Bontempo v. Lare (Md. Ct. Spec. App.)

Filed: April 30, 2014

Opinion by: Douglas R. M. Zanarian

Holding:

(1) When a minority stockholder petitions a court for dissolution pursuant to Md. Code Ann., Corps. & Ass’ns § 3-413 (the “dissolution statute”), such stockholder’s rights will be informed by any existing stockholder agreement and, where there is no evidence of a deadlock of the board of directors or that the company is likely to become insolvent, the court has discretion under the statute to order alternatives to the extraordinary remedy of dissolution.

(2) The dissolution statute does not provide for personal liability, even if fraud is proven.

(3) The proper remedy when a court finds an officer or director has breached his or her fiduciary duties to the company by diverting money from the company for personal use is an order directing such officer or director to repay such money to the company, not an order requiring the company to declare equivalent distributions for all stockholders.

(4) An award of attorneys’ fees and expenses is only appropriate if the injured company has recovered a common fund.

(5) It is the trial court’s role to determine a party’s credibility and whether evidence is sufficient to support the existence of an oral contract.

Facts: Plaintiff became a minority stockholder of Quotient, Inc. (“Quotient”), a close corporation organized under Maryland law, in 2001. Plaintiff executed a shareholder agreement with the other stockholders of Quotient – the defendants, the Lares (a husband and wife collectively owning 55% of the stock in Quotient). In addition to being a director and officer of Quotient, Plaintiff was also an employee pursuant to an oral agreement with Mr. Lare, which Plaintiff alleged included that he would receive a salary equal to that of the Lares combined. In addition to certain “perks” (e.g., company credit cards for gas, meals and entertainment and a corporate fitness trainer), paid for by Quotient and received by Plaintiff and the Lares, the Lares began paying household employees from Quotient’s payroll account in 2006, advanced interest-free loans from Quotient to two companies in which the Lares had an interest and took a loan from Quotient for renovations to the Lares’ personal home. The relationship between Plaintiff and the Lares began to sour and in 2010 Mr. Lare terminated Plaintiff’s employment with Quotient after Plaintiff refused to voluntarily resign and sell his shares in Quotient. Plaintiff remained an officer and director of Quotient for six months after termination, however, and continued to receive distributions as a stockholder. Plaintiff filed suit against the Lares seeking relief pursuant to Maryland’s dissolution statute and asserted derivate claims on behalf of Quotient for imposition of a constructive trust, breach of fiduciary duty, and constructive fraud and a direct claim for breach of contract.

The trial court ruled in favor of Plaintiff as to his petition for dissolution; however, the trial court refused to dissolve Quotient and instead ordered Quotient to pay Plaintiff $167,638 in damages. The trial court also ruled in favor of Plaintiff as to his claim for breach of fiduciary duty and ordered that the misappropriated funds be treated as a distribution from Quotient and ordered Quotient to pay Plaintiff a proportionate amount, including attorney’s fees, but ruled in favor of the Lares as to Plaintiff’s claim for constructive fraud. The trial court ruled in favor of Plaintiff as to his claim for breach of contract and ordered Quotient to pay Plaintiff $81,818.18 in unpaid distributions, but refused to find an oral equal-compensation contract existed. Both parties appealed.

Analysis: The Court affirmed the holding of the trial court, including the trial court’s refusal to dissolve Quotient; however, it found that the trial court erred in how it allocated the damages.

Although the Court upheld the trial court’s finding, not contested on appeal, that Mr. Lare’s behavior met the standard for oppressive conduct, particularly his threat and ultimate firing of Plaintiff for refusing to voluntarily resign and sell his shares in Quotient, the Court also upheld the trial court’s conclusion that dissolution was not the only available remedy. The Court noted that it was Plaintiff’s status as a stockholder of Quotient, as defined by the shareholder agreement, that defined and bound the rights he was entitled to vindicate under the dissolution statute and the appropriate remedies. Unlike in Edenbaum v. Shcwarcz-Osztreicherne, 165 Md. App. 233 (2005), the Court noted that the shareholder agreement did not mention Plaintiff’s employment rights, thus the shareholder agreement did not give Plaintiff a reasonable expectation of employment or provide an enforceable to such. Instead, the Court found that Plaintiff was entitled to participate in distributions and the affairs and decisions of Quotient consistent with his status as a stockholder. Although Mr. Lare’s actions frustrated such rights, Plaintiff had resigned from Quotient’s board of directors and thus there was no evidence of a deadlock justifying dissolution, nor was there any evidence to suggest that, despite the use by the Lares of Quotient’s funds for personal expenses, Quotient was likely to become insolvent. Therefore, the extreme remedy of dissolution was inappropriate.

