28 U.S.C. § 1367(a). It

was therefore within the District Court’s power to exercise

subject matter jurisdiction over the state law corporate

governance claim.4

4

We review for abuse of discretion a district court’s

decision to exercise supplemental jurisdiction. Cf. Elkadrawy

v. Vanguard Grp., Inc., 584 F.3d 169, 174 (3d Cir. 2009)

(reviewing for abuse of discretion the district court’s decision

19

C. Grounds for Appointing a Custodian5

Section 1767(a)(3) of title 15 of the Pennsylvania

Consolidated Statutes permits a court to appoint a custodian

“of and for any business corporation when it is made to appear

that … the conditions specified in section 1981(a)(1), (2)[,] or

to decline supplemental jurisdiction); see also Valencia ex rel.

Franco v. Lee, 316 F.3d 299, 305 (2d Cir. 2003) (“[W]e review

the district court’s decision to exercise such jurisdiction under

an abuse-of-discretion standard.”). In this instance, however,

we need not delve deeply into that exercise of discretion, as the

parties have not addressed the issue and any complaint about it

has been forfeited. It is sufficient to observe that we do not

perceive an abuse of discretion.

5

We review the District Court’s decision to appoint a

custodian for abuse of discretion. Maxwell v. Enter. Wall

Paper Mfg. Co., 131 F.2d 400, 403 (3d Cir. 1942). A court

abuses its discretion if its “decision rests upon a clearly

erroneous finding of fact, an errant conclusion of law[,] or an

improper application of law to fact.” EEOC v. City of Long

Branch, 866 F.3d 93, 97-98 (3d Cir. 2017) (citation omitted).

The interpretation of bylaws is subject to our plenary

review. Peters Creek United Presbyterian Church v. Wash.

Presbytery of Pa., 90 A.3d 95, 104 (Pa. Commw. Ct. 2014).

“When we interpret corporate bylaws, we must use the same

rules applicable to the interpretation of statutes.” M4 Holdings,

LLC v. Lake Harmony Ests. Prop. Owners’ Ass’n, 237 A.3d

1208, 1218 (Pa. Commw. Ct. 2020) (citation and internal

quotation marks omitted).

20

(3) … exist with respect to the corporation.” There are five

conditions specified in section 1981:

(1) The acts of the directors are illegal,

(2) The acts of the directors are oppressive,

(3) The acts of the directors are fraudulent,

(4) The corporate assets are being misapplied or wasted, or

(5) The directors are deadlocked, the shareholders are

unable to break the deadlock, and the corporation is

suffering or being threatened to suffer irreparable

injury.

See 15 Pa. Cons. Stat. § 1981(a). The District Court found that

each of those five grounds individually justified the

appointment of the Custodian in this case. The Court’s

conclusions, however, are based on a faulty interpretation of

the Bylaws and on unsupported findings of facts. Accordingly,

they cannot stand.

1. Illegality, Oppression, and Deadlock

The District Court found that the Madonna Directors

acted illegally and oppressively and that the Republic First

Board was deadlocked. Each of those conclusions was based

on the Court’s interpretation of the Bylaws as requiring at least

five of the Board’s full complement of eight directors to be

present to form a quorum and conduct any business, including

filling any Board vacancy. Based on that interpretation, the

Court held that the four Madonna Directors violated the

Bylaws by their actions at the May 13 special board meeting

and by intending to fill the Board’s vacancy at the May 17

21

special board meeting.6 Similarly, it held that the Madonna

Directors’ attempt to “wrest immediate control of Republic

First” was oppressive, as those actions likely violated the

Bylaws and “are thus ultra vires or unjust.” (App. at 18.)

Finally, it concluded that the Board was deadlocked because

neither faction could muster enough directors to form a five-

person quorum. Each of those conclusions, however, is based

on an unsupportable interpretation of the Bylaws.

Article II, Section 7 of the Bylaws addresses the process

for filling vacancies on the Board. Its first two sentences state:

Any vacancies in the Board of Directors,

whether arising from death, resignation, removal

or any other cause except an increase in the

number of directors, shall be filled by a vote of

the majority of the Board of Directors then in

office even though that majority is less than a

quorum. A majority of the entire Board may fill

a vacancy that results from an increase in the

number of directors.

(App. at 45 (emphasis added).)

That language is unambiguous. If a vacancy on the

Board arises from the death of a director, the majority of the

remaining directors must fill that vacancy, regardless of

6

The District Court held that violating the Bylaws was

illegal under title 15, section 1505 of the Pennsylvania

Consolidated Statutes, which states that the directors of a

corporation are bound by its bylaws.

22

whether they form a quorum. Based on that clear language, the

four Madonna Directors, who constituted a majority of the

seven remaining directors, had the power and in fact the

obligation to fill the vacancy left by Flocco.

Contrary to the District Court’s holding, the clarity of

Section 7 is not “obscured” by its third sentence. (App. at 16.)

That sentence reads:

In the event that at any time a vacancy exists in

any office of a director that may not be filled by

the remaining directors, a special meeting of the

shareholders shall be held as promptly as

possible and in any event within sixty (60) days,

for the purpose of filling the vacancy or

vacancies.

