A recent court ruling in New Jersey could cause corporate governance headaches for mutual thrifts and activist investors.

Judge Margaret McVeigh of the Superior Court of New Jersey ruled earlier this month that Spencer Savings Bank in Elwood Park, N.J., could require 10% support from its members before board nominees stand for full election. But her ruling also squashed a motion by Spencer Savings to increase the threshold to 15%.

McVeigh also conveyed some sympathy for the plaintiff, Lawrence Seidman, an investor who wants the threshold eliminated. Seidman "certainly prevailed" in establishing that the bylaws "did not address significant governance issues and served to disenfranchise its members," McVeigh wrote in her March 4 decision.

The ruling sought to resolve a long-standing dispute between Seidman, who wants to nominate directors to Spencer Savings' board, and the $1.9 billion-asset thrift. Spencer Savings wants to keep Seidman out of the boardroom, fearing he will try and force it to convert to a stock-owned company.

The mutual and Seidman were equally miffed with the ruling; both are considering appeals. McVeigh's ruling could also set a dangerous precedent by creating a single standard for all mutuals when it comes to director nominations, says Doug Faucette, a lawyer at Locke Lord who represents Spencer Savings.

"Not only are mutuals subjected to one-size-fits-all regulations from Capitol Hill, but now the courts are making the same mistakes," Faucette says. "You simply can't apply the same law of stockholders' fiduciary duty that exists in the public stock company arena to mutuals."

The ruling also highlights the tricky balance that courts — and regulators — must strike when supervising corporate governance at mutuals, says John Bowman, a lawyer at Venable and former acting director at the Office of Thrift Supervision.

"Problems arise when a depositor …tries to assert rights like a shareholder," Bowman says. "Regulators don't want to entrench a mutual's management at the expense of shareholders."

The ruling applies specifically to New Jersey state law governing mutuals, Faucette notes. But investor groups can reference the opinion in other legal battles with mutuals. "You don't know where the hell these courts are going to go," Faucette says.

A spokesman for Spencer Savings said that Jose Guerrero, the mutual's chairman, president and chief executive, would not comment.

Seidman has a long history of forcing management changes and mergers at publicly traded banking companies. He has waged legal battles with several New Jersey thrifts, including Clifton Savings Bancorp (CSBK) in Clifton and Center Bancorp (CNBC) in Union. He also opposed an attempt by Columbia Bank of Fair Lawn, N.J., to modify its bylaws to restrict board nominations; the Office of Thrift Supervision ultimately rejected the thrift's proposal.

It is much more difficult to force a privately held mutual thrift to convert, Bowman says. Depositors at mutuals, compared to shareholders of a public company, "don't have any real rights," he says.

The lawsuit against Spencer Savings was filed in an effort to force mutuals to implement basic corporate governance policies, Seidman says.

"Nobody has the right to put a barrier up to nominate people for a board," Seidman says. "Credit unions have legal procedures for corporate governance. Why shouldn't mutuals?"

Mutuals are designed to operate for the benefit of their members. Spencer Savings' management has acted otherwise, including a costly trip to a retreat in Spain on the thrift's dime, Seidman claims

Seidman says the trip, which was referenced in a lawsuit he filed against the thrift in the Superior Court of New Jersey in the mid-2000s, prompted his most recent lawsuit.

"I don't think it's correct …for a mutual to have a meeting in Spain," Seidman says.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.