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Stisser v. SP Bancorp, Inc.

Court of Special Appeals of Maryland

November 29, 2017

SP BANCORP, INC., et al.

         Circuit Court for Baltimore City Case No. 24-C-14-003610

          Woodward, C.J., Leahy, Reed, JJ.

          OPINION [*]

          LEAHY, J.

         This appeal concerns Maryland's power to exercise personal jurisdiction over a company headquartered in Texas, as well as the out-of-state directors of another company that was incorporated in Maryland and headquartered in Texas. All relevant activity leading to the merger of companies challenged in the underlying shareholder action occurred outside Maryland except one: the incorporation of a transitory merger subsidiary.

         Gary W. Stisser and Fundamental Partners ("Appellants") are not residents of Maryland, but they owned shares of common stock in SP Bancorp, Inc. ("SP"), which was a company headquartered in Texas and incorporated in Maryland. They filed a shareholder class action in the Circuit Court for Baltimore City following the merger of SP into a newly formed subsidiary of Green Bancorp, Inc. ("Green")-a bank holding company incorporated under Texas law with its principal place of business in Texas.

         Appellants filed the lawsuit against SP and the individual members of SP's Board of Directors ("SP Directors") (collectively, the "SP Defendants"), and against Green and Green's newly-formed Maryland subsidiary, Searchlight Merger Sub, Inc. ("Searchlight") (collectively, the "Green Defendants").[1] Appellants' primary contention was that the SP Directors breached their fiduciary duty, aided and abetted by Green, in contriving the merger to advance their interests at the shareholders' expense. The circuit court granted motions to dismiss filed by the SP Defendants and the Green Defendants (together as "Appellees"), finding that the court lacked personal jurisdiction over the SP Directors and Green, and that, although the court had jurisdiction over SP and Searchlight, Appellants failed to state a claim against them.

         Appellants noted an appeal to this Court presenting four questions, which we have rephrased as follows:[2]

1. By forming Searchlight in Maryland for the purpose of consummating a merger, did Green subject itself to personal jurisdiction in Maryland?
2. Are the SP Directors subject to personal jurisdiction in Maryland because the Articles of Merger were filed in Maryland?
3. Were SP and Searchlight necessary parties under Maryland Rule 2-211(a)?
4. Does the Complaint state a claim for relief against each of the Appellees?

         We hold that Green was not subject to specific jurisdiction in Maryland because (1) the quality and quantity of its contacts in Maryland in relation to the merger did not rise to the level of "transacting any business" in Maryland within the meaning of Maryland's long-arm statute; and (2) Maryland's exercise of jurisdiction would not comport with traditional notions of due process under International Shoe Co. v. Washington, 326 U.S. 310 (1945), given Green's limited and attenuated contacts in Maryland. In accordance with the Supreme Court's recent decisions delimiting the authority of state courts to exercise general jurisdiction over nonresident corporations and corporate directors, we also conclude Green was not "at home" in Maryland for purposes of general personal jurisdiction. Bristol Myers Squibb Co. v. Superior Ct. of Cal, S.F. Cty., 137 S.Ct. 1773 (2017) [hereinafter "Bristol-Myers"]; BNSF Ry. Co. v. Tyrell, 137 S.Ct. 1549 (2017); Daimler AG v. Bauman, 134 S.Ct. 746 (2014); Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915 (2011). Consistent with Daimler, we hold that a nonresident parent corporation is not subject to general jurisdiction in Maryland based solely on its incorporation of a subsidiary within Maryland. We also decline to impute SP's contacts to its directors, and hold that the SP Directors-all nonresidents who never entered Maryland in connection with SP business-did not purposefully avail themselves of the privileges and protections of Maryland law.

         In light of these holdings, we do not reach Appellants' third and fourth questions.


         Back in October 2010, SP converted its business structure from a mutually-owned thrift to a stock-based ownership bank holding company. This conversion triggered federal regulations prohibiting the sale of SP for the next three years.[3] SP was incorporated in Maryland and served as the holding company and parent of SharePlus Bank, a Texas-chartered state bank. SP's principal place of business was in Texas, and the company did not have any offices or employees in Maryland. Indeed, according to the record on appeal, none of the SP Directors resided or were employed in Maryland.

