Sutton v. Fedfirst Financial

REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 1751
September Term, 2014
______________________________________
LARRY SUTTON
v.
FEDFIRST FINANCIAL CORPORATION,
ET AL.
______________________________________
Graeff,
Reed,
Eyler, James R.
(Retired, Specially Assigned),
JJ.
______________________________________
Opinion by Graeff, J.
______________________________________
Filed: October 29, 2015
This appeal arises from a merger between FedFirst Financial Corporation
(“FedFirst”) and CB Financial Services, Inc. (“CB Financial”). After the merger agreement
was announced, Larry Sutton, appellant, a former shareholder of FedFirst, filed a lawsuit
against the two companies. He sought to enjoin the merger, alleging that: (1) FedFirst’s
directors breached fiduciary duties owed to FedFirst’s shareholders; and (2) CB Financial
aided and abetted the “breaches of fiduciary duty in connection with the Proposed
Acquisition.” On September 19, 2014, the circuit court dismissed Mr. Sutton’s direct
claims with prejudice.
On appeal, Mr. Sutton presents one multi-part question for our review,1 which we
have reorganized and reworded, as follows:
1. Did the circuit court err in granting the motion to dismiss the claims
against the directors of FedFirst?
2. Did the circuit court err in granting the motion to dismiss the claims
against CB Financial?
1
Mr. Sutton’s question presented is as follows:
Did the Circuit Court for Baltimore City err in dismissing the [Amended]
Complaint with prejudice on grounds including that: (1) Appellant failed to
assert a direct injury that is separate and distinct from that suffered by other
stockholders; (2) Shenker does not permit individual stockholders to bring
direct claims against corporate directors for breaches of the common law
duties to maximize stockholder value and of candor in connection with non-
cash-out merger transactions; (3) Appellant has not rebutted the presumption
afforded [FedFirst’s Directors] under Maryland’s business judgment rule[];
(4) Appellant failed to meet his heavy burden of demonstrating in the
Complaint that the information omitted from the S-4 [Registration
Statement] was the sort of information stockholders needed to make an
informed decision whether or not to vote in favor of the Transaction?
CB Financial and FedFirst present an additional question for our review, which we
have reworded and rephrased slightly, as follows:
Should this Court dismiss this appeal as moot because the merger between
FedFirst and CB Financial, which has now been consummated, cannot be
undone, leaving Mr. Sutton with no relief that the Court can order?
For the reasons set forth below, we conclude that the appeal is not moot, and we
shall affirm the judgment of the circuit court.
FACTUAL AND PROCEDURAL BACKGROUND
The Merger Agreement
On April 15, 2014, FedFirst and CB Financial announced that the two corporations
had executed a merger agreement that, if approved by the stockholders of a majority of the
outstanding shares of stock, would result in the merger of FedFirst and CB Financial.2 The
merger agreement provided that FedFirst shareholders would receive either $23.00 in cash
or 1.1590 shares of CB Financial common stock in exchange for each FedFirst share. The
FedFirst shareholders could elect to receive cash or stock, or a combination thereof, subject
to the requirement in the agreement that 65% of the total shares of FedFirst would be
2
At the time the amended complaint was filed, FedFirst, a Maryland corporation
publicly traded on the Nasdaq Capital Market, was a savings and loan holding company
headquartered in Pennsylvania. As of March 31, 2014, FedFirst had total assets of $323.3
million and stockholders’ equity of $51 million. CB Financial is a publicly traded bank
holding company incorporated and headquartered in Pennsylvania. As of March 31, 2014,
CB Financial had total assets of $550 million and shareholders’ equity of $43.5 million.
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exchanged for CB Financial stock and 35% would be exchanged for cash.3 Mr. Sutton’s
complaint estimated that the value of the merger was approximately $54.5 million dollars.
Pursuant to the merger agreement, FedFirst President and Chief Executive Officer
Patrick G. O’Brien would become the Executive Vice President and Chief Operating
Officer of Community Bank, a wholly owned subsidiary of CB Financial through which
CB Financial conducted its operations. FedFirst directors John J. LaCarte, John M.
Swiatek, Richard B. Boyer, and Mr. O’Brien would join the board of directors of CB
Financial. The stockholders were advised that some of FedFirst’s officers and directors
obtained interests in the merger that were not shared by stockholders generally. For
example, all outstanding stock options would be terminated and the holders of the stock
options would receive a cash payment equal to the number of shares multiplied by the
amount by which $23.00 exceeded the “exercise price” of the stock option. Cash payments
for directors included the following: Patrick G. O’Brien (President and CEO) $446,314;
Richard B. Boyer (Vice President) $193,958; Jamie L. Prah (Senior Vice President and
Chief Financial Officer) $199,996; Henry B. Brown III (Senior Vice President and Chief
Lending Officer) $161,862. Cash payments to all non-employee directors (5 persons)
totaled $538,708.
Moreover, the agreement accelerated the vesting of FedFirst restricted stock awards,
resulting in restricted stock awards becoming “fully vested upon the occurrence of a change
3
The tax consequences of the merger to each shareholder depended on the election
chosen by each shareholder.
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in control and each share of restricted stock will be converted into 1.1590 shares of CB
common stock.”4 Finally, with respect to Exchange Underwriters, Inc., an insurance
agency in which FedFirst owned 80% equity interest and Mr. Boyer owned 20% interest,
FedFirst would buy out Mr. Boyer’s 20% interest prior to the closing of the merger, and
Mr. Boyer would continue to be employed as Chief Executive Officer of the company
following the merger.
The Merger Agreement also included covenants that protected CB Financial’s
interests and encouraged the completion of the merger. Initially, FedFirst agreed that it
would not initiate, solicit, or knowingly encourage any other acquisition proposals (e.g., a
merger or tender offer). The agreement, however, did not preclude FedFirst from
considering unsolicited offers, as long as they were “superior proposals.” Moreover,
FedFirst agreed to promptly
notify CB of such inquiries, proposals or offers received by, any such
information requested from, or any such discussions or negotiations sought
to be initiated or continued with FedFirst or any of its representatives
4
“Restricted Stock Unit” has been defined as:
Compensation offered by an employer to an employee in the form of
company stock. The employee does not receive the stock immediately, but
instead receives it according to a vesting plan and distribution schedule after
achieving required performance milestones or upon remaining with the
employer for a particular length of time. The restricted stock units (RSU) are
assigned a fair market value when they vest. Upon vesting, they are
considered income, and a portion of the shares are withheld to pay income
taxes. The employee receives the remaining shares and can sell them at any
time.
Restricted Stock Unit Definition, Investopedia, http://perma.cc/T4D7-7MZ4.
-4-
indicating, in connection with such notice, the name of such Person and the
material terms and conditions of any inquiries, proposals or offers.[5]
Finally, “in order to induce CB to enter into this Agreement, and to reimburse CB for
incurring the costs and expenses related to entering into this Agreement and consummating
the transactions contemplated,” the agreement included a termination fee of $2,750,000,
which FedFirst agreed to pay in the event that it terminated the agreement.
The S-4 Registration Statement
On June 13, 2014, CB Financial filed a Registration Statement (Form S-4) with the
United States Securities and Exchange Commission (“SEC”). On July 28, 2014, CB
Financial filed an amended S-4 with the SEC (hereinafter “the S-4”), which was more than
300 pages long and included a plethora of information about the companies and the
proposed merger. It included, inter alia, the following:
 A letter to stockholders of FedFirst explaining the proposed transaction and advising
that the approval of the merger agreement required the affirmative vote of the
holders of a majority of the outstanding shares of FedFirst common stock.
 A summary providing a description of the two companies and the highlights of the
merger.
 A detailed discussion of the risks associated with the merger (e.g., the price of CB
Financial stock may decrease after the merger, and/or “FedFirst stockholders will
have reduced ownership and voting interest after the merger”) and risks related to
CB Financial (e.g., “Changes in interest rates may reduce CB’s profits and impair
asset values”).
5
In his amended complaint, Mr. Sutton argued that this provision was one of three
“preclusive deal protection mechanisms” that unduly benefitted CB Financial. He argued
that the information regarding any “superior proposals” that FedFirst was to provide to CB
Financial, which included the material terms of the offer, was designed to give CB
Financial “matching rights,” providing “CB Financial the ability to top the superior offer.”
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 Selected historical financial information for both companies.
 A description of the special meeting of the stockholders during which the
stockholders would vote on the merger.
The S-4 also included a detailed chronological account of the negotiation of the
merger. It explained that, in January 2013, Patrick G. O’Brien, President and Chief
Executive Officer, of FedFirst, met with Barron P. McCune, Jr., President and Chief
Executive Officer of CB, at Mr. McCune’s invitation, to discuss a possible business
combination of their two institutions. No price or other terms were discussed at this
meeting. In February 2013, Mr. O’Brien and Mr. LaCarte met with FedFirst’s financial
advisor, Mufson Howe Hunter, “to examine the current [Mergers & Acquisitions
(“M&A”)] market in the bank and thrift industry and review the financial characteristics
of a possible business combination between CB and FedFirst.” In March, the FedFirst
board of directors discussed the issue and “observed that there were many compelling
strategic business reasons for a combination with CB, including their complementary
market areas and similar corporate cultures.” FedFirst did not, however, pursue a
transaction with CB or any other company at that time.
