Lavine v. American Airlines, Inc. (Ct. of Special Appeals)

Filed: December 1, 2011

Opinion by Judge James Kenney III

Held: A "no oral modification" clause of a contract can preclude oral modifications where it constrains the authority of agents to act without written authorization from a corporate officer.

Facts: This case arises from a contract dispute between an airline and two airline passengers. Passengers booked airline tickets online and received an "E-Ticket Confirmation" email which included a link "Conditions of Carriage" providing the terms and conditions of the contract. The "Conditions of Carriage" stated in part, "[n]o agent, employee or representative of American has authority to alter, modify or waive any provision of the Conditions of Carriage unless authorized in writing by a corporate officer of American."

Due to a delay in the passengers outbound flight, an employee of the airline represented to passengers that a connecting flight would be provided. The outbound flight did not arrive at the connecting destination in time to board the connecting flight. The passengers were not provided a substitute connecting flight until the following day. The passengers contend that the airline employee's representation orally modified the terms of the contract.

Analysis: Even if an employee's representations amount to what would generally be an oral modification to a contract, the modification would not have been valid because of the specific language in the non-modification clause. The Court did not address whether or not the employee's representation otherwise would amount to an oral modification. The Court only addressed whether the employee had authority to make a modification.

[ed. Compare this result with the one in Hovnanian Land v. Annapolis Towne Ctr., 415 MD. 337, 1 A.3d 467 (2010), where the Court of Appeals held that a condition precedent may be waived by a party's conduct despite a non-waiver clause which required any waiver to be in writing.]

In Lavine, the Court held a non-modification clause of a contract which provides that no agent, employee or representative of the party has authority to alter, modify or waive any provision of the contract unless in writing by an officer of the party will withstand challenges that a contract has been orally modified, so long as the agent, employee or representative that made the oral modification did not have written authorization.

The full opinion is available in pdf.

Roger E. Herst Revocable Trust, et al. v. Blinds to Go (U.S.) Inc., et al. (Maryland U.S.D.C.)

Filed: October 26, 2011

Opinion by Judge Ellen Lipton Hollander

Held: When a tenant is contractually obligated to pay rent even after acts that could be considered termination of the lease as a matter of real property law, the damage principles of contract law apply and, in the absence of a lease provision with reasonable clearness to the contrary, a defaulting tenant is entitled to the benefit of any excess rent realized from reletting the premises.

Facts: Crest Net Lease, Inc., as landlord, entered into a triple net commercial Lease with Blinds to Go (U.S.) Inc. ("BTG"), as tenant, on September 21, 2011 and entered into a Guaranty with Blinds to Go Inc. ("BTG's Parent"), the parent company of BTG, on the same date for the guaranty of the obligations of BTG under the Lease. On August 21, 2011, Crest Net Lease, Inc. assigned all of its right, title and interest in the Lease and Guaranty with the Blinds to Go entities to the plaintiffs, Roger E. Herst Revocable Trust, Dr. Roger E. Herst, Trustee of the Roger E. Herst Revocable Trust, and Joshua R. Herst (collectively, the "Plaintiffs"). Under the terms of the Lease, all rent was due and payable on the first day of each calendar month during the term and there was a late charge of 3% of the monthly rent each time the rent was late and interest also accrued on all amounts that had not been paid to the landlord at the rate of 5.25%. On or about August 31, 2009, BTG abandoned and vacated the leased premises and sent a letter to the Plaintiffs on the next day informing the Plaintiffs of the decision to vacate the leased premises. In its letter, BTG informed the Plaintiffs that it would cease paying any and all rent and additional rent otherwise payable under the Lease and suggested that it was in the best interests of the parties to terminate the Lease due to the rental rates under the Lease being well below market rates and permit the Plaintiffs to directly recover a higher rent from a new tenant. Following receipt of the BTG's letter, the Plaintiffs sent a letter to BTG informing it the the Plaintiffs "fully rejected the unilateral termination" by BTG of the Lease and would hold BTG responsible for payment of all rent and expenses set forth in the Lease through the expiration date of the Lease. Subsequent to sending the letter to BTG, the Plaintiffs also entered into an Exclusive Leasing/Sales Agreement with StreetSense Retail Advisors, LLC ("StreetSense") to authorize StreetSense to act as the Plaintiffs' agent to obtain a new tenant of the leased premises. In attempting to find a tenant, StreetSense reached out to KLNB to see if any of KLNB's clients would be interested in the premises. BTG also contacted Bialow Real Estate, LLC ("Bialow") in an effort to find a new tenant for the leased premises. On November 30, 2009, Bialow sent KLNB, on behalf of Vitamin Shoppe a letter for intent to express Vitamin Shoppe's interest in the premises. The letter of intent eventually made it to the Plaintiffs and was countersigned by the Plaintiffs on December 7, 2009. On August 3, 2010, the Plaintiffs and Vitamin Shoppe executed a lease agreement (the "Vitamin Lease") for the premises with an initial term of 10 years. The premises were delivered to Vitamin Shoppe on September 1, 2010. Because the Vitamin Lease contained provisions that gave the tenant a build-out period of 90 days in which to make tenant improvements to the premises for purposes of getting the premises ready for Vitamin Shoppe's business and a building improvement allowance of up to $87,500. The Vitamin Lease's term began on December 1, 2010 and , unlike BTG's Lease, was not a triple net lease. For delivering Vitamin Shoppe as a tenant and because there were three brokers involved, StreetSense, KLNB and Bialow, the Plaintiffs' paid commission equal to $81,218.

