Opinion ID: 2345086
Heading Depth: 2
Heading Rank: 2

Heading: Derivative and Direct Suits

Text: The Court of Special Appeals held that Petitioners could not pursue their claims for breach of fiduciary duty directly because § 2-405.1(g), also added in 1999, bars all shareholder direct claims and they had presented no evidence that their grievances are personal to them rather than common to all of Laureate's shareholders. Thus any such claim for breach of fiduciary duties had to proceed derivatively, if at all. Petitioners argue that the only parties with any interest inand therefore, with any claim regardinghow much Laureate's public shareholders would personally receive for their shares are the shareholders themselves, and that the only means available for [Petitioners] to protect themselves from loss of their property for inadequate consideration as a direct result of the breaches of fiduciary duties by [Board Respondents] is through a direct action. They claim that, when it comes to the consideration that shareholders receive for their stock in a cash-out merger transaction, the corporation has no interest and, thus, no enforceable right to be asserted derivatively. In riposte, Board Respondents contend that a direct claim by a shareholder for breach of duty cannot proceed unless there was an independent and personal relationship between the shareholder and the director. We agree with Petitioners and hold that, in a cash-out merger transaction where the decision to sell the corporation already has been made, shareholders may pursue direct claims against directors for breach of their fiduciary duties of candor and maximization of shareholder value. The business and affairs of a corporation, including the decision to institute litigation, are managed generally under the direction of its board of directors. Bender v. Schwartz, 172 Md.App. 648, 665, 917 A.2d 142, 152 (2007). Ordinarily, a shareholder does not have standing to sue to redress an injury to the corporation resulting from directorial mismanagement. Mona, 176 Md.App. at 697-98, 934 A.2d at 464. Developed as a check on directorial power, the derivative form of action permits an individual shareholder or group of shareholders to bring suit to enforce a corporate cause of action against officers, directors, and third parties where those in control of the company refuse to assert a claim belonging to it. Bender, 172 Md. App. at 665, 917 A.2d at 152; Mona, 176 Md.App. at 698, 934 A.2d at 464. The purpose of the derivative action is to place in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of `faithless directors and managers.' Danielewicz v. Arnold, 137 Md.App. 601, 626, 769 A.2d 274, 289 (2001) (quoting Cohen v. Beneficial Indus Loan Corp., 337 U.S. 541, 548, 69 S.Ct. 1221, 1226, 93 L.Ed. 1528 (1949)). In Waller v. Waller , we outlined in detail the general concept of the derivative suit and the reasons for allowing such claims: It is a general rule that an action at law to recover damages for an injury to a corporation can be brought only in the name of the corporation itself acting through its directors, and not by an individual stockholder though the injury may incidentally result in diminishing or destroying the value of the stock. The reason for this rule is that the cause of action for injury to the property of a corporation or for impairment or destruction of its business is in the corporation, and such an injury, although it may diminish the value of the capital stock, is not primarily or necessarily a damage to the stockholder, and hence the stockholder's derivative right can be asserted only through the corporation. The rule is advantageous not only because it avoids a multiplicity of suits by the various stockholders, but also because any damages so recovered will be available for the payment of debts of the corporation, and, if any surplus remains, for distribution to the stockholders in proportion to the number of shares held by each. Waller v. Waller, 187 Md. 185, 189-90, 49 A.2d 449, 452 (1946). We continued to say that: Generally, therefore, a stockholder cannot maintain an action at law against an officer or director of the corporation to recover damages for fraud, embezzlement, or other breach of trust which depreciated the capital stock or rendered it valueless. Where directors commit a breach of trust, they are liable to the corporation, not to its creditors or stockholders, and any damages recovered are assets of the corporation, and the equities of the creditors and stockholders are sought and obtained through the medium of the corporate entity. Id. at 190, 49 A.2d at 452. In order to sue derivatively on behalf of the corporation, a plaintiff shareholder must overcome a number of procedural hurdles and demonstrate that he or she, rather than the corporation itself, should control the litigation. Specifically, before instituting suit, the derivative plaintiff either must make a demand on the corporation's board of directors to pursue the claim against the offending parties or demonstrate to the court that such demand would be futile due to the conflicting interests of the members of the board. Bender, 172 Md.App. at 666, 917 A.2d at 152; Mona, 176 Md.App. at 699, 934 A.2d at 465-66. Once demand is made, the corporation's board of directors must conduct an investigation into the allegations in the demand and determine whether pursuing the demanded litigation is in the best interests of the corporation. Bender, 172 Md.App. at 666, 917 A.2d at 152; Mona, 176 Md.App. at 700, 934 A.2d at 466. If the corporation, after investigation, fails to take the action requested by the shareholder, the shareholder may bring a demand refused action. Bender, 172 Md. App. at 666, 917 A.2d at 152; Mona, 176 Md.App. at 700, 934 A.2d at 466. In a derivative action, any recovery belongs to the corporation, not the plaintiff shareholder. Id. at 698, 934 A.2d at 465. It is well established that courts generally will not