(App. at 45.) The District Court construed “may not be filled”

to mean “shall not be filled,” and then expressed confusion at

why Section 7 would, in the first two sentences, address

situations where the remaining directors shall fill a vacancy

and then, in the third sentence, imply that there are situations

where they shall not fill a vacancy. Based on that perceived

inconsistency, the Court concluded that Section 7 did not

permit the remaining directors to fill a vacancy.7

7

The District Court also reasoned that Republic First’s

articles of incorporation “seem to contemplate the filling of

Directorships only by shareholder election.” (App. at 17.) The

articles of incorporation indeed provide that shareholders will

elect directors to three-year terms at each annual shareholders’

meeting, but they do not exclude the availability of interim,

temporary appointments to the Board. Section 7 of the Bylaws

23

But Section 7’s third sentence does not generate

ambiguity. Combined with the first two sentences, it leads to

a consistent and logical understanding of the Bylaw: The

remaining directors must fill a vacancy with a majority vote; if

the remaining directors are unable to fill the vacancy – such as

when the vacancy leaves the Board with an even number of

directors who are deadlocked – then the shareholders must fill

that vacancy. That clear construction gives effect to every

sentence of Section 7, and it makes sense. The District Court

needlessly stretched its reading of “may not be filled” to create

an inconsistency, making no discernable effort to harmonize

the provisions before tossing out that crucial Bylaw. See

Keystone Fabric Laminates, Inc. v. Fed. Ins. Co., 407 F.2d

1353, 1356 (3d Cir. 1969) (“It is axiomatic in contract law that

two provisions of a contract should be read so as not to be in

conflict with each other if it is reasonably possible.”). That

was error.

The Hill Directors do not defend the District Court’s

analysis. Rather, their main argument is that a quorum is still

required for the remaining Board members to fill a vacancy,

and Section 7’s contrary language – “the majority of the Board

of Directors then in office even though that majority is less

than a quorum” – only comes into play if there are not enough

directors remaining to mathematically form a quorum. They

provides that “[a]ny director elected or appointed to fill a

vacancy shall hold office for the balance of the term then

remaining and until a successor has been chosen[.]” (App. at

45.) That does not conflict in any way with the articles of

incorporation.

24

are correct that, “[a]s a general rule[,] the directors of a

corporation may bind a corporation only when they act at a

legal meeting of the board.” Stone v. Am. Lacquer Solvents

Co., 345 A.2d 174, 176 (Pa. 1975). And a legal meeting

requires a quorum, unless the bylaws provide otherwise. 15

Pa. Cons. Stat. § 1727(a). Their argument fails here, however,

because the Bylaws plainly do provide otherwise.

Moreover, Section 7 of the Bylaws tracks

Pennsylvania’s default rule for filling vacancies on the boards

of corporations: “Except as otherwise provided in the

bylaws[,] [v]acancies in the board of directors … may be filled

by a majority vote of the remaining members of the board

though less than a quorum, or by a sole remaining director[.]”

Id. § 1725(b)(1)(i). Pennsylvania courts have not addressed

whether the phrase “though less than a quorum” overrides the

general quorum requirement even when a quorum is possible,

but Delaware courts have provided helpful guidance in

applying their substantively identical statute, 8 Del. C.

§ 223(a)(1). Ninety years ago, the Delaware Court of

Chancery flatly stated that a bylaw implementing

section 223(a)(1) meant that “a majority of the remaining

directors may [fill a vacancy] regardless of whether a quorum

of the board is left in office or not.” In re Chelsea Exch. Corp.,

159 A. 432, 434 (Del. Ch. 1932). That interpretation has not

been abrogated by any later decision.

Nevertheless, the Hill Directors cite two cases they

believe signal that Chelsea Exchange is no longer good law.

The first is Applied Energetics, Inc. v. Farley, 239 A.3d 409

(Del. Ch. 2020). But Applied Energetics was not about filling

board vacancies. Rather, it was about whether a single director

could transact business even though he alone did not constitute

25

a quorum under his company’s bylaws. The Court of Chancery

held that he could not, but it pointed to section 223(a)(1) as one

of the very few instances in which a board can act without a

quorum. Id. at 426-47. The Applied Energetics decision did

not cite Chelsea Exchange.

The second case is Tomlinson v. Loew’s Inc., 134 A.2d

518 (Del. Ch.), aff’d, 135 A.2d 136 (Del. 1957). In Tomlinson,

the company had a bylaw that expressly granted to the board

the power to fill vacancies. Id. at 523. The company also had

a second bylaw allowing for vacancies to be filled by a

majority of the remaining directors even if not a quorum,

similar to the bylaw in Chelsea Exchange (and here). Id. at

524. The Court of Chancery acknowledged the holding from

Chelsea Exchange, but it held that the existence of the first

bylaw made Chelsea Exchange distinguishable. The court said

that the two bylaws worked together to create a tiered

framework: If there were enough directors to form a quorum,

the first bylaw required board action at a meeting with a

quorum; if there were not enough directors to form a quorum,

the second bylaw permitted the remaining directors to fill

vacancies with a majority vote, regardless of any quorum

requirement. Id. at 525-28. In our case, however, there is no

separate Bylaw that specifically grants the Board the power to

fill vacancies. The Hill Directors’ request to have us adopt the

same framework as in Tomlinson is therefore without any

foundation in the governing documents of Republic First.8

8

The Hill Directors further claim that the Madonna

Directors cannot fill a Board vacancy without first allowing the

Board’s Nominating Committee to recommend a candidate.