The Plaintiffs filed suit against in the Fall of 2010 against BTG and BTG's Parent (collectively, the "Defendants") alleging breach of the Lease and the Guaranty and seeking recovery for damages incurred as a result of such breaches, including unpaid rent from the Defendants for a total of 23 1/3 months, representing the amount of time from Defendants' breach in September 2009 until when the Plaintiffs received rent payments from Vitamin Shoppe, late charges for unpaid rent, repayment of real estate taxes and utilities, reimbursement of brokers' commission, reimbursement for costs with entering into the Vitamin Lease, administrative costs, litigation costs, and prejudgment interest. In response to the claims of Plaintiffs, the Defendants challenged the reasonableness of the Plaintiffs' efforts in mitigating their losses, the reasonableness of some of the concessions made in connection with the Vitamin Lease, the necessity of the build-out period and the reasonableness of the tenant improvement allowance, the administrative charge, litigation expenses regarding zoning issues for Vitamin Shoppe's signage and brokers' commission. The Defendants also argued that the Plaintiffs' claimed damages should be prorated to account for the time period that the Vitamin Lease extends beyond the term of the BTG's Lease and that their liability should be offset by the surplus rent that the Plaintiffs are receiving as a result of the rent being charged under the Vitamin Lease being much more than that under BTG's Lease.

Analysis: Because the parties stipulated as to the amount of unpaid rent and the amount of late charges, the Court turned first to addressing the Defendants' arguments that the length of time it took the Plaintiffs' to execute a lease with Vitamin Shoppe was unreasonable. The Court noted that while the Defendants' claim that the Plaintiffs received four originals of the lease for execution from Vitamin Shoppe's attorney on May 15, 2010 but did not sign the lease until August 3, 2010, the Defendants failed to provide any evidence indicating whether the lease that was finally signed was identical to the lease that was delivered in May. Even with such evidence, the Court explained that it would not have mattered because not only did the exact terms of the lease provide that the projected delivery date of the premises would be on September 1, 2010 but that it was clear from the outset that the lease would not be executed until the end of 2010 due to the letter of intent expressing Vitamin Shoppe's desire for the premises to be delivered "on or about January 3, 2011." The Court then quickly dismissed the Defendants' argument that the inclusion of a 90 day build-out period was unreasonable in light of BTG having been granted a 180 day build-out period under its lease with the Plaintiffs. While the Court found the number of hours claimed by Dr. Herst for purposes of performing administrative services as a result of the Defendants' breach, the Court found the hourly charge of Dr. Herst to be commensurate with market rates and awarded the Plaintiffs' recovery of the administrative charges due to them being expressly allowed under the terms of the Lease, less the number of hours the Court found to be excessively high or covered as a result of professionals hired by the Plaintiffs. Similarly, to the other challenges of Defendants' questioning the reasonableness of the brokers' commission, the title fees, the litigation fees expended to unsuccessfully deal with a zoning issue for Vitamin Shoppe's signage, the Court found all such charges to be reasonable, within the ability of the Plaintiffs' to recover as a result of Defendant's breach and within market rates.

