Maryland Appellate Court Clarifies Applicability Of Business Judgment Rule For Board Responding To Shareholder Demand

Cheryl A. Feeley is an Associate in our Washington, D.C. office.

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...