Oliveira v. Sugarman ( 2017 )

Albert F. Oliveira, et al. v. Jay Sugarman, et al., No. 17, September Term, 2016, Opinion
by Adkins, J.
CORPORATIONS — DERIVATIVE LAWSUITS — BUSINESS JUDGMENT
RULE: The modified business judgment rule established by Boland v. Boland, 423 Md.
296 (2011), does not apply to a disinterested and independent board of directors’ decision
to deny a shareholder litigation demand. The Boland standard only applies when a board
of directors that is not majority disinterested and independent chooses to utilize a special
litigation committee to respond to such a demand. When a board consisting of a majority
of disinterested and independent directors does not delegate its decision-making power to
a special litigation committee, the traditional business judgment rule applies.
CORPORATIONS — SHAREHOLDER DIRECT LAWSUIT AGAINST
CORPORATE DIRECTORS — BREACH OF CONTRACT: When a board of
directors modifies a shareholder-approved equity compensation plan to allow for
compensation despite the failure to meet established performance goals, it does not give
rise to a direct shareholder claim for breach of contract. To constitute a contract, the equity
compensation plan must include a clear offer and acceptance, as well as language
indicating an intent for both parties to be bound.
CORPORATIONS — SHAREHOLDER DIRECT LAWSUIT AGAINST
CORPORATE DIRECTORS — PROMISSORY ESTOPPEL: Although statements
within a shareholder proxy statement may be sufficient to give rise to a direct claim for
promissory estoppel, to make out such a claim shareholders must allege that they suffered
an injustice distinct from any injury to the corporation that can only be remedied by the
enforcement of the promise. Here, shareholders failed to allege such an injustice.
Circuit Court for Baltimore City
Case No.: 24-C-14-001243
Argued: October 7, 2016
IN THE COURT OF APPEALS
OF MARYLAND
No. 17
September Term, 2016
ALBERT F. OLIVEIRA, et al.
v.
JAY SUGARMAN, et al.
Barbera, C.J.
Greene
Adkins
McDonald
Watts
Hotten
Getty,
JJ.
Opinion by Adkins, J.
Filed: January 20, 2017
Petitioners Albert F. Oliveira and Lena M. Oliveira filed suit against current and
former members of iStar’s Board of Directors and senior management in the Circuit Court
for Baltimore City for breach of fiduciary duty, unjust enrichment, waste of corporate
assets, breach of contract, and promissory estoppel arising from the Board of Directors’
modification of performance-based executive compensation awards, which were granted
in the form of stock. The Circuit Court dismissed all of Petitioners’ claims for failure to
state a claim, and the Court of Special Appeals affirmed. We hold that the traditional
business judgment rule applies to a board of directors’ decision to deny a shareholder
litigation demand, not the heightened standard established by Boland v. Boland, 423 Md.
296 (2011). Furthermore, we hold that Petitioners do not allege facts sufficient to support
direct claims for breach of contract or promissory estoppel. Thus, they are derivative
claims that are subject to the business judgment rule. They were correctly dismissed.
FACTS AND LEGAL PROCEEDINGS
Petitioners are Albert F. Oliveira and Lena M. Oliveira, trustees for the Oliveira
Family Trust, a shareholder of iStar Financial Inc. (“iStar”). iStar is a publicly traded real
estate investment trust incorporated in Maryland with its principal place of business in New
York. Respondents are iStar and current and former members of iStar’s Board of
Directors.1
1
Management Respondents are Jay Sugarman, Nina B. Matis, R. Michael Dorsch
III, Michelle M. MacKay, Barbara Rubin, and David DiStaso. They were each recipients
of the disputed executive compensation awards. Jay Sugarman is the Chairman and Chief
Executive Officer of iStar and currently serves on iStar’s Board of Directors. Director
Respondents are Glen August, Robert W. Holman, Jr., Robin Josephs, John G. McDonald,
George R. Puskar, Dale Anne Reiss, Barry W. Ridings, and Jeffrey A. Weber. iStar is also
The 2008 Awards and 2009 Plan
On December 19, 2008, iStar’s Board of Directors (“the Board”) granted over ten
million performance-based restricted stock units to certain iStar executives and employees
(“the 2008 Awards”). The Board intended for the awards to vest only if iStar common
stock achieved any of the following average closing prices over a period of 20 consecutive
days: $4.00 or more prior to December 19, 2009; $7.00 or more prior to December 19,
2010; or $10.00 or more prior to December 19, 2011. When the Board granted these
awards, iStar did not have enough authorized shares of stock to pay the awards if they
vested. Thus, in 2009, the Board sought shareholder approval of an issuance of additional
stock units to be used for executive compensation.
On April 23, 2009, Chief Executive Officer (“CEO”) Jay Sugarman sent a letter
inviting iStar shareholders to the annual shareholders meeting. The letter indicated that at
the meeting shareholders would be asked to “consider and vote upon a proposal to approve
the iStar Financial Inc. 2009 Long-Term Incentive Plan” (“the 2009 Plan”). The mailing
also included a notice of the annual shareholders’ meeting, which explained that
shareholders were to “consider and vote” on the 2009 Plan at the meeting. The notice
indicated that the 2009 Plan was “further described in the accompanying proxy statement.”
Moreover, the Board included a letter introducing the proxy statement, which urged
shareholders to approve the 2009 Plan. The letter told shareholders, “[I]t is crucial that we
a Respondent. It filed a brief with Director Respondents, which Management Respondents
joined. iStar and Director Respondents joined in Management Respondents’ brief.
Therefore, for the sake of brevity, we will refer to all of them as “Respondents.”
2
retain and motivate our senior leaders and key employees by granting long-term,
performance-based equity incentive compensation.” It continued, “In particular, if the
2009 Plan is not approved, we are obligated to settle existing performance-based awards
granted on December 19, 2008 in cash, rather than common stock, if the performance and
vesting conditions of those awards are achieved.”
The attached Schedule 14A Proxy Statement (“the 2009 Proxy Statement”) further
described the 2009 Plan, which authorized the issuance of an additional eight million shares
of common stock. The Proxy Statement explained that “the ongoing financial crisis and
its negative impact on [iStar] business and financial results” had led to a depletion of iStar
shares issued in 2006. This new stock would allow iStar to settle the 2008 Awards—if
they vested—with stock rather than cash, which would enable the corporation to preserve
cash. The Proxy Statement also noted that approval of the 2009 Plan would “ensure, for
federal tax purposes, the deductibility of compensation recognized by certain participants
in the 2009 Plan which may otherwise be limited by Section 162(m) of the Internal
Revenue Code.” A copy of the 2009 Plan was attached to the Proxy Statement.
On April 27, 2009, Respondents filed the Proxy Statement with the United States
Securities and Exchange Commission. On May 27, 2009, at the annual shareholders’
meeting, the shareholders voted to approve the 2009 Plan.
In 2009, iStar did not meet its target share price for 20 consecutive days as required
for the 2008 Awards to vest. In 2010, iStar achieved the target price of $7.00 for 20
consecutive days ending on December 20—eight trading days too late to vest the 2008
Awards. Following this near miss, iStar began considering modification of the 2008
3
Awards “to achieve a fair balance between rewarding management’s exceptional
performance, as reflected by the 300% rise in the market value of iStar stock, and enforcing
the terms of the 2008 Awards.” After several Board and Compensation Committee
meetings, as well as discussion with legal, accounting, and compensation advisors, the
Board modified the 2008 Awards to convert them from performance-based to service-
based awards (the “2011 Modification”).
Under the 2011 Modification, iStar executives received compensation in three
installments—on January 1, 2012, 2013, and 2014—as long as the employee still worked
for iStar on the vesting date. The 2011 Modification also reduced the amount of the 2008
Awards by 25 percent. With the 2011 Modification, the Board hoped to prevent key
members of iStar management from leaving the corporation. Additionally, the Board
believed that modifying the existing 2008 Awards, which had already been largely
expensed, would be more cost effective than issuing new awards.
