Federal Deposit Insurance Corporation as received for Bradford Bank v. Arthur (Maryland U.S.D.C.)

Filed: March 2, 2015

Opinion by: Richard D. Bennett

Holding:  In a claim against officers and directors of a Maryland corporation, a plaintiff may only overcome the business judgment rule with a showing of gross negligence. 

Facts: Plaintiff was appointed receiver for a Bank and brought suit against four former officers of the Bank.  Plaintiff alleged Defendants were negligent, grossly negligent and breached fiduciary duties to the Bank by ignoring the Bank’s loan policy and failing to exercise due care in approving seven loan transactions. 

Analysis:  The Court first enforced a Tolling Agreement that was executed by and between the Plaintiff and each of the Defendants (and extended five times) to suspend operation of the statute of limitations under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).  The Court noted that a defendant who enters into a contract while believing the contract is enforceable cannot be said to be acting in good faith. 

The Court then addressed the correct standard of liability for director and officer conduct under the FIRREA and Maryland law.  The Court stated that the FIRREA provides that a director or officer of an insured depository institution may be held personally liable for monetary damages for gross negligence, as such term is defined under applicable state law. 

Plaintiff argued that negligence applied to the conduct of corporate officers and directors under Maryland law due to the codification of the business judgment rule.  The Court disagreed and cited Parish v. Maryland & Virginia Milk Producers Ass’n and Billman v. State of Md. Deposit Ins. Fund Corp. as precedent from the Court of Appeals and the Court of Special Appeals, prior to and after codification of the business judgment rule, that applied a gross negligence standard.  

The 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.

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.