A federal judge gave Baltimore Bancorp a tactical victory in its battle to fight off an insurgent slate of directors, declining a request to rule that the insurgents need only a simple majority of shareholder votes to expand the board to 28 members.
U.S. District Judge J. Frederick Motz said he wasn't convinced that a federal question was presented during yesterday's hearing, which was prompted by Barbara Larkin, a Severna Park widow, and Edwin F. Hale Sr., the leader of dissident shareholders who want to expand the board to 28 members from 18 and elect 16 new members to gain a majority and take control of the company.
Baltimore Bancorp, parent company of the Bank of Baltimore, contends that the insurgents need to win the votes of shareholders who own 80 percent of the company's voting stock to expand the board.
Judge Motz's ruling didn't explicitly endorse either side's position.
Whether expanding the board takes a 50 percent vote or an 80 percent vote is an issue of state law, the federal judge said.
Attorneys for Mr. Hale and Mrs. Larkin tried unsuccessfully to convince him that Baltimore Bancorp's position is such a blatant distortion of state law that it violates federal requirements governing proxy fights and makes the issue a matter for the federal courts.
The judge disagreed. "The bank clearly in good faith can make that argument" that an 80 percent vote is needed, he said. "The shareholders know there's a dispute."
William Bradford Reynolds, an attorney for Mrs. Larkin and Mr. Hale, said that his clients could either take the question to state court or try to convince a federal appeals court that the issue belongs in the federal courts because proxy battles are subject to federal securities laws.
The ruling means its unlikely that control of the company will be settled at the company's annual shareholder meeting Wednesday at the Sheraton Inner Harbor hotel.
Mr. Reynolds said that it will probably be impossible to get the legal questions settled before the meeting and that the insurgents will appeal, either in state or federal court, unless Mr. Hale gets more than 80 percent of the votes.
If the Hale slate gets between 50 percent and 80 percent of the votes, the two sides will be fighting in court over whether that's enough to give his group control of the company.
If the insurgents get less than 50 percent of the vote on their proposal to expand the board, then Mr. Hale will contend that the company's insistence on an 80 percent shareholder vote may have kept some shareholders from voting or caused them to change their vote, Mr. Reynolds said.
The issue is whether Baltimore Bancorp's bylaw requiring an 80 percent shareholder vote to expand the board is valid. Attorneys representing Mr. Hale and Mrs. Larkin said a company must make that sort of rule in its corporate charter. They cited parts of the state's corporation code and a 1954 court decision involving a Roland Park shopping center.
David Clarke, a Piper & Marbury attorney representing Baltimore Bancorp, said that a different section of state corporation law says a company's bylaws can give boards of directors the authority to take away shareholders' rights to change the bylaws.
The conflict over 50 percent vs.80 percent was the second court hearing in two weeks on a similar issue. Baltimore Bancorp settled a dispute with Mrs. Larkin last week over a proposal to make the company create a shareholder advisory board that would meet with directors every quarter.
The company agreed to demand only a majority vote on that issue but continued to insist it would take 80 percent to adopt Mr. Hale's resolution to expand the board.