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

On Behalf of | Aug 11, 2016 | Business Management, Maryland Law update, Uncategorized

In Oliveira v. Sugarman,[1] the Court of Special Appeals of Maryland said that, in reviewing corporate decisions made by a board of directors, it needs to consider the business judgment rule—a presumption that the board 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. The court explained that a shareholder derivative action, like this one, begins with a demand on the board and the board is required to make a decision as to whether to pursue the demanded lawsuit. In doing so, the board must conduct an investigation into the allegations in the demand and determine whether pursuing the demanded lawsuit is in the best interests of the corporation. If the corporation, after investigation, fails to take the action requested by the shareholder, the shareholder then may bring a lawsuit on behalf of the corporation, which is where this case was at.

Here, the shareholders claimed that the iStar board was somehow tainted and, thus, the business judgment rule did not apply. The court found, however, the board consisted of a majority of disinterested and independent directors—only a single director was alleged to have received the original performance-based awards and the remaining five directors were nothing more than outside, non-management directors that did not receive any of the awards. The shareholders also alleged that the board’s investigation of the shareholders’ demand was rife with impropriety. The court found, however, that the investigative committee member was sufficiently experienced (40 years of business and board experience), was independent (no personal, social, or other relationships with anyone on the board), hired highly respected and experienced legal counsel to assist him, and conducted multiple interviews. Finally, the court examined the board’s letter explaining why the board elected to refuse the shareholders’ demand. As the board explained, the modified awards saved the company tens of millions of dollars, and pursuing the claims raised in the shareholders’ demand would not be in the best interests of the company because of legal fees in excess of any benefits that the company might receive from winning the lawsuit. Thus, the court found that the board’s refusal of the shareholders’ demand was a proper exercise of business judgment and affirmed the lower court’s dismissal of the shareholders’ claims.

So what is a board of directors to do when a shareholder makes a demand? Oliveira shows that a majority of disinterested and independent directors following reasonable procedures to investigate the demand will be entitled to the presumptions afforded by the business judgment rule.

This post was the third 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  If you have any questions about the content of this blog or other business law issues not discussed here, please contact us.

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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.