Demand and Response
On May 23, 2013, Petitioners demanded that the Board “investigate and institute
claims on behalf of [iStar] . . . against responsible persons” related to the 2011
Modification. Petitioners demanded that the Board rescind all shares of stock issued under
the 2009 Plan to settle the 2008 Awards, or, alternatively, “seek any other appropriate relief
on behalf of [iStar] for damages sustained . . . as a result of the Board’s misconduct” in
modifying the 2008 Awards. Additionally, Petitioners sought to “[e]njoin [iStar] from
issuing any more shares under the 2009 Plan to settle the 2008 Awards.”
4
In June 2013, the Board appointed Barry W. Ridings, an outside, non-management
director who joined the Board after the 2011 Modification, to serve as the demand response
committee (“the Committee”). The Committee was tasked with investigating Petitioners’
demand and making a recommendation to the Board as to the best course of action. The
Committee hired outside counsel, Joseph S. Allerhand and Stephen A. Radin of Weil,
Gotshal & Manges LLP, to assist with the investigation. In October 2013, following
extensive document review and interviews with key iStar executives, the Committee
recommended that the Board refuse Petitioners’ demand. On November 11, 2013, the
Board unanimously voted in accordance with that recommendation.
In a letter sent to Petitioners on November 12, 2013, the Board presented several
reasons for denying their demand. The Board noted that the Committee had concluded that
the Board made a good faith, informed business judgment to modify the 2008 Awards, and
that it had the authority to do so. Additionally, the Board explained that if it were to rescind
the 2008 Awards, it would harm corporate morale and likely invite litigation from
management executives. Lastly, the Board noted that even if it were to win the demanded
litigation, the damages would not be enough to offset the cost of issuing new awards. The
Board concluded that it saw “no upside—and much downside—to the action and lawsuit
proposed in the [d]emand. iStar would probably lose, suffer substantial harm, and pay both
sides’ attorneys’ fees.”
Legal Proceedings
On March 10, 2014, Petitioners filed a complaint in the Circuit Court for Baltimore
City. They brought five claims against Respondents: (1) breach of fiduciary duty;
5
(2) unjust enrichment; (3) waste of corporate assets; (4) breach of contract; and
(5) promissory estoppel. The first three counts were alleged derivatively, and the last two
were brought directly. In their motion to dismiss, Respondents argued that all of
Petitioners’ claims were derivative, and they had failed to plead facts sufficient to
overcome the presumption that the Board had acted with sound business judgment.
Following a hearing, the Circuit Court dismissed all of Petitioners’ claims.
Petitioners filed a timely appeal to the Court of Special Appeals. In a reported
decision, the Court of Special Appeals affirmed the grant of the motion to dismiss. Oliveira
v. Sugarman, 226 Md. App. 524 (2014). It held that the Circuit Court correctly applied the
business judgment rule to the Board’s decision to deny Petitioners’ litigation demand, and
that Petitioners failed to allege facts overcoming the business judgment rule presumption.
Id. at 540, 543. It viewed Petitioners’ breach of contract and promissory estoppel claims
as derivative claims that could not be asserted directly. Id. at 552.
We granted certiorari to answer the following questions: 2
2
We have rephrased the questions presented for clarity. The Petition for Writ of
Certiorari presented the following questions:
1. Is a board of directors entitled to the presumption of the
business judgment rule contained in Md. Code Ann., Corps.
& Ass’ns § 2-405.1 when responding to a shareholder
demand without presenting evidence that the board acted
independently, in good faith, and was reasonably informed
as required by Boland v. Boland, 423 Md. 296 (2011)?
2. Can shareholders of a Maryland corporation bring direct
claims against the board of directors for (a)
misrepresentations made in a proxy statement soliciting
6
1. Does the modified business judgment rule established by
Boland v. Boland, 423 Md. 296 (2011), apply to a
disinterested and independent board of directors’ decision
to deny a shareholder litigation demand?
2. Have Petitioners alleged sufficient facts to support direct
shareholder claims for breach of contract and promissory
estoppel?
We answer no to both questions. Therefore, we shall affirm the judgment of the
Court of Special Appeals.
STANDARD OF REVIEW
Petitioners appeal from the Circuit Court’s grant of a motion to dismiss. “We review
the grant of a motion to dismiss as a question of law.” Shenker v. Laureate Educ., Inc.,
411 Md. 317, 334 (2009) (citation omitted). Therefore, we analyze whether the granting
of the motion was legally correct. RRC Northeast, LLC v. BAA Maryland, Inc., 413 Md.
638, 643–44 (2010) (citations omitted). In doing so, we review the Circuit Court’s decision
without deference. See State v. Johnson, 367 Md. 418, 424 (2002). To determine whether
dismissal was appropriate, we ask whether the facts alleged in the well-pleaded complaint,
if taken as true, support a cause of action for which relief may be granted. RRC Northeast,
LLC, 413 Md. at 644 (citation omitted). We construe all inferences in the light most
favorable to the non-moving party, and order dismissal only if the allegations and
permissible inferences, if true, still fail to afford the plaintiff relief. Id. at 643 (citation
omitted).
shareholder votes and (b) for breaches of a shareholder-
approved incentive stock plan?
7
DISCUSSION
Petitioners argue that this Court should apply the modified business judgment rule
established in Boland v. Boland, 423 Md. 296 (2011), to all instances where a corporate
board denies a shareholder’s demand to initiate a derivative suit. In applying this
heightened scrutiny, they argue, the Court should hold that Respondents improperly denied
their litigation demand as to their claims of breach of fiduciary duty, unjust enrichment,
and waste of corporate assets. Additionally, Petitioners claim the right to proceed on their
breach of contract and promissory estoppel counts because, as direct—not derivative—
shareholder claims, they are not subject to the business judgment rule.3
Respondents, by contrast, urge this Court to review the Board’s decision to deny
Petitioners’ litigation demand under the traditional business judgment rule and affirm the
grant of the motion to dismiss. Regarding Petitioners’ claims for breach of contract and
promissory estoppel, Respondents say they are derivative claims that were properly
dismissed for failure to state a claim overcoming the business judgment rule.
3
Petitioners also argue that whether or not we apply enhanced Boland scrutiny to
the Board’s decision to deny Petitioners’ litigation demand, we should not accept assertions
made in a demand denial letter as true in determining whether to grant a motion to dismiss.
They contend that the Court of Special Appeals erred in relying on Scattered Corporation
v. Chicago Stock Exchange, Inc., 701 A.2d 70, 76 n.24 (Del. 1997), overruled on other
grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000), to hold otherwise. But this question
does not pertain to the two certiorari issues before us. The Circuit Court relied on the
demand denial letter to determine whether the Board acted in accordance with the business
judgment rule. Referring to information within the letter, the court found that Barry W.
Ridings, who served as the Committee, was a disinterested director. Additionally, looking
to the methodology described in the letter, the court concluded that the Committee’s
procedure neither “suggests impropriety” nor “raises concern.” Here, Petitioners do not
assert that the Board failed to act in accordance with the business judgment rule, only that
we should apply enhanced scrutiny instead. Thus, this question is not before us.
8
The Business Judgment Rule
Under the traditional business judgment rule, courts apply a presumption of
disinterestedness, independence, and reasonable decision-making to all business decisions
made by a corporate board of directors. The business judgment rule protects corporate
directors from liability when the majority of directors act prudently and in good faith.
Boland, 423 Md. at 328 (quoting Devereux v. Berger, 264 Md. 20, 31–32 (1971)). The
Delaware Supreme Court described the rule as follows:
It is a presumption that in making a business decision the
directors of a corporation acted on an informed basis, in good
faith and in the honest belief that the action taken was in the
best interests of the company. Absent an abuse of discretion,
that judgment will be respected by courts.
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (citations omitted), overruled on other
grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).4 To overcome the “dangerous
terrain” of the business judgment rule presumption, the plaintiff must assert facts that
suggest the corporate directors did not act in accordance with the rule. Boland, 423 Md. at
329 (quoting Bender v. Schwartz, 172 Md. App. 648, 666 (2007)). In other words, “[t]he
burden is on the party challenging the decision to establish facts rebutting the
presumption.”5 Aronson, 473 A.2d at 812.
