Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Oliveira v. Sugarman

Court of Appeals of Maryland

January 20, 2017


          Argued: October 7, 2016

         Circuit Court for Baltimore City Case No.: 24-C-14-001243

          Barbera, C.J. Greene Adkins McDonald Watts Hotten Getty, JJ.


          Adkins, J.

         Petitioners 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.


         Petitioners 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 Directors.[1]

         The 2008 Awards and 2009 Plan

         On 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.

         On 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."

         The 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.

         On 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.

         In 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").

         Under 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.

         Demand and Response

         On May 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."

          In 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.

         In a 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' fees."

         Legal Proceedings

         On 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 Petitioners' claims.

         Petitioners 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 552.

         We granted certiorari to answer the following questions: [2]

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 promissory estoppel?

         We answer no to both questions. Therefore, we shall affirm the judgment of the Court of Special Appeals.


         Petitioners 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).


         Petitioners 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.[3]

         Respondents, 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 rule.

         The Business Judgment Rule

         Under 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).[4] 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."[5] Aronson, 473 A.2d at 812.

         Maryland 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."[6] 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."[7] 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 (1996)).

         To seek 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.)).

         Because 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.

         Our 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 ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.