In a set of recent rulings, Maryland’s appellate courts have reviewed numerous legal principles applicable to stockholder disputes, and the resulting litigation, including derivative actions and the application of Maryland’s business judgment rule.
In Boland v. Boland, (2011) the Maryland Court of Appeals:
1. Held that the business judgment rule applied as outlined in Auerbach v. Bennett, 393 N.E.2d 994 (N.Y. 1979), and rejected the approach of Zapata Corp. v.Maldonado, 430 A.2d 779 (Del. 1980), adopted by the Maryland Court of Special Appeals in Boland v. Boland, 194 Md. App. 477 (2010);
2. Refused to review the substantive conclusions of the Special Litigation Committee (“SLC”), or conduct an independent judicial review as required under the Zapata standard;
3. Reaffirmed and articulated the recognized fundamental distinction between derivative claims, and the direct claims of stockholders (enforcement of rights of the corporation versus the rights of the stockholders), and reversed the dismissal of the direct claims on a res judicata basis;
4. Affirmed the decision that the stockholders agreement was supported by legally sufficient consideration, and therefore, a declaratory judgment was proper.
The most significant result of Boland was the determination of the standard of review to apply to SLC decisions. “We shall adhere to the business judgment rule as applied in Auerbach and limit the judicial investigation of an SLC report to the issues of whether the SLC was independent, acted in good faith based on facts, and followed reasonable procedures.” Boland at p. 4. The Court was clear that this standard was not a “rubber stamp” on the actions of the SLC nor did it create a presumption in favor of the SLC. Boland at p. 37. The Court of Appeals reversed and remanded the matter to the Circuit Court based upon an inadequate inquiry in to the areas required by the Auerbach standard. The Court of Appeals refused, though, to apply “independent business judgment” or conduct a review of the SLC’s substantive conclusions. The Court specifically rejected the independent judicial review of the SLC’s actions as required by the holding in Zapata.
Citing Edenbaum v.Schwarcz-Osztreicherne, 165 Md. App. 233 (2005), The Court of Appeals outlined direct stockholder actions (as opposed to derivative actions) and found that the rulings on the derivative action did not preclude, by res judicata, the direct claims. The Court reasoned that the lack of a ruling on the merits in the derivative action barred the use of that judgment in support of the application res judicata principles. While the Court’s ruling was more procedural in nature, the Court took care to recognize the right of a stockholder to allege oppressive conduct as the basis for a claim and cited the factors considering direct versus derivative claims as outlined in Shenker v. Laureate Educ., Inc., 411 Md. 317 (2009).
The Court additionally recognized the right of recovery of attorney’s fees to a successful derivative plaintiff under the “common fund” doctrine citing Hess Constr.Co. v. Board of Educ., 341 Md. 155 (1996).
The Court affirmed the trial court in enforcement of the stockholders agreement. “We merely conclude, as the Circuit Court did, that the Stock Purchase Agreement’s repurchase upon death provision, a common feature of family-owned corporations, was a valid and enforceable contract in these circumstances.” Boland p. 74.
In the underlying Court of Special Appeals case Boland v. Boland, 194 Md. App. 477 (2010) , the business judgment and demand principles applicable to derivative claims outlined in Werbowsky v. Collomb, 362 Md. 581 (2001) and Shenker v. Laureate Educ., Inc., 411 Md. 317 (2009) were restated. With the exception of rejection of the Zapata standard in favor of the Auerbach standard, those principles were largely untouched by the Court of Appeals in the more recent decision.
The Court of Special Appeals pointed out the special nature of Maryland’s business judgment rule as being codified in the Maryland Code, Corporations & Associations “§2-405.1(a) (stating that “[a] director shall perform his duties as a director, including his duties as a member of a committee of the board on which he serves . . . (1) In good faith; (2) In a manner he reasonably believes to be in the best interests of the corporation; and (3)With the care that an ordinarily prudent person in a like position would use under similar circumstances.” and § 2-411(a) “The board of directors of a corporation may: (1) Appoint from among its members...committees composed of one or more directors; and (2) Delegate to these committees any of the powers of the board of directors [with exceptions not here applicable]. . . ”