The Court next turned its attention to the argument of Defendants' that the damages should be prorated to account for the additional months of tenancy obtained by the Plaintiffs as a result of the term of the Vitamin Lease being longer than the remainder of BTGs' Lease. As support for their argument, the Defendants pointed to Wilson v. Ruhl, 277 Md. 607 (1967), and the Maryland Court of Appeals approval of the proration of a broker's commission that a landlord paid to procure a replacement tenant. The Plaintiffs argued that Wilson was inapplicable because it concerned a residential lease and not a commercial lease and, even if it applicable to commercial leases, it was overruled by Millison v. Clarke, 287 Md. 420 (1976). The Court first noted that Wilson's holding regarding the proration of a brokerage fee to exclude that portion of the brokers' commission that is for a term in excess of the breaching tenant did differ for residential and commercial leases and then explained that Millison only overruled dicta of Wilson that suggested that a landlord's reletting of premises for a term longer than the original term of the lease was the landlord accepting the surrender of the the premises by the original tenant and not the proration holding. The Court also found that while the express language of the Lease obligated BTG to pay the brokers' commission as one of the listed items that can be incurred in reletting the premises if there is a breach by BTG, it did not warrant disregarding the holding of Wilson. Therefore, with respect to the brokers' commission, the Court held that to the extent that amount requested for the brokers' commission would be reduced to allocate to the Plaintiffs that amount of the brokers' commission that was applicable solely to Vitamin Shoppe's tenancy beyond the balance of the remainder of BTG's tenancy under the Lease.

Turning to the Defendant's next argument, the Court addressed Defendants' argument that they were entitled to setoff the damages owed by them by the amount of the surplus rent that has already been received, and that will be received, by the Plaintiffs as a result of Vitamin Shoppe's rent under the Vitamin Lease being higher than BTG's rent under the Lease. The Plaintiffs' argued that the Defendants were not entitled to a deduction for such surplusage. Because neither of the parties cited any cases, the Court reviewed secondary sources and cases from other jurisdictions regarding Defendants' argument. The Court found the New York case Hermitage Co. v. Levine, 162 N.E. 97 (N.Y. 1928), to be particularly instructive. In Hermitage, the court held that "in the absence of a lease provision to the contrary, a defaulting tenant was entitled to the benefit of any excess rent realized from reletting." The court also acknowledged that a contract damages provision could be drafted in such as way to not require the landlord to account for surplus. In referencing the terms of the Lease, the Court noted that Section 17.2.3 of the Lease expressly authorized the Plaintiffs to relet the premises without terminating the Lease and required the Plaintiffs to apply any rent received by the Plaintiffs "to the account of [BTG], not to exceed [BTG's] total indebtedness to [Plaintiffs]". Because the express terms of the Lease required the Plaintiffs to apply any amount received from reletting to the account of the Defendants, the Court held that the Defendants were entitled to set-off as a result of the surplus rent being received, but that the surplus amounts had to be adjusted to account for present value of future surplus and, in light of the fact that BTG's Lease was a triple net lease and the Vitamin Lease is not a triple net lease, the amounts that would have been paid for taxes utilities and maintenance by the Defendants.

Lastly, the Court addressed the issue of prejudgment interest. Referencing Fourth Circuit precedent that applied state law to questions involving prejudgment interest and Maryland precedent setting prejudgment interest at 6% per annum unless another percentage is established by contract or statute, the Court held that the Plaintiffs would be entitled to prejudgment interest in the amount of 5.25% per annum, as set forth in the Lease, for unpaid rent and late charges beginning on the date due, but were only entitled to pre-judgment expenses for all other awards of damages, including the brokers' commission, the attorneys' fees, the administrative costs and any other amounts from the date of the Court's order until the date judgment was entered against the Defendants. The Court explained that pre-judgment interest was allowable for the unpaid rent and late charges from the date due because those amounts had previously become due and were capable of precise calculation from the date that they were due. The other damages could not have been determined precisely as of any date certain prior to the ruling of a trier of fact and therefore could not begin running interest until they became due and certain as a result of the resolution of the case.