The Court also held that the Lares could not be personally liable under the dissolution statute, even if their actions constituted fraud, because the purpose of that statute is to vindicate the reasonable expectations of minority stockholders, in such capacity, against oppression by majority stockholders. Plaintiff’s injury as a minority stockholder was lost distributions, and thus, Plaintiff was made whole by accounting to determine how much money the Lares diverted from Quotient and an order to pay distributions to Quotient stockholders based on the amounts diverted.

The Court also agreed that the Lares had breached their fiduciary duties as directors and officers of Quotient by diverting money from Quotient for personal use; however, the Court held that the trial court erred in ordering a distribution to all stockholders as a remedy. The Court noted that it was Quotient, not Plaintiff, who was harmed because it was Quotient’s money that was taken by the Lares and, thus, distributions would not make Quotient whole but would instead take more money from Quotient. The Court held that the appropriate remedy would have been ordering the Lares to repay Quotient for the money taken. Because such payment would result in a recovery by Quotient of a common fund, the Court noted that an award by the trial court on remand of attorneys’ fees and expenses would be appropriate under the common fund doctrine.

Despite holding that the Lares had breached their fiduciary duties to Quotient, the Court affirmed the trial court’s ruling in favor of the Lares as to Plaintiff’s claim for constructive fraud. Although constructive fraud usually arises from a breach of fiduciary duty, the Court noted that they are not equivalent and that “a director can breach fiduciary duties without committing fraud.” The Court found that, although the Lares had used bad judgment in using funds from Quotient for their personal expenses, they had not engaged in a long course of illegal or fraudulent conduct, especially since all of the transactions were recorded on the books of Quotient and Plaintiff had access to such books. For the same reason, the Court found that the Lares did not act with malice.

Finally, the Court found that the trial court committed no error in refusing to find that an oral equal-compensation contract existed between Plaintiff and Quotient. Although Plaintiff and his wife testified to the oral equal-compensation agreement and evidence showed that Plaintiff was paid a salary equal to the Lares for four years, there was also evidence that, for multiple years in the beginning and towards the end of his employment, the salaries of Plaintiff and the Lares differed significantly. The Court noted that it was the trial court that heard the evidence and it was not for the Court to determine on appeal whether the trial court gave appropriate weight to the parties’ credibility.

The full opinion is available in PDF.

Boland Trane Associates v. Boland (Mont. Co. Cir. Ct.)

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.

Weinberg v. Gold, et al. (Maryland U.S.D.C.)

Filed: March 12, 2012
Opinion by Judge James K. Bredar

Held: In a shareholder's derivative suit, the plaintiff shareholder failed to plead sufficient factual allegations to excuse demand on the corporation under the demand futility exception set forth in Werbowsky v. Collomb, 766 A.2d 123 (Md. 2001).

Facts: Plaintiff Arnold Weinberg (the "Shareholder") brought a derivative suit against various officers and directors of Biomed Realty Trust, Inc. (the "Company") alleging, among other things, breach of fiduciary duty for failing to rescind approval of an executive compensation plan rejected in a "say on pay" vote by the shareholders of the Company. The plan was formulated by a three-member compensation committee of directors and approved by the board. The issue before the Court was whether the Shareholder pled sufficient factual allegations to justify filing the suit without first making a demand on the Company.

Analysis: The Court cited Werbowsky v. Collomb, 766 A.2d 123 (Md. 2001) as the most recent, authoritative exposition of Maryland law on the issue of demand futility. Werbowsky affirmed the demand futility exception but limited it to matters in which the "allegations or evidence clearly demonstrate, in a very particular manner, either that (1) a demand, or a delay in awaiting a response to a demand, would cause irreparable harm to the corporation, or (2) a majority of the directors are so personally and directly conflicted or committed to the disputed decision that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule."