The responsibilities of the Nominating Committee, as listed in

its charter, include “[i]dentify[ing] individuals qualified to

26

The Bylaws here unambiguously permit – in fact,

require – the remaining directors in office to fill the vacancy

with a majority vote, regardless of whether those voting to fill

the vacancy constitute a quorum. The Madonna Directors

constitute four of the seven remaining directors, so they have

sufficient numbers to fill the vacancy. Because the Bylaws

give the Madonna Directors the power and obligation to fill the

vacancy, their efforts to do so were not illegal or oppressive,

and there is no deadlock on the Board.9 The District Court’s

become Board members” and, “[i]n the case of a vacancy in

the office of a director, … recommend[ing] to the Board an

individual to fill such vacancy though appointment by the

Board[.]” (App. at 344.) But nowhere in the Nominating

Committee’s charter (or any other constitutive document) is

there a requirement that the Board wait for a recommendation

from the Nominating Committee before filling a vacancy. The

Bylaws state that a vacancy arising from death “shall be filled

by a vote of the Majority of the Board of Directors then in

office[.]” (App. at 45.) The Board organized a committee to

assist in that process, but the Board did not abdicate its

appointment power or delegate it to the Nominating

Committee.

9

If the Madonna Directors appoint an ally, then they

will also have sufficient numbers (five out of eight) to ratify

past acts, including acts taken at the May 13 special board

meeting. See Stone v. Am. Lacquer Solvents Co., 345 A.2d

174, 177 (Pa. 1975) (noting that ratification can remedy acts

taken at an illegal board meeting).

The Madonna Directors’ ability to fill the vacancy with

an allied fifth director likely renders irrelevant the parties’

27

interpretation of Section 7 is erroneous, and hence its findings

of illegality, oppression, and deadlock – all of which depended

on that interpretation – were abuses of discretion. None of

those grounds justified appointing a custodian for Republic

First.

2. Fraudulent Conduct and Waste

Independent of the District Court’s declaration that the

Madonna Directors were acting ultra vires under the Bylaws,

the Court also found that fraud and waste justified the

appointment of a custodian. A review of the Court’s decision,

however, reveals that there was no evidence to justify the

drastic remedy of appointing a custodian.

With respect to fraud, the District Court merely opined

that the accusations between the two Board factions “suggest

widespread self-dealing and dishonesty among the Directors.”

(App. at 18.) It conceded that it did not actually know “if either

accusation is true.” (App. at 18.) And that is a serious

problem. Mere speculation of fraud will not justify appointing

a custodian, particularly when that speculation is based on

dispute over the Bylaws’ quorum requirement. Article II,

Section 15 of the Bylaws defines a quorum as “[a] majority of

the members or the entire Board of Directors[.]” (App. at 46.)

The Madonna Directors interpret that to mean a majority of the

directors then in office; the Hill Directors say that it contains a

typo and should instead read “a majority of the members of the

entire Board.” We need not offer an interpretation of that

phrase, but Republic First would do well to amend Section 15

to clarify that language.

28

nothing more than the plaintiff’s unsupported allegations. See,

e.g., Tyler v. O’Neill, 1998 WL 695991, at *3 (E.D. Pa. Oct. 6,

1998) (declining to appoint a custodian where there were “no

substantiated allegations of present waste, mismanagement,

fraud, or dissipation”), aff’d, 189 F.3d 465 (3d Cir. 1999).

With respect to waste, the District Court expressed its

concern that the infighting on the Board would “injure both

public confidence in the institution and the institution itself.”

(App. at 18-19.) But it acknowledged that it could not quantify

that harm, and it cited no other evidence or even allegation of

waste. Potential reputational damage stemming from

infighting directors does not come close to the type of waste

that justifies appointing a custodian. See Principles of Corp.

Governance: Analysis & Recommendations § 1.42 (Am. Law

Inst. 1994) (defining corporate waste as “an expenditure of

corporate funds or a disposition of corporate assets” in

exchange for little or no consideration and with no rational

business purpose); In re Tower Air, Inc., 416 F.3d 229, 238 (3d

Cir. 2005) (explaining that, to constitute corporate waste under

Delaware law, “the decision must go so far beyond the bounds

of reasonable business judgment that its only explanation is

bad faith”). A contrary ruling would invite every dissenting

director of a Pennsylvania corporation to request a custodian

to supplant the governance rules of the company.

The District Court’s terse reasoning and the lack of any

well-developed evidentiary record expose the insufficient

factual basis for the findings of fraud and waste. Appointing a

custodian based on those reasons, on the current record, was an

abuse of discretion.

29

III. CONCLUSION

In conclusion, there were no sound grounds for

appointing a custodian for Republic First. The 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 (App. at 45),

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. 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.

30