         By mid-2012, the SP Directors began entertaining the idea of a possible merger with Green. On August 2, 2012, Mr. Jeffrey L. Weaver, SP's President, and Mr. Paul M. Zmigrosky, the Chairman of SP's Board of Directors, met in Dallas, Texas with representatives from Green, "during which the representatives of Green initiated a high level discussion of a potential reverse merger with SP Bancorp following expiration of the three year restriction."

         A. Preliminary Negotiations

         In July of 2013, SP hired Commerce Street Capital ("CSC"), an investment banking firm, to help find potential candidates to merge with SP. The next month, representatives from SP and Green met again in Texas to discuss a potential merger. On September 14, 2013, CSC presented SP with an analysis of a merger of equals, using Green as the basis for a merger partner. At this presentation, CSC advised the SP Directors on different growth strategies, including the purchase of a smaller financial institution, a merger of equals, or acquisition by a larger financial institution. Over the next few months, Mr. Zmigrosky and Mr. Weaver held preliminary discussions with several candidates, including a larger bank that the parties referred to as "Party A."

         On January 9, 2014, from its headquarters in Texas, Green submitted a letter of intent to purchase SP for $43 million, representing approximately $25.91 per share. In the letter, Green proposed retention agreements for certain members of SP's senior management and non-compete covenants for the remaining SP Directors. The SP Directors met the next day at their headquarters in Texas to discuss Green's offer as well as the preliminary negotiations with Party A. At the meeting, the SP Directors decided to form a mergers and acquisitions subcommittee ("Committee"), composed of Chairman Zmigrosky and Directors Carl Forsythe, P. Stan Keith, and Jeff Williams. The Committee, in part, served to shield Mr. Weaver from merger negotiations due to the concern that, as President, Mr. Weaver was likely to be offered continued employment post-merger.

         Throughout February, the Committee negotiated with and considered offers from Party A and a third entity. The most valuable offer came from Party A for approximately $23.78 per share comprised of cash and Party A stock. After learning of Party A's offer, Green revised its own offer, and increased the original offer price by approximately 21%. Ultimately, the Committee determined that Green's second offer was the best option, and on February 27, 2014, the Committee recommended that the full board of SP Directors accept Green's offer. In response, the SP Directors instructed the Committee to terminate negotiations with Party A and execute Green's non-binding letter of intent.

         B. SP and Green Negotiate the Merger

         Green and SP, through outside counsel, continued negotiations and conducted due diligence in Texas and in New York over the course of the next month. Then, on March 28, 2014, Mr. Weaver met with representatives from Green in Dallas to discuss the possibility of his post-merger employment with Green. Three days later, CSC disclosed to SP that it owned a 3% share in Green. The Committee met with its legal counsel to discuss CSC's potential conflict of interest and determined that CSC had no existing commercial relationship with Green but, to avoid any potential impropriety, the Committee decided to engage Mercer Capital Management, Inc. as an independent advisor to render a fairness opinion on the merger.

         On April 24, 2014, the SP Directors met with counsel, CSC, and Mercer to discuss Green's proposal. At this meeting, Mercer offered its preliminary conclusions from its fairness inquiry, indicating a "strong comfort level" that the merger met or exceeded SP's fair market value. Then, on May 1 and 5, 2014, the SP Directors met in Texas with legal counsel and the two financial advising firms to consider the merger. On May 1, the Committee provided the SP Directors with their recommendation to approve the merger. On May 5, Mercer issued its opinion that the merger was fair. Using multiple measures, Mercer valued SP in a range between $16.20 and $32.05 per share. Green's final proposed offer would pay $29.55 per share, which put the purchase price in the 96th percentile of Mercer's valuation-a 24.26% increase from Green's initial offer and approximately 40% over the price at which SP's shares closed the day prior. This 40% difference between purchase price and market price of the shares represented the approximate cash payout for shareholders.[4] Mercer concluded that the merger with Green was "fair, from a financial point of view, to [SP's] shareholders." At the meeting's conclusion, on May 5, the SP Directors voted unanimously to approve the merger agreement.

         SP announced the merger agreement that same day and set August 15, 2014, as the record date for its special meeting, at which point then-current owners of SP common stock would be entitled to a vote at the special meeting. The special meeting, scheduled for October 8, 2014, in Plano, Texas, required a quorum of eligible voters, in person or by proxy, representing a majority of SP's 1, 602, 313 outstanding shares of common stock. Of those voting shareholders, the merger agreement required a bare majority for its approval.

