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Maryland Law Update: How a Board Might Exercise Business Judgment When a Shareholder Makes a Demand (Part II)

On Behalf of | Aug 4, 2016 | Business Management, Maryland Law update, Uncategorized

In Oliveira v. Sugarman,[1] two shareholders of iStar Financial Inc. (“iStar”), a Maryland corporation, sued former and current members of the company’s board of directors and senior management regarding employee compensation plans. In 2009, iStar approved an executive compensation plan to award shares of the company based on stock performance in order to retain key employees and to reduce the company’s tax burden. During the financial crisis, however, iStar became concerned that it did not have enough shares available for the performance-based awards and that key employees might leave for better-paying opportunities. So in 2011, after four board meetings and 11 compensation committee meetings, as well as discussions with legal, accounting, and compensation advisors, the board converted the performance-based awards to service-based awards.

Subsequently, the shareholders demanded that the board investigate and rescind the 2011 modification. In response, the board formed an investigative committee of a single, outside, non-management director who joined the board after the alleged wrongdoing and had no business, personal, social, or other relationships with any member of the board. iStar also retained outside counsel—a very well-respected law firm that had no prior relationships with iStar or its board members—to assist in the investigation and make a recommendation to the board. After a thorough investigation, which consisted of meetings between the committee and the counsel, reviews of relevant documents, and interviews of iStar board members, management, and outside directors and counsel, the committee recommended that the board refuse the shareholders’ demand. The board asked counsel to draft a letter explaining the reasons for refusing the demand, discussed the letter in a board meeting, and unanimously determined that pursuing the litigation demanded by the shareholders would not serve the best interests of the company. The shareholders then sued, claiming that the board members breached their fiduciary duties and wasted corporate assets by approving the 2011 modification.

This post was the second part of a multi-part series on pre-suit demand and business judgment rule under Maryland law. You can find the other posts by searching our blogs at  In our next post, we will discuss what the appeals court had to say about the iStar board’s decision to refuse the shareholders’ demand.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers, and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] Oliveira v. Sugarman, No. 1980 (Md. Ct. Spec. App., Jan. 28, 2016). Unless otherwise noted, all references to the case are from this citation.