In August, the following occurred:
[T]he FedFirst board of directors met to discuss its strategic alternatives.
Representatives of Mufson Howe Hunter were present at the meeting, as was
a representative of Kilpatrick Townsend & Stockton LLP, outside legal
counsel to FedFirst. Representatives of Mufson Howe Hunter reviewed with
the directors bank and thrift stock market trends; compared key balance sheet
and profitability metrics of FedFirst to those of comparable companies in
Pennsylvania; examined FedFirst’s historical and projected financial
performance; provided an update on the M&A market in the bank and thrift
industry; reviewed with the directors the financial characteristics of a
possible business combination between CB and FedFirst; and identified
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potential acquirers of FedFirst, evaluated their likely interest, and analyzed
their capacity to pay based on certain transaction assumptions. Legal counsel
reviewed with the directors their fiduciary duties in the context of a business
combination with another company.
In September, the FedFirst board of directors “authorized Mufson Howe Hunter to
contact three selected parties regarding their interest in a possible business combination
with FedFirst.” It “determined that the business risks resulting from awareness in the local
banking community of FedFirst’s interest in a business combination outweighed the benefit
of contacting additional companies that were unlikely to have the interest or ability to
complete a transaction with FedFirst.”
By October, FedFirst had received responses from each of the three companies. The
first company (Bank A) initially indicated that it had an interest in acquiring FedFirst, but
by November, Bank A lost interest in pursuing a merger with FedFirst. Because “none of
the other parties considered by FedFirst were likely to be more interested in a business
combination with FedFirst than CB, FedFirst decided to restart discussions with CB.”
After further discussions with CB Financial, the following occurred:
On February 14, 2014, CB provided FedFirst with a non-binding letter
of interest for a business combination between the two companies. CB
proposed the merger of FedFirst into CB valued at $21.80 per share of
FedFirst common stock, with the exchange of 65% of the outstanding shares
of FedFirst common stock for shares of CB common stock and the remaining
35% exchanged for cash. CB conditioned the transaction on FedFirst
purchasing from Mr. Boyer his 20% minority interest in Exchange
Underwriters prior to closing.
***
On February 27, 2014, FedFirst delivered its mark-up of the letter of
interest and communicated its view on the value of the merger consideration,
which was that the merger consideration should be increased to a value of
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$23.00 per share. On March 6, 2014, CB agreed to increase the value of the
merger consideration to $23.00 per share, and on March 7, 2014 delivered a
revised letter of interest. . . . . During the course of negotiations, the parties
also discussed the method of calculating the exchange ratio and agreed that
the exchange ratio would be determined at the time of signing the definitive
merger agreement by dividing $23.00 by the volume-weighted average price
of CB common stock over the prior 20 trading-day period. CB did not agree
to FedFirst’s request to reduce the termination fee from 5% of the transaction
value to 4% of the transaction value, but did agree to make the termination
fee reciprocal.
The directors discussed the proposal and consulted with legal counsel. They
ultimately voted to accept the letter of interest, and the following occurred:
On March 28, 2014, Luse Gorman Pomerenk & Schick, PC, special
counsel for CB delivered an initial draft of the merger agreement. Over the
ensuing days, the parties negotiated the terms of the merger agreement and
ancillary documents. In particular, the parties negotiated the various
representations and warranties to be made by each of them, the terms of the
covenants that restrict the activities of the parties pending completion of the
merger, including the “no-shop” provision that restricts the ability of FedFirst
to seek alternative transaction proposals, the treatment of various employee
benefit plans and agreements, and the expense limitation on director and
officer liability insurance. The parties also discussed the details with respect
to the composition of CB’s board of directors following the merger, agreed
that CB would take action to amend its articles of incorporation to eliminate
pre-emptive rights in connection with future share issuances, worked out the
details with respect to the purchase of the minority interest in Exchange
Underwriters, and agreed that the listing of CB common stock on the Nasdaq
Stock Market would be a condition to closing.
On April l4, 2014, the FedFirst board of directors met to consider the merger
agreement. Representatives of Mufson Howe Hunter presented a financial analysis of the
transaction and gave its opinion that “the consideration to be received by the stockholders
of FedFirst under the merger agreement [was] fair, from a financial point of view, to the
-8-
holders of FedFirst common stock.” The board of directors then unanimously approved
the definitive merger agreement.
That same day, on April 14, 2014, the CB Financial board of directors unanimously
approved the definitive merger agreement, and the merger agreement was executed by
officers of FedFirst and CB Financial. A joint press release was issued, announcing the
execution of the merger agreement and the terms of the merger.
After providing the events leading to the merger, the S-4 set forth a discussion of
FedFirst’s reasons for the merger, stating that the FedFirst board of directors “unanimously
determined that the merger agreement [was] in the best interests of FedFirst and its
shareholders.” The S-4 listed a number of factors considered, including:
 [the Board’s] belief that the merger will result in a stronger commercial
banking franchise with a diversified revenue stream, strong capital ratios, a
well-balanced loan portfolio and an attractive funding base that has the
potential to deliver a higher value to FedFirst’s shareholders as compared to
continuing to operate as a stand-alone entity;
***
 the expanded possibilities, including organic growth and future acquisitions,
that would be available to the combined company, given its larger size, asset
base, capital, market capitalization and footprint;
***
 [] that the value of the merger consideration for holders of FedFirst common
stock at $23.00 per share, represents a premium of 15% over the $20.06
closing price of FedFirst common stock on NASDAQ on April 10, 2014,
which is the most recent date on which FedFirst common stock traded prior
to April 14, 2014;
 [the opinion of the independent financial advisor that the merger
consideration was fair];
***
 [] that the merger consideration consists of a combination of CB common
stock and cash and that FedFirst shareholders will be given the opportunity
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to elect the form of consideration that they wish to receive, giving FedFirst
shareholders the opportunity to participate as stockholders of CB in the
benefits of the combination and the future performance of the combined
company generally;
 [] that upon completion of the merger FedFirst shareholders will own
approximately 42% of the outstanding shares of the combined company;
***
 the perceived limited opportunities for a strategic partnership with another
financial institution, at a similar or higher price, having characteristics that
would achieve the benefits for FedFirst stockholders that the board believes
will be achieved through the merger with CB; [and]
***
 the equity interest in the combined company that FedFirst’s existing
shareholders will receive in the merger, which allows such shareholders to
continue to participate in the future success of the combined company.
The S-4 contained further information, including the following:
 A summary of the Fairness Opinion provided by Mufson Howe Hunter & Company
LLC, FedFirst’s financial advisor, including the financial data upon which Mufson
Howe Hunter relied to render its opinion (the full text of the Fairness Opinion was
attached to the end of the S-4).
 A description of the consideration stockholders would receive in the merger,
including detailed hypothetical examples regarding how the two types of
consideration (cash and stocks) would be apportioned based on the potential
elections of FedFirst stockholders.6
6
The merger agreement required that 65% of all FedFirst’s outstanding stock be
traded for CB Financial stock, and it provided that, in the event that shareholder stock
elections were oversubscribed:
[A]ll FedFirst stockholders who have elected to receive cash or who have
made no election will receive cash for their FedFirst shares and all
stockholders who have elected to receive CB common stock will receive a
pro rata portion of the available CB shares plus cash for those shares not
converted into CB common stock.
(continued . . .)
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 A section discussing the “Interests of Certain Persons in the Merger that are
Different from Yours,” which described the unique benefits received by FedFirst’s
officers and directors.
 A discussion of the management of CB Financial and the roles of FedFirst’s officers
and directors after the merger, including detailed information about compensation
and benefits.
 The Agreement and Merger Agreement (provided in full in Annex A of the S-4).
Proceedings Below
On April 21, 2014, Mr. Sutton filed a class action and derivative lawsuit against
FedFirst, its seven individual directors, and CB Financial.7 Mr. Sutton asserted:
In any situation where the directors of a publicly traded corporation
undertake a transaction that will result in either a change in corporate control
(. . . continued)
Conversely, if stock elections were undersubscribed, the agreement provided the following
procedure:
[A]ll FedFirst stockholders who have elected to receive CB common stock
will receive CB common stock and those stockholders who elected to receive
cash or who have made no election will be treated in the following manner:
 If the number of shares held by FedFirst stockholders who have made
no election is sufficient to make up the shortfall in the number of CB
shares that CB required to issue, then all FedFirst stockholders who
elected cash will receive cash, and those stockholders who made no
election will receive both cash and CB common stock in such
proportion as is necessary to make up the shortfall.
 If the number of shares held by FedFirst stockholders who made no
election is insufficient to make up the shortfall, then all FedFirst
stockholders who made no election will receive CB common stock
and those FedFirst stockholders who elected to receive cash will
receive cash and CB common stock in such proportion as necessary
to make up the shortfall.