         C. Shareholders Institute a Class Action

         Following SP's announcement, Mr. Stisser and Fundamental Partners filed class actions on June 10 and 12, 2014, respectively, on their own behalf and on behalf of those similarly situated, against the Appellees and CSC in the Circuit Court for Baltimore City.[5]The circuit court thereafter granted the Appellants joint motion to consolidate their claims into a single action.

         On August 25, 2014, SP filed its definitive proxy statement with the Securities Exchange Commission ("SEC") pursuant to Section 14(a) of the Securities Exchange Act of 1934, and sent copies of the statement from Texas to its shareholders, informing them it would hold a special shareholder meeting in Texas. Just over two weeks later, on September 10, the Appellants filed a motion for preliminary injunction in Baltimore, asking the circuit court to enjoin the merger. Meanwhile, in Texas, Green offered Mr. Weaver a position post-merger.

         On October 3, 2014, SP filed a supplement to its original proxy, which it sent to the SEC and all shareholders. The supplement disclosed, among other things, that in 2013, SP "sold certain market rate loans made by SP [] to certain of its directors and officers to Green." It also explained that, as early as March 28, 2014, Green's President and CEO, Mr. Geoffrey D. Greenwade, expressed his intention to employ Mr. Weaver post-merger. For this reason, the supplement explained, Mr. Weaver "was expressly excluded" from the Committee. Additionally, it disclosed the basis and methodology of Mercer's fairness opinion, including the factors Mercer considered in predicting SP's potential growth rate. Additionally, it explained the basis of the approximately 21% increase in Green's proposal, that Party A had expressed difficulty competing with a cash offer, and that Party A's second offer was "substantially equivalent to [its] prior proposal." Accordingly, the Committee believed Party A's offer would be "economically dilutive to [SP] stockholders and subject to significant execution risk[, ]" and the Committee broke off negotiations with Party A because Green's offer "presented more value to [SP] stockholders[.]" SP postponed its special shareholder meeting from October 8 to October 15 "in order to provide stockholders with additional time to consider the supplemental disclosures."

         Back in Maryland, three days after SP supplemented its proxy statement, the circuit court held a conference call with the parties to discuss the status of the Appellants' motion for preliminary injunction. Following that call, Appellants sent the court a letter stating that they believed their claims were still viable, but conceding that it would "be difficult, if not impossible to demonstrate the requisite irreparable harm and balancing of the equities[]" necessary to support a preliminary injunction. Consequently, Appellants asked the court to remove the next day's oral argument from the court calendar.

         SP convened its special meeting in Texas on October 15, 2014, and 99.5% of the SP shareholders who voted cast their votes in favor of the merger, with 75.8% of the total outstanding shares voting in favor of the merger. SP, along with Searchlight, Green's newly formed subsidiary in Maryland, filed articles of merger with the Maryland State Department of Assessments and Taxation on October 17, 2014 ("Articles of Merger").[6] As explained in the proxy statement,

Searchlight Merger Sub Corp., a wholly owned subsidiary of Green, [was] a newly formed Maryland corporation created solely for the purpose of engaging in the transactions contemplated by the merger agreement and ha[d] not carried on any activities other than in connection with the merger. The address of the Merger Sub [wa]s 4000 Greenbriar St., Houston, Texas[.]

         When SP and Searchlight effected the merger, Searchlight merged into and was subsumed by SP.

         D. The Underlying Complaint

         On November 7, 2014, Appellants filed an amended consolidated complaint ("Complaint") in the Circuit Court for Baltimore City. The Complaint stated that the circuit court had jurisdiction over each SP Director for the following reasons:

(a) [each Director] created continuing obligations invoking the benefits and protections of Maryland law between [himself/herself] and SP Bancorp, which was incorporated in, and hence a resident of, this State at the time of the actions challenged herein; and (b) [each Director's] improper conduct alleged in this Complaint occurred in substantial part, was directed at, intended to have its primary effect in, and/or culminated in purposeful actions in, this State.

         The Complaint alleged that collectively, the SP Directors,

acting deliberately, dishonestly, breached their fiduciary duties to SP Bancorp's public shareholders by acting to cause or facilitate the [Merger] Agreement[.] . . . The [Merger] Agreement was not in the best interests of SP Bancorp's shareholders, but was, and is, in the best interests of the Individual Defendants. This is particularly true of Mr. Weaver, who received significant personal profits as a result of the [Merger] Agreement and fully expected to be employed by the surviving company following consummation of the [Merger] Agreement.