interfere with the internal management of a corporation. Devereux v. Berger, 264 Md. 20, 31, 284 A.2d 605, 612 (1971) (quoting Parish, 250 Md. at 74, 242 A.2d at 540). In a derivative action, the business judgment rule protects a disinterested director from liability to the corporation and its stockholders by insulating the business decisions made by the director from judicial review, absent a showing of fraud, self-dealing, unconscionable conduct, or bad faith. NAACP v. Golding, 342 Md. 663, 673, 679 A.2d 554, 559 (1996). The conduct of the corporation's affairs are placed in the hands of the board of directors and if the majority of the board properly exercises its business judgment, the directors are not ordinarily liable. Devereux, 264 Md. at 31-32, 284 A.2d at 612 (quoting Parish, 250 Md. at 74, 242 A.2d at 540). We have held that the business judgment rule applies to all decisions regarding the corporation's management. NAACP, 342 Md. at 673, 679 A.2d at 559. In contrast to a derivative action, a shareholder may bring a direct action, either individually or as a representative of a class, against alleged corporate wrongdoers when the shareholder suffers the harm directly or a duty is owed directly to the shareholder, though such harm also may be a violation of a duty owing to the corporation. Matthews v. Headley Chocolate Co., 130 Md. 523, 536, 100 A. 645, 650 (1917) (noting that shareholders may sue directly where they have suffered some peculiar injury independent of what the company has suffered); Waller v. Waller, 187 Md. at 192, 49 A.2d at 453; Bender, 172 Md.App. at 665-66, 917 A.2d at 152; Danielewicz, 137 Md.App. at 618, 769 A.2d at 284. Cases where direct harm is suffered by shareholders include, for example, actions to enforce a shareholder's right to vote or right to inspect corporate records. That the plaintiff suffered his or her injury in common with all other shareholders is not determinative of whether the injury suffered is direct or indirect. See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del.2004) (noting that the issue of whether a claim should be brought derivatively or directly turns on considerations of who suffered the alleged harm and who would receive the benefit of any recovery); Strougo v. Bassini, 282 F.3d 162, 171 (2d Cir.2002) (applying Maryland law) (noting that, in Maryland, where shareholders suffer an injury distinct from that of the corporation, rather than deriving from an injury to the business or property of the corporation, the corporation lacks standing to sue, and Maryland's `distinct injury' rule allows shareholders access to the courts to seek compensation directly). Where the rights attendant to stock ownership are adversely affected, shareholders generally are entitled to sue directly, and any monetary relief granted goes to the shareholder. Mona, 176 Md.App. at 697, 934 A.2d at 464; see also 13 William Meade Fletcher, Cyclopedia of the Law of Private Corporations § 5939 (2004 Rev. Vol.). If the plaintiff demonstrates that he or she has suffered the alleged injury directly, he or she need not make demand on the corporate board of directors or prove futility of demand, and the business judgment rule does not apply. A stockholder may proceed with a direct suit or a derivative suit against officers and directors depending on whether the complaining stockholder suffered direct harm or indirect harm as a result of decisions made by the officers or directors of a corporation. Wm. David Chalk, Maryland Corporate Practice and Forms: The DLA Piper Manual § 4.18 (2008); Mona, 176 Md.App. at 697, 934 A.2d at 464 (noting that a shareholder may bring a direct action against the corporation, its officers, directors, and other shareholders to enforce a right that is personal to him). Whether a cause of action is individual or derivative must be determined from the nature of the wrong alleged and the relief, if any, that could result if the plaintiff were to prevail. 12B Fletcher § 5911 (2009 Rev. Vol.). This Court held that, where a shareholder is cheated through misrepresentation and fraud during a sale of stock, no right of action accrues to the corporation because the stock is the personal property of the stockholder. Llewellyn v. Queen City Dairy, Inc., 187 Md. 49, 61, 48 A.2d 322, 328 (1946). In such a case, the right of action lies with the stockholder. Id. Here, Petitioners claim that Board Respondents violated the fiduciary duties of candor and maximization of value that they owed directly to Laureate's shareholders. As discussed above, where a shareholder's action is based on breach of a duty owed directly to the shareholder, a direct action may be filed against the directors. Thus, because the fiduciary duties of Board Respondents were owed directly to Petitioners as shareholders, Petitioners may proceed directly against Board Respondents. In addition, it is clear that, here, the injury alleged, namely, a lesser value that shareholders received for their shares in the cash-out merger, is an injury suffered solely by the shareholders and not by Laureate as a corporate entity. Such an injury, if suffered, is a direct one, separate from any injury suffered by the corporation, thus allowing Petitioners to proceed with their direct action against Board Respondents. A higher or lower price received by shareholders for their shares in the cash-out merger in no way implicated Laureate's interests and causes no harm to the corporation. Were Petitioners required to bring their action derivatively, any recovery would go to the corporation. Such a result demonstrates the error of labeling Petitioners' action a derivative claim, as Board Respondents retaining control of Laureate, the defendants who allegedly breached their fiduciary duties to the shareholders, would share in any potential recovery. Petitioners alleged a direct claim against Board Respondents and were not required to proceed derivatively in the name of the corporation.