7
The seven individual directors are John J. LaCarte, Carlyn Belczyk, John M. Kish,
Richard B. Boyer, John M. Swiatek, David L. Wohleber, and Patrick G. O’Brien.
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or a break-up of the corporation’s assets, the directors have an affirmative
fiduciary obligation to act in the best interests of the company’s shareholders,
including the duty to obtain maximum value under the circumstances.
He alleged that the individual directors
violated, and are violating, the fiduciary duties they owe to [Mr. Sutton] and
the other public shareholders of FedFirst, including their duty of candor and
duty to maximize shareholder value. As a result of the Individual
Defendants’ divided loyalties, [Mr. Sutton] will not receive adequate, fair or
maximum value for their FedFirst common stock in the Proposed
Acquisition.
Mr. Sutton also alleged, inter alia, that the deal included “preclusive deal mechanisms
which effectively discourage other bidders from making successful topping bids,” and “the
Proposed Acquisition will allow CB Financial to purchase FedFirst at an unfairly low price
while availing itself of FedFirst’s significant value.”
The first count of the amended complaint alleged a breach of fiduciary duty against
the individual defendants. It asserted that the directors had
initiated a process to sell FedFirst that undervalues the Company and vests
them with benefits that are not shared equally by FedFirst’s public
shareholders. In addition, by agreeing to the Proposed Acquisition,
Defendants have capped the price of FedFirst at a price that does not
adequately reflect the Company’s true value.
Mr. Sutton sought to have the court enjoin the vote on the merger, stating that the plaintiff
had no adequate remedy at law.
The second count alleged that CB Financial and FedFirst aided and abetted the
individual directors’ breach of fiduciary duty. In that regard, it alleged that CB Financial
“knowingly assisted the Individual Defendants’ breaches of fiduciary duty in connection
with the Proposed Acquisition, which, without such aid, would not have occurred,” and as
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a result, Mr. Sutton “will be damaged in that [he has] been and will be prevented from
obtaining a fair price for [his] shares.”
The third count sought declaratory relief. Mr. Sutton requested a declaration that:
(1) the vote should be enjoined, (2) the proposed acquisition was unlawful and
unenforceable and the merger agreement “and/or the transactions contemplated thereby,
should be rescinded and the parties returned to their original position.”
In the Prayer for Relief, the amended complaint stated, as follows:
WHEREFORE, Plaintiff demands injunctive relief, in his favor and
in favor of the Class, and against the Defendants, as follows:
A. Declaring that this action is properly maintainable as a class
action, certifying Plaintiff as Class representative and certifying his counsel
as class counsel and derivative counsel;
B. Declaring and decreeing that the Proposed Acquisition was
entered into in breach of the fiduciary duties of the Individual Defendants
and is therefore unlawful and unenforceable, and rescinding and invalidating
any merger agreement or other agreements that Defendants entered into in
connection with, or in furtherance of, the Proposed Acquisition;
C. Preliminarily and permanently enjoining Defendants, their
agents, counsel, employees and all persons acting in concert with them from
consummating the Proposed Acquisition;
D. Directing the Individual Defendants to exercise their fiduciary
duties to obtain a transaction that is in the best interests of FedFirst’s
shareholders;
E. Imposing a constructive trust, in favor of Plaintiff and the
Class, upon any benefits improperly received by Defendants as a result of
their wrongful conduct;
F. Awarding Plaintiff the costs and disbursements of this action,
including reasonable attorneys’ and experts’ fees; and
G. Granting such other and further equitable relief as this Court
may deem just and proper.
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On June, 19 and 20, 2014, FedFirst (the company and the individual directors) and
CB Financial, respectively, filed motions to dismiss the complaint for failure to state a
claim. FedFirst provided five arguments in its motion: (1) Mr. Sutton lacked standing to
bring a direct claim against FedFirst’s Board for breach of fiduciary duties; (2) Mr. Sutton
failed to overcome the business judgment rule; (3) Mr. Sutton’s allegations of omissions
in the Registration Statement failed to meet Maryland’s materiality standard; (4) the
FedFirst Board was under no duty to maximize shareholder value; and (5) to the extent that
Mr. Sutton alleged that FedFirst aided and abetted the individual directors’ alleged
breaches of fiduciary duties, Mr. Sutton failed to adequately allege any elements of an
aiding and abetting claim against FedFirst.8 CB Financial reiterated some of FedFirst’s
arguments in its motion, and it argued that, even if there was a breach of fiduciary duty by
the directors of FedFirst, Mr. Sutton had not alleged any specific facts from which it could
be inferred that CB Financial “knowingly participated” in such a breach.
On July 29, 2014, after CB Financial filed the S-4 with the SEC, Mr. Sutton filed
an amended complaint, adding the allegation that the S-4 “omits material information about
the Proposed Acquisition that must be disclosed to FedFirst’s shareholders to enable them
to make a fully informed decision.” On August 12, 2014, FedFirst filed an amended motion
to dismiss.
8
FedFirst also argued that Mr. Sutton failed to make a required demand on the
FedFirst Board before filing his derivative suit. Mr. Sutton ultimately dismissed his
derivative claims, and therefore, the circuit court did not address this argument.
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On September 2, 2014, Mr. Sutton voluntarily dismissed his derivative claim,
leaving only his direct claim. On September 17, 2014, Mr. Sutton filed a motion for a
preliminary injunction, requesting that the court enjoin FedFirst from holding a shareholder
vote on the proposed merger. On September 18, 2014, the court heard argument on the
defendants’ motions to dismiss. In an order dated September 19, 2014, the circuit court
dismissed Mr. Sutton’s direct claims, with prejudice. On October 17, 2014, Mr. Sutton
filed a Notice of Appeal.
On January 14, 2015, the circuit court issued its Memorandum Opinion. The court
explained that it was granting the motions to dismiss for the following reasons:
(1) Mr. Sutton “failed to assert a direct injury necessary to bring [a] direct claim” because
he “failed to demonstrate how the alleged injury [was] ‘separate and distinct’ from that
suffered from other shareholders”; (2) Shenker v. Laureate Education, Inc., 411 Md. 317
(2009), “only applies in the limited context of a cash-out merger that will result in a change
of control, which [was] not contemplated by the Proposed Transaction,” and therefore, the
case does not provide Mr. Sutton with a direct cause of action against the FedFirst Board
for breach of common law duties of candor and maximization of shareholder value; (3)
even if Mr. Sutton could maintain his direct claim against the FedFirst Board, his
allegations were insufficient to rebut the presumptions afforded to the directors by the
business judgment rule; (4) “the alleged omissions in the Registration Statement are wholly
immaterial”; and (5) Mr. Sutton “failed to allege an underlying breach of fiduciary duty,”
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and therefore, his “aiding and abetting claims fail as a matter of law.” On January 15,
2015, Mr. Sutton filed an amended notice of appeal.
Post-Dismissal Events
Mr. Sutton did not move to stay the merger pending his appeal, and the parties have
represented that, on October 31, 2014, FedFirst and CB Financial completed the merger.9
On November 7, 2014, CB Financial filed a motion to dismiss the appeal as moot, arguing
that, “because the merger has now occurred, there is no relief that this Court can order,
rendering [Mr.] Sutton’s appeal moot.” On November, 10, 2014, FedFirst filed a similar
motion to dismiss, arguing that Mr. Sutton “did not move to stay the Circuit Court’s order,”
the merger has already been completed, “FedFirst ceased to exist as an entity,” “the
consideration has been distributed to FedFirst shareholders,” and therefore, Mr. Sutton’s
“appeal is moot because there is no effective remedy which this Court can provide.”
On November, 21, 2014, Mr. Sutton filed an opposition to the motions to dismiss,
arguing that the “consummation of the merger does not make it impossible for the trial
court to grant the relief requested.” He argued that, even if the merger could not be undone,
he “made clear in his complaint that he would seek damages that he . . . suffered as a result
9
Pursuant to a news article that all parties referenced in their briefs, preliminary
election results indicated that, of the 2,286,008 FedFirst shares outstanding, holders of
approximately 21.9% of the shares elected to receive CB Financial Stock, approximately
64.0% elected to receive cash, and approximately 14.1% made no election.
http://perma.cc/DPN6-PAHJ. Because cash elections were oversubscribed (the merger
agreement limited cash exchanges to 35% of FedFirst’s outstanding shares), those
shareholders who elected to receive cash were compensated with cash for approximately
55% of their FedFirst shares with the remainder being traded for CB Financial shares. Id.
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of Defendants’ conduct.” In an order filed on December 16, 2014, this Court denied
appellees’ motions with leave to seek that relief in their briefs.
Additional facts will be discussed as necessary in the discussion that follows.
DISCUSSION
I.
Mootness
Before addressing the merits of Mr. Sutton’s claims, we address appellees’
argument in their initial motions, and reiterated in their briefs, that this case should be
dismissed because it is moot. “A case is moot when there is no longer an existing
controversy when the case comes before the Court or when there is no longer an effective
remedy the Court could grant.” Prince George’s Cnty. v. Columcille Bldg. Corp., 219 Md.