Recognizing the Werbowsky court's clear statement that mere participation in or approval of the challenged transaction by the directors does not excuse demand, the Court dismissed the Shareholder's argument that demand was futile because each director named in the suit was on the board when the compensation plan was approved, three directors were members of the compensation committee and two of the seven directors were officers of the Company and beneficiaries of the compensation plan. The Court recognized that the two directors who were officers of the Company and beneficiaries of the compensation plan were arguably "so personally and directly conflicted" that they could not reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule. However, Werbowsky requires that a majority of the board be so personally disqualified before demand is excused. Likewise, the fact that directors are named in the suit does not mean that prior to the suit demand would have been futile. It if did, the Court opined, the demand requirement would be nullified in every suit that named directors are defendants.

The Shareholder also sought to excuse demand on the basis that the directors' actions were not the product of valid business judgment. Werbowsky, however, implicitly disallows consideration of the merits of the case in analyzing demand futility. While recognizing that a "say on pay" vote can arguably provide the board with an opportunity to reconsider its executive compensation decisions, the Court concluded that it is not the equivalent of a pre-suit demand. Such a vote can, however, be reasonably considered as a non-conclusive factor in the demand futility analysis. The Court also rejected the Shareholder's analysis of the "say on pay" vote under Ohio and Delaware standards for demand futility because neither standard is comparable to the standard set forth in Werbowsky.

The full opinion is available in pdf.

Boland v. Boland; Boland v. Boland Trane Associates, Inc. (Ct. of Appeals)

Filed: October 25, 2011
Opinion by Judge Sally D. Adkins.

Held:

Holding 1: After a motion to dismiss or for summary judgment against a derivative plaintiff, Maryland courts must review a special litigation committee's ("SLC") independence, and whether it made a reasonable investigation and principled, factually-based conclusions. In this inquiry, the SLC is not entitled to a presumption that it was sufficiently independent from a corporation's directors.

Holding 2: When a court grants summary judgment in a derivative suit based on an SLC's determination that continuing the lawsuit is not in the corporation’s best interest, that court decision is not a final adjudication on the merits so as to preclude a direct suit under the doctrine of res judicata. The court makes no determination of the merits of the allegations when reviewing an SLC's decision. Moreover, a direct action, which asserts individual rights, is an entirely different cause of action than a derivative action, which is brought on behalf of the corporation.

Facts: Two lawsuits arose when a family business, consisting of two corporations and owned primarily by eight siblings (collectively, the "Corporation"), attempted to repurchase the stock of one sister upon her death pursuant to a Stock Purchase Agreement. When the sister's estate refused to sell the stock, the Corporation filed a declaratory judgment action seeking enforcement of the Stock Purchase Agreement. Meanwhile, non-director siblings who had learned of earlier stock transactions that resulted in director siblings acquiring additional corporate stock for themselves, sent a demand for litigation to the Corporation and filed a derivative action in the Circuit Court alleging self-dealing and a breach of fiduciary duty. They also filed "direct" claims, as cross-claims in the declaratory judgment action.

In response, the corporations appointed an SLC consisting of two newly hired "independent directors" to examine the claims. The SLC determined that the stock transactions were legitimate and the Stock Purchase Agreement was enforceable.

The Circuit Court, applying the business judgment rule, deferred to the judgment of the SLC and granted summary judgment to the Corporation on the derivative action. The Circuit Court also dismissed the cross-claims relying on res judicata.

Analysis: On appeal in the Court of Appeals, the Court upheld the application of the business judgment rule by the Circuit Court and held that after a motion to dismiss or for summary judgment against a derivative plaintiff, Maryland courts must review the SLC’s independence, and whether it made a reasonable investigation and principled, factually-based conclusions. However, in this inquiry, the SLC is not entitled to a presumption that it was sufficiently independent from the directors. Because the Circuit Court presumed the independence and good faith of the SLC without requiring that the Corporation prove the SLC's independence, the Court of Appeals vacated the Circuit Court's judgment and remanded for further proceedings.

The Court referred to its holding as an "Auerbach enhanced" standard, in reference to Auerbach v. Bennett, 393 N.E.2d 994 (N.Y. 1979). In so holding, the Court rejected the so-called Zapata standard under which Delaware courts review a SLC’s recommendation on the merits, applying their “independent business judgment.”

