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Demand refusal: Board action without a Special Litigation Committee

In Oliveira v. Sugarman, the Maryland Court of Special Appeals reviewed Maryland law regarding shareholder demands and derivative actions in the context of the appropriate standard of review of board action with and without the use of a special litigation committee (“SLC”).


The Court held that review of a corporation’s refusal of action by a shareholder was subject to the business judgment rule, only, where no SLC had been created and to which the Board’s obligations of investigation had not been delegated.  The Court contrasted the ““deferential business judgment rule, which insulates ‘the business decisions made by the director from judicial review[.]’” (Boland v. Boland, 423 Md. 296, 328 (2011) (quoting Shenker, supra, 411 Md. at 344) (Oliveira p. 11), to that applied where a SLC is used “which grants no presumption of independence, good faith, or with respect to the reasonableness of the investigation of the demand”  (Oliveira p. 15)


Explaining the standard of review of actions by a board with and without a SLC, the Court stated:


Critically, the iStar Board of Directors consisted of a majority of disinterested and independent directors. It is logical for different standards to apply to judicial review decisions made by a board comprised of a majority of disinterested and independent directors and decisions made by an SLC. An SLC is only formed when a board as a whole lacks disinterestedness and independence. Stricter scrutiny of the corporate decision is appropriate in such situations.


Oliveira p. 15


Applying the business judgment rule, the client found no improper action.

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