In Oliveira v. Sugarman, No. 1980 September Term 2014 (Jan. 28, 2016), the Maryland Court of Special Appeals held that the decision of a board of directors of a Maryland corporation to refuse a stockholder demand is entitled to the presumption of the statutory business judgment rule, codified in Section 2-405.1(e) of the Maryland General Corporation Law. In reaching its decision, the Court of Special Appeals revisited the 2011 Court of Appeals decision, Boland v. Boland, 423 Md. 296 (2011), which concerned the applicable standard of review pertaining to decisions of a special litigation committee (“SLC”) formed by the board of directors of a Maryland corporation.
An SLC is a board committee, comprised of disinterested directors, specially formed by a board to respond to a stockholder demand or stockholder derivative litigation when there is not a quorum of existing disinterested directors. The members of an SLC may be appointed from the existing board, be newly appointed or elected directors, or be comprised of a combination of the two. The goal in forming an SLC is to isolate from the decision making process the interested directors forming a majority of the then-current board. Ultimately, if the SLC determines not to pursue the derivative litigation sought by the stockholders, it is undisputed that the decision of the SLC not only forecloses future derivative litigation, but can result in the dismissal of existing derivative litigation.
In Boland, the Court of Appeals established the standards applicable to judicial review of the decision of an SLC. First, the Court of Appeals reaffirmed the general rule that the presumption of the statutory business judgment rule applies to the decision of a board of directors to refuse a stockholder demand. Second, however, the Court distinguished decisions made by an SLC. The Court of Appeals held that while the “substantive conclusions” of an SLC are “entitled to judicial deference,” the SLC must be independent, act in good faith, and make a reasonable investigation and principled factually supported conclusions – and the SLC was entitled to no presumption as to those requirements.
In Oliveira, the Court of Special Appeals was asked to decide whether the Boland standard – specifically the loss of the presumption as to the independence and process requirements – applies to any decisions of a board of directors to refuse a stockholder demand or only to the decisions of an SLC. The Court of Special Appeals held that an SLC is only necessary where the board as a whole lacks disinterestedness and independence. Therefore, it is appropriate that the corporation shall bear some initial burden to establish independence, good faith and the reasonableness of investigation of the SLC. But where the board is otherwise able to establish a quorum of disinterested directors and act in response to a stockholder demand, the Boland standard has no application. Thus, the Court of Special Appeals held that, as a general matter, the statutory business judgment rule continues to apply to refusals of stockholder demands.
In applying the presumption of the statutory business judgment rule, the Court of Special Appeals explained that the burden is on the stockholder challenging the presumption to allege, and then establish, facts rebutting the presumption. The Court of Special Appeals held that the stockholders in Oliveira had not alleged such facts. In reaching that conclusion, the court reiterated that a board does not lack disinterestedness under Maryland law simply because the board approved or participated in some way in the challenged transaction or decision. Moreover, and of particular note for litigators and those responding to stockholder demands, the court held that under the business judgment rule, statements made by the board and contained in a letter refusing such demands, are presumptively true, absent particularized allegations rebutting specific statements therein.
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