App. 19, 26 (2014) (quoting Suter v. Stuckey, 402 Md. 211, 219 (2007)). “This Court does
not give advisory opinions; thus, we generally dismiss moot actions without a decision on
the merits.” Green v. Nassif, 401 Md. 649, 655 (2007) (quoting Dep’t of Human Res.,
Child Care Admin. v. Roth, 398 Md. 137, 143 (2007)). “In rare instances, however, we
‘may address the merits of a moot case if we are convinced that the case presents
unresolved issues in matters of important public concern that, if decided, will establish a
rule for future conduct.’” Roth, 398 Md. at 143-44 (quoting Coburn v. Coburn, 342 Md.
244, 250 (1996)).
Appellees argue that this Court “should dismiss this appeal as moot because the only
meaningful relief sought by the amended complaint – enjoining the merger – cannot be
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granted because the merger has already occurred and cannot be unwound.” They assert:
“FedFirst’s Merger into CB Financial was finalized in October 2014 and the proceeds have
been distributed to the shareholders. There is nothing more that this Court can do, other
than find that the appeal is moot.”
If Mr. Sutton’s sole claim for relief was to enjoin the merger, we would agree that
the appeal was moot. In that regard, National Collegiate Athletic Association v. Tucker,
300 Md. 156 (1984), is instructive. In Tucker, two students of Johns Hopkins University
filed a complaint and motion for injunction against the National Collegiate Athletic
Association (NCAA), arguing that, pursuant to the NCAA’s bylaws, they had not “used up
one of their four seasons of eligibility for intercollegiate competition by participating in
Fall lacrosse scrimmages prior to transferring to Hopkins.” 300 Md. at 157. The circuit
court granted the students’ motion for an injunction, ordering the NCAA to allow them to
play for the remainder of the season. Id. at 158. The NCAA noted an appeal, but by the
time the case was heard by the Court, the season had ended. Id. The Court of Appeals
dismissed the appeal, stating: “[S]imply put, the season is over. Accordingly, because the
only question before us is the appropriateness of the issuance of the interlocutory
injunction, we hold that the appeal is moot.” Id. at 159.
Other cases reiterate the rule that, once the act sought to be enjoined has occurred,
any appeal of the issue is moot. See Hagerstown Reprod. Health Servs. v. Fritz, 295 Md.
268, 271 (appeal from injunction prohibiting abortion moot where abortion performed),
cert. denied, 463 U.S. 1208 (1983); Banner v. Home Sales Co. D., 201 Md. 425, 428 (1953)
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(“[T]he general rule is ‘that the court should confine itself to the particular relief sought in
the case before it, and refrain from deciding abstract, moot questions of law which may
remain after that relief has ceased to be possible.”) (quoting Montgomery Cnty. v.
Maryland-Washington Metro. Dist., 200 Md. 525, 530-31 (1952)).
In Brill v. General Industrial Enterprises, Inc., 234 F.2d 465 (3d Cir. 1956), the
Court of Appeals for the Third Circuit addressed an issue similar to the one presented here.
In that case, stockholders of a corporation sought to enjoin a shareholder vote on the sale
of the corporation’s physical assets, asserting that the sale price was inadequate. Id. at 467.
The trial court dismissed the complaint, and the sale occurred. Id. at 468. The appellate
court dismissed the appeal, explaining that “an appeal from a decree dismissing a complaint
seeking an injunction, or refusing to grant an injunction, will not disturb the operative effect
of such a decree, and where the act sought to be restrained has been performed, the
appellate courts will deny review on the ground of mootness.” Id. at 469.10
Mr. Sutton recognizes these mootness principles. He concedes that he “can no
longer enjoin the Stockholders’ vote on the Transaction or the Closing,” but he contends
10
The court also rejected Brill’s argument that the appellate court rule that he be
permitted to file a supplemental pleading to amend the prayer for relief. Brill v. Gen’l
Indus. Enter., Inc., 234 F.2d 465, 470 (3d Cir. 1956). We similarly reject Mr. Sutton’s
argument that this Court order that he be permitted to amend his request for relief. As this
Court recently explained: “[A]lthough Rule 2-341(b) is ‘silent as to when a request for
leave to amend may be filed,’ a party may not amend the pleadings in the ‘appellate court
after an appealable final judgment has been entered.’” Advance Telecom Process LLC v.
DSFederal, Inc., 224 Md. App. 164, 184 (2015) (quoting Bijou v. Young–Battle, 185 Md.
App. 268, 289 (2009)).
-19-
that the case is not moot because “the trial court can order the unwinding of the merger
transaction or grant other relief . . . if the case is remanded.” With respect to such “other
relief,” Mr. Sutton asserts that, although “rescission of the [t]ransaction (versus rescissory
damages) is admittedly unlikely, it is plausible that, on remand, [he] will convince the
Circuit Court to ‘impose a constructive trust,’” in his favor “upon any benefits improperly
received by [appellees] as a result of their wrongful conduct.” He further asserts that,
although no monetary damages claims appear in the ad damnum section of the complaint,
there was “explicit reference to [his] claim of damages” throughout the complaint, and on
remand, the court has “the power . . . to allow an award of money in the form of
compensatory damages and/or rescissory damages for [a]ppellant’s direct injury.”11
11
Some courts have held that there is an exception to the rule that an appeal from
the demand of an injunction “is mooted by the occurrence of the action sought to be
enjoined” when “a court can feasibly restore the status quo.” Moore v. Consol. Edison Co.
of New York, 409 F.3d 506, 509 (2d Cir. 2005). Accord Bastian v. Lakefront Realty Corp.,
581 F.2d 685, 691 (7th Cir. 1978). See also, Bank of New York Co. v. Northeast Bancorp,
Inc., 9 F.3d 1065, 1066 (2d Cir. 1993) (declining to address whether there is an exception
to the general rule of mootness where the appellate court feasibly can restore the status quo
because, in that case, where a merger had been consummated months earlier, a stock
transfer would “not restore the three companies to their pre-merger circumstances,” and
therefore, “rescission would not restore the status quo”). Mr. Sutton does not ask us to
adopt such an exception to the mootness doctrine, but rather, he asserts that a remedy is
available based on the relief sought in his complaint. We will confine our analysis to that
argument.
-20-
A.
Unwinding the Merger
With respect to the argument that this case is not moot because the circuit court on
remand could “unwind” the merger between FedFirst and CB Financial, Mr. Sutton raised
this contention in his response to appellees’ initial motion to dismiss the appeal, which he
adopts by reference in his brief. In his brief, he concedes that this relief “is admittedly
unlikely,” but he has not abandoned the claim, so we will address it.
Mr. Sutton contends that, in his complaint, he requested that the court rescind the
merger agreement. Accordingly, he contends his claim to rescind the agreement, and
therefore any resulting merger, preserves a remedy precluding this court from dismissing
this case as moot.
Neither party cites any Maryland case addressing whether, or under what
circumstances, a court can “unwind” a completed corporate merger. Accordingly, we look
to other courts for guidance.
Delaware courts addressing this issue repeatedly have held that, once a merger is
consummated, it generally is impracticable for it to be undone.12 For example, in McMillan
v. Intercargo Corporation, 768 A.2d 492, 500 (Del. Ch. 2000), the Delaware Court of
Chancery stated: “Having unsuccessfully attempted to obtain an injunction against the
12
The Court of Appeals “has noted the ‘respect properly accorded Delaware
decisions on corporate law’ ordinarily in our jurisprudence.” Shenker v. Laureate Educ.,
Inc., 411 Md. 317, 338 n.14 (2009) (quoting Werbowsky v. Collomb, 362 Md. 581, 618
(2001)).
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consummation of the merger, the metaphorical merger eggs have been scrambled. Under
our case law, it is generally accepted that a completed merger cannot, as a practical matter,
be unwound.” Similarly, in In re Lukens Inc. Shareholders Litigation, 757 A.2d 720, 728
(Del. Ch. 1999), aff’d sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000), the
court explained: “[P]laintiffs’ demand for rescission of the transaction is plainly futile. . . .
[I]t goes without saying that at this juncture it is ‘impossible to unscramble the eggs.’
Money damages [are] the only possible form of relief available.” Accord Weinberger v.
UOP, Inc., 457 A.2d 701, 714 (Del. 1983) (concluding that a “long completed” cash-out
merger was “too involved to undo”); Coggins v. New England Patriots Football Club, Inc.,
492 N.E.2d 1112, 1119 (Mass. 1986) (rescission of a merger is inequitable and not feasible
where the merger had long been completed and “the interests of the corporation and of the
plaintiffs will be furthered best by limiting the plaintiffs’ remedy to an assessment of
damages”).
Based on this case law, it is clear that the unwinding of a long-ago completed
corporate merger generally is not practicable. Although that determination, in some cases,
would be one for the trial court, several appellate courts have concluded, on the facts of the
case, that rescission is not a viable remedy. See Bank of New York Co. v. Northeast
Bancorp, Inc., 9 F.3d 1065, 1066 (2d Cir. 1993); Coggins, 492 N.E.2d at 1119. We
similarly conclude here. In light of the representation that the agreement involved a 54.5
million dollar merger, with more than two million shares of publicly traded stock and an
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integration of corporate management, that occurred almost a year ago, we hold that
rescission is not a potential remedy that would preclude a finding that the appeal is moot.
