ALBERT F. OLIVEIRA, et al.
JAY SUGARMAN, et al.
Argued: October 7, 2016
Court for Baltimore City Case No.: 24-C-14-001243
Barbera, C.J. Greene Adkins McDonald Watts Hotten Getty, JJ.
Albert F. Oliveira and Lena M. Oliveira filed suit against
current and former members of iStar's Board of Directors
and senior management in the Circuit Court for Baltimore City
for breach of fiduciary duty, unjust enrichment, waste of
corporate assets, breach of contract, and promissory estoppel
arising from the Board of Directors' modification of
performance-based executive compensation awards, which were
granted in the form of stock. The Circuit Court dismissed all
of Petitioners' claims for failure to state a claim, and
the Court of Special Appeals affirmed. We hold that the
traditional business judgment rule applies to a board of
directors' decision to deny a shareholder litigation
demand, not the heightened standard established by Boland
v. Boland, 423 Md. 296 (2011). Furthermore, we hold that
Petitioners do not allege facts sufficient to support direct
claims for breach of contract or promissory estoppel. Thus,
they are derivative claims that are subject to the business
judgment rule. They were correctly dismissed.
AND LEGAL PROCEEDINGS
are Albert F. Oliveira and Lena M. Oliveira, trustees for the
Oliveira Family Trust, a shareholder of iStar Financial Inc.
("iStar"). iStar is a publicly traded real estate
investment trust incorporated in Maryland with its principal
place of business in New York. Respondents are iStar and
current and former members of iStar's Board of
2008 Awards and 2009 Plan
December 19, 2008, iStar's Board of Directors ("the
Board") granted over ten million performance-based
restricted stock units to certain iStar executives and
employees ("the 2008 Awards"). The Board intended
for the awards to vest only if iStar common stock achieved
any of the following average closing prices over a period of
20 consecutive days: $4.00 or more prior to December 19,
2009; $7.00 or more prior to December 19, 2010; or $10.00 or
more prior to December 19, 2011. When the Board granted these
awards, iStar did not have enough authorized shares of stock
to pay the awards if they vested. Thus, in 2009, the Board
sought shareholder approval of an issuance of additional
stock units to be used for executive compensation.
April 23, 2009, Chief Executive Officer ("CEO") Jay
Sugarman sent a letter inviting iStar shareholders to the
annual shareholders meeting. The letter indicated that at the
meeting shareholders would be asked to "consider and
vote upon a proposal to approve the iStar Financial Inc. 2009
Long-Term Incentive Plan" ("the 2009 Plan").
The mailing also included a notice of the annual
shareholders' meeting, which explained that shareholders
were to "consider and vote" on the 2009 Plan at the
meeting. The notice indicated that the 2009 Plan was
"further described in the accompanying proxy
statement." Moreover, the Board included a letter
introducing the proxy statement, which urged shareholders to
approve the 2009 Plan. The letter told shareholders,
"[I]t is crucial that we retain and motivate our senior
leaders and key employees by granting long-term,
performance-based equity incentive compensation." It
continued, "In particular, if the 2009 Plan is not
approved, we are obligated to settle existing
performance-based awards granted on December 19, 2008 in
cash, rather than common stock, if the performance and
vesting conditions of those awards are achieved."
attached Schedule 14A Proxy Statement ("the 2009 Proxy
Statement") further described the 2009 Plan, which
authorized the issuance of an additional eight million shares
of common stock. The Proxy Statement explained that "the
ongoing financial crisis and its negative impact on [iStar]
business and financial results" had led to a depletion
of iStar shares issued in 2006. This new stock would allow
iStar to settle the 2008 Awards-if they vested-with stock
rather than cash, which would enable the corporation to
preserve cash. The Proxy Statement also noted that approval
of the 2009 Plan would "ensure, for federal tax
purposes, the deductibility of compensation recognized by
certain participants in the 2009 Plan which may otherwise be
limited by Section 162(m) of the Internal Revenue Code."
A copy of the 2009 Plan was attached to the Proxy Statement.
April 27, 2009, Respondents filed the Proxy Statement with
the United States Securities and Exchange Commission. On May
27, 2009, at the annual shareholders' meeting, the
shareholders voted to approve the 2009 Plan.
2009, iStar did not meet its target share price for 20
consecutive days as required for the 2008 Awards to vest. In
2010, iStar achieved the target price of $7.00 for 20
consecutive days ending on December 20-eight trading days too
late to vest the 2008 Awards. Following this near miss, iStar
began considering modification of the 2008 Awards "to
achieve a fair balance between rewarding management's
exceptional performance, as reflected by the 300% rise in the
market value of iStar stock, and enforcing the terms of the
2008 Awards." After several Board and Compensation
Committee meetings, as well as discussion with legal,
accounting, and compensation advisors, the Board modified the
2008 Awards to convert them from performance-based to
service-based awards (the "2011 Modification").
the 2011 Modification, iStar executives received compensation
in three installments-on January 1, 2012, 2013, and 2014-as
long as the employee still worked for iStar on the vesting
date. The 2011 Modification also reduced the amount of the
2008 Awards by 25 percent. With the 2011 Modification, the
Board hoped to prevent key members of iStar management from
leaving the corporation. Additionally, the Board believed
that modifying the existing 2008 Awards, which had already
been largely expensed, would be more cost effective than
issuing new awards.