The full opinion is available in PDF.

Stalker Brothers, Inc., et al. v. Alcoa Concrete Masonry, Inc. (Ct. of Appeals)

Filed: October 24, 2011
Opinion by Judge Joseph F. Murphy Jr.

Held: The Maryland Home Improvement Law does not render a contract between a home improvement general contractor and an unlicensed subcontractor unenforceable. The statute was intended to protect the public under contractor-owner contracts and not contracts between contractors who engage in arms-length transactions with one another.

Facts: Alcoa Concrete Masonry, Inc. ("Plaintiff") was an unlicensed subcontractor providing work for Stalker Brothers, Inc. ("Defendant") on contract. The two companies did business together from 2004 to 2007. Payments were regular at first but the Defendant started to miss payments in 2005 and after an attempt to reconcile the amount due among themselves the Defendant began to miss payments again, eventually refusing to pay the Plaintiff altogether.

The Plaintiff contended that they had been intentionally misled by the Defendant and that the Defendant had signed Releases of Liens stating that all subcontractors had been paid for the work when in fact the Defendant knew they had not paid the Plaintiff thereby gaining access to funds not rightfully theirs. As a defense the Defendant claimed that the Plaintiff had preformed this residential home improvement work while an unlicensed subcontractor in Maryland and as such contracts made by such an unlicensed subcontractor were illegal and unenforceable under the Maryland Home Improvement Law.

Analysis: In broad agreement with the opinion of the Court of Special Appeals [see HERE for a prior blog entry regarding the Court of Special Appeals opinion] the Court of Appeals applied the "revenue/regulation rule". Using this rule the Court distinguished between a contract between an owner and contractor as a contract covered under the Maryland Home Improvement Law, and a contract between a contractor and a subcontractor as not covered under this statute. The Court found that the purpose of the Maryland Home Improvement Law is to protect the public and not a method by which contractors could escape liability for past due amounts due to subcontractors that were unlicensed at the time they performed the contract.

The full opinion is available in PDF.

Ramlall v. Mobilepro Corp. (Ct. of Special Appeals)

Filed: October 28, 2011

Opinion by: Judge Albert J. Matricciani, Jr.

Held: A corporate veil may only be pierced to prevent fraud or to enforce a paramount equity. Without precedent from the Court of Appeals, the Court of Special Appeals declines to guess what a paramount equity may be. In addition, a "forward triangular merger," by which an acquiring company secures the benefit of limited liability for a target company's debts, is not fraudulent so as to create grounds for piercing the corporate veil.

Facts: The plaintiff was hired by a company to negotiate a billing dispute among the company and and its telephone service provider. Before the plaintiff could collect his fee, the company that hired him (the "Dissolved Company") merged with another company (the "Surviving Company") and was dissolved. The Surviving Company was wholly owned by a parent (the "Parent"), and had been formed for the purpose of merging with the Dissolved Company.

Neither the Surviving Company nor the Parent paid the plaintiff's fee. The plaintiff sued them both - the Surviving Company as the successor to the Dissolved Company, and the Parent as an entity responsible for the debts of the Surviving Company. The Circuit Court granted the Parent's motion for summary judgment. After a trial of the claim against the Surviving Company, the Court granted a motion for judgment in favor of the Surviving Company on the ground that a transaction disclosure agreement stated the terms by which the plaintiff was to be paid, and the plaintiff was not entitled pursuant to those terms. The plaintiff appealed.

Analysis:
Summary Judgment for the Parent: The plaintiff argued that the Parent exercised sufficient control over the Surviving Company to justify piercing the corporate veil. Referencing the Court of Appeals' decision in Bart Aconti & Sons, Inc. v. Ames-Ennis, Inc., the Court affirmed the black-letter principle that it may pierce the corporate veil only based on proof of fraud or necessity to enforce a paramount equity.