4
This Court frequently looks to Delaware courts for guidance on issues of corporate
law. See Shenker v. Laureate Educ., Inc., 411 Md. 317, 338 n.14 (2009) (“This Court has
noted the respect properly accorded Delaware decisions on corporate law ordinarily in our
jurisprudence.” (quoting Werbowsky v. Collomb, 362 Md. 581, 618 (2001) (internal
quotation marks omitted))).
5
When a shareholder successfully makes such a showing, courts generally apply
the two-pronged “entire fairness standard” to evaluate the challenged business decision.
9
Maryland has codified the business judgment rule in Maryland Code (1976, 2014
Repl. Vol.), § 2-405.1 of the Corporations and Associations Article (“C & A”). Section 2-
405.1(a) imposes a duty on a director to act “(1) [i]n good faith; (2) [i]n a manner he
reasonably believes to be in the best interests of the corporation; and (3) [w]ith the care
that an ordinarily prudent person in a like position would use under similar
circumstances.”6 Under C & A § 2-405.1(e), “[a]n act of a director of a corporation is
Bender v. Schwartz, 172 Md. App. 648, 670 (2007). The Delaware Supreme Court has
explained the standard as follows:
The concept of fairness has two basic aspects: fair
dealing and fair price. The former embraces questions of when
the transaction was timed, how it was initiated, structured,
negotiated, disclosed to the directors, and how the approvals of
the directors and the stockholders were obtained. The latter
aspect of fairness relates to the economic and financial
considerations of the [business decision], including all relevant
factors: assets, market value, earnings, future prospects, and
any other elements that affect the intrinsic or inherent value of
a company’s stock.
Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983) (citations omitted).
6
Effective October 1, 2016, Maryland Code (1976, 2014 Repl. Vol.), § 2-405 of the
Corporations and Associations Article (“C & A”) was amended. Section 2-405.1(a) was
renumbered as § 2-405.1(c) and rewritten in gender-neutral language. The amended statute
provides:
(c) In general. — A director of a corporation shall act:
(1) In good faith;
(2) In a manner the director 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.
10
presumed to satisfy the standards of subsection (a) of this section.”7 Maryland courts apply
the business judgment rule to “all decisions regarding the corporation’s management.”
Shenker, 411 Md. at 344 (citing NAACP v. Golding, 342 Md. 663, 673 (1996)).
To seek judicial review of a board’s business decision under the business judgment
rule, shareholders must file a derivative suit on behalf of the corporation. Werbowsky v.
Collomb, 362 Md. 581, 599 (2001). The obligation of directors to perform their duties in
accordance with good business judgment runs to the corporation, not directly to the
shareholders. Id. Therefore, its breach gives rise to a legal right that belongs exclusively
to the corporation. Id. By bringing a derivative action, shareholders invoke “an
extraordinary equitable device . . . to enforce a corporate right that the corporation failed
to assert on its own behalf.” Id. In a derivative suit, “[t]he corporation is the real party in
interest and the shareholder is only a nominal plaintiff. The substantive claim belongs to
the corporation.” Id. (quoting 13 William Meade Fletcher et al., Cyclopedia of the Law of
Private Corporations § 5941.10 (1995 Rev. Vol.)).
Because a derivative lawsuit intrudes upon the board of directors’ managerial
control of the corporation, shareholders are required to first make a demand that the board
take action before initiating a derivative suit. Id. at 600. In Kamen v. Kemper Financial
Services, Inc., 500 U.S. 90 (1991), the Supreme Court explained that “[t]he purpose of the
demand requirement is to afford the directors an opportunity to exercise their reasonable
7
Section 2-405.1(e) was renumbered as § 2-405.1(g) and now reads: “An act of a
director of a corporation is presumed to be in accordance with subsection (c) of this
section.”
11
business judgment and waive a legal right vested in the corporation in the belief that its
best interests will be promoted by not insisting on such right.” Id. at 96 (citation omitted)
(internal quotation marks omitted). If the board of directors denies a litigation demand, the
shareholder must overcome the presumption of the business judgment rule to continue the
lawsuit. Boland, 423 Md. at 331. The corporate board’s decision to deny the litigation
demand receives the same business judgment rule presumption as any other board decision.
Id. at 329–30.
Our decision in Boland, however, established an exception to the application of the
business judgment rule to a board’s decision to deny a shareholder litigation demand.
When a board consisting of a majority interested directors utilizes a special litigation
committee (an “SLC”) to evaluate a litigation demand, courts apply a modified business
judgment rule. Directors are considered to be interested if they either “appear on both sides
of a transaction” or “expect to derive [ ] personal financial benefit from it in the sense of
self-dealing, as opposed to a benefit which devolves upon the corporation or all
stockholders generally.” Id. at 329 (quoting Werbowsky, 362 Md. at 609). If a majority of
a corporate board is interested in the challenged transaction, the board can appoint an SLC
to decide whether it should accept or deny the litigation demand. Through the selection of
the SLC’s members, interested boards “can retain a voice in the derivative lawsuit despite
the adverse interests of board members.” Id. at 332. In Boland, we defined an SLC as a
committee “composed of independent, disinterested directors, either inside the corporation
or specially appointed from outside the corporation” and “vested with the authority to
12
render a corporate decision.” Id. Unlike other demand response committees, an SLC does
not make a recommendation to the board—it renders a decision itself.8
In Boland, a corporate board comprising of four brothers executed two stock
transactions that substantially increased their ownership interest in the family business.
Boland, 423 Md. at 313. The brothers’ non-director siblings demanded the board pursue
litigation for a breach of fiduciary duties, among other claims, and the board appointed an
SLC to respond. Id. at 315, 319. The SLC denied the litigation demand, and the non-
director siblings contested the decision. Id. at 321–23. We held that when an interested
board—a board with a majority interested directors—forms an SLC to address a
shareholder’s litigation demand, the reviewing court does not presume the SLC acted with
proper business judgment. Rather, the burden of proof is on the corporation to present
evidence that the SLC acted independently, in good faith, and with reasonable procedures.
We explained:
[T]he court should not grant summary judgment on the basis
of an SLC’s decision unless the directors have stated how they
8
We recognize that some courts—including this one—have used the term “special
litigation committee” broadly to describe any committee appointed by a board to evaluate
a litigation demand, regardless of whether it has the power to render a final decision or
only give a recommendation. See, e.g., Werbowsky, 362 Md. at 619 (demand requirement
gives the board the option to “seek the advice” of a “special litigation committee”); Seidl
v. Am. Century Cos., Inc., 799 F.3d 983, 992–94 (8th Cir. 2015) (evaluating demand denial
when board utilized a “special litigation committee” but retained full decision-making
power). Others have used the term to refer specifically to committees with final say as to
the litigation demand. See, e.g., Janssen v. Best & Flanagan, 662 N.W.2d 876, 888 (Minn.
2003) (rejecting defendant’s attempt to portray special counsel as a special litigation
committee because “he acted more like a legal advisor than a neutral decision maker”).
We adopt the definition set forth in Boland, 423 Md. at 332. As used in this opinion,
“special litigation committee” refers only to a committee vested with full decision-making
power to accept or deny the shareholder litigation demand.
13
chose the SLC members and come forward with some evidence
that the SLC followed reasonable procedures and that no
substantial business or personal relationships impugned the
SLC’s independence and good faith.
Id. at 340–41. This “enhanced” scrutiny shifts the burden to prove the legitimacy of the
SLC and its procedures from the shareholders to the corporate board. Id. at 349.
Our Boland SLC exception draws from two seminal decisions, one from New York,
Auerbach v. Bennett, 393 N.E.2d 994 (N.Y. 1979), and one from Delaware, Zapata
Corporation v. Maldonado, 430 A.2d 779 (Del. 1981). Boland, 423 Md. at 333–37. When
reviewing a demand denial by an SLC, New York courts apply the same business judgment
rule presumption as they do to denials made by a board of directors. Auerbach, 393 N.E.2d
at 1001. The Delaware Supreme Court, by contrast, instructed courts to apply “[their] own
independent business judgment” in evaluating these denials. Zapata Corp., 430 A.2d at788–89. In Boland, we adopted Auerbach’s presumption of reasonableness as to the
substance of a board’s decision, but imposed “rigorous” judicial review of an SLC’s
decision-making procedures. Boland, 423 Md. at 342. We explained, “The court’s review,
though not on the merits, can be rigorous on the questions of good faith, independence, and
procedure.” Id. With this standard, we balanced traditional judicial deference to corporate
boards against our concern about a “tainted” board of directors utilizing a biased SLC to
improperly benefit from the presumption of the business judgment rule. Id. at 337–42.