         The Complaint also asserted that to "exert influence" over the SP Directors, Green purchased SP's outstanding loans to Directors Williams, Forsythe, and Cozby during the summer of 2013. Additionally, Appellants suggested that the SP Directors were self-interested in the merger agreement because it entitled them to cash payments for unvested stock options as well as a "change in control" severance payment.

         Counts I - III alleged that the SP Directors breached their fiduciary duties; aided and abetted Mr. Weaver's breaches of loyalty, fair dealing, and due care;[7] and breached their duty to disclose all material facts in the proxy statement. In Count IV, Appellants alleged that Green aided and abetted the SP Directors' alleged breaches of fiduciary duties by (1) promising Mr. Weaver post-merger employment; (2) discussing the merger within the three-year period following SP's conversion from a mutually-owned thrift, during which federal regulations prohibited SP from negotiating a merger; (3) purchasing loans owed by the SP Directors to exert undue influence over them; (4) concealing from the SP Directors that CSC was a shareholder in Green; (5) soliciting a No Solicitation Clause; (6) negotiating the merger with an intent to exploit the SP Directors' conflicts of interest; (7) negotiating a termination fee should the merger break down; and (8) agreeing to indemnify the SP Directors. Finally, in Count V, the Complaint asserted a claim against CSC for aiding and abetting the SP Directors' alleged breaches of fiduciary duties.

         E. Motions to Dismiss

         On December 19, 2014, the SP Defendants filed a motion to dismiss the Complaint against them, arguing that the court lacked personal jurisdiction over the SP Directors and that the Complaint failed to state a claim upon which relief could be granted against the SP Defendants. The motion included an affidavit of Director Williams, in which he attested that he was an SP Director prior to the merger and:

3. SP Bancorp, Inc. has at all times since its formation had its corporate offices in Plano, Texas. SP Bancorp, Inc., has not had any branch or office in Maryland, and has not conducted any corporate business in Maryland.
4. The banks previously owned and operated by SP Bancorp, Inc. were all located in the greater Dallas, Texas area, Louisville, Kentucky and Irvine, California.
5. The meetings of the SP Directors took place in Plano, Texas or sometimes by phone from Plano, Texas.
6. The SP directors all live in Texas. Paul Zmigrosky also has a residence in Michigan. Carl Forsythe also has a residence in Massachusetts.
7. On January 10, 2014, the SP Directors formed a Strategic Review Committee . . . to consider potential strategic transactions involving SP Bancorp. I was a member of that committee. The [] committee held its meetings in Texas, or by phone from Texas.

         The SP Defendants refuted Appellants' claim that SP was sold under value by pointing out that the merger was approved unanimously by all ten SP Directors, and that each owned substantial stock in the company and, therefore, had a personal interest in achieving the maximum sale price for the sale of SP. They also contended that other than Mr. Weaver, none of the remaining nine Directors were alleged to have any potential role in the surviving bank and, "like the other SP Bancorp shareholders, the SP Directors' ownership interest was completely extinguished by the cash-out Merger." Therefore, the Appellants based their Complaint "on the implausible assertion that all nine of the disinterested SP directors approved a merger that was contrary to each of their financial interests solely because Mr. Weaver might obtain a job with the surviving bank." Regardless, they argued, the SP Directors were not subject to jurisdiction in Maryland because SP is a "phantom" corporation, with none of its operations taking place in Maryland-it's headquartered in Texas and operates in Texas, Kentucky, and California.

         The Green Defendants also filed a motion to dismiss the claims against Green for lack of personal jurisdiction, and to dismiss the claims against both Green Defendants for failure to state a claim. They asserted that Maryland lacked personal jurisdiction over Green because all of the conduct on which Appellants based their claims occurred outside of Maryland and Green had no other connection to the forum. Additionally, they argued that Appellants failed to state a claim against Searchlight, because they "d[id] not make a single allegation about any conduct, let alone wrongful conduct, " by Searchlight. Included with their motion was an affidavit by Mr. Greenwade, who attested that Green was incorporated and headquartered in Texas with "no offices or employees in Maryland." He further attested that Green does not solicit business in Maryland, "has no local address or local telephone number[, ]" and "no agent to accept service in Maryland." In regard to the merger, he specified that no merger negotiations occurred in Maryland; that Green sent the letter of intent from Texas to the SP Directors in Texas; that SP responded by sending a letter to Green in Texas; that the parties negotiated in Texas and through counsel in New York; that Green conducted due diligence at SP's offices in Texas; that Green offered employment to Mr. Weaver by telephone in Texas; that Green signed the merger agreement in Texas and that he (Greenwade) believed that SP did as well; that the SP shareholders voted at a meeting in Texas; and that Green purchased the loans of several SP Directors from its offices in Texas.