In response to the plaintiff's argument that his claim was a paramount equity, the Court noted that "notwithstanding its hint that enforcing a paramount equity might suffice . . ., the Court of Appeals has not elaborated upon the meaning of this phrase or applied it in any case of which we are aware." Accordingly, "with no precedent approving this extraordinary remedy," the Court declined to pierce the corporate veil on that ground. Regarding alleged fraud, the Court rejected the contention that the merger scheme (a "forward triangular merger") was a fraudulent action.

Judgment for the Surviving Company: The Plaintiff argued that the Dissolved Company owed him money based on the benefit he provided in negotiating its dispute. In addition, if the Dissolved Company owed him money, then after the merger, the obligation to pay became the Surviving Company's obligation.

The Court discussed in detail the case law and statutory law providing that, when there is a merger, "the successor is liable for all the debts and obligations of each non-surviving corporation." Accordingly, any obligation of the Dissolved Company to pay the plaintiff was an obligation of the Surviving Company. The question remained, what was that obligation?

Regarding the obligation, the Court found that both sides presented conflicting evidence concerning the terms of the oral agreement to pay. In addition, there was additional evidence to be adduced during the defendant's case. The Court held that, even though it was a bench trial, it was a mistake for the trial court to rely upon the transaction's disclosure statement as dispositive of the disputed oral agreement. In doing that, the trial court disregarded substantial evidence that the statement was not an accurate representation of the agreement.

Accordingly, the Court vacated the judgment in favor of the Surviving Company and remanded for the trial court to receive all the evidence and determine the terms of the agreement.

The full opinion is available in .pdf.

Jackson v. Dackman (Ct. of Appeals)

Filed: October 24, 2011

Opinion by: Judge John C. Eldridge

Held: Immunity provisions of the Reduction of Lead Risk in Housing Act which, under specific conditions, grant immunity to a rental property owner from personal liability suits arising from lead paint poising, are invalid under Article 19 of the Maryland Declaration of Rights.

Facts: The case involves two rental properties, which were owned and maintained by defendants. In January 2007, plaintiff and her daughter moved into the first property when the daughter was one year old. When the lease was first executed, the tenants failed to note any defective conditions. Nevertheless, paint chipped and flaked throughout the apartment, which plaintiff’s daughter ingested, causing her to suffer from lead poising. In February 1999, plaintiff and her daughter moved to the second property, which had been inspected pursuant to the Reduction of Lead Risk in Housing Act and represented as lead-free. However, similar to the first property, paint chipped and flaked throughout the apartment, which the daughter again ingested. Plaintiff brought suit against the defendants and sought damages based on her daughter’s severe and permanent brain injuries allegedly resulting from ingestion of lead-based paint.

Analysis: Section 6-828 of The Reduction of Lead Risk in Housing Act grants immunity from personal injury suits to a rental owner who has complied with the statute, unless notice is given to the owner and the owner has been given the opportunity to make a qualified offer to the person at risk or to a parent or legal guardian of a minor. The statute sets forth specific blood-lead levels at which the tenants are required to give notice to rental owners. The Act also caps the maximum amount payable under a qualified offer to $17,000, which includes medical and relocation expenses. The Act provides that acceptance of a qualified offer releases the owner from all potential liability. It further states that if the qualified offer is rejected “[a]n owner of an affected property is not liable, for alleged injury or loss caused by ingestion of lead by a person at risk in the affected property.”

An issue presented to the court focused on whether the immunity provisions in the Act were invalid under Article 19 of the Maryland Declaration of Rights. Article 19 establishes the right to a remedy for a person who experiences an injury to person or property. The Court explained that the remedy may be found at common law, or substituted by the legislature through statute. The general inquiry, under Article 19 jurisprudence, “is whether the abolition of the common law remedy and substitution of a statutory remedy is reasonable.” Article 19 permits the legislature to impose a reasonable limit upon non-economic damages recoverable in tort cases. The Court, while reaffirming that some restrictions upon judicial remedies have been upheld -- including certain well-established immunities, ultimately held the immunity provisions of the Act to be unreasonable.