In this case, Petitioners urge us to expand the application of the Boland rule to all
board decisions denying a shareholder litigation demand, regardless of whether the board
consisted of a majority of disinterested directors or used an SLC.
14
The Application of Boland
Petitioners argue that “institutional symbiosis” within a corporation requires courts
to apply the enhanced Boland standard to any board decision denying a shareholder
litigation demand. They contend that corporate boards are inherently biased whenever a
shareholder makes a demand, and courts should not trust board members to pass judgment
on other directors. Petitioners point to Boland, which noted that New York’s deferential
Auerbach approach had been criticized because it “does not acknowledge the structural
bias inherent in a system which allows directors to judge the actions of their fellow
directors.” Boland, 423 Md. at 340 (quoting Rosengarten v. Buckley, 613 F. Supp. 1493,
1500 (D. Md. 1985)). Furthermore, Petitioners assert that enhanced scrutiny is even more
appropriate in cases such as this one, when a board takes a recommendation from a
committee rather than delegating the authority to make the decision exclusively to an SLC.
Thus, they argue, no board decision denying a shareholder litigation demand should receive
the benefit of the business judgment rule presumption. We disagree.
Petitioners’ argument misperceives the rationale of the Boland decision. Boland
involved a board of directors who stood to benefit from the transaction being challenged.
In that context we imposed on the directors the burden to prove that the SLC members
were independent, acted in good faith, and followed reasonable procedures. Id. at 341. We
did so because the directors themselves had personal interests at stake in the resolution of
the shareholder demand. Id. at 313–14. In other words, in Boland, the Court declined to
permit a tainted board to preserve the full presumption of the business judgment rule by
using an SLC. But in this case, Respondents’ board of directors was both disinterested and
15
independent.9 Therefore, the concerns about the SLC’s independence, good faith, and
procedure that drove the Boland Court are simply not present here.
Petitioners argue that other states recognize the inherent bias involved in any
shareholder litigation demand and grant shareholders greater protections accordingly.
Thus, they contend, applying enhanced scrutiny to all board decisions denying litigation
demands would not place Maryland outside of mainstream corporate law. Specifically,
Petitioners point to Delaware and New Jersey as states that have instituted greater
shareholder protections to counteract inherent bias in the litigation demand process. In
Delaware, they argue, shareholders can demand documents related to their derivative
claims and any denial of their litigation demand. Petitioners also argue that New Jersey
has adopted a modified business judgment rule that applies to all board demand denials.
As explained below, these arguments are misplaced.
By statute, Delaware grants shareholders access to corporate documents upon a
showing of a “proper purpose.”10 Del. Code Ann. tit. 8, § 220(b) (2010). Although
Delaware’s statute might provide broader shareholder access to corporate documents than
9
Out of the six directors on the Board when it approved the 2011 Modification,
Sugarman was the only one who financially benefitted from the decision. The parties agree
that the Board consisted of a majority of disinterested and independent directors when it
approved the 2011 Modification.
10
Del. Code Ann. tit. 8, § 220(b) (2010) provides:
Any stockholder . . . shall . . . have the right during the usual
hours for business to inspect for any proper purpose, and to
make copies and extracts from: (1) The corporation’s stock
ledger, a list of its stockholders, and its other books and
records . . . .
16
Maryland,11 this legislative determination is hardly relevant to our decision whether or not
to expand our common-law business judgement rule and its Boland exception.
Furthermore, Delaware common law on this point is quite similar to ours—it only applies
an additional layer of scrutiny when plaintiffs have put forth evidence demonstrating that
a board was not disinterested and independent.12 Weinberger v. UOP, Inc., 457 A.2d 701,
710 (Del. 1983) (citations omitted). As to New Jersey, Petitioners are correct that In re
PSE & G Shareholder Litigation, 801 A.2d 295, 312 (N.J. 2002), applied a Boland-like
standard to all cases where the board denied a shareholder litigation demand, but this
holding was later overruled by statute.13 Therefore, contrary to Petitioners’ assertion,
11
In Maryland, any shareholder may inspect a corporation’s bylaws, minutes of
stockholder meetings, annual statements of affairs, and voting trust agreements. Md. Code
(1957, 2014 Repl. Vol.), C & A § 2-512(a)(1)–(4). Shareholders who own more than five
percent of any class of the outstanding stock of a corporation may also inspect a
corporation’s books of account, its stock ledger, a statement of affairs which “sets forth in
reasonable detail the corporation’s assets and liabilities as of a reasonably current date,”
and a list of stockholders. Md. Code (1957, 2014 Repl. Vol.), C & A § 2-513(a)–(b).
Maryland does not grant shareholders the right to inspect any other corporate books or
records.
12
The Model Business Corporation Act, which 29 states had adopted in full or in
large part as of 2005, also only places the burden of proof on the board when it does not
have a majority of disinterested and independent directors. Model Bus. Corp. Act xxvii,
§ 7.44(d) (Am. Bar Ass’n 2005). Otherwise, it applies the traditional business judgment
rule to denials of litigation demands. Id. at § 7.44(d). With our holding in this case we
remain in accord with the Model Act and the states that have adopted it.
13
In In re PSE & G Shareholder Litigation, 801 A.2d 295 (N.J. 2002), instead of
the traditional business judgment rule, the court applied “a modified business judgment
rule that imposes an initial burden on a corporation to demonstrate that in deciding to reject
or terminate a shareholder’s suit the members of the board” acted with sound business
judgment. Id. at 312. But New Jersey enacted a statute in 2013 that shifts the initial burden
of proof back to the plaintiff. N.J. Stat. Ann. § 14A: 3-6.5(3). Under the statute, if a
shareholder brings a derivative suit after the litigation demand has been denied, the plaintiff
17
adopting enhanced scrutiny for all corporate board decisions denying shareholder litigation
demands—interested or disinterested—would not put Maryland in line with either
Delaware or New Jersey law.
Relying on Maryland’s “demand futility exception,” Petitioners further argue that if
the Court does not extend the application of Boland, enhanced scrutiny will be limited to
those rare instances when shareholders are not required to make a demand on the board
before bringing suit. As a result, Boland scrutiny will be rarely applied.
We are not so persuaded. First, our purpose here is not to ensure Boland’s wide
footprint. Second, we do not see Boland as so limited. Boland enhanced scrutiny is a
useful and practical remedy for shareholders in smaller, usually non-public companies in
which directors are often not disinterested. Third, Petitioner understates the narrowness of
Maryland’s demand futility exception. Demand is only excused when either “(1) a
demand, or a delay in awaiting a response to a demand, would cause irreparable harm to
the corporation” or “(2) a majority of the directors are so personally and directly conflicted
or committed to the decision in dispute that they cannot reasonably be expected to respond
to a demand in good faith and within the ambit of the business judgment rule.” Werbowsky,
362 Md. at 620. This exception to the demand requirement is quite narrow and does not
encompass every instance in which a majority of the board of directors is interested. A
director that expects to derive a personal benefit from a corporate transaction—and is
therefore not disinterested—is not necessarily “so personally and directly conflicted or
must set out facts in the complaint establishing that the board of directors was not majority
independent at the time the demand was made. Id.18
committed to the decision in dispute that they cannot reasonably be expected to respond to
a demand in good faith and within the ambit of the business judgment rule.” Id.Petitioners also make an overlapping argument—contending that we only apply
enhanced scrutiny to SLC decisions to balance Maryland’s narrow futility exception.