23, 2013, Petitioners demanded that the Board
"investigate and institute claims on behalf of [iStar] .
. . against responsible persons" related to the 2011
Modification. Petitioners demanded that the Board rescind all
shares of stock issued under the 2009 Plan to settle the 2008
Awards, or, alternatively, "seek any other appropriate
relief on behalf of [iStar] for damages sustained . . . as a
result of the Board's misconduct" in modifying the
2008 Awards. Additionally, Petitioners sought to
"[e]njoin [iStar] from issuing any more shares under the
2009 Plan to settle the 2008 Awards."
June 2013, the Board appointed Barry W. Ridings, an outside,
non-management director who joined the Board after the 2011
Modification, to serve as the demand response committee
("the Committee"). The Committee was tasked with
investigating Petitioners' demand and making a
recommendation to the Board as to the best course of action.
The Committee hired outside counsel, Joseph S. Allerhand and
Stephen A. Radin of Weil, Gotshal & Manges LLP, to assist
with the investigation. In October 2013, following extensive
document review and interviews with key iStar executives, the
Committee recommended that the Board refuse Petitioners'
demand. On November 11, 2013, the Board unanimously voted in
accordance with that recommendation.
letter sent to Petitioners on November 12, 2013, the Board
presented several reasons for denying their demand. The Board
noted that the Committee had concluded that the Board made a
good faith, informed business judgment to modify the 2008
Awards, and that it had the authority to do so. Additionally,
the Board explained that if it were to rescind the 2008
Awards, it would harm corporate morale and likely invite
litigation from management executives. Lastly, the Board
noted that even if it were to win the demanded litigation,
the damages would not be enough to offset the cost of issuing
new awards. The Board concluded that it saw "no
upside-and much downside-to the action and lawsuit proposed
in the [d]emand. iStar would probably lose, suffer
substantial harm, and pay both sides' attorneys'
March 10, 2014, Petitioners filed a complaint in the Circuit
Court for Baltimore City. They brought five claims against
Respondents: (1) breach of fiduciary duty; (2) unjust
enrichment; (3) waste of corporate assets; (4) breach of
contract; and (5) promissory estoppel. The first three counts
were alleged derivatively, and the last two were brought
directly. In their motion to dismiss, Respondents argued that
all of Petitioners' claims were derivative, and they had
failed to plead facts sufficient to overcome the presumption
that the Board had acted with sound business judgment.
Following a hearing, the Circuit Court dismissed all of
filed a timely appeal to the Court of Special Appeals. In a
reported decision, the Court of Special Appeals affirmed the
grant of the motion to dismiss. Oliveira v.
Sugarman, 226 Md.App. 524 (2014). It held that the
Circuit Court correctly applied the business judgment rule to
the Board's decision to deny Petitioners' litigation
demand, and that Petitioners failed to allege facts
overcoming the business judgment rule presumption.
Id. at 540, 543. It viewed Petitioners' breach
of contract and promissory estoppel claims as derivative
claims that could not be asserted directly. Id. at
granted certiorari to answer the following
1. Does the modified business judgment rule established by
Boland v. Boland, 423 Md. 296 (2011), apply to a
disinterested and independent board of directors'
decision to deny a shareholder litigation demand?
2. Have Petitioners alleged sufficient facts to support
direct shareholder claims for breach of contract and
answer no to both questions. Therefore, we shall affirm the
judgment of the Court of Special Appeals.
appeal from the Circuit Court's grant of a motion to
dismiss. "We review the grant of a motion to dismiss as
a question of law." Shenker v. Laureate Educ.,
Inc., 411 Md. 317, 334 (2009) (citation omitted).
Therefore, we analyze whether the granting of the motion was
legally correct. RRC Northeast, LLC v. BAA Maryland,
Inc., 413 Md. 638, 643-44 (2010) (citations omitted). In
doing so, we review the Circuit Court's decision without
deference. See State v. Johnson, 367 Md. 418, 424
(2002). To determine whether dismissal was appropriate, we
ask whether the facts alleged in the well-pleaded complaint,
if taken as true, support a cause of action for which relief
may be granted. RRC Northeast, LLC, 413 Md. at 644
(citation omitted). We construe all inferences in the light
most favorable to the non-moving party, and order dismissal
only if the allegations and permissible inferences, if true,
still fail to afford the plaintiff relief. Id. at
643 (citation omitted).
argue that this Court should apply the modified business
judgment rule established in Boland v. Boland, 423
Md. 296 (2011), to all instances where a corporate board
denies a shareholder's demand to initiate a derivative
suit. In applying this heightened scrutiny, they argue, the
Court should hold that Respondents improperly denied their
litigation demand as to their claims of breach of fiduciary
duty, unjust enrichment, and waste of corporate assets.
