Oliveira v. Sugarman
152 A.3d 728
Md.2017Background
- iStar’s board granted performance-based restricted stock units in 2008 (the “2008 Awards”) tied to stock-price hurdles; shareholders later approved a 2009 equity plan to authorize shares to satisfy those awards.
- The 2008 Awards failed to vest on the original schedule; after the stock nearly met a target in 2010, the board converted the awards from performance-based to service-based (the 2011 Modification), reducing amounts by 25% and spreading payments.
- Shareholders (the Oliveiras) demanded the board investigate and pursue claims challenging the 2011 Modification and sought rescission or other relief; the board appointed a non-management director-led committee which recommended denial, and the board unanimously refused the demand.
- The Oliveiras sued derivatively and directly for breach of fiduciary duty, unjust enrichment, waste, breach of contract, and promissory estoppel; the trial court dismissed all claims and the Court of Special Appeals affirmed.
- The Court of Appeals addressed (1) whether the Boland modified-business-judgment standard applies when a disinterested, independent board denies a litigation demand, and (2) whether the breach-of-contract and promissory-estoppel counts were direct claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standard of review for denial of shareholder litigation demand | Boland’s enhanced scrutiny should apply to any board denial of a demand because boards are structurally biased | Traditional business judgment rule applies to disinterested, independent boards; Boland applies only when an interested board uses an SLC | Boland does not apply; traditional business judgment rule governs when the board is majority disinterested and independent |
| Nature of the Committee’s action (SLC vs. advisory) | Committee recommendation should not insulate the board; heightened scrutiny required even when board just relies on a committee | Boland’s concern is about interested boards using an SLC to preserve deference; here the board retained decision-making and was disinterested | Court declined to expand Boland; no heightened scrutiny where board was disinterested and independent |
| Breach of contract claim—whether the 2009 Plan is a contract enforceable directly by shareholders | 2009 Plan (and related disclosures) created contractual rights between shareholders and the board enabling direct enforcement (NAF Holdings analogy) | The Plan lacks offer/acceptance and shows board reserved amendment/termination power; no intent to be bound to shareholders as contracting parties | 2009 Plan is not a contract with shareholders; breach-of-contract claim is derivative and was properly dismissed |
| Promissory estoppel based on proxy statements (uninformed vote) | Proxy statements and solicitation letters promised performance-based vesting inducing approval of the 2009 Plan; shareholders suffered injustice from an uninformed vote | Any injury (tax cost, dilution, uninformed vote) is corporate injury, not a distinct personal injury required for direct relief | Promissory estoppel fails: although statements may be promissory, plaintiffs did not allege an injustice or individual damages distinct from corporate harm; claim is derivative |
Key Cases Cited
- Boland v. Boland, 423 Md. 296 (Md. 2011) (adopted enhanced procedural scrutiny for special litigation committees when a board lacks a majority of disinterested directors)
- Werbowsky v. Collomb, 362 Md. 581 (Md. 2001) (derivative suit and demand requirement principles)
- Shenker v. Laureate Educ., Inc., 411 Md. 317 (Md. 2009) (test for direct vs. derivative claims; distinct injury requirement)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (formulation of the business judgment rule presumption)
- Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981) (Delaware approach of independent judicial review of SLC decisions)
- Auerbach v. Bennett, 393 N.E.2d 994 (N.Y. 1979) (deferential treatment of SLC decisions under New York law)
- NAF Holdings, LLC v. Li & Fung (Trading) Limited, 118 A.3d 175 (Del. 2015) (distinguishing direct contractual rights held by a shareholder separate from the corporation)
- Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (limited circumstances where dilution by a controller can support a direct claim)