Filed: June 6, 2012
Opinion by Judge Ronald B. Rubin
Held: Applying the standard newly announced by the Court of Appeals, by which trial courts are to assess the decisions of special litigation committees in response to shareholder demands, the circuit court held that the committee in this case used proper methods, focused on the correct issues, and reached a reasonable, good faith business decision. Accordingly, the court accepted its recommendation to terminate the pending derivative litigation.
Facts:In Boland v. Boland, 423 Md. 296 (2011), the Court of Appeals announced new standards to be used when trial courts review the decisions of a special litigation committee ("SLC") in a derivative suit. We analyzed that opinion, with a full account of the facts, in a previous post. The case was returned to the circuit court for disposition consistent with the standard.
Pursuant to the standard, the circuit court considered the evidence concerning how the SLC members were chosen, the relationships, if any, among the SLC and the company board(s), and the methods and procedures of the SLC investigation, the issues reviewed, and the basis for it conclusions.The circuit court was to determine whether there was a reasonable basis for the SLC's conclusions. The burden of proof was on the SLC to show its independence and the reasonableness of its investigation and conclusion(s).
BTA and BTS were related, closely held Maryland S corporations.They were owned by husband and wife, who issued stock over time to eight children and some long-term employees. Each recipient executed a stock purchase agreement ("SPA") that restricted transfer. After the death of the founder/husband, his wife sold her stock back to the companies for an annuity. This was followed by a series of stock sales to some but not all of the children. When the non-participating children found out, they were upset.
After one child/shareholder died, the executor of her estate refused to sell the stock back to the companies. The companies sued for a declaration seeking to enforce the SPA. Each stockholder was named as an interested party. The children/shareholders who had been left out of the latest stock sales then filed a counterclaim advancing claims against the board members of each corporation.The counterclaimants also filed a derivative action based on exactly the same facts.
The companies moved to dismiss, advising the court that the boards of both companies had voted to form an SLC of two newly appointed directors who did not participate in the offending stock transactions.The SLC also hired independent, outside counsel. The circuit court stayed the litigation pending the outcome of the SLC inquiry.
After an investigation, the SLC issued its report and recommended that the derivative action be terminated.
Analysis: As an initial matter, the circuit court noted that the factual allegations of the direct claims against the directors track those of the derivative complaint. The court assessed the viability of the claims as direct and/or derivative. Relying on the standard set forth in Paskowitz v. Wohlstadter, 151 Md. App. 1 (1993), the circuit court posed the relevant inquiry as two-fold: 1) who suffered the alleged harm, the corporation or the individuals; and 2) who would receive the benefit of any recovery?
The court summarized the thrust of the claims as: 1) the defendants improperly redeemed the mother's stock for insufficient consideration; and 2) the claimants were excluded from the "sweet deal" of the subsequent stock sales. The court concluded that the harm alleged was to the companies, not the individual stockholders suing. Thus, the claims should be considered derivative.
Next, the court assessed the independence of the SLC and its counsel.The court noted that the board undertook a lengthy search for suitable candidates. One of the new directors was an experienced CPA. The other an experienced lawyer. The SLC selected another experienced lawyer as outside, independent counsel. The SLC members and its counsel had no prior experience or contacts with the parties. On this basis, the circuit court concluded the search for and retention of the SLC directors was proper and that the SLC was independent.
Next, the court assessed the reasonableness of the SLC's investigation and conclusions. The court held that there is no formula or set procedure that an SLC must follow. In sum, the SLC must act reasonably to investigate the theories of recovery and obtain and review information relevant to the subject matter. Here, the SLC investigated for five months. It solicited briefs from all parties outlining their legal positions. The companies did so. The claimants did not.The SLC also obtained and reviewed relevant documents, interviewed 11 witnesses (including the key actors), and spent at least 160 hours in the process. The SLC met with counsel eight times before issuing a report. The SLC also relied on generally accepted stock valuation methodologies, sources of information, and four independent appraisals.
On that basis, the court held that the SLC understood its role, employed proper methods of investigation, and focused on the right legal and factual issues. The court concluded that the SLC reached a reasonable, good faith business decision, in a reasonable and fair manner, and it accepted its recommendation to terminate the derivative litigation.
The full opinion is available in pdf.
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