Because it is difficult for shareholders to assert demand futility, Petitioners argue, the
Boland court imposed enhanced scrutiny to maintain the feasibility of derivative suits. If
Boland is only applied to cases where the board used an SLC, Petitioners contend, this
balance will be disrupted. This argument mischaracterizes Boland’s rationale. Boland was
concerned with the situation in which a board that does not have a disinterested majority
appoints an SLC to address a litigation demand. The Boland Court expressed concern
about SLCs serving as a puppet for the interested board, not the feasibility of shareholder
derivative suits more broadly.14 We decline to apply the Boland standard to all corporate
boards that have refused a shareholder demand.
14
Petitioners also argue that in both Werbowsky and Boland this Court advanced a
policy of encouraging corporate boards to use SLCs to respond to shareholder litigation
demands. If we decline to extend Boland, Petitioners contend, boards will be less likely to
use SLCs because in doing so they would forfeit the protection of the business judgment
rule. Petitioners argue that applying enhanced Boland scrutiny to all board decisions
denying a litigation demand would remove this disincentive to using an SLC. This
argument fails for two reasons. First, this Court has never advanced a policy of
encouraging boards to use SLCs. In fact, this Court has recognized the importance of
allowing disinterested directors to maintain control over derivative suits because they
“necessarily intrude[ ] upon the managerial prerogatives ordinarily vested in the directors.”
Werbowsky, 362 Md. at 600. Second, under Boland, interested boards already have an
incentive to use an SLC. Without one, an interested board’s decision to deny a litigation
demand is subject to the “entire fairness standard,” as discussed supra. But with the use
of an SLC, the board still receives deference as to the substance of the SLC’s decision, and
must only present evidence demonstrating a sound decision-making process.
19
Direct or Derivative Claims
Petitioners argue that their claims for breach of contract and promissory estoppel
are direct shareholder claims, which are not subject to the business judgment rule. Thus,
Petitioners contend, they should not have been dismissed for the failure to overcome the
business judgment rule presumption. Whether a claim is direct or derivative depends on
(1) “the nature of the wrong alleged” and (2) the relief that the plaintiff would receive if
successful.15 Shenker, 411 Md. at 346. To assert a direct claim, a plaintiff must have
suffered a “distinct injury” separate from any harm suffered by the corporation. Id. at 345.
The remedy that a shareholder seeks must benefit the shareholder as an individual, not the
corporate entity. Id. at 346. Petitioners allege three harms that they argue give rise to direct
claims: (1) the failure of the 2011 Modification to qualify for a tax deduction under 26
U.S.C. § 162(m) (2012); (2) the casting of an uninformed vote on the 2009 Plan; and (3)
15
Petitioners argue that whether their breach of contract and promissory estoppel
claims can be brought directly should be analyzed narrowly. Therefore, they argue,
Delaware’s two-part test for determining whether a claim for a breach of fiduciary duty is
direct or derivative, established in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d
1031, 1033 (Del. 2004), does not apply to their claims. In Tooley, the Delaware Supreme
Court held that whether a claim for a breach of fiduciary duty was direct or derivative
should depend only on: (1) who suffered the alleged harm and (2) who would receive the
benefit of any recovery or other remedy. Id. Maryland’s Shenker approach analyzes these
same two factors. Shenker, 411 Md. at 346.
Petitioners are correct that this analysis should only be applied when the shareholder
attempts to assert a claim for breach of fiduciary duty or otherwise enforce the
corporation’s own rights. Citigroup Inc. v. AHW Inv. P’ship, 140 A.3d 1125, 1126–27
(Del. 2016). Before applying Tooley, courts should ask whether the plaintiff seeks to
“bring a claim belonging to her personally or one belonging to the corporation itself.” Id.
at 1127 (citation omitted). We hold that Petitioners are asserting claims belonging to the
corporation, and proceed with the Shenker and Tooley inquiry.
20
dilution in the value of their shares. As we shall explain, none of these harms give rise to
a direct shareholder claim.
Increased Tax Liability
Petitioners argue that they suffered harm when the 2008 Awards failed to qualify
for a tax deduction under § 162(m) of the Internal Revenue Code. 26 U.S.C. § 162(m).
Section 162(m)(1) prohibits corporations from deducting compensation paid to the CEO
or the four other highest paid corporate officers exceeding one million dollars. Section
162(m)(4)(C), however, provides an exception for executive compensation paid to reward
the achievement of shareholder-approved performance goals. The 2009 Proxy Statement
indicated that the 2009 Plan was meant “to ensure, for federal tax purposes, the
deductibility of compensation recognized by certain participants in the 2009 Plan which
may otherwise be limited by Section 162(m).” When Respondents distributed the 2008
Awards in accordance with the 2011 Modification, the Awards did not qualify for the
§162(m)(4)(C) exception because they were no longer based on a shareholder-approved
performance plan. Presumably, iStar paid taxes on the Awards in accordance with
§ 162(m)(1). But this financial loss to the corporation does not give rise to a direct
shareholder claim. Petitioners have not alleged any harm related to this tax cost distinct
from that suffered by the corporation. In fact, Petitioners’ Prayer for Relief asked for the
damages sustained by the corporation.
Petitioners nevertheless attempt to maintain their direct claims by arguing that the
2009 Plan grants them contract rights that they may enforce directly. In support of their
argument, they point to NAF Holdings, LLC v. Li & Fung (Trading) Limited, 118 A.3d 17521
(Del. 2015), as an example of when the Delaware Supreme Court allowed a shareholder to
bring a breach of contract claim directly even though the shareholder’s loss derived from
the corporation’s loss.16 In NAF Holdings, the shareholder entered into a contract with a
third party to serve as the sourcing agent for the shareholder’s subsidiary corporation.
When the third party defendant breached the contract, the subsidiary corporation suffered
financial loss, and its stock value decreased. Consequently, the shareholder also suffered
economic harm. Even though the shareholder’s harm flowed directly from the
corporation’s loss, the court declined to require the shareholder to bring a derivative suit.
It explained, “[I]t is of course true that [the shareholder] cannot bring direct contractual
claims belonging only to its subsidiaries without first proving demand futility. But this
does not mean that [the shareholder] must proceed derivatively as to contract claims [the
shareholder] itself possesses.” Id. at 180. The court allowed the shareholder to bring the
claim because its commercial contract granted it distinct rights separate from those of the
corporation. Id. at 179. The court concluded, “It would be inconsistent with [corporate]
legal principles to subject commercial parties to a burdensome demand excusal process
before allowing them to sue on their own commercial contracts.” Id. at 181.
16
Petitioners also point to George Wasserman & Janice Wasserman Goldsten
Family LLC v. Kay, 197 Md. App. 586 (2011), to support their argument that they can
assert a direct breach of contract claim for harm suffered by the corporate entity. In
Wasserman, however, a partner brought suit against a managing member of his partnership
for the breach of partnership agreements. Id. at 602. The Court of Special Appeals allowed
the appellants to proceed with a direct claim, but specifically distinguished the case from a
derivative suit in the corporate context. It explained, “[A]ppellants’ goals are unlike the
goals of corporate shareholders, who strive to increase stock value and ownership interest.
In addition, the type of harm here is not the indirect harm that appellants would suffer if
the entities in question were in another type of business.” Id. at 622.
22
Petitioners argue that the 2009 Plan constitutes a contract between the Board and
the shareholders, and Respondents breached that contract when they implemented the 2011
Modification. Thus, they argue, in accordance with NAF Holdings, they can assert their
breach of contract claim directly. Petitioners put forth two theories under which the 2009
Plan is a contract. First, they argue that because the Plan contains “all the essential material
terms” of the agreement between the shareholders and the Board, it constitutes a contract.
Second, Petitioners argue that the “intra-corporate contract” consisting of a corporation’s
certificate of incorporation and bylaws includes equity compensation plans such as the
2009 Plan. Because the 2009 Plan was approved in New York, and it expressly provides
that it is to be governed by New York law, we will apply New York law in determining
whether the Plan constitutes a contract.17
Petitioners argue that a contract can be created if a written document contains “all
the essential material terms” of an agreement.18 This definition misstates New York law.
