Opinion ID: 53575
Heading Depth: 4
Heading Rank: 1

Heading: Independent Trustees

Text: Before addressing Hartman’s two principal arguments regarding trustee independence, we note preliminarily that, as with the Board’s decision to repeal the majority written consent bylaw provision, it is of no consequence in this case whether the business judgment rule or a stricter fiduciary standard applies to the Board’s opt-in to the MUTA. The REIT contends, and the district court agreed, that the business judgment rule applies to the Board’s decision to opt in to the MUTA provisions. In contrast, Hartman insists that a stricter fiduciary standard should apply. It matters not whether a stricter fiduciary standard or the more lenient business judgment rule is applicable, because Maryland law expressly dictates that a board member has no duty to shareholders to refrain from opting in to the MUTA. Specifically, subsection (d) of section 2-405.1, which is expressly incorporated into Maryland’s REIT statute, states: “The duty of the directors of a corporation does not require them to: . . . refrain from electing on behalf of the corporation to be subject to any or all of the provisions 7 No. 07-20315 of Title 3, Subtitle 8 of this article [the MUTA].”5 Consequently, if opting in to the MUTA was itself proper, then the Board could not have breached any duty to the REIT’s shareholders by opting in. We also note preliminarily that, contrary to the district court’s belief, Maryland law does not prohibit judicial review of a board’s action to opt in to the MUTA. True, courts are prohibited from reviewing a board’s substantive decision to opt in to the MUTA; but courts may review whether the procedural prerequisites for opting in are satisfied.6 Here then, the “method by which” the Board opted in to the MUTA — the very question posed in the instant case — is subject to judicial review.7 We now address whether the method employed by the Board was proper. First, the Board did meet the MUTA’s opt-in requirement for three independent trustees. The MUTA mandates that, to opt in to the provisions of the statute, an entity must have at least three independent directors “who, at the time of any election are not officers or employees of the corporation; are not acquiring persons; are not directors, officers, affiliates, or associates of an acquiring person; and were not nominated or designated as directors by an acquiring person.”8 We recognize that this statutory language could be twisted abusively by boards of directors or trustees to immunize themselves from shareholder influence and thereby improperly subvert shareholder interests. In the context of the instant case, though, we read the language of the MUTA to 5 MD. CODE CORPS. & ASS’NS § 2-405.1(d). 6 Goldstein v. Lincoln National Convertible Securities Fund, Inc., 140 F.Supp.2d 424, 438 (E.D. Pa. 2001), vacated in part on other grounds, 2003 WL 1846095 (3rd. Cir. 2003). 7 Id. 8 MD. CODE CORPS. & ASS’NS § 3-802(b). 8 No. 07-20315 require that at least three of the REIT’s Trustees be independent of Hartman at the time that the REIT opted in to the MUTA. Hartman makes two challenges to trustee independence. He first asserts that two of the four Trustees do not qualify as independent directors under the MUTA because, as a result of their status as limited partners in one of his unrelated non-REIT partnerships, they were his “associates” and thus not independent, as defined by the statute. Hartman is mistaken. The MUTA precisely defines “associate” of an acquiring person, and the two Trustees of the REIT singled out by Hartman do not meet this definition.9 The fact that these two Trustees of the REIT were limited partners in an entity unrelated to the REIT itself does not compromise their independence. Meriting closer scrutiny, however, is Hartman’s second contention concerning the independence of the REIT’s Trustees, viz., that, because he is attempting to acquire the REIT, and he originally nominated three of the four current Trustees to the Board, these three individuals do not qualify as independent directors. Under the MUTA, board members who “were nominated or designated as directors by an acquiring person”10 are not independent for optin purposes. Hartman contends that, as he originally nominated three of the REIT’s four Trustees, his current status as an acquiring person forever bars these three individuals from being independent vis-à-vis him, i.e., “once nominated, forever nominated.” But Hartman fails to recognize that the statute 9 Under the MUTA, associate means: “(1) Any corporation or organization (other than the corporation or a subsidiary of the corporation) of which such person is an officer, director, or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities; (2) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (3) any relative or spouse of such person, or any relative of such spouse, who has the same principal residence as such person or who is a director or officer of the corporation or any of its affiliates.” Id. § 3-801(e). 10 Id. § 3-802(b) (emphasis added). 9 No. 07-20315 considers a director’s status only “at the time of any election.”11 The three Trustees were independent for purposes of the votes here at issue because, before this election, they had been re-nominated by the Board, not by Hartman. Their terms of office during which the vote was taken to amend the bylaws and opt in to the MUTA were terms for which they had been nominated by the Board itself. Under the instant circumstances, the only nomination that matters is the most recent one. Any taint connected to an acquirer’s prior nomination of a trustee evanesces with a subsequent nomination for re-election of the trustee by a non-acquirer (e.g., the Board or a third party). The MUTA subparagraph at issue reads “were not nominated or designated,” not “were never nominated or designated.” The Maryland legislature could have used the latter phraseology or something similar if it had intended to make the taint of nomination by one party permanent. We thus follow the language enacted by, and what we judge to be the intent of, the Maryland legislature, and hold that the three Trustees in question were independent when the Board opted in to the MUTA. It is obvious to us that, in this case, the Board was justly trying to protect the REIT and its shareholders from a former CEO who had allegedly done damage to the REIT. In more predictable fact patterns, our reading of the MUTA language at issue could conceivably open the door for a potentially acquiring person to stack a board with his own nominees, and then claim that those same nominees later became independent because they were most recently re-nominated by the very same stacked board. We are not unmindful, therefore, that our interpretation of the MUTA could allow managers to perpetuate incestuous, self-serving boards, thereby emasculating the intended protection of shareholders. Today, however, we are bound by the plain language of the statute: We leave to the legislature or courts of Maryland the task of revising 11 Id. § 3-802(b)(1). 10 No. 07-20315 and clarifying this provision of the MUTA if either finds that our statutory interpretation and application has missed the mark.