Board of Directors’ Response to Shareholder Demand Not Subject to Heightened Boland Scrutiny
A Maryland appellate court has ruled that a demand refusal by an entire board, consisting of a majority of disinterested and independent directors who chose not to appoint a special litigation committee, is entitled to the presumption of the business judgment rule and is not subject to the heightened scrutiny set forth in Boland v. Boland.
In 2011, Maryland’s highest court – in Boland v. Boland, 423 Md. 296 (2011) – held there is no presumption that a special litigation committee (“SLC”) appointed to respond to a shareholder demand is independent, acted in good faith, or followed reasonable procedures. The Maryland Court of Appeals stated in Boland that, instead, the directors must demonstrate the process used to pick the SLC’s members and must show that no substantial business or personal relationships impugned the committee’s independence and good faith. The Court indicated that the directors must also demonstrate that the SLC followed reasonable procedures and employed a reasonable process.
Many practitioners believed that the Boland opinion left open the question of whether the heightened scrutiny governing SLC decisions would also be applied by the courts to shareholder demand decisions made by a board of directors, which historically and statutorily have been entitled to a presumption that the directors acted reasonably and in the best interests of the corporation. That question has now been answered, at least in part.
On January 28, 2016, the Maryland Court of Special Appeals ruled in Oliveira v. Sugarman that a demand refusal by a board consisting of a majority of disinterested and independent directors is not subject to heightened Boland scrutiny. In Sugarman, the shareholders of iStar Financial Inc. (“iStar”) – a Maryland corporation headquartered in New York – demanded that the iStar Board of Directors institute claims challenging certain compensation awards given to iStar executives. In response, the iStar Board, which consisted of a majority of disinterested and independent directors, formed a committee to investigate the allegations contained in the shareholder demand and to make a recommendation to the Board concerning a demand response. The committee was comprised of a single, outside non-management director, who was tasked with investigating, but who was not vested with authority to make a demand decision (and, therefore, was not an SLC). Following a report by the single-member committee, the iStar Board unanimously voted to refuse the demand. The shareholders thereafter filed suit, and the Circuit Court for Baltimore City, Maryland dismissed their claims.
On appeal, the shareholders argued, among other things, that the Board’s decision is subject to heightened Boland scrutiny and, therefore, is not entitled to the presumption that it was made in good faith and followed reasonable procedures. The Court of Special Appeals disagreed, concluding that, because the iStar Board consisted of a majority of disinterested and independent directors, the Board’s demand refusal was entitled to the presumption of the business judgment rule and was not subject to heightened Boland scrutiny. In reaching its conclusion, the Court explained that, because an SLC is typically formed only when the board as a whole lacks disinterestedness and independence and chooses to delegate decision-making authority to an SLC, stricter scrutiny of the demand decision is appropriate, as Boland requires, in those circumstances.
The Sugarman opinion thus answers in the negative, at least as far as the Court of Special Appeals is concerned, the question whether the decision to refuse a shareholder demand made by an entire board consisting of a majority of disinterested and independent directors that elects not to appoint an SLC is subject to heightened Boland scrutiny.
For more information on this ruling and how it may affect your business, please contact the authors or the attorney at the firm with whom you are regularly in contact.