The immunity granted by the Act was not a well-established immunity in personal injury actions because it did not exist prior to the enactment of the statute in 1994. Under the Act, the only remedy offered in substitution for a personal injury action is a qualified offer by the owners which is accepted by a “person at risk, or a parent or legal guardian of a minor who is a person at risk.” The Court noted that the statute did not provide a remedy where no qualified offer was made. In addition, under the statute, the maximum compensation that may be offered is $17,000, which the Court deemed “minuscule” for a child who is found to be permanently brain damaged. Thus, the Court reasoned, “the remedy which the Act substitutes for a traditional personal injury action results in either no compensation (where no qualified offer is made or where a qualified offer is rejected) or drastically inadequate compensation (where such qualified offer is made and accepted).”


Furthermore, the Act has no exception to the owner’s immunity in the situation where an injured child reaches the age of majority and attempts to bring, in his or her own name, a personal injury action against the owner. The Court held, that because no adequate remedy was substituted for the grant of immunity, the immunity provisions of the Act were unreasonable and therefore invalid under Article 19. However, the Court found that the invalid provisions were severable from the rest of the statute, ultimately upholding the Act.

The full opinion is available in pdf. 

Suntrust Bank v. Goldman (Ct. of Special Appeals)

Filed: September 30, 2011
Opinion by: Judge James R. Eyler

Held: The prevailing party in a suit for breach of a line of credit agreement may only be awarded attorneys' fees in the amount of fees actually incurred (including future fees that can be proven with certainty), notwithstanding contract language allowing for recovery of a greater sum measured as a percentage of the principal loan amount.

Facts: A borrower entered into a line of credit agreement with a bank. The agreement contained a clause that stated that the borrower would be responsible to pay any costs of collection for failure to pay on the loan, including 15% of the principal as attorneys' fees or reasonable attorneys' fees. The borrower defaulted and the bank sued. The borrower failed to answer, and the trial court awarded the bank an order of default for the principal amount due and interest. The bank also asked the court for attorneys' fees in the amount of $60,206.00, or 15% of the principal. The court denied this request and only awarded attorneys' fees in the amount of $3,258.30, or the actual fees incurred to date plus costs. The bank filed a motion to revise judgment to award attorneys' fees as provided in the contract, which the trial court denied. The bank appealed.

Analysis: The Court of Special Appeals affirmed.

The bank argued that it sought the 15% fee to cover actual fees, as well as fees it may incur in the future as a result of efforts to enforce the judgment. The bank pointed out that if it were denied that fee, it would not be able to sue to enforce the provision after final judgment due to the doctrine of merger.

The Court stated that attorneys' fee provisions are in the nature of indemnity agreements. The Court explained that "Maryland law limits the amount of contractual attorneys fees to actual fees incurred, regardless of whether the contract provides for a greater amount." The Court distinguished this case from Webster v. People's Loan, Sav. & Deposit Bank of Cambridge, 160 Md. 57 (1976) that contained language by the Court of Appeals that supports the bank's claim for the 15% attorneys' fee then later crediting the appellees with the amount of fees not actually incurred. This Court distinguished Webster because it dealt with a judgment by confession when confessed judgments were entered by the clerk of the court based on the terms of the underlying note. Now, the Court explained, the procedure is different. Md. Rule 2-611, amended in 2010, includes a new section (b) which "requires a court to review a confessed judgment for factual and legal validity before the clerk may enter the judgment." Therefore, judicial review of confessed judgment is now done at the outset where the reviewing court can make a determination as to the reasonableness of the attorneys' fees.

The bank explained that it should be able to claim un-incurred fees, subject to later credit because the merger doctrine does not allow a party to seek post-judgment requests for attorneys' fees for which the court has already entered judgment. The Court discusses various ways to avoid the merger bar, including for the parties to state their intent in the contract that the fee provision shall not merge into the judgment (without specifying how this would be done).

The Court concluded that in order to collect both incurred fees and future fees, the requesting party will need to put on evidence of fees that it will certainly incur in the future, as well as those fees actually incurred at that time, as long as they are reasonable. Because the bank presented no evidence as to any agreement to pay attorneys' fees other than on an hourly basis and no evidence to provide fees certain to be incurred in the future, the Court concluded that the trial court had properly awarded only incurred attorneys' fees to the bank.

