Appellate Division Restricts a Board’s Ability to Amend Corporate Bylaws

Appellate Division Restricts a Board’s Ability to Amend Corporate Bylaws
Riker Danzig Corporate Alert April 11, 2016

In a recent opinion approved for publication, the Appellate Division of the New Jersey Superior Court held that an amendment passed by a majority of the defendant’s board of directors to change the bylaw’s definition of “quorum” for purposes of shareholder meetings was invalid, as it reduced the rights of the shareholders without their consent or involvement.  See Sterling Laurel Realty v. Laurel Gardens Co-Op, 2016 WL 1312159 (N.J. Super. Ct. App. Div. Apr. 5, 2016).  In this case, the board sent notice of two separate shareholder meetings to vote on a proposed amendment to the defendant’s bylaws.  Because a majority of the shareholders were not present at the meetings, the quorum necessary to conduct business was not reached.  Due to the time and cost associated with rescheduling shareholder meetings that fail to reach a quorum, the board then proposed an amendment to the bylaws to reduce the necessary quorum from a majority of the defendant’s shares to 20% of the shares.  At its next monthly meeting, the board unanimously approved the shareholder-quorum amendment.  

The plaintiffs, who had opposed the original proposed amendment and boycotted the shareholder meetings, filed suit seeking a declaratory judgment pronouncing the shareholder-quorum amendment void and an order enjoining the defendant from enforcing the amendment, among other things.  The Superior Court’s Chancery Division in Monmouth County denied the requested injunctive relief, finding that the board had the authority to amend the bylaws, and the plaintiffs appealed.

On appeal, the Appellate Division reversed the lower court’s decision by relying on the plain language of Section 14A:5-9 of the New Jersey Business Corporation Act (the “Act”), which states, in pertinent part, “Unless otherwise provided in the certificate of incorporation or this act, the holders of shares entitled to cast a majority of the votes at a meeting shall constitute a quorum at such meeting.”  That statutory language led the Court to the “clear and unambiguous” result that “in order to hold a vote amongst the Co-Op’s shareholders, a majority of all shares in the Co-Op must be represented at the meeting.”  Moreover, because the defendant’s certificate of incorporation did not provide an alternative to the Act’s majority quorum requirement, the Act controlled, and could only be modified by amending the defendant’s certificate of incorporation—which, under Section 14A:9-2(4) of the Act, requires a vote of the shareholders.  

The Appellate Division rejected the board’s argument that it had general authority to amend the bylaws by a two-thirds vote, finding such authority “insufficient to supplant the default majority quorum requirement set forth in the Act[.]”  Also unpersuasive was the board’s contention that plaintiffs’ boycotting left it no choice but to reduce the shareholder quorum requirement, noting that defendants could have addressed the perceived obstructive behavior by either initiating litigation in the General Equity Part of the Superior Court to obtain a court-ordered shareholders meeting, or by convincing a majority of the shareholders to attend.  

This case is a reminder that, even when boards have wide authority to amend corporate bylaws, certain shareholder rights cannot be violated or modified without shareholder consent.   

If you have any questions on this case, please feel free to contact Jason Navarino or any of Riker Danzig’s other Corporate Law partners: Robert Daleo, Robert Frucht and Ronald Leibman