B.
Rescissory Damages
Although rescission is not practicable, there is a possibility that, if Mr. Sutton
prevailed on his claim, he could be awarded rescissory damages. In In re Orchard
Enterprises, Inc. Stockholder Litig., 88 A.3d 1, 38 (Del. Ch. 2014), the Court of Chancery
of Delaware explained: “Rescissory damages are ‘the monetary equivalent of rescission’
and may be awarded where ‘the equitable remedy of rescission is impractical.’” (quoting
Strassburger v. Earley, 752 A.2d 557, 579-81 (Del. Ch. 2000)). Accord Cinerama, Inc. v.
Technicolor, Inc., 663 A.2d 1134, 1144 (Del. Ch. 1994), aff’d, 663 A.2d 1156 (Del.
1995). The court explained: “[T]he Weinberger court held that when a merger has been
successfully challenged, the possible forms of monetary relief include an out-of-pocket
measure of damages equal to what a stockholder would have received in an
appraisal, viz., the fair value of the stockholder’s shares.” Orchard Enter., 88 A.3d at
40. Because rescissory damages in lieu of actual rescission is a possible form of relief if
Mr. Sutton were to prevail on his claims, we hold that this case is not moot. Accordingly,
we proceed to address Mr. Sutton’s claims on the merits.
-23-
II.
Substantive Claims
Mr. Sutton contends that the circuit court erred in granting the motions to dismiss
filed by FedFirst and CB Financial. We will address the claims with respect to each of the
appellees separately. Before doing so, however, we will address the proper standard of
review of a motion to dismiss and discuss generally shareholder lawsuits against
corporations.
A.
Standard of Review
“A trial court may grant a motion to dismiss if, when assuming the truth of all well-
pled facts and allegations in the complaint and any inferences that may be drawn, and
viewing those facts in the light most favorable to the non-moving party, ‘the allegations do
not state a cause of action for which relief may be granted.’” Latty v. St. Joseph’s Soc. of
Sacred Heart, Inc., 198 Md. App. 254, 262-63 (2011) (quoting RRC Northeast, LLC v.
BAA Md., Inc., 413 Md. 638, 643 (2010)). The facts set forth in the complaint must be
“pleaded with sufficient specificity; bald assertions and conclusory statements by the
pleader will not suffice.” RRC, 413 Md. at 644.
“‘We review the grant of a motion to dismiss de novo.’” Unger v. Berger, 214 Md.
App. 426, 432 (2013) (quoting Reichs Ford Road Joint Venture v. State Roads Comm’n,
388 Md. 500, 509 (2005)). Accord Kumar v. Dhanda, 198 Md. App. 337, 342 (2011) (“We
review the court’s decision to grant the motion to dismiss for legal correctness.”), aff’d,
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426 Md. 185 (2012). We will affirm the circuit court’s judgment “‘on any ground
adequately shown by the record, even one upon which the circuit court has not relied or
one that the parties have not raised.’” Monarc Constr., Inc. v. Aris Corp., 188 Md. App.
377, 385 (2009) (quoting Pope v. Bd. of Sch. Comm’rs, 106 Md. App. 578, 591 (1995)).13
B.
Shareholder Suits Against Corporate Boards of Directors
The board of directors of a corporation generally manages the business of the
corporation. Werbowsky v. Collomb, 362 Md. 581, 598-99 (2001); George Wasserman &
Janice Wasserman Goldsten Family LLC v. Kay, 197 Md. App. 586, 609 (2011).
Shareholders ordinarily are not permitted to interfere in the management of the company
because they are owners of the company, not managers. Werbowsky, 362 Md. at 599;
Wasserman, 197 Md. App. at 609.
13
In addressing the motion to dismiss, the court considered the S-4, a document not
included in Mr. Sutton’s amended complaint. We have stated that, “where matters outside
of the allegations in the complaint and any exhibits incorporated in it are considered by the
trial court, a motion to dismiss generally will be treated as one for summary judgment.”
Advance Telecom, 224 Md. App. at 175. There is an exception to the general rule, however,
where “a document such as the [S-4] merely supplements the allegations of the complaint,
and the document is not controverted, consideration of the document does not convert the
motion into one for summary judgment.” Id. Accord ATSI Commc’ns, Inc. v. Shaar Fund,
Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (in addressing a motion to dismiss, a court “may
consider any written instrument attached to the complaint, statements or documents
incorporated into the complaint by reference, legally required public disclosure documents
filed with the SEC, and documents possessed by or known to the plaintiff and upon which
it relied in bringing the suit”). Accordingly, the circuit court properly considered the S-4
in addressing appellees’ motions to dismiss.
-25-
Corporate directors, however, do not have unlimited authority. They are subject to
the fiduciary duties set forth in Md. Code (2014 Repl. Vol.) § 2-405.1 of the Corporations
and Associations Article (“CA”). CA § 2-405.1(a) provides that directors must perform
their duties in good faith in a manner that he or she reasonably believes to be in the best
interests of the corporation, and “[w]ith the care that an ordinarily prudent person in a like
position would use under similar circumstances.”14 These duties, however, are “to the
corporation and not, at least directly, to the shareholders.” Werbowsky, 362 Md. at 599.15
Because director fiduciary duties relating to management do not extend to
shareholders, a shareholder generally does not have a direct action against the directors,
and any action taken against the directors requires the shareholder to file a derivative
action. Wasserman, 197 Md. App. at 609-10. As the Court of Appeals explained in Waller
v. Waller, 187 Md. 185, 189-90 (1946):
It is a general rule that an action at law to recover damages for an
injury to a corporation can be brought only in the name of the corporation
itself acting through its directors, and not by an individual stockholder,
though the injury may incidentally result in diminishing or destroying the
value of the stock. The reason for this rule is that the cause of action for injury
to the property of a corporation or for impairment or destruction of its
business is in the corporation, and such an injury, although it may diminish
14
Md. Code (2014 Repl. Vol.) § 2-405.1(e) of the Corporations and Associations
article provides that “[a]n act of a director of a corporation is presumed to satisfy the
standards of subsection (a) of this section.” This statutory provision codifies, with some
changes, the “business judgment rule,” which is a “‘presumption that corporate directors
acted in accordance with’” the requisite standard of care. Mona v. Mona Elec. Group, Inc.,
176 Md. App. 672, 696 (2007) (quoting Yost v. Early, 87 Md. App. 364, 378 (1991)).
15
Section 2-405.1(g) provides that “[n]othing in this section creates a duty of any
director of a corporation enforceable otherwise than by the corporation or in the right of
the corporation.”
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the value of the capital stock, is not primarily or necessarily a damage to the
stockholder, and hence the stockholder’s derivative right can be asserted only
through the corporation. The rule is advantageous not only because it avoids
a multiplicity of suits by the various stockholders, but also because any
damages so recovered will be available for the payment of debts of the
corporation, and, if any surplus remains, for distribution to the stockholders
in proportion to the number of shares held by each.
The Court of Appeals has explained a shareholder’s derivative action as follows:
“The nature of the derivative proceeding is two-fold. First, it is the equivalent
of a suit by the shareholders to compel the corporation to sue. Second, it is
[a] suit by the corporation, asserted by the shareholder on its behalf, against
those liable to it. The corporation is the real party in interest and the
shareholder is only a nominal plaintiff. The substantive claim belongs to the
corporation. . . . The proceeding is typically brought by a minority
shareholder, because a majority or controlling shareholder can usually
persuade the corporation to sue in its own name.”
Werbowsky, 362 Md. at 599 (quoting 13 William Meade Fletcher et al., Cyclopedia of the
Law of Private Corporations § 5941.10 (1995 Rev. Vol)). “In a derivative action, any
recovery belongs to the corporation, not the plaintiff shareholder.” Shenker, 411 Md. at
344.16
There are situations, however, where a shareholder may bring a direct action against
alleged corporate wrongdoers. Such a cause of action arises “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.” Shenker, 411 Md. at 345. Accord
16
Before instituting a derivative action, the plaintiff must make a demand on the
corporation’s board of directors to preserve the claim or demonstrate that such a demand
would be futile. Shenker, 411 Md. at 317, 343-44. Here, FedFirst argued below that
Mr. Sutton failed to follow these procedural hurdles, and Mr. Sutton subsequently
dismissed the derivative claim.
-27-
Matthews v. Headley Chocolate Co., 130 Md. 523, 526 (1917) (shareholders may sue
directly where “they have suffered some peculiar injury independent of what the company
has suffered”); Mona v. Mona Elec. Group, Inc., 176 Md. App. 672, 697 (2007)
(shareholder may bring direct action to enforce a right that is personal to him or her). See
also Boland v. Boland, 423 Md. 296, 316-17 (2011) (a derivative action involves a
corporate right, whereas a direct claim involves a cause of action involving a wrong against
the shareholder individually).
