Oliveira v. Sugarman, 130 A.3d 1085

Background

iStar granted 10,164,000 restricted stock units (2008 Awards) that vested only if the stock hit specified price targets by certain dates; iStar lacked sufficient authorized shares, so it obtained shareholder approval of a 2009 Long-Term Incentive Plan (the 2009 Plan) to allow settlement in shares.
The stock narrowly missed the 2010 $7 target (hit eight trading days after deadline); after a six-month review, the Board adopted a 2011 Modification converting the awards from performance-based to service-based, reducing amounts by 25% and adding multi-year vesting.
Shareholders (Oliveira Trustees) demanded the Board investigate and litigate to rescind shares issued under the 2009 Plan or seek other relief; the Board created a one-member investigating committee (Director Ridings), retained outside counsel, investigated, and the full Board unanimously refused the demand in a detailed refusal letter.
Shareholders filed suit alleging derivative claims (breach of fiduciary duty, waste, unjust enrichment) and two claims styled as direct (breach of contract, promissory estoppel); defendants moved to dismiss for failure to state a claim and as improperly direct claims.
The Circuit Court dismissed the complaint for failure to state a claim; on appeal the Court of Special Appeals reviewed de novo and affirmed, holding the business judgment rule applied to the Board’s demand refusal and plaintiffs failed to rebut it; the purported direct claims were actually derivative and also failed on the merits.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the Board's refusal of the demand is subject to heightened (no-presumption) review like a Special Litigation Committee (SLC) or entitled to business judgment presumption	Boland requires that no presumption applies and the Board must produce evidence of independence, good faith, and reasonable investigation; plaintiffs should get discovery	The Board was a majority-disinterested, majority-independent board (not an SLC); therefore the business judgment rule presumption applies and plaintiffs must plead facts to overcome it	The business judgment rule applies because the full Board (majority independent/disinterested) refused demand; Boland’s no-presumption rule is limited to SLCs; demand refusal was presumptively valid
Whether plaintiffs overcame the business judgment presumption as to the demand refusal	Alleged procedural irregularities in the investigation, Ridings lacked independence/experience, and the Board’s reasons were pretextual	Investigation was adequate (experienced investigator, outside counsel, multiple interviews); Ridings was independent; statements in refusal letter presumed true absent particularized rebuttal	Plaintiffs failed to plead particularized facts to rebut the presumption; the refusal letter’s factual statements are presumptively true and plaintiffs offered only conclusory allegations
Whether the 2011 Modification violated the 2009 Plan (thus invalidating Board action) and whether that would make refusal unreasonable	The Modification exceeded Board authority under the 2009 Plan and invalidated treatment under the Plan	The 2009 Plan expressly gave the Board broad discretionary authority to grant and later determine awards and take other actions; even if improper, pursuing the requested litigation could harm the corporation	The court adopted the circuit court’s analysis that the 2009 Plan authorized the Board’s actions; even assuming impropriety, the Board could reasonably conclude litigation was not in the corporation’s best interest
Whether Counts IV (breach of contract) and V (promissory estoppel) are direct claims or derivative, and if direct whether they state claims	Styled as direct: plaintiffs claim breach of contract/promissory estoppel harmed shareholders (voting rights and economic injury)	Defendants: injuries alleged are to the corporation (iStar), so claims are derivative; plaintiffs identify no distinct shareholder-only injury or contract offer	Claims are derivative, not direct, because alleged injury (millions in compensation/tax liability) is to the corporation; alternatively, plaintiffs fail to plead a contract or promissory-estoppel elements

Key Cases Cited

Shenker v. Laureate Educ., 411 Md. 317 (Md. 2010) (differentiates direct versus derivative suits; direct suit allowed where shareholder suffers distinct injury)
Boland v. Boland, 423 Md. 296 (Md. 2011) (business judgment rule applies to board demand refusals; special scrutiny/no-presumption rule applies to SLCs)
Werbowsky v. Collomb, 362 Md. 581 (Md. 2001) (discusses demand requirement and directors’ presumptive authority; limited futility exception)
Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (formulation of business judgment presumption and burden to rebut it)
Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (notes that board approval of transaction alone does not render directors interested for demand futility)
Levine v. Smith, 591 A.2d 194 (Del. 1991) (no fixed procedure required for boards responding to demand; permitting discovery in demand-refused cases undermines directors’ authority)
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040 (Del. Ch. 2004) (mere friendships or outside business relationships generally insufficient to impugn independence)
Feldman v. Cutaia, 951 A.2d 727 (Del. 2008) (claims seeking damages flowing to the corporation are derivative)
In re Triarc Companies, Inc., 791 A.2d 872 (Del. Ch. 2001) (payment of corporate compensation gives rise to derivative, not individual, claim)