Hill v. Cohen, No. 22-2023 (3d Cir. 2022)Annotate this Case
Under Pennsylvania law, a court may 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. The eight-person FRBK Board of Directors became evenly split into two factions until one of the Hill Directors died. The Madonna Directors immediately used their new numerical advantage to start rearranging the bank’s leadership and took steps to fill the Board vacancy with an ally.
The Hill Directors sued. Within hours, the district court ordered the Madonna Directors to cease their actions. Nine days later, without an evidentiary hearing or fact-finding, the court appointed a custodian to take control of FRBK and to hold a special shareholders’ meeting to fill the vacant Board seat. The following month, the court – without prompting from any shareholder or Board member – directed the custodian to add a Board seat and to fill that seat at the special shareholders’ meeting.
The Third Circuit reversed. The decision to displace the corporate governance structure of a publicly-traded company did not reflect the required caution, circumspection, or justification for such a drastic step. FRBK’s bylaws describe how the Board should proceed after the death of a director. The Madonna Directors followed those instructions. The court abused its discretion by hastily supplanting the Bylaws with its own process. There was no deadlock, illegality, oppression, or any other ground for appointing a custodian.