The Court of Appeals has explained:
Cases where direct harm is suffered by shareholders include, for example,
actions to enforce a shareholder’s right to vote or right to inspect corporate
records. 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. See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031,
1033 (Del. 2004) (noting that the issue of whether a claim should be brought
derivatively or directly turns on considerations of who suffered the alleged
harm and who would receive the benefit of any recovery); Strougo v. Bassini,
282 F.3d 162, 171 (2d Cir. 2002) (applying Maryland law) (noting that, in
Maryland, where shareholders suffer an injury distinct from that of the
corporation, rather than deriving from an injury to the business or property
of the corporation, “the corporation lacks standing to sue, and Maryland’s
‘distinct injury’ rule allows shareholders access to the courts to seek
compensation directly”). Where the rights attendant to stock ownership are
adversely affected, shareholders generally are entitled to sue directly, and
any monetary relief granted goes to the shareholder. . . . If the plaintiff
demonstrates that he or she has suffered the alleged injury directly, he or she
need not make demand on the corporate board of directors or prove futility
of demand, and the business judgment rule does not apply.
Shenker, 411 Md. at 345.
In Shenker, the Court addressed whether shareholders of a corporation that was
purchased in a cash-out merger had a direct cause of action against the directors for failure
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to maximize the amount they would receive for their shares in the transaction. The Court
rejected the argument that, pursuant to CA § 2-405.1, shareholder claims against directors
for breaches of fiduciary duty may be pursued only by a derivative action. Id. at 335-36.
The Court agreed with Shenker’s argument that, although § 2-405.1 addresses duties
involving the management of the business of the corporation, such as the decision whether
a corporation should be sold, which are enforceable only by the corporation, there are
additional common law duties that are triggered once a decision to sell the corporation has
been made that are personal to the shareholders and give a direct cause of action to the
shareholders. Id. at 337. The Court of Appeals held that,
where corporate directors exercise non-managerial duties outside the scope
of § 2-405.1(a), such as negotiating the price that shareholders will receive
for their shares in a cash-out merger transaction, after the decision to sell the
corporation already has been made, they remain liable directly to
shareholders for any breach of those fiduciary duties.
Id. at 328-29 (emphasis added). The Court held that, “in a cash-out merger transaction
where the decision to sell the corporation already has been made, shareholders may pursue
direct claims against directors for breach of their fiduciary duties of candor and
maximization of shareholder value.”17 Id. at 342.
17
The Court explained a cash-out merger in a footnote, as follows:
Generally, in a cash-out (or freeze-out) merger transaction, the
majority shareholder (or shareholders) of the target company seeks to gain
ownership of the remaining shares in the target company. This is
accomplished by incorporating an acquiring company to purchase for cash
the shares of the target company. Due to the majority’s controlling position
in the target company, it may force any minority shareholders (continued . . .)
-29-
C.
The Scope of Shenker
The argument in the parties’ briefs primarily addresses the significance of the
holding in Shenker. Indeed, FedFirst states that “[t]his appeal turns on whether the Court
of Appeals’ decision in Shenker applies to this case.”
The circuit court similarly relied on Shenker. In granting the motion to dismiss, the
court agreed with Mr. Sutton “that under Shenker a shareholder may, under certain
circumstances, bring direct claims against a corporation’s board of directors for breaches
of common law duties of candor and maximization of shareholder consideration.” The
court concluded, however, that Mr. Sutton’s
reliance on Shenker is misguided. Shenker only applies in the limited context
of a cash-out merger that will result in a change of control, which is not
contemplated by the Proposed Transaction. Shenker does not permit
individual shareholders to bring direct claims against corporate directors for
breaches of these common law duties in a non-cash-out merger transaction.
In support of its conclusion that the Court intended to so limit its holding, the circuit court
pointed to footnote 3 in the Court of Appeals’ opinion in Shenker, finding that the footnote
(. . . continued)
to surrender their shares and accept the cash payment, effectively eliminating
their interest in the target company (and leaving them with no subsequent
interest in the acquiring company). Such a cash-out merger stands in contrast
to a traditional merger, in which shareholders of the target company trade in
their shares in exchange for shares in the acquiring company. See generally
James J. Hanks, Jr., Maryland Corporation Law § 9.5 (2006 Supp.).
Shenker, 411 Md. at 326 n.3.
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“expressly distinguish[ed] a cash-out merger from a traditional stock-for-stock merger.”
Accordingly, the court determined that Mr. Sutton did not have a claim against FedFirst,
or CB Financial for aiding and abetting, with regard to a breach of the common law duties
of candor and maximization of shareholder value.
Mr. Sutton argues that the circuit court’s conclusion in this regard was erroneous.
He asserts that the court
erroneously held that directors of publicly traded Maryland corporations owe
no common law fiduciary or other duty to maximize stockholder value and
no common law fiduciary duty of candor directly to the stockholders when
considering, negotiating and then recommending to the stockholders the sale
of their company at a particular dollar value per share when any of the
consideration those stockholders will receive for their personal property in
the sale is in the form of stock in the acquiring entity.
He contends that, once the directors make the decision that the company is for sale, they
act, not only as a director engaged in managing the business of the unsold corporation, but
also as an agent trustee, with the non-managerial common law duty to maximize
shareholder value and to disclose all material information regarding how maximization was
pursued. Mr. Sutton contends that the circuit court erred in deciding that a direct action
can be brought by a shareholder only “if 100% of the consideration the stockholders of the
target company will receive consists of cash.” He asserts that, although the Court in
Shenker “discussed its holding numerous times in the context of the facts[,] where the
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consideration was all cash, in other statements, Shenker expressly did not restrict its
holding to cash-out transactions.” 18
FedFirst argues that “Shenker does not apply to this case,” and therefore, “the
FedFirst Board owed no duty of candor above or apart from their statutory fiduciary duties
under the Maryland General Corporation Law.” It asserts that the circuit court “correctly
held that the Court of Appeals’ decision in Shenker applied only in the limited context of
a cash-out merger that resulted in a change of control, and that the [m]erger in this case
was not a cash-out merger and there was no change in control.”
Given the parties’ contentions, it is clear that a thorough analysis of the decision in
Shenker is warranted. In that case, shareholders of Laureate Education, Inc. (“Laureate”),
18
Mr. Sutton also contends that the “decision of the Circuit Court has left the
[s]tockholders without a remedy in violation of Maryland’s Constitution.” Mr. Sutton,
however, did not raise this argument below, and therefore, we decline to address it. See
Md. Rule 8-131(a) (this Court generally will not decide an issue “unless it plainly appears
by the record to have been raised in or decided by the trial court”). Moreover, Mr. Sutton
does not explain why, at the time he filed his amended complaint seeking to enjoin the
merger, a derivative action (which he filed and voluntarily dismissed), was not available.
Although we will not engage in a detailed analysis of Mr. Sutton’s argument because the
issue was not raised below and not adequately briefed on appeal, see Honeycutt v.
Honeycutt, 150 Md. App. 604, 618 (when party fails to adequately brief an argument, court
may decline to address it on appeal), cert. denied, 376 Md. 544 (2003), we do note, without
deciding the issue, that at least one court has disagreed with Mr. Sutton’s argument that,
“once the corporation ceases to exist, as did FedFirst after the [c]losing, any derivative
complaint” filed prior to the merger would have to be dismissed for standing “because the
non-existent corporation could not maintain the action and the plaintiff, no longer a
stockholder, could not maintain the action in the right of the corporation in which the
stockholder no longer owns shares.” See Shelton v. Thompson, 544 So. 2d 845, 848-49
(Ala. 1989) (a merger resulting in the termination of a corporation did not deprive former
shareholders of the defunct corporation of their derivative standing).
-32-
a publicly-held Maryland corporation, challenged a cash-out merger transaction between
Laureate and several private equity investors. Shenker, 411 Md. at 326. The Court
described the mechanics of the transaction in issue as follows:
Laureate announced on 3 June 2007 that it accepted an increased offer
from Investor Respondents to acquire Laureate at a price of $62 per share by
way of a tender offer and second-step (or “short-form”) merger, a process
whereby Investor Respondents would purchase, at a price per share equal to
the offer price, a number of newly issued shares of Laureate’s common stock
sufficient to provide the Investor Respondents with ownership of one share
more than 90% of the total shares outstanding and then, by virtue of their
90% ownership, convert all remaining shares of Laureate’s common stock
into the right to receive the same price paid per share in the tender offer.
Id. at 331.19
Several shareholders objected to the deal and filed a direct lawsuit against
Laureate’s board of directors, arguing that the directors breached their fiduciary duties
owed to the plaintiff shareholders, and the private investors aided and abetted the directors.
Id. at 330-32. The circuit court granted Laureate’s motion to dismiss on the ground that
CA § 2-405.1(g) prevented a direct action against the corporate directors for alleged
violations of fiduciary duties, stating that the directors’ duties are owed only to the
corporation.20 Shenker, 411 Md. at 332. This Court affirmed, “holding that directors of
Maryland corporations owe no common law fiduciary duties directly to their shareholders
19
The Court noted that Shenker contended that this “tactic was designed to foreclose
a shareholder vote and to ensure that Investor Respondents’ acquisition of Laureate closed
for the lowest price and as quickly as possible.” Shenker, 411 Md. at 331 n.8.