Additionally, Petitioners claim the right to proceed on their
breach of contract and promissory estoppel counts because, as
direct-not derivative- shareholder claims, they are not
subject to the business judgment rule.
by contrast, urge this Court to review the Board's
decision to deny Petitioners' litigation demand under the
traditional business judgment rule and affirm the grant of
the motion to dismiss. Regarding Petitioners' claims for
breach of contract and promissory estoppel, Respondents say
they are derivative claims that were properly dismissed for
failure to state a claim overcoming the business judgment
Business Judgment Rule
the traditional business judgment rule, courts apply a
presumption of disinterestedness, independence, and
reasonable decision-making to all business decisions made by
a corporate board of directors. The business judgment rule
protects corporate directors from liability when the majority
of directors act prudently and in good faith.
Boland, 423 Md. at 328 (quoting Devereux v.
Berger, 264 Md. 20, 31-32 (1971)). The Delaware Supreme
Court described the rule as follows:
It is a presumption that in making a business decision the
directors of a corporation acted on an informed basis, in
good faith and in the honest belief that the action taken was
in the best interests of the company. Absent an abuse of
discretion, that judgment will be respected by courts.
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)
(citations omitted), overruled on other grounds
by Brehm v. Eisner, 746 A.2d 244 (Del.
2000). To overcome the "dangerous
terrain" of the business judgment rule presumption, the
plaintiff must assert facts that suggest the corporate
directors did not act in accordance with the rule.
Boland, 423 Md. at 329 (quoting Bender v.
Schwartz, 172 Md.App. 648, 666 (2007)). In other words,
"[t]he burden is on the party challenging the decision
to establish facts rebutting the
presumption." Aronson, 473 A.2d at 812.
has codified the business judgment rule in Maryland Code
(1976, 2014 Repl. Vol.), § 2-405.1 of the Corporations
and Associations Article ("C & A"). Section
2-405.1(a) imposes a duty on a director to act "(1) [i]n
good faith; (2) [i]n a manner he reasonably believes to be in
the best interests of the corporation; and (3) [w]ith the
care that an ordinarily prudent person in a like position
would use under similar circumstances." Under C & A
§ 2-405.1(e), "[a]n act of a director of a
corporation is presumed to satisfy the standards of
subsection (a) of this section." Maryland courts apply the
business judgment rule to "all decisions regarding the
corporation's management." Shenker, 411 Md.
at 344 (citing NAACP v. Golding, 342 Md. 663, 673
judicial review of a board's business decision under the
business judgment rule, shareholders must file a derivative
suit on behalf of the corporation. Werbowsky v.
Collomb, 362 Md. 581, 599 (2001). The obligation of
directors to perform their duties in accordance with good
business judgment runs to the corporation, not directly to
the shareholders. Id. Therefore, its breach gives
rise to a legal right that belongs exclusively to the
corporation. Id. By bringing a derivative action,
shareholders invoke "an extraordinary equitable device .
. . to enforce a corporate right that the corporation failed
to assert on its own behalf." Id. In a
derivative suit, "[t]he corporation is the real party in
interest and the shareholder is only a nominal plaintiff. The
substantive claim belongs to the corporation."
Id. (quoting 13 William Meade Fletcher et al.,
Cyclopedia of the Law of Private Corporations § 5941.10
(1995 Rev. Vol.)).
a derivative lawsuit intrudes upon the board of
directors' managerial control of the corporation,
shareholders are required to first make a demand that the
board take action before initiating a derivative suit.
Id. at 600. In Kamen v. Kemper Financial
Services, Inc., 500 U.S. 90 (1991), the Supreme Court
explained that "[t]he purpose of the demand requirement
is to afford the directors an opportunity to exercise their
reasonable business judgment and waive a legal right vested
in the corporation in the belief that its best interests will
be promoted by not insisting on such right."
Id. at 96 (citation omitted) (internal quotation
marks omitted). If the board of directors denies a litigation
demand, the shareholder must overcome the presumption of the
business judgment rule to continue the lawsuit.
Boland, 423 Md. at 331. The corporate board's
decision to deny the litigation demand receives the same
business judgment rule presumption as any other board
decision. Id. at 329-30.
decision in Boland, however, established an
exception to the application of the business judgment rule to
a board's decision to deny a shareholder litigation
demand. When a board consisting of a majority interested
directors utilizes a special litigation committee (an
"SLC") to evaluate a litigation demand, courts
apply a modified business judgment rule. Directors are
considered to be interested if they either "appear on
both sides of a transaction" or "expect to derive [
] personal financial benefit from it in the sense of
self-dealing, as opposed to a benefit which devolves upon the
corporation or all stockholders generally." Id.
at 329 (quoting Werbowsky, 362 Md. at 609). If a
majority of a corporate board is interested in the challenged
transaction, the board can appoint an SLC to decide whether
it should accept or deny the litigation demand. Through the
selection of the SLC's members, interested boards
"can retain a voice in the derivative lawsuit despite
the adverse interests of board members." Id. at
332. In Boland, we defined an SLC as a committee
"composed of independent, disinterested directors,
either inside the corporation ...