Under New York law, “[t]o establish the existence of an enforceable agreement, a plaintiff
must establish an offer, acceptance of the offer, consideration, mutual assent, and an intent
17
Maryland abides by the common law doctrine of lex loci contractus, which applies
the law of the jurisdiction where the contract was made “when determining the
construction, validity, enforceability, or interpretation of a contract.” Cunningham v.
Feinberg, 441 Md. 310, 326 (2015) (citation omitted).
18
Petitioners rely on Kowalchuk v. Stroup, 873 N.Y.S.2d 43 (N.Y. App. Div. 2009),
for this proposition. But Kowalchuk does not address the issue of contract formation. In
Kowalchuk, both parties conceded that an offer had been made, and the issue before the
court was whether the offer had been revoked before it was accepted. Id. at 46.
23
to be bound.”19 Kolchins v. Evolution Mkts., Inc., 8 N.Y.S.3d 1, 9 (N.Y. App. Div. 2015)
(citing 22 N.Y. Jur. 2d, Contracts § 9). The New York Court of Appeals has further
explained, “A contract is an obligation attached by the mere force of law to certain acts of
the parties, usually words, which ordinarily accompany and represent a known intent.”
Mencher v. Weiss, 114 N.E.2d 177, 181 (N.Y. 1953).
An examination of the language of the 2009 Plan reveals that it does not constitute
a contract. The 2009 Plan does not contain any provision extending a contract offer to the
shareholders. Unlike the Proxy Statement and its accompanying letters, the 2009 Plan does
not address the shareholders. It does not make a promise to shareholders in exchange for
any action or promise in return. See Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher,
417 N.E.2d 541, 543 (N.Y. 1981) (“[A] contract is a private ‘ordering’ in which a party
binds himself to do, or not to do, a particular thing.”). Furthermore, several provisions of
the 2009 Plan suggest that the Board did not intend to be strictly bound by its terms. For
example, Section 12(b) authorizes the Board or a committee it appoints to “make such
changes to the Plan as may be necessary or appropriate to comply with the rules and
regulations of any government authority or to obtain tax benefits applicable to an Award.”
Section 13(iii) provides that the Board or a committee may “take any other actions and
make any other determinations or decisions that it deems necessary or appropriate in
connection with the Plan or the administration or interpretation thereof.” Section 13(iii)
Maryland law also requires a clear offer for a contract to be formed. Cochran v.
19
Norkunas, 398 Md. 1, 23 (2007) (“Creation of a contract requires an offer by one party and
acceptance by the other party.”).
24
also states, subject to certain limitations, “The Board may amend the Plan as it shall deem
advisable . . . .” Additionally, the 2009 Plan specifically allows the Board to terminate the
2009 Plan at any point. This language weighs heavily against the finding of a contract.
Petitioners also argue that the 2009 Plan is part of a larger “intra-corporate contract”
between the directors and the shareholders. Both Maryland and New York recognize a
corporation’s certificate of incorporation as a contract between shareholders and the
corporation. See McQuillen v. Nat’l Cash Register Co., 27 F. Supp. 639, 645 (D. Md.
1939) (describing a corporate charter as a contract between the corporation and
shareholders); Warren v. Fitzgerald, 189 Md. 476, 485 (1948) (corporate charter is a
“contract between stockholders” and “between the corporation and the State”); Mgmt.
Techs., Inc. v. Morris, 961 F. Supp. 640, 646 (S.D.N.Y. 1997) (“[A] company’s certificate
of incorporation and by-laws in substance are a contract between the corporation and its
shareholders.”). Delaware also recognizes that a company’s certificate of incorporation
and bylaws make up a contract between directors, officers, and stockholders, and that
shareholders can bring direct claims to enforce that contract when they have been distinctly
harmed. See STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (“[A]
corporate charter is both a contract between the State and the corporation, and the
corporation and its shareholders.”); Allen v. El Paso Pipeline GP Co., 90 A.3d 1097, 1107–
08 (Del. Ch. 2014) (“[T]he certification of incorporation, and the bylaws [ ] constitute a
multi-party contract among the directors, officers, and stockholders of the corporation” that
shareholders can directly enforce. (footnote omitted)). Equity compensation plans,
however, have not been recognized as a part of any larger contract between corporate
25
boards and shareholders in Maryland, New York, or Delaware.20 Therefore, without
language indicating a clear offer and an intent to be bound, we conclude that the 2009 Plan
is not a contract between the Board and iStar shareholders.
Uninformed Vote
Petitioners argue that if the 2009 Plan did not create a contract between the
shareholders and directors, the 2009 Proxy Statement and accompanying letters still give
rise to a promissory estoppel claim. To make out a claim for promissory estoppel,
Petitioners must show that (1) the directors made a clear and definite promise; (2) the
directors had a reasonable expectation that the promise would induce shareholder action;
(3) the promise did induce such action; and (4) the shareholders suffered an injustice that
can only be avoided by the enforcement of the promise. See Pavel Enters., Inc. v. A.S.
Johnson Co., 342 Md. 143, 166 (1996) (adopting the elements for promissory estoppel
from Restatement (Second) of Contracts § 90(1) (1979) as Maryland law). Petitioners
argue that the directors promised them that the 2008 Awards would only vest if certain
conditions were met, and that promise induced them to vote to approve the 2009 Plan.
Because of this inducement, Petitioners argue, they cast an uninformed vote.
To satisfy the first element of a claim for promissory estoppel, Petitioners must
establish that the 2009 Proxy Statement and accompanying letters made them “a real
promise—mere expressions of expectation, opinion, or assumption are insufficient.”
20
We decline to consider the unreported case law that Petitioners refer to on this
point. Maryland Rule 1-104 states that unreported opinions of this Court and the Court of
Special Appeals are “neither precedent within the rule of stare decisis nor persuasive
authority.”
26
Territory of U.S. Virgin Islands v. Goldman, Sachs & Co., 937 A.2d 760, 804 (Del. Ch.
2007), aff’d, 956 A.2d 32 (Del. 2008) (footnote omitted). In a letter to shareholders
introducing the Proxy Statement, the Board urged the approval of the 2009 Plan. It told
shareholders, “The performance-based awards we have granted will vest only if
performance conditions are achieved over measurement periods of up to three years and if
additional service-based vesting periods of up to three years are satisfied.” (Emphasis
added.) In the Proxy Statement itself the Board again assured shareholders that the 2008
Awards “will vest only if a specified price target for our common stock is achieved within
three years and if the employee is employed on the subsequent vesting dates.” (Emphasis
added.) This language could constitute a clear and definite promise on the part of the
Board.
Relying on a Delaware Chancery Court’s decision in Territory of U.S. Virgin
Islands v. Goldman, Sachs & Co., Respondents argue that statements within a proxy
statement can never amount to a clear and definite promise. We are not so certain.
Goldman involved a third party’s claim to money a shareholder received when a
corporation was liquidated. The U.S. Virgin Islands brought suit against the former
shareholder for the corporation’s environmental contamination. Goldman, Sachs & Co.,
937 A.2d at 806. The Virgin Islands argued that the following sentence within a proxy
statement the corporation issued to shareholders estopped the former shareholder from
retaining the funds:
If the amount held in the Liquidating Trust is insufficient to
discharge fully all liabilities which arise, or if liabilities arise
after the Liquidating Trust is terminated, each [ ] stockholder
27
may be liable for any unpaid portion of such liabilities to the
extent of the liquidating distributions paid to him.
Id. at 805. In analyzing the Virgin Island’s promissory estoppel claim, the court stated,
“Descriptive statements in disclosure statements do not amount to a promise.” Id. But this
third party claim does not present an analogous situation to a shareholder’s promissory
estoppel claim against its own board of directors—the situation at issue here.
Next, Petitioners suggest that the Board had a reasonable expectation that its
promise would induce the shareholders to vote to approve the 2009 Plan, and that the
shareholders in fact did so—the second and third elements of a promissory estoppel claim.
The Board concluded its introductory letter by telling shareholders, “The board of directors
believes that the significant shareholder returns required in order to meet the performance
hurdles of these proposed equity incentive awards . . . make the overall compensation
strategy a compelling one for shareholders . . . .” On May 27, 2009, the shareholders voted
to approve the 2009 Plan. We conclude that the facts alleged are sufficient to make a prima
facie showing for the second and third elements.