         Appellants countered that the SP Directors were subject to jurisdiction in Maryland because they "transacted business" in the forum by causing the merger between SP and Searchlight to be consummated in Maryland with the filing of the Articles of Merger. Appellants also contended that the SP Directors were subject to jurisdiction because the alleged tortious conduct-breaching their fiduciary duties-was not complete until the merger was consummated in Maryland. Exercising jurisdiction would satisfy due process, Appellants argued, because the SP Directors chose to consummate the merger in Maryland and chose Maryland law to govern the merger. Appellants insisted that "the formation of a Maryland corporation to acquire another Maryland corporation and the consummation of that acquisition in Maryland is precisely the sort of 'significant activity' in Maryland that supports long arm jurisdiction." Jurisdiction would comport with due process, according to Appellants, because Green purposefully availed itself of Maryland law by choosing to organize Searchlight under Maryland law rather than the law of another state.

         The circuit court held a hearing on Appellees' motions on March 27, 2015. Subsequently, in a Memorandum Opinion and Order issued on April 8, 2015, the court dismissed the actions against Green and the SP Directors for lack of personal jurisdiction and/or failure to state a claim, and dismissed the actions against Searchlight and SP for failure to state a claim. The court began with some general observations: neither SP nor Green had offices in Maryland or solicited business within the state; none of the SP Directors resided in Maryland; Green initiated merger negotiations in Texas; Green sent the letter of intent from Texas to SP in Texas; SP responded by sending its own letter to Green within Texas and negotiations continued in Texas and New York; and Green conducted due diligence in Texas.

         The court ruled that Green was not subject to general jurisdiction in Maryland based on its incorporation of Searchlight in the state and that the Appellants otherwise "failed to show a 'substantial connection' between Green and Maryland, as they have not demonstrated that Green engaged in 'significant activities' or 'created continuing obligations' in Maryland." Appellants, according to the court, provided no substantive support for their "principal-agent" theory between Green and Searchlight, only "vaguely allud[ing]" that Green was Searchlight's alter ego. Further, the filing of the Articles of Merger, which incorporated Searchlight, was not a "purposeful tortious act" under Maryland's long-arm statute, and no injury was felt in Maryland because Searchlight's incorporation was not central to the case. The court noted that "Searchlight did not exist until after the parties agreed to the Merger." Green did not "invoke" the benefits of Maryland law, the court continued; instead, it selected Delaware law to govern the merger and purchased a business that did not operate within Maryland. The court concluded that Maryland has neither general nor specific personal jurisdiction over Green, after observing the following:

Plaintiffs have provided no support for their argument that forming a subsidiary is a "significant activity" that supports long-arm jurisdiction. Green has not engaged in "significant activities" or "created continuing obligations" in Maryland. Green is incorporated in Texas and has its headquarters in Houston. All of its branches are in Texas, except a branch in Kentucky[, ] which was established subsequent to the Merger. Green has no local offices in Maryland nor does it conduct, transact, or solicit business in Maryland. Furthermore, it has no employees, addresses, telephone numbers, or agents for service of process in Maryland. No merger negotiations occurred in Maryland, and all of the meetings between Green and SP [] occurred in Texas, except for negotiations by counsel in New York.

         Turning to the SP Directors, the court ruled that Appellants failed to prove that the

         Directors purposefully availed themselves of the laws of Maryland. The court ruled that mere acceptance of a directorship is not enough to subject the SP Directors to personal jurisdiction, reasoning that, unlike states such as Delaware, Maryland has not adopted a statute subjecting corporate directors to personal jurisdiction based on their acceptance of a directorship. Further, the court held, SP's conduct was not attributable to its Directors. It was SP-not the SP Directors-that signed and filed the Articles of Merger in Maryland. All of the SP Directors' conduct-the directors' meetings, ...

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