Court Opinion

ID: 7920612
Source: CourtListenerOpinion
Date Created: 2022-09-08 22:22:14.159589+00
Date Added: 2024-06-11T16:33:00.736302
License: Public Domain

BATTAGLIA, J.,
dissenting.
I respectfully dissent. What we and our colleagues have been asked to do in this case is wade in on an intra-family financial dispute in which siblings are vying for financial hegemony in their two family owned and operated corporations. Two of the Boland brothers seek to have this Court consider their siblings on the boards of directors “as a serpent’s egg”1 because of the latters’ approval of stock exchanges to each other in an alleged unseemly effort to take control of their corporations at the expense of the rest of the family. In the face of these accusations, the boards of directors of the corporations formed a committee, which included non-sibling disinterested directors, unrelated to the Boland corporations, to investigate the disgruntled brothers’ claims and whether legal action should be undertaken. The committee recommended that pursuit of the claims in court would not be in the best interests of the corporations. The trial court, adhering to the business judgment of the disinterested committee, applied the business judgment rule to their investigation and recommendation and dismissed the disgruntled brothers’ claims. That decision was affirmed in a thorough and evidently correct opinion by the Court of Special Appeals, *374Boland v. Boland, 194 Md.App. 477, 5 A.3d 106 (2010). Although I could adopt that opinion as my own, I wade into the mix to urge restraint in the judicial meddling in this familial affair.
What the majority does in its opinion is introduce a new standard of judicial review for a refusal to pursue litigation in a shareholder derivative action when a disinterested special litigation committee has recommended against pursuit of litigation. I would instead give our historical deference, referred to as the business judgment rule, to decisions made as a result of the recommendation of a special litigation committee (SLC), which is comprised of members who are disinterested in the subject of their investigation and recommendation. Further, I disagree with the majority’s insistence on investigating any personal aspects of the lives of the members of the SLC to determine their disinterest and would hold that the directors are independent for the purposes of demand refusal where they are not financially involved in any way with the challenged board decision.
To put the whole case in context:
The boards of directors of the corporations, Boland Trane Services, Inc. and Boland Trane Associates, Inc., are comprised of five members, including three Boland siblings, Sean, James, and Louis, Jr., and two long-term employees of the corporations, Lawrence Cain and John Heise. In 2005, the boards of directors voted to sell stock to James, Louis, Jr., Mr. Cain, and Sean, Jr., Sean’s son. Mr. Heise was not present at this meeting. Each director abstained from the vote on their purchase, and Sean did not vote on his son’s purchase. After siblings John and Kevin, Petitioners, learned of these stock purchases, they challenged them in two separate actions before the Circuit Court for Montgomery County, both filed on May 1, 2007.
In the first action, John and Kevin filed a cross-claim and counterclaim in an ongoing dispute between the corporations and the estate of their sister, Colleen Boland. In this dispute, the corporations sought to enforce, by declaratory judgment, a *375shareholder purchase agreement that Colleen had signed prior to her death in which she had agreed to resell her stock to the corporations. John and Kevin, as shareholders, alleged that the directors’ approval of the stock purchases by the directors and Sean, Jr. constituted oppression, fraud, illegality, breaches of the fiduciary duties of loyalty and good faith, and self-dealing.
In another action, John and Kevin themselves filed a derivative complaint as shareholders, purportedly on behalf of the corporations, against Sean, James, Louis, Jr. and Mr. Cain, the four directors who voted in approval of the stock purchases. Similar to the direct claims in the first action, the derivative complaint alleged that the directors engaged in oppression, fraud, illegality, breaches of the fiduciary duties of good faith and loyalty and self-dealing when they approved the stock purchases. The two actions were consolidated by the circuit court.
Thereafter, the boards of directors, in response to John and Kevin’s previously-made demand,2 formed a special litigation committee,3 to evaluate whether the corporations’ pursuit of *376John and Kevin’s allegations was in the best interests of the corporation. On July 30, 2007, the circuit court stayed the consolidated case, including the declaratory judgment action involving John and Kevin’s direct claims against the corporations and directors, to await a determination by the SLC.
The SLC was comprised of James J. Cromwell, Esq., and Charles J. Wolf, II, CPA, two individuals who had no interest in the disputed transactions. The SLC also engaged independent counsel, Albert D. Brault, Esq., who similarly had no interest in the transactions under scrutiny.