20
CA § 2-405.1(g) provides the following: “Nothing in this section creates a duty
of any director of a corporation enforceable otherwise than by the corporation or in the
right of the corporation.”
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and that, in a cash-out merger transaction, any claims shareholders may have against
directors for breach of fiduciary duties must be brought derivatively on behalf of the
corporation.” Id. at 333.
The Court of Appeals reversed. Id. at 354. Although it agreed that CA § 2-405.1(a)
“governs the duty of care owed by directors when they undertake managerial decisions on
behalf of the corporation,” id at 338, it disagreed that § 2-405.1(a) was the sole source of
duties owed by corporate directors, id at 335. The Court held “that § 2–405.1(a) does not
provide the sole source of directorial duties, and that other, common law fiduciary duties
of directors remain in place and may be triggered by the occurrence of appropriate events.”
Id. at 339.
The question presented in this case is what constitutes “appropriate events” that
trigger common law duties of directors to shareholders. This is important because a critical
factor in determining whether a shareholder has a direct, as opposed to a derivative, action
against the directors is whether there is a duty to the shareholder individually.
We previously have explained that Shenker has “a narrow application.”
Wasserman, 197 Md. App. at 620. FedFirst agrees, but it argues that Shenker’s holding
regarding the common law duties of directors to stockholders is limited to one situation,
i.e., a cash-out merger. We disagree that the decision is so limited.
To be sure, the specific holding of Shenker was confined to the facts of the case, “a
cash-out merger transaction.” Id at 336. The language in Shenker as a whole, however,
-34-
indicates that the principles set forth were not limited to that specific factual scenario.21
Instead, the Court held that the common law fiduciary duty of directors “may be triggered
by the occurrence of appropriate events.” Id. at 339.
In discussing the events that would trigger common law duties that give rise to a
direct stockholder action, the Court focused on the scenario where corporate directors act
outside their typical managerial duties after the decision is made to sell the corporation. In
determining that CA § 2-405.1 did not control in that case, the Court explained:
When directors undertake to negotiate a price that shareholders will receive
in the context of a cash-out merger transaction, however, they assume a
different role than solely “managing the business and affairs of the
corporation.” Duties concerning the management of the corporation’s affairs
change after the decision is made to sell the corporation. See Revlon, Inc. v.
MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986)
(noting that, once sale became inevitable, “[t]he directors’ role changed from
defenders of the corporate bastion to auctioneers charged with getting the
best price for the stockholders at a sale of the company”). Beyond that point,
in negotiating a share price that shareholders will receive in a cash-out
merger, directors act as fiduciaries on behalf of the shareholders. As a result
of the confidence and trust reposed in them during the price negotiation, their
ability to affect significantly the financial interests of the shareholders, and
the inherent conflict of interest that arises between directors and shareholders
in any change-of-control situation, the common law imposes on those
directors duties to maximize shareholder value and make full disclosure of
all material facts concerning the merger to the shareholders.
21
The Court held that
where corporate directors exercise non-managerial duties outside the scope
of § 2-405.1(a), such as negotiating the price that shareholders will receive
for their shares in a cash-out merger transaction, after the decision to sell the
corporation already has been made, they remain liable directly to
shareholders for any breach of those fiduciary duties.
Shenker, 411 Md. at 328-29 (emphasis added).
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Shenker, 411 Md. at 338-39.
The Court of Appeals noted that its decision was consistent with the Delaware
Supreme Court’s holding in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506
A.2d 173 (Del. 1986). The Court stated:
In that case, the Delaware Supreme Court held that, where it is clear that the
board has determined that the corporation is for sale or sale is a foregone
conclusion, the duty of the directors “changed from the preservation of [the
corporation] as a corporate entity to the maximization of the company’s value
at a sale for the stockholders’ benefit.” Revlon, 506 A.2d at 182. The court
noted that, at this point, the “directors’ role changed from defenders of the
corporate bastion to auctioneers charged with getting the best price for the
stockholders at a sale of the company.” Id.
Shenker, 411 Md. at 340. The Court of Appeals explained that “Revlon and the duties that
it described are aimed at the duties involved in a situation where sale of the corporation is
a foregone conclusion and the primary remaining interests are those of the shareholders in
maximizing their share value in a sale.” Id. at 341.
The Court concluded that CA § 2-405.1 did not supersede the common law duties
“in Maryland, including those characterized in Revlon, that, when faced with an inevitable
or highly likely change-of-control situation, corporate directors owe their shareholders
fiduciary duties of candor and maximization of shareholder value.” Id. It held that, “[o]nce
the threshold decision to sell Laureate was made, Board Respondents owed fiduciary duties
of candor and maximization of shareholder value to Petitioners, common law duties not
encompassed or superseded by § 2-405.1(a).” Id. Thus, pursuant to Shenker, the events
triggering the common law duties of maximization of value and candor, which are owed to
a shareholder and permit a direct action, are when “the decision is made to sell the
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corporation,” the “sale of the corporation is a foregone conclusion,” or the sale involves
“an inevitable or highly likely change-of-control situation.” Id. at 338, 341.
The Court of Appeals did not, in Shenker or in any subsequent case, explain what
factual scenarios satisfy the above triggering events. Accordingly, in assessing whether
the FedFirst directors had duties of maximization of value and candor owed to the
shareholders in the merger transaction here, we look to other jurisdictions for guidance. In
particular, because the Court of Appeals relied on the Delaware Supreme Court’s decision
in Revlon, we look to the decisions of the Delaware courts.
The Delaware Supreme Court has made clear that not every corporate combination
triggers a duty to maximize shareholder value. See Paramount Commc’ns v. Time Inc.,
571 A.2d 1140, 1151 (Del. 1989) (Revlon duties do not arise simply because a company is
“in play’ or “up for sale.”). In Time, the court held that the Time Board did not put the
corporation up for sale, or make the dissolution of the corporate entity inevitable, and
therefore trigger Revlon duties, merely by entering into a merger agreement with Warner
Communications, Inc., even where the agreement contained a “no-shop” clause and other
structured safety devices to protect the agreement. Id.22
Rather, the Revlon duties have been held to apply in only limited circumstances. To
date, Revlon duties have been found to apply only in the following scenarios:
22
As the Delaware Supreme Court subsequently noted, the transaction that
ultimately was consummated in Time-Warner, however, “was not a merger, as originally
planned, but a sale of Warner’s stock to Time.” Paramount Commc’n v. QVC Network
Inc., 637 A.2d 34, 47 (Del. 1993).
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(1) “when a corporation initiates an active bidding process seeking to sell
itself or to effect a business reorganization involving a clear break-up of the
company,” Paramount[, 571 A.2d at 1150]; (2) “where, in response to a
bidder’s offer, a target abandons its long-term strategy and seeks an
alternative transaction involving the break-up of the company,” id.; or (3)
when approval of a transaction results in a “sale or change of control,”
[Paramount Commc’n v. QVC [Network Inc.], 637 A.2d [34,] 42-43, 47
[(Del. 1993)].
Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1289-90 (Del. 1994). We thus
address these facts in the context of the claims raised in this case.
D.
FedFirst
1.
Applicability of Revlon/Shenker Duties
In assessing whether Revlon duties, referred to by the Court of Appeals in Shenker,
apply to the directors in the case, we note that there is no allegation that FedFirst initiated
an active bidding process or abandoned a long-term strategy to seek to break up the
company. Rather, the directors merely explored options for a potential merger, which they
would then present to the stockholders for approval.23
These facts do not support a conclusion, pursuant to Shenker, 411 Md. at 338, 341,
that Revlon duties applied because “the decision [had been] made to sell the corporation”
23
Pursuant to CA § 3-105, a board of directors proposing to merge the corporation
submits the proposed transaction to the shareholders for approval. Directors of a
corporation have a duty of loyalty to the shareholders in a merger, which typically is subject
to the business judgment rule, i.e., a presumption that the officers acted in good faith and
in the best interests of the corporation. Wittman v. Crooke, 120 Md. App. 369, 376-77
(1998).
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or “the sale of a corporation [was] a foregone conclusion.” See Arnold, 650 A.2d at 1290
(Revlon duties applicable to directors “seeking to sell” the corporation apply in the context
of the directors “initiat[ing] an active bidding process”); Time, 571 A.2d at 1151 (directors
did not put corporation up for sale or make dissolution of the company inevitable merely
by entering into a merger agreement). The only potential rationale raised for finding a
Revlon duty to maximize shareholder value, therefore, involves whether the transaction
involved a “highly likely change-of-control situation.” Id. at 341.
