As community banks around the country battle with shareholders, a federal judge has blocked a New Jersey bank's effort to keep dissident investors off its board.

A U.S. District Court judge in Camden, N.J., ruled that IBS Financial Corp., Cherry Hill, N.J., cannot reduce the size of its board to block dissident shareholders from running for open seats. Legal experts said the ruling stands as a warning to other banks.

"The board can't just take corporate action simply for the purpose of warding off an insurgent," said Richard A. Schaberg, a lawyer at Thacher, Proffitt & Wood in Washington.

The setback for IBS came as a growing number of community banks face pressure from shareholders to boost returns or seek buyers. Many banks have been relying on a defensive tactic similar to that of IBS.

Judge Joseph E. Irenas, in his Jan. 23 ruling, ordered the parent of $750 million-asset Inter-Boro Savings and Loan Association to put two activist candidates on the ballot at its next annual meeting, which has not been scheduled.

The judge said the IBS board should not have eliminated a board seat last July, which reduced the number of directors to six and made it harder for the dissident group to gain a voice.

"Board actions taken for the sole, or primary, purpose of impeding the effectiveness of the shareholder vote are deeply suspect," the judge wrote.

Thrift investor Lawrence B. Seidman, who has a 7.7% stake in IBS, has led the Committee to Maximize Shareholder Value in its protracted battle against IBS management. The shareholder group, upset with IBS' average financial performance and steady stock price, is pushing for better returns or even a sale of the thrift.

"I think it's about time the outside directors of this company start realizing they work for the shareholders and not" IBS managers, Mr. Seidman said.

IBS chairman Joseph Ochman Sr., through his secretary, declined to comment. However, a prepared statement said the company is reviewing the court's decision and is considering its options.

If the thrift appeals, Mr. Seidman said, his group would fight back. In the meantime, he will continue to seek seats on the board for shareholders Richard Whitman and Ernest Beier Jr.

The judge's decision caps a two-year battle between Mr. Seidman's group and IBS officials.

The shareholder group lost a proxy fight in 1995 but did not give up. When the board's size was reduced last summer, Mr. Seidman's group was told it could only nominate one person to the board.

He insisted on nominating two people, and IBS sued, alleging in November that the investors had failed to disclose all information required by federal securities laws.

But Judge Irenas said disclosure forms filed by Mr. Seidman's group followed Securities and Exchange Commission rules. He told IBS to honor the shareholder group's request for a shareholder list and any materials the thrift uses to communicate with investors.

In an interview in November, Mr. Ochman told the American Banker that the company would spend "whatever it takes" to pursue a lawsuit against the shareholders group. He admitted the reduction of the board was an attempt to keep IBS out of control of the Seidman group.

At the time, Mr. Ochman said: "They've made a bad decision in picking the wrong company, wrong board of directors, and wrong CEO."

Bob Freedman, a managing partner at Silver, Freedman & Taft in Washington, said, with proper planning, reducing board sizes or taking other actions designed to defend against renegade shareholders can be pulled off.

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