The Court reasoned that "a procedural review under the business judgment rule, although clearly the more deferential standard [toward the Corporation], nonetheless provides for a thorough review of an SLC’s independence, good faith, and methodology, and such inquiry gives trial courts the ability to scrutinize SLC decisions and protect shareholders against collusive practices or inadequate investigations."

On the issue of whether the non-director siblings' "direct" claims, brought as cross-claims in the declaratory judgment action were precluded by res judicata, the Court held that the Circuit Court's grant of summary judgment in the derivative action, based on a recommendation of the SLC, does not form a basis for res judicata because it is not a determination on the merits. Accordingly, the Court held that a trial court's resolution of a derivative complaint, when based on the recommendation of an SLC, cannot be said to be a final judicial resolution on the merits of the claims.

The full opinion is available in PDF.

The George Wasserman and Janice Wasserman Goldsten Family Limited Liability Company v. Kay (Ct. of Special Appeals)

Filed: February 9, 2011

Opinion by Judge James R. Eyler

Held: A claim brought by partners in a general partnership or members of an LLC against a managing partner or managing member will survive a motion to dismiss if they sufficiently allege they suffered harm directly and the managing partner or managing member violated duties owed to the partners or members.

Facts: Plaintiffs are partners in five real estate investment general partnerships and two real estate investment LLCs. Defendants are Mr. Kay, an individual that is the managing member or de facto managing member or partner of the partnerships and LLCs, and Kay Management Company, Inc. and Kay Investment Group, LLC, two entities controlled by Kay. Plaintiffs alleged Defendant took money from the partnerships and LLCs and invested the money with Kay Investment through Kay Management. In turn, Kay Investment invested the money with the Bernard Madoff entities. Plaintiffs brought suit following the Madoff ponzi scheme collapse.

The complaint set forth thirteen counts, including, among others, fraud, breach of fiduciary duties, conversion, civil conspiracy and negligence. The Circuit Court granted Defendant's motion to dismiss because none of the claims were individual, the derivative claims involving the partnerships were not agreed to by a majority of the partnership, and the failure to make demand on behalf of the LLCs was unexcused.

Analysis:

After a lengthy discussion of corporations, general partnerships and LLCs, the Court framed the principal issues on appeal as (1) whether Plaintiffs may assert individual claims against Kay and (2) whether Plaintiffs may bring derivative claims on behalf of the partnerships and LLCs against Kay.

(1) Individual Claims

Applying logic from Shenker v. Laureate Education, Inc., which permitted a shareholder to bring a direct action when the shareholder suffers the harm directly or duties owed to the shareholder have been violated, the Court extended the rationale to the law of partnerships and LLCs. The Court then concluded Plaintiffs sufficiently alleged (a) they suffered harm directly and (b) Kay violated duties owed directly to the Plaintiffs.

Plaintiffs alleged Kay took funds that were required to have been distributed. He also took funds required to be held in reserve, further injuring Plaintiffs by forcing them to replace the removed reserves.

Under the Revised Uniform Partnership Act, general partners owe each other, not just the partnership, fiduciary duties. Section 9A-405(b) of the RUPA "clearly provides a mechanism through which partners can sue other partners directly for breach of those obligations and others." However, there is no statute in Maryland expressly addressing LLC members' fiduciary duties. The Court, after finding managing members to be "agents for the LLC and each of the members, which is a fiduciary position under common law," again applied rationale from Shenker, to state where no statute precludes or limits fiduciary duties under common law, the underlying duties apply. Accordingly, the Court found Kay's fiduciary duties as the managing partner/member to run to the partnerships, the LLCs, the partners and the members.

(2) Derivative Claims

The Court found the term "derivative" inappropriate in a general partnership context. Derivative actions are necessary in a corporate and limited partnership context because shareholders and limited partners have no management rights. "Unlike shareholders and limited partners, however, general partners all have the ability to act on behalf of the partnership, and all have management rights." Accordingly, no need for a derivative action exists. The Court turned to whether minority general partners can bring claims against other partners. The Court cited many sections of RUPA to conclude all partners have equal ability to enforce rights involving partnership property. While section 9A-405(j) of RUPA requires unanimous consent of all the partners, the Court felt it should be tempered "when non-plaintiff partners have conflicts of interest." Instead, "the unanimity requirement should not apply to defendant partners and other interested partners."