The full opinion is available in pdf.

In re Nationwide Health Properties, Inc. S'holder Litig. (Cir. Ct. Balt. City)

Filed: May 25, 2011

Opinion by: Judge Stuart R. Berger

Held: When stating a claim for breach of fiduciary duty by the board of directors in a stock-for-stock merger, the duty of profit maximization under Shenker v. Laureate Education, Inc. does not apply.

Facts: The Board of Directors (the Board) of Nationwide, a publicly traded Maryland corporation and REIT with investments primarily in healthcare property in the United States, sought the advice of financial advisers on potential merger opportunities. Over a period of three months Nationwide actively pursued a deal with two of these opportunities. After some back-and-forth with the two potential acquiring companies the Board went with the company that offered them a firm, but slightly lower, price than the other.

Analysis: Plaintiffs attempted to use Shenker v. Laureate Education, Inc. to impose a duty of maximizing shareholder value on the Board. The Court distinguished the "cash-out" merger in Shenker as a different transaction from that of a "stock-for-stock" merger. In Shenker the duty of profit maximization was placed upon that board since the transaction was a "cash out" merger, where shareholders are given cash for their stocks, potentially forcing minority shareholders to accept a cash payment, effectively eliminating their interest in the target company and leaving them with no interest in the acquiring company. In a "stock-for-stock" merger, as is the case here, the current shareholder's equity is exchanged at a fixed conversion rate for shares in the acquiring company. The profit maximization standard may only be applied in a "cash-out" merger situation due to the finality of the decision by the board in such a merger as opposed to the current situation where shareholders will maintain an interest in the merged company. The Court noted that if it were to adopt the plaintiffs' reasoning, then there would be a duty of profit maximization in every merger, in direct opposition to existing case law.

The plaintiffs also argued the "stock-for-stock" purchase is effectively a change in control. The Court disagreed and cited the Delaware Supreme Court, which held where "control of both [companies] remains in a large, fluid, changeable and changing market, "directors do not have to obtain the highest possible value for shareholders since the asset remains liquid and easily sold or transferred in the broader market. A "stock-for-stock" merger is essentially a managerial function and there is no duty to maximize shareholder value, as opposed to a cash-out merger where this duty may be imposed. Further, Maryland corporation law reflects the same principle, "[A] stock-for-stock merger will not be a change of control..." (Hanks, Maryland Corporation Law § 6.6(b)). As the plaintiffs did not sufficiently plead facts supporting their change of control argument, the Court did not impose a duty of profit maximization on the Board.

The Court stated the proper analysis of the merger is under the Maryland Business Judgment Rule. To rebut the presumption, the plaintiffs needed to introduce evidence of director self-interest or self-dealing, or that the directors lacked good faith or failed to exercise due care. The allegations in the complaint did not allege a fraud, but rather self-dealing and negligence leading to substantially lower consideration for their shares. The plaintiffs did not show that interests such as early vesting of stock options influenced a majority of the Board in approving the transaction. The allegations of a breach of acting in the interest of the corporation must establish a link between the material benefit and the Board's decision to approve the merger transaction - absent this, allegations of self dealing are conclusory.

A breach of good faith is not met when the Board is presented with two rational options and chooses one that turns out to be less advantageous than the other. To succeed in showing a lack of care, the plaintiffs must show gross negligence was committed by the Board. Courts have held that boards are justified in accepting a lower but more firm offer over one that is higher but more speculative and that a board may act decisively to preserve an offer. The Court did not find such gross negligence was committed by the Board and the claim was dismissed with prejudice.

Lastly, the plaintiffs alleged a breach of the duty of candor. The Court found the complaint failed to state how any of the alleged omissions were material because the plaintiffs made no attempt to explain how the additional information they sought would alter the "total mix" of information made available in the lengthy report provided to shareholders. Accordingly, the plaintiff's disclosure claims were dismissed with prejudice.

The full opinion is available in pdf.