United States: Maryland Appellate Courts To Hear Important Maryland Corporate Law Appeals

Last Updated: October 14 2016
Article by Scott R. Wilson and Tunji O. Williams

On Friday, October 7, 2016, the Court of Appeals of Maryland and the Maryland Court of Special Appeals will each hold oral argument in appeals with implications for Maryland corporations and their directors. In Oliveira v. Sugarman, No. 17 Sept. Term 2016, the Court of Appeals of Maryland will consider:

  1. Whether stockholders of a Maryland corporation may bring direct claims against a board of directors for alleged breaches of the duty of candor in a proxy statement and for alleged breaches of a stockholder-approved incentive stock plan?
  2. Whether a board of directors is entitled to the presumption of the business judgment rule contained in Section 2-405.1 of the Maryland General Corporation Law when responding to a stockholder demand without presenting evidence that the board acted independently, in good faith, and was reasonably informed as required by Boland v. Boland, 423 Md. 296 (2011)?

In Stisser v. SP Bancorp, Inc., No. 1790 Sept. Term 2015, the Maryland Court of Special Appeals will consider (among other things):

Are directors of a Maryland corporation subject to specific personal jurisdiction in Maryland for claims brought by or in the right of the corporation against the director?

Each of these cases could have significant ramifications for Maryland corporations and their directors.

Court of Appeals to Review Denial of Stockholder Demand

In February, we blogged that the Maryland Court of Special Appeals, in Oliveira v. Sugarman, 226 Md. App. 524 (2016), held that the rejection of a stockholder demand by a disinterested board of directors is entitled to the presumption of the statutory business judgment rule now codified in Section 2-405.1(g) of the Maryland General Corporation Law (formerly Section 2-405.1(e)). In reaching its decision, the Court of Special Appeals analyzed Boland, which concerned the applicable standard of review pertaining to decisions of a special litigation committee ("SLC"). In Boland, the Court of Appeals held that in order for the substantive conclusions of an SLC are entitled to judicial deference, the SLC must be independent, act in good faith, and make a reasonable investigation and principled factually supported conclusions. The Court further held that an SLC and corporate defendants are not entitled to a presumption as to those requirements. Consequently, where an SLC has resolved not to pursue a demand or to terminate existing derivative litigation, in order for that determination to result in the dismissal of derivative litigation, the SLC and the corporate defendants bear the initial burden with regard to independence, good faith, and the reasonableness of the investigation.

In Oliveira, the Court of Special Appeals considered whether the Boland standard – specifically the loss of the presumption as to independence, good faith and reasonable process– applies to a decision of a board of directors (comprised of a majority of disinterested directors) to refuse a stockholder demand or only to the decisions of an SLC (where the majority of the board of directors is interested or conflicted). The Court of Special Appeals held that an SLC is only necessary where the board as a whole lacks disinterestedness and independence. But where the board is otherwise able to establish a quorum of disinterested directors and act in response to a stockholder demand, the Boland standard has no application such that the court reviews the decision to reject a stockholder demand pursuant to the presumption contained in the statutory business judgment rule.

Somewhat conflated in the appellant-stockholder's briefing in Oliveira, however, are (1) the prior conduct of the board of directors that forms the substantive basis for the stockholder demand and resulting derivative claims, and (2) the decision of the board of directors to deny the stockholder demand. Without question, the actions of the board of directors with regard to item 1 are protected by the statutory business judgment rule. The issue presented in Oliveira is whether the decision of the board of directors to deny the stockholder demand and pursue the litigation at all (or take other remedial action) should be entitled to the same judicial deference following Boland. Stated otherwise, even if the Court of Appeals concludes that a denial of a stockholder demand by a board of directors should not be afforded the protection of the statutory business judgment rule, notwithstanding the plain language of Section 2-405.1 of the Maryland General Corporation Law, motions to dismiss will continue to serve as an important gatekeeping function as the underlying conduct and substantive decisions that form the basis for the derivative action will nevertheless be entitled to the protection of the statutory business judgment rule.

Do Stockholders Have Direct Claims for Breach of a Stockholder-Approved Long Term Incentive Plan?

A second issue presented in Oliveira, and the first issue that the appellant-stockholder chose to argue in its brief, concerns a species of litigation that has been popular in other jurisdictions: executive compensation litigation based upon alleged breaches of stockholder-approved equity incentive plans. In the lower courts, the appellant-stockholder argued that a breach of a corporation's long-term incentive plan, which stockholders approve at an annual meeting largely for tax reasons related to Section 162(m) of the Internal Revenue Code, results in a direct breach of contract claim in favor of each stockholder of the corporation or, alternatively, could be the basis for a direct tort claim against the board of directors under Shenker v. Laureate Education, Inc., 411 Md. 317 (2009). In Oliveira, the Court of Special Appeals rejected both of these arguments holding that such claims are quintessentially derivative under existing Maryland case law. The Court of Appeals will be called upon to revisit the distinction between direct and derivative litigation.

Impact of Amendments to Section 2-405.1 of the Maryland General Corporation Law

Interestingly, each of the issues presented in Oliveira will be argued on October 7, 2016 – six days after the effective date of recent amendments to Section 2-405.1. While the appellant relies heavily on Shenker and the common law duties outside of Section 2-405.1 owed directly to stockholders under Shenker, the amendments to the statute eliminate the distinction between managerial and non-managerial acts, resolve the surrounding confusion, and clarify that Section 2-405.1 is the sole source of a director's duties. As such, although the appellant-stockholder's arguments are largely divorced from Section 2-405.1, any future analysis of similar claims must start with the standard articulated in Section 2-405.1(c). Perhaps more importantly, if the Court of Appeals were to conclude that a direct action is appropriate under Section 2-405.1, any resulting litigation against a director will be subject to the statutory business judgment rule articulated in amended subsection (g). 

Court of Special Appeals to Consider Personal Jurisdiction of Maryland Directors

As we blogged in July 2015, in Gary W. Stisser v. SP Bancorp, Inc., Case No. 24-C-14-003610 (Balt. Cir. Ct. April 13, 2015) the Circuit Court for Baltimore City granted motions to dismiss in stockholder litigation (in part) for lack of personal jurisdiction over the director defendants. The Circuit Court held that service as a director of a Maryland corporation does not establish specific personal jurisdiction with regard to claims against the director brought by or in the right of the corporation. As previously discussed in our May 5, 2015 client alert, this holding appears contrary to an earlier interlocutory decision in Costa Brava Partnership III, L.P. v. Telos Corp., Case No. 24-C-05-009296 (Balt. Cir. Ct. March 30, 2006). For the Maryland appellate courts, this will be a matter of first impression.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions