Maryland’s Highest Court Clarifies Application of Boland Heightened Scrutiny to Shareholder Demand Response
In a “sweet” decision for corporate boards, on January 20, 2017, Maryland’s highest court ruled in Oliveira v. Sugarman that the decision of the full board to refuse a shareholder demand is not subject to the heightened scrutiny set forth in Boland v. Boland. Specifically, the Court of Appeals of Maryland held that when a corporate board consisting of a majority of disinterested and independent directors that has not appointed a Special Litigation Committee refuses a shareholder demand for derivative litigation, the board’s decision is entitled to the presumption of the Business Judgment Rule.
In 2011, Maryland’s highest court held, in Boland v. Boland, 423 Md. 296 (2011), that 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 Court of Appeals of Maryland instead stated in Boland that the directors must explain the process used to appoint the SLC’s members and must show that no substantial business or personal relationships impugned the SLC’s independence and good faith. The Boland Court further held that the directors must demonstrate that the SLC followed reasonable procedures and adhered to a reasonable process. As a result of Boland, Maryland courts essentially must apply a more rigorous, heightened review of a demand refusal when a corporation acts through an SLC.
Many practitioners believed that the Boland opinion left open the question of whether the heightened scrutiny governing demand refusal decisions would apply when a full board of directors responds to a shareholder demand. Historically, the decisions of an SLC board have been entitled to a presumption that the directors acted reasonably and in the best interests of the corporation. See Md. Code Ann., Corps. & Ass’ns § 2-405.1(g). The Court of Appeals has now distinguished certain decisions of the full board from that of the SLC in Boland.
On January 20, 2017, the Court of Appeals – in Oliveira v. Sugarman, No. 17, Sept. Term 2016, 2017 WL 244092 (Md. Ct. App. Jan. 20, 2017) – ruled 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, a shareholder of iStar Financial Inc. (“iStar”) – a publicly traded real estate investment trust incorporated in Maryland and headquartered in New York – demanded that the iStar Board of Directors (“Board”) bring claims on behalf of the corporation challenging certain compensation awards given to iStar executives. In response, the Board, which consisted of a majority of disinterested and independent directors, formed a committee to investigate the allegations and to make a recommendation to the Board concerning a demand response. The committee consisted of a single, outside non-management director, who was tasked with investigating the allegations in the demand, but who was not vested with decision-making authority (and, therefore, was not an SLC). Following the report and recommendation of the single-member investigative committee, the iStar Board voted unanimously to refuse the demand. The shareholder thereafter filed suit in the Circuit Court for Baltimore City, Md., alleging (inter alia) that the demand was wrongfully refused, and the Circuit Court dismissed the shareholder’s claims. Maryland’s intermediate appellate court, the Court of Special Appeals, affirmed that decision last January.
On appeal to the Court of Appeals, the shareholder argued, among other things, that the full Board’s decision is subject to the heightened Boland scrutiny and, therefore, is not entitled to the presumption that it was made in good faith or that the Board followed reasonable procedures. In so arguing, the shareholder urged that Boland scrutiny should apply in all instances where a corporate board denies a shareholder’s demand to initiate a derivative suit. The shareholder contended that all corporate boards are inherently biased whenever a shareholder demands that board members take action against fellow directors and, therefore, courts should not trust board members to pass judgment on other directors.
The Court of 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. 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, heightened scrutiny of the demand decision is appropriate. As the Court explained, Boland requires heightened scrutiny in those circumstances to ensure that a tainted board is not entrusting the demand decision to a biased SLC in an effort to benefit from the presumption of the Business Judgment Rule.
For more information on this decision and what it means for your business, please contact the authors or the attorney at the firm with whom you are regularly in contact.