The Maryland Court of Special Appeals recently ruled in Oliveira v. Sugarman, -- A.3d --, 2016 WL 361055 (2016), that a Maryland board's rejection of a shareholder demand is subject to the presumption of the business judgment rule – and not subject to heightened scrutiny – where a majority of disinterested and independent directors rejects the demand.
In Oliveira v. Sugarman, the shareholders of Maryland corporation iStar Financial Inc. demanded that the board of directors investigate and institute claims on behalf of iStar against persons responsible for a decision to modify certain compensation awards to iStar executives. In response to the demand, the iStar board formed a committee consisting of one outside, non-management director to investigate the allegations and make a recommendation to the board regarding the demand. This committee was not vested with authority to make a decision about the demand, however, and was not a special litigation committee (SLC). Following the committee reporting on the results of the investigation, the iStar board unanimously voted to refuse the demand, and the shareholders subsequently filed a complaint including derivative and direct claims. The Circuit Court for Baltimore City, Maryland dismissed the shareholders' claims, and the shareholders appealed the dismissal.
The shareholders in Oliveira v. Sugarman argued that the board's decision to reject the demand is subject to heightened scrutiny pursuant to the decision by the Court of Appeals of Maryland (Maryland's highest court) in Boland v. Boland, 423 Md. 296 (2011). In Boland, the Court of Appeals held there is no presumption that a SLC appointed to respond to a shareholder demand is independent, acted in good faith, or followed reasonable procedures. According to Boland, the directors must demonstrate how they chose the SLC members and must provide evidence that the SLC followed reasonable procedures and that no substantial business or personal relationships impugned the SLC's independence and good faith.
In Oliveira v. Sugarman, a SLC had not been appointed and, instead, a majority of disinterested and independent directors had rejected the demand. In finding that the heightened standard articulated in Boland did not apply, the Court of Special Appeals flatly rejected the shareholders' argument that "the Boland standard -- which grants no presumption of independence, good faith, or with respect to the reasonableness of the investigation of the demand -- applies to all decisions regarding a shareholder demand, not only to decisions rendered by an SLC." Oliveira, 2016 WL 361055, at *7. The court reasoned that:
It is logical for different standards to apply to judicial review [of] 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.
Id. After determining that the business judgment rule provided the proper framework to analyze the board's decision, the Court of Special Appeals upheld the lower court's dismissal of the derivative claims.
The Court of Special Appeals' decision clarifies that, for now, a Maryland board with a majority of disinterested and independent directors responding to a shareholder demand will be entitled to the presumptions afforded by the business judgment rule.