In that regard, the Delaware courts have addressed when a merger, other than a
cash-out merger, constitutes a “change of control” that triggers Revlon duties. In
Equity-Linked Investors, LP v. Adams, 705 A.2d 1040, 1055 (Del. Ch. 1997), the court
determined that Revlon duties apply in a stock-for-stock merger where there is “no
tomorrow for the shareholders (no assured long-term)” because the stock received is
subject to the control of a single individual or associated group who has majority control
over the merged entity. Id. By contrast, in the context of a stock-for-stock merger where
control of the merged entity will remain in a large, fluid, public market, Revlon duties do
not apply because there is no change-of-control. See Arnold, 650 A.2d at 1290 (No “sale
or change of control” triggering Revlon duty to maximize value in stock-for-stock merger
when “‘[c]ontrol of both [companies] remain[s] in a large, fluid, changeable and changing
market.’”) (quoting QVC, 637 A.2d at 47). Accord In re Santa Fe Pacific Corp. S’holder
Litig., 669 A.2d 59, 71 (Del. 1995) (plaintiff failed to state a claim that the board had a
duty to seek the best value where the board was committed to a stock-for-stock merger and
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plaintiff failed to allege that control of the company after the merger would not remain in
a large, fluid, changing market); Krim v. Pronet, Inc., 744 A.2d 523, 528 (Del. Ch. 1999)
(“Revlon duties are not triggered when ownership remains with the public shareholders and
no change of control results.”). See also James J. Hanks, Maryland Corporation Law,
§ 6.6A at 195 (“A sale of the business for cash—whether through merger, sale of assets or
otherwise—will always result in a change of control. Conversely, a stock-for-stock merger
will not be a change of control so long as there is no single stockholder or affiliated group
of stockholders who did not have effective voting control of the target before the
transaction but who will hold a majority of the voting power of the combined company
after the transaction.”).
In QVC, the Delaware Supreme Court explained why a stock-for-stock merger does
not result in a change of control where the remaining corporation is owned by a “fluid
aggregation of unaffiliated voters.” 637 A.2d at 46. In that regard, it noted its prior
decision in Time, 571 A.2d at 1150, where it approved the Chancellor’s conclusions
regarding when a change of control occurs, as follows:
Surely under some circumstances a stock for stock merger could reflect a
transfer of corporate control. That would, for example, plainly be the case
here if Warner were a private company. But where, as here, the shares of
both constituent corporations are widely held, corporate control can be
expected to remain unaffected by a stock for stock merger. This in my
judgment was the situation with respect to the original merger agreement.
When the specifics of that situation are reviewed, it is seen that, aside from
legal technicalities and aside from arrangements thought to enhance the
prospect for the ultimate succession of [Nicholas J. Nicholas, Jr., president
of Time], neither corporation could be said to be acquiring the other. Control
of both remained in a large, fluid, changeable and changing market.
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The existence of a control block of stock in the hands of a single
shareholder or a group with loyalty to each other does have real consequences
to the financial value of “minority” stock. The law offers some protection to
such shares through the imposition of a fiduciary duty upon controlling
shareholders. But here, effectuation of the merger would not have
subjected Time shareholders to the risks and consequences of holders of
minority shares. This is a reflection of the fact that no control passed to
anyone in the transaction contemplated. The shareholders of Time would
have “suffered” dilution, of course, but they would suffer the same type of
dilution upon the public distribution of new stock.
QVC, 637 A.2d at 46-47 (quoting Paramount Commc’ns Inc. v. Time Inc., No. 10866 (Del.
Ch. July 17, 1989)). The Court explained that a key reason behind imposing Revlon duties
is concern regarding actions where the shareholder’s voting power is diminished. Id. at 45.
Here, Mr. Sutton does not allege, for good reason, that control of the company after
the merger would not remain in a large, fluid, changing market. Thus, the merger did not
result in a “sale or change of control.” Arnold, 650 A.2d at 1270. Unlike the scenario
involved in the cash-out merger transaction in Shenker, FedFirst’s shareholders in this case,
by virtue of the stock portion of the merger agreement, have a continuing interest, including
voting power, in the combined company, and they can participate in the future successes
of CB Financial.24 Accordingly, there was no “sale or change of control,” and Revlon
duties were not triggered in this case.
24
To be sure, the transaction here was not a 100% stock-for-stock transaction.
Rather, the merger consideration here was a mix of cash and stock. The agreement
provided that 65% of FedFirst’s stock be traded for CB Financial stock and 35% of the
stock exchanged for cash. The parties do not argue that this fact, that the transaction was
a mixed stock and cash merger, is critical to the analysis whether there was a change of
control transaction implicating the Revlon duty to maximize value. We note, however, that
in In re Synthes, Inc. Shareholder Litigation, 50 A.3d 1022, 1047-48 (continued . . .)
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2.
Direct Action By Stockholders
Although the Court of Appeals in Shenker recognized an exception to the general
rule that a shareholder must bring a derivative action when challenging a merger
transaction, the exception was limited to situations where “the decision [was] made to sell
the corporation,” “the sale was a foregone conclusion,” or the sale involved “an inevitable
or highly likely change-of-control situation.” 411 Md. at 338, 341. None of these scenarios
are presented here where the directors merely entered into a merger agreement involving a
stock-for-stock transaction in which the combined corporation continued to remain in a
large, fluid, public market in which FedFirst’s stockholders were left with a continuing
interest in CB Financial.
Rather, given the circumstances of the merger agreement here, the Fedfirst directors
were acting pursuant to their managerial duties, and the duties owed were those set forth
in CA § 2-405.1, i.e., to perform in good faith, in the best interest of the corporation, and
with the care that an ordinarily prudent person would use. With respect to those duties, the
directors were entitled to the business judgment rule, which provides that the officers acted
(. . . continued) (Del. Ch. 2012), the Court of Chancery of Delaware held, in an almost
identical situation, that where merger consideration consisted of a mix of 65% stock and
35% cash, and the stock portion involved stock in a company whose shares were held in a
large, fluid market, the transaction did not result in a change of control that triggered Revlon
duties.
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in good faith and in the best interests of the corporation, and any claim regarding an alleged
breach of those duties was required to be brought derivatively on behalf of the corporation.
The Shenker exception that allows a shareholder to bring a direct action based on
the common law “non-managerial” duties of candor or maximization of value does not
apply here. Accordingly, Mr. Sutton did not have a direct shareholder action against the
directors, and because he dismissed his derivative action, the circuit court properly granted
the motion to dismiss Mr. Sutton’s claim against FedFirst and its directors.
E.
CB Financial – Aiding and Abetting
CB Financial argues that “the circuit court correctly held that the Amended
Complaint failed to state a claim for ‘aiding and abetting’ against CB Financial because
there was no underlying breach of fiduciary duties.” We agree.
As the Court of Appeals has explained:
One of the requirements for tort liability as an aider and abettor is that there
be a “direct perpetrator of the tort.” Thus, civil aider and abettor liability,
somewhat like civil conspiracy, requires that there exist underlying tortious
activity in order for the alleged aider and abettor to be held liable.
Alleco Inc. v. Harry & Jeanette Weinberg Found., Inc., 340 Md. 176, 200-01 (1995)
(citations omitted). As previously indicated, we have concluded that Mr. Sutton did not
state a cognizable cause of action against the FedFirst directors for breach of fiduciary
duties. Accordingly, his claim against CB Financial for aiding and abetting any such
breach similarly fails.
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In any event, even if the claim against the FedFirst directors survived, Mr. Sutton
failed to state a claim against CB Financial. To state a claim for aiding and abetting a non-
fiduciary, a plaintiff must allege, inter alia, facts that the aider and abettor “knowingly and
substantially assist[ed] the principal violation.” Holmes v. Young, 885 P.2d 305, 308 (Colo.
Ct. App. 1994). Sufficient facts in that regard were not alleged here.
In Shenker, 411 Md. at 353-54, the Court of Appeals addressed a similar claim. It
stated:
The allegations made by Petitioners fail to demonstrate that the
actions taken by Investor Respondents, alleged to have aided and abetted
Board Respondents’ breach of fiduciary duties, were anything more than
“those normally attendant to a private entity pursuing the private acquisition
of a public corporation.” The crux of Petitioners’ allegations seem to pin their
claim on the restrictive nature of the merger agreement presented by Investor
Respondents to Board Respondents. We fail to see how merely offering an
agreement containing penalties if Board Respondents solicited or accepted
competing bids for Laureate rises to the level of encouraging or inciting
Board Respondents’ alleged breach of their fiduciary duties.
Id. We similarly conclude here. Accordingly, the circuit court properly dismissed
Mr. Sutton’s claims against CB Financial for aiding and abetting.
F.
Declaratory Action
Mr. Sutton next contends that the declaratory judgment count in his amended
complaint should not have been dismissed. He asserts that he is entitled to a written
declaration of the rights of the parties.
In Popham v. State Farm Mutual Insurance Co., 333 Md. 136, 158 n.2 (1993), the
Court of Appeals explained that, where the circuit court is presented with an issue in a
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declaratory judgment action that is also presented in another count of the complaint,
resolution of the other count renders moot the need for a declaration. Here, because the
circuit court resolved the issues raised in Count III, seeking declaratory relief, in Counts I
and II, asserting claims against FedFirst and CB Financial, the resolution of the count
seeking declaratory relief was moot. Accordingly, the circuit court properly dismissed the
Amended Complaint without specifically addressing that claim.
MOTION TO DISMISS DENIED.
JUDGMENT AFFIRMED. COSTS
TO BE PAID BY APPELLANT.
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