However, based on the facts, the Court found a suit on behalf of the partnerships unnecessary because Plaintiffs adequately alleged an individual direct injury. If Plaintiff's prove the allegations, complete relief will be afforded. The derivative claims on behalf of the LLC were rejected for the same reason.

Note: In discussing fiduciary duties in the LLC context, the Court, citing section 4A-402(a) of the Maryland Limited Liability Company Act, notes that "one Maryland statute governing LLC operating agreements does suggest that provisions within operating agreements could alter existing duties or create other duties..." However, no such provisions were alleged in the case.

The full opinion is available in pdf.

Boland v. Boland (Ct. of Special Appeals)

Filed: September 14, 2010
Opinion by Judge Deborah S. Eyler

Held: Courts must apply the business judgment rule in reviewing the decision of a board’s special litigation committee not to pursue a derivative claim alleging self-dealing.

Facts: Certain shareholders (the “Shareholders”) of Boland Trane Associates, Inc. and Boland Trane Services, Inc. (collectively, the “Corporations”) filed derivative claims against the Corporations, alleging that their directors engaged in self-dealing transactions. The directors appointed a special litigation committee to investigate whether to pursue the derivative claims. After conducting an investigation, the committee determined that the claims had no merit and advised that the directors seek to have the claims dismissed.

The circuit court granted summary judgment in favor of the Corporations, deferring to the special litigation committee’s decision under the business judgment rule. The Court of Special Appeals affirmed.

Analysis: The Court of Special Appeals held that the business judgment rule was the proper standard of review. Maryland case law has already addressed the level of deference courts must give to determinations of special litigation committees. A new standard does not apply simply because the Shareholders characterize their claims as alleging self-dealing. Unless the actual members of the special litigation committee themselves engaged in self-dealing (which was not the case), the court must defer to the committee’s decision in accordance with the business judgment rule.

The full opinion is available in pdf.

Shoregood Water Company, Inc. v. U.S. Bottling Company (Maryland U.S.D.C.)

Filed: May 11, 2010

Opinion by Judge Richard D. Bennett

Held: Under Maryland law and Federal Rule of Civil Procedure 23.1, when a shareholder seeks to pursue a derivative action on behalf of a corporation in receivership, the shareholder must allege with particularity any efforts to have the receiver institute suit or why such efforts would be futile.

Facts: Shareholders of companies in receivership, which also were also defendants in litigation, alleged derivative counterclaims on behalf of the companies. The shareholders alleged that the companies lacked the resources to prosecute the claims. The shareholders did not explain whether the companies exhausted their legal proceedings, nor did they describe the circumstances surrounding the companies' actions in seeking redress. The shareholders also failed to allege with particularity any effort to make the receiver institute suit or why such efforts would be futile. Accordingly, the Court dismissed the shareholder derivative actions under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.

The full opinion is available in PDF.

Shenker v. Laureate Education, Inc. (Ct. of Appeals)

Filed November 12, 2009
Opinion by Judge Glenn T. Harrell, Jr.

Held: Where corporate directors exercise non-managerial duties outside the scope of §2-405.1(a) of the Maryland Corporations and Associations Article, such as negotiating the price that shareholders will receive for their shares in a cash-merger after the decision to sell the corporation has already been made, they owe their shareholders common law duties of candor and good faith efforts to maximize shareholder value and shareholders may bring direct claims for breach of those fiduciary duties.

Facts: In 2006 and 2007, Laureate Education, Inc., a publicly-held Maryland corporation, underwent a private acquisition process whereby several directors ("Board Respondents") and private equity investors ("Investor Respondents") purchased Laureate through a cash-out merger transaction.

In June 2006, Laureate's Chairman and CEO Douglas L. Becker informed the Board of Directors that he intended to make an offer to purchase Laureate, at which time the Board created a Special Committee composed of three independent directors, who retained a law firm and financial advisors. The Special Committee approved Becker's second offer to purchase Laureate for $60.50 per share and unanimously recommended that the Board approve the proposed transaction on January 28, 2007.