The fourth element is the hurdle Petitioners cannot clear—they have not alleged an
injustice that can only be avoided by the enforcement of the promise.21 To demonstrate an
injustice, “[l]ogically, injury is required; without injury there would be no injustice in not
enforcing the promise.” Joseph M. Perillo, Contracts § 6.1, at 230 (7th ed. 2014). It is not
21
Petitioners cite to In re Ebix, Inc. Stockholder Litigation, No. 8526-VCN, 2014
WL 3696655 (Del. Ch. July 24, 2014), to support their proposition that an uninformed vote
constitutes a detriment that can give rise to a claim of promissory estoppel. As discussed
supra, however, we decline to consider unreported case law.
28
sufficient for Petitioners to show that they acted in reliance on Respondents’ promise.
“[E]ven the most substantial action or forbearance may not create an unjust situation, as
when the promisee, although she has engaged in clear action . . . is not injured as a result.”
Richard A. Lord, Williston on Contracts § 8:7, at 165 (4th ed. 2008). Judge Posner has
further explained, “To ‘rely,’ in the law of promissory estoppel, is not merely to do
something in response to the inducement offered by the promise. There must be a cost to
the promisee of doing it.” Cosgrove v. Bartolotta, 150 F.3d 729, 733 (7th Cir. 1998)
(citations omitted) (emphasis added).
No court has analyzed whether the casting of an uninformed vote satisfies the fourth
element of a promissory estoppel claim. Delaware cases evaluating whether the harm of
an uninformed vote supports a direct claim generally are instructive on this question.
Delaware courts require plaintiffs to allege individual damages due to the uninformed
vote—not just damages to the corporation. In In re Tyson Foods, Inc. Consolidated
Shareholder Litigation, 919 A.2d 563 (Del. Ch. 2007), shareholders brought a direct class
action claim against a corporation for material misrepresentations in a proxy statement.
They claimed that if certain transactions had been revealed in the statement, the
shareholders may not have elected the current directors, so the election results should be
invalidated. Id. at 580. The Chancery Court agreed that the shareholders’ claim was direct
rather than derivative. It explained, “Where a shareholder has been denied one of the most
critical rights he or she possesses—the right to a fully informed vote—the harm suffered
is almost always an individual, not corporate, harm.” Id. at 601. But this proved to be a
29
hollow victory—the court dismissed the claim because the “plaintiffs [ ] failed to suggest
any form of relief that [could] be granted to them in a direct claim.” Id. at 602.
In In re J.P. Morgan Chase & Co. Shareholder Litigation, 906 A.2d 766 (Del.
2006), shareholders brought a direct claim against directors for allegedly inducing them to
approve a merger “with a proxy statement that contained materially inaccurate or
incomplete disclosures.” Id. at 768. A New York Times article had revealed to the
shareholders that J.P. Morgan Chase could have purchased Bank One at a lower price if
they had agreed to allow the Bank One CEO to become CEO of the merged entity
immediately, rather than at a later date. Id. at 769. The Delaware Supreme Court
acknowledged “that where it is claimed that a duty of disclosure violation impaired the
stockholders’ right to cast an informed vote, that claim is direct.” Id. at 772. The court
dismissed the claim, however, because the shareholders failed to assert direct, individual
damages. The court rejected the shareholders’ theory of damages—the difference between
the potential Bank One purchase price and the actual purchase price—reasoning that the
price difference had “no logical or reasonable relationship to the harm caused to the
shareholders individually for being deprived of their right to cast an informed vote.” Id. at
773 (emphasis in original). The shareholders were denied even nominal damages for injury
to their voting rights because their voting rights remained unchanged after the merger. Id.
at 773–74.
We are persuaded by the reasoning of the Delaware Supreme Court, and hold that,
because Petitioners have not alleged any individual damages due to their uninformed vote
30
on the 2009 Plan, their uninformed vote, by itself, fails to sufficiently support their
promissory estoppel claim.
Share Dilution
During oral argument, Petitioners argued that they suffered direct harm because the
value of their iStar shares was diluted when the corporation issued additional stock through
the 2009 Plan. Therefore, Petitioners contend, they can bring direct shareholder claims to
remedy this harm. Respondents reply that any dilution in the value of Petitioners’ stock is
a result of harm suffered by the corporation. Thus, such claims can only be asserted
derivatively. Although we agree with Petitioners that financial harm due to stock dilution
could support a direct shareholder claim under some circumstances, the allegations here do
not suffice.
As discussed supra, a harm suffered by both the shareholders and the corporation
alike can only support a shareholder derivative claim. In Waller v. Waller, 187 Md. 185(1946), this Court explained that even when injury to a corporation “may incidentally result
in diminishing or destroying the value of the stock,” a lawsuit to recover damages “can be
brought only in the name of the corporation itself acting through its directors, and not by
an individual stockholder.” Id. at 189–90. Because both the shareholders and the
corporation have suffered the same financial loss, a decline in stock value does not give
rise to a direct claim. Instead, to maintain a direct action, the shareholder must allege that
he has suffered “an injury that is separate and distinct from any injury suffered either
directly by the corporation or indirectly by the stockholder because of the injury to the
31
corporation.” James J. Hanks, Jr., Maryland Corporation Law § 7.12(b), at 276.18 (1994,
2015 Supp.).
In general, Delaware law does not distinguish between a decrease in stock value due
to the corporation’s financial loss and a decrease in stock value due to the issuance of
additional shares—or dilution. The Delaware Supreme Court has held that when a
shareholder alleges corporate overpayment in a transaction where the payment was stock,
those claims are “not normally regarded as direct, because any dilution in value of the
corporation’s stock is merely the unavoidable result (from an accounting standpoint) of the
reduction in the value of the entire corporate entity, of which each share of equity represents
an equal fraction.” Gentile v. Rossette, 906 A.2d 91, 99 (Del. 2006). The court further
explained, “In the eyes of the law, such equal ‘injury’ to the shares resulting from corporate
overpayment is not viewed as, or equated with, harm to specific shareholders individually.”
Id. Thus, to redress this wrong, shareholders must bring a lawsuit derivatively. Id.The Delaware Supreme Court permits direct claims, however, when minority
shareholders have suffered a substantial decrease in the value of their stock due to share
dilution. It first recognized such a claim in In re Tri-Star Pictures, Inc., Litigation, 634
A.2d 319 (Del. 1993), where the court explained that the economic harm due to share
dilution was “the reduction in value of the minority stockholders’ shares, determined by
the liquidation value of each share both before and after [the business decision].” Id. at
330. Furthermore, the court recognized that the plaintiffs “suffer harm by voting power
dilution which, in essence, is no more than a relative diminution in the minority’s
32
proportionate influence over corporate affairs.” Id. (footnote omitted). Accordingly, the
court allowed the plaintiffs’ direct claims to proceed. Id. at 335.
The Delaware Supreme Court expanded on this theory in Gentile v. Rossette, in
which shareholders alleged that the corporation wrongly granted newly issued stock to its
CEO and controlling shareholder in exchange for the forgiveness of an outstanding debt.
The shareholders alleged that the stock issued to the CEO exceeded the value of the debt
owed. Gentile, 906 A.2d at 93. Relying on Tri-Star, the shareholders argued that the board
“wrongfully reduced the cash-value and the voting power of the public stockholders’
minority interest, and increased correspondingly the value and voting power of the
controller’s majority interest.” Id. at 93, 99. The court held that shareholders can assert a
dilution claim directly if the following requirements are met:
(1) a stockholder having majority or effective control causes
the corporation to issue ‘excessive’ shares of its stock in
exchange for assets of the controlling stockholder that have a
lesser value; and (2) the exchange causes an increase in the
percentage of the outstanding shares owned by the controlling
stockholder, and a corresponding decrease in the share
percentage owned by the public (minority) shareholders.
Id. at 100. Under these limited circumstances, the court explained, share dilution gives rise
to both a direct and a derivative claim.22 Id. We agree with the Delaware court that Gentile
stated a direct claim. We decline, however, to adopt the second limiting circumstance.
22
One year after Gentile v. Rossette, 906 A.2d 91 (Del. 2006), in Gatz v. Ponsoldt,
925 A.2d 1265 (Del. 2007), the Delaware Supreme Court allowed shareholders to bring a
direct claim for breach of fiduciary duty against the corporation’s directors and majority
shareholders on a share dilution theory even though the newly issued shares were granted
to a new shareholder, rather than an already-controlling one. Id. at 1281. But in 2016, the
court declined to further extend Gentile’s holding to allow a limited partner to bring a direct
33
In Maryland, a shareholder must only show that she has suffered an injury distinct
from the corporation to bring a direct claim—not that she has suffered an injury distinct
from other shareholders. Matthews v. Headley Chocolate Co., 130 Md. 523, 536 (1917)
(requiring “some peculiar injury independent of what the company has suffered” for
shareholders to assert direct claim) (citations omitted). This Court explained in Shenker,
“That the plaintiff suffered his or her injury in common with all other shareholders is not
determinative of whether the injury suffered is direct or indirect.” 411 Md. at 345.
Maryland courts have not addressed the question of whether a shareholder can assert
a direct claim based on share dilution. But in Strougo v. Bassini, 282 F.3d 162 (2d Cir.
2002), the United States Court of Appeals for the Second Circuit applied Maryland law to
that question. The Strougo shareholders alleged that when an investment fund issued
additional shares of stock and offered them to existing shareholders for purchase, it diluted
the value of each outstanding share and harmed shareholders who decided not to purchase
more shares through the offering. The Second Circuit suggested that the shareholders may
be able to bring direct claims for share dilution as a result of this stock offering. Although
the court expressed concern over redressability, it explained the distinct nature of the
shareholders’ injury:
It is clear [ ] that the claims of the shareholders generally
cannot be dismissed for failure to state a direct, as opposed to
derivative, claim, as the district court did. The alleged injuries
resulting from the coercive nature of the rights offering do not
derive from a reduction in the value of the Fund’s assets or
claim for overpayment when he did not allege voting rights dilution or an increase in the
general partner’s control at the expense of the limited partners. El Paso Pipeline GP Co.,
L.L.C. v. Brinckerhoff, No. 103, slip op. at 28 (Del. Dec. 20, 2016).
34
any other injury to the Fund’s business. Indeed, with
reference to the shareholders that purchased new shares in
order to avoid dilution, the acts that allegedly harmed the
shareholders increased the Fund’s assets. And as for the non-
participating shareholders, the reduced value of their equity did
not derive from a reduction in the value of the Fund’s assets,
but rather from a reallocation of equity value to those
shareholders who did participate.
Id. at 175 (emphasis added). The court then remanded the case for the District Court to
determine whether any duty to the shareholders was breached by the offering, and if so,
what remedy would be appropriate. Id. at 176.
We agree that share dilution in some circumstances can support a direct claim. But
the allegations of the complaint fall short of what is required. Petitioners did not allege
share dilution in their complaint. On appeal, they contend that the 2009 Plan caused share
dilution, but they fail to allege any facts detailing the impact of such dilution. We do not
know by how much Petitioners’ shares were allegedly diluted, what effect that dilution had
on Petitioners’ voting power, if any, or what financial loss they might have suffered due to
such dilution. Petitioners have not even alleged that the stock price decreased after the
2009 Plan was executed.23 See N.Y.C. Emps.’ Ret. Sys. v. Jobs, 593 F.3d 1018, 1024 (9th
23
Additionally, in the 2009 Proxy Statement, the Board asserted that the 2009 Plan
would not have noticeable dilutive effect on outstanding shares of stock. The Board
explained, “Our repurchases of approximately 32.6 million shares of our common stock in
open market transactions from July 1, 2008 through March 31, 200[9] effectively offset
any dilution that would be created by issuing shares pursuant to the December 19, 2008
performance-based awards to employees.” The Board further stated that even if “all
performance targets are met, all employees fulfill their timing vesting obligations and
shares are issued upon vesting of all of the [2008 Awards], total shares outstanding at
December 31, 2011 will have been reduced approximately 17% since July 1, 2008.”
Petitioners have not alleged any facts contrary to these assertions.
35
Cir. 2010), overruled on other grounds by Lacey v. Maricopa Cty., 693 F.3d 896 (9th Cir.
2012) (holding that “economic loss does not necessarily accompany dilution, so [ ]
conclusory allegations of loss are insufficient” to state a claim under the Securities
Exchange Act for material misrepresentation in a proxy statement).
For these reasons, Petitioners’ direct claims for breach of contract and promissory
estoppel cannot proceed on a share dilution theory.
Direct Duty to Shareholders
Petitioners argue that even if they have not suffered a harm distinct from that of the
corporation, the 2009 Plan created a duty owed to the shareholders by the corporation
which gives rise to a direct claim. They rely on Shenker v. Laureate Education, Inc., where
the Court wrote, “[A] shareholder may bring a direct action . . . when the shareholder
suffers the harm directly or a duty is owed directly to the shareholder, though such harm
also may be a violation of a duty owing to the corporation.” 411 Md. at 345 (emphasis
added) (citation omitted). Thus, if the corporate board has breached a duty owed directly
to the shareholders, Petitioners argue, they do not have to demonstrate a distinct harm to
bring a direct claim. But Shenker did not eliminate the requirement that a shareholder must
have suffered an injury distinct from that suffered by the corporation to bring a direct claim.
In so far as the Court suggested that a breach of a duty to shareholders alone—absent any
separate harm—could support a direct shareholder claim, the facts of Shenker and
subsequent case law applying it demonstrate that this is not Maryland law.
In Shenker, shareholders sued the directors for a breach of their fiduciary duty
during merger negotiations. The shareholders alleged that the directors did not negotiate
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the highest possible price per share during a cash-out merger. In allowing the lawsuit to
proceed, we held that “in the context of a cash-out merger transaction, where the decision
to sell the corporation already has been made, corporate directors owe their shareholders
common law duties of candor and good faith efforts to maximize shareholder value.” Id.
at 336. We also held that breaches of these duties could be pursued through a direct
shareholder claim because the shareholders’ injury was separate from the corporation’s.
Id. We explained that “the injury alleged, namely, a lesser value that shareholders received
for their shares in the cash-out merger, is an injury suffered solely by the shareholders and
not by [the] corporate entity.” Id. at 346. We continued, “Such an injury, if suffered, is a
direct one . . . thus allowing Petitioners to proceed with their direct action against Board
Respondents.” Id. (emphasis added). Our decision to allow the shareholders to bring a
direct claim was squarely based upon the fact that the shareholders had suffered injury
separate from the corporation.
In George Wasserman & Janice Wasserman Goldsten Family LLC v. Kay, 197 Md.
App. 586 (2011), the Court of Special Appeals “extend[ed] the rationale in Shenker to the
law of partnerships and LLCs,” and therefore required that the plaintiffs show both a direct
harm and the breach of a duty owed specifically to the plaintiffs. Id. at 620–21 (emphasis
added) (noting that “Shenker has a narrow application in the corporate context”). In
Boland, we explained that “[w]e held [the Shenker] claim to be direct, as the fiduciary
claims were based on a breach owed directly to the shareholder, and the injury was suffered
solely by the shareholders and not by the corporate entity.” 423 Md. at 316 (emphasis
added) (internal quotation marks and brackets omitted). Despite Shenker’s dicta
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suggesting otherwise, we hold that to bring a direct claim shareholders must show that they
have suffered harm distinct from that of the corporation. Here, Petitioners have not done
so. Thus, their claims are derivative.
CONCLUSION
Petitioners’ claims were properly dismissed by the Circuit Court for failure to
overcome the business judgment rule presumption. Additionally, Petitioners’ claims for
breach of contract and promissory estoppel are derivative claims that are subject to the
business judgment rule. Thus, we affirm the judgment of the Court of Special Appeals.
JUDGMENT OF THE COURT OF
SPECIAL APPEALS AFFIRMED. COSTS
TO BE PAID BY PETITIONERS.
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