On January 30, 2007, various Laureate shareholders ("Petitioners") challenged the proposed merger on the grounds that the Board Respondents breached their fiduciary duty, that they conspired to breach those duties, and that they and the Investor Respondents aided and abetted that breach.

The Circuit Court granted Respondents' motions to dismiss, dismissing the action as an impermissible direct shareholder suit where the Petitioners had "failed to allege a cognizable duty owed them" by Investor Respondents.

In June 2007, Laureate announced that it had accepted an increased offer from Investor Respondents to acquire Laureate at $62 per share by way of a tender offer and second-step merger. The Special Committee's financial advisors again concluded the offer as financially fair, although several of Laureate's institutional shareholders disagreed, and the Board approved the transaction. Petitioners filed a second complaint in the Circuit Court alleging that the Board Respondents breached their fiduciary duties owed to Petitioners and the Circuit Court again dismissed the claims.

The Circuit Court held that a direct action against corporate directors for alleged violations of fiduciary duties is unavailable in Maryland because §2-405.1(g) forecloses exactly these types of claims. Petitioners appealed to the Court of Special Appeals, which affirmed the Circuit Court's dismissal, holding that §2-405.1(g) bars all direct shareholder claims and that any claims by shareholders against directors for breach of fiduciary duties must be brought derivatively on behalf of the corporation.

Analysis: The Court of Appeals disagreed with the Circuit Court and the Court of Special Appeals that §2-405.1(a) provides the only source of duties owed by corporate directors and that §2-405.1(g) bars all direct shareholder claims against those corporate directors for breach of their fiduciary duties. The Court held that such conclusions are erroneous and shareholders may indeed bring direct suits against corporate directors for breach of common law duties of candor and good faith efforts in particular circumstances, such as in the context of a cash-out merger transaction.

The Court stated that directors and officers owe a duty of care to the corporation and its shareholders under §2-405.1(a). Petitioners conceded that §2-405.1(a) governed the sole source of directorial duties in instances that involve the management of the business and affairs of the corporation. However, Petitioners argued, additional common law duties are triggered once a "threshold decision to sell the corporation has been made and which concern only matters personal to the shareholders." The Court agreed, holding that directors of Maryland corporations owe fiduciary duties of candor and maximization of shareholder value to their shareholders beyond those enumerated in §2-405.1(a) made outside the purely managerial context, such as when faced with an inevitable or highly likely change-of-control situation, and at least in the context of negotiating the amount shareholders will receive in a cash-out merger.

In the context of a cash-out merger, the Court stated, directors assume a different role than solely "managing the business and affairs of the corporation." The Court cited the pivotal Delaware case Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) numerous times in support of its holding that duties concerning the management of the corporation's affairs change after the decision is made to sell the corporation. Directors act as fiduciaries on behalf of the shareholders in negotiating a share price that shareholders will receive. The Court also stated that a 1997 opinion by the Maryland Attorney General suggests that the General Assembly did not seek to occupy the entire field of directorial duties owed by corporate directors in enacting §2-405.1(a), but instead intended to codify the duty of care owed by directors in exercising their managerial duties.

In addition to its holding regarding directors' fiduciary duties to shareholders in particular situations, the Court also held that the Court of Special Appeals erred in holding that §2-405.1(g) bars all shareholder direct claims. Claims for breach of common law fiduciary duties of candor and maximization of shareholder value may be brought directly by shareholders despite the language of §2-405.1(g). The Court held that Petitioners in this case were not restricted to derivative claims and could pursue direct claims for breach of fiduciary duty because the shareholders were owed direct fiduciary duties from the Board Respondents. In support of this holding, the Court noted that the injury alleged here, that shareholders received too low a value for their shares in a cash-out merger, was an injury suffered solely by the shareholders and not Laureate as a corporation. Laureate's interests would not be implicated by the price received by shareholders, nor would it suffer harm as a result of the price.

The Court agreed with the Court of Special Appeals and rejected the civil conspiracy claims, holding that "a defendant may not be adjudged liable for civil conspiracy unless that defendant was legally capable of committing the underlying tort alleged."

The Court also affirmed the Court of Special Appeals in rejecting the aiding and abetting claims, holding that the actions of the Investor Respondents were not out of the normal course of business practices.

The full opinion is available in PDF.