After a five-month investigation, the SLC determined that the pursuit of John and Kevin’s claims was not in the best interests of the corporation, and thus recommended termination of the derivative actions, a decision commonly known as “demand refusal.” Thereafter, on May 23, 2008, the defendant directors moved to dismiss, or in the alternative, for summary judgment in the derivative action. The circuit court granted summary judgment in favor of the defendant directors in the derivative action, applying the business judgment rule and deferring to the business judgment of the corporations upon finding that the SLC conducted its investigation and reached its recommendation independently, reasonably and in good faith. Following the grant of summary judgment, the corporations and defendant-directors also moved for dismissal, or in the alternative summary judgment, as to John and Kevin’s claims against the corporation and directors in the direct action, asserting that the doctrine of res judicata prevented John and Kevin from re-litigating claims that were already resolved by the circuit court in the derivative action. The circuit court agreed and dismissed John and Kevin’s claims.
We have historically deferred to the board of directors’s business judgment, presuming that their actions are in the best interest of their corporation unless otherwise demonstrat*377ed. In his treatise, Maryland Corporation Law, James J. Hanks, Jr. explains that the business judgment rule
“is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” Thus the board’s “decisions will not be disturbed if they can be attributed to any rational business purpose. A court ... will not substitute its own notions of what is or is not sound business judgment.”
Section 6.8, at 189 (2007 Supp.), quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984) overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.2000), and Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del.1971). Under this standard, Maryland courts review internal disputes of shareholders challenging the decisions of the board of directors by asking “whether any rational business person could have reached that result, proceeding independently and in good faith with the best interests of the corporation in mind.” Bender v. Schwartz, 172 Md.App. 648, 667, 917 A.2d 142, 152 (2007), citing Aronson, 473 A.2d at 812.
For more than a hundred and fifty years, we have employed a presumption of validity upon the decisions of the board of directors made on behalf of the corporation and later challenged by shareholders. In the mid-19th century, we held in Anacosta Tribe v. Murbach, 13 Md. 91, 94-95 (1859), that the corporation’s own regulations, rather than the equitable powers of the court, were to generally govern disputes between shareholders themselves or with directors. In 1864, we observed in Mayor and City Council of Baltimore v. Baltimore & Ohio Rail Road Company, 21 Md. 50, 92 (1864), that “the decision of questions of expediency, as to the fitness of the means employed, are properly confided by the law to the Board of Directors. Courts of Justice will not pass upon them — they are manifestly incompetent to the task — and to attempt to do so, would often defeat the ends of the law.”
*378In 1894, in Shaw v. Davis, 78 Md. 308, 316-17, 28 A. 619, 621, we reiterated our refusal to review “internal disputes between shareholders” or shareholders and directors, “unless there be something illegal, oppressive, or fraudulent.” In Shaw, a minority shareholder sought to enjoin his company from entering in a lease. We refused the intervention and opined that we should “leave all such matters to be disposed of by the majority of stockholders in such a manner as their interests may dictate,” 78 Md. at 316, 28 A. at 621, rather than to the will of a minority shareholder with the assistance of the courts, absent a showing of fraud, illegality or conduct showing ultra vires, to avoid contravening the ideals of free government:
And if the proposed lease be not ultra vires or unlawful or fraudulent, no court, at the instance of a minority stockholder, or at the instance of anyone else, has the power or the right to restrain the majority from dealing with the property as they may deem most advantageous to their own interests. Any other doctrine would put it in the power of a single stockholder, owning but one share out of many hundreds, to transfer the entire management of a corporation to a court of equity and would effectually destroy the right of the owners of the property lawfully to control it themselves. It would make a court of equity practically the guardian, so to speak, of such a corporation, and would substitute the chancellor’s belief as to what contracts a corporation ought, as a matter of expediency, or policy, or business venture to make, instead of allowing such questions to be settled by the persons beneficially interested in the property. No such arbitrary or dangerous power has ever been claimed by any court, and, if laid claim to, it would never be tolerated in a free government.
Id. at 328-29, 28 A. at 625. We also concluded that the corporation, rather than the minority shareholder, was adversely affected by the disputed lease, and thus “every litigation must be in the name of the company, if the company really desire it.” Id. at 317, 28 A. at 621 (emphasis added).
*379Although the business judgment rule may be an exercise in restraint, it is not a “rubber stamp.” At the turn of the twentieth century, in Du Puy v. Transportation & Terminal Company, 82 Md. 408, 83 A. 889 (1896), we found the fraud necessary under the business judgment rule to intervene when two minority shareholders claimed that the corporation’s majority shareholder, board of directors, and appointed trustee had engaged in a series of fraudulent acts to wind up the solvent corporation. Shortly after the minority shareholders, the Du Puys, had purchased shares, the president of the board of directors and the majority shareholder took the Du Puys’ money for themselves and wound up the corporation by appointing a trustee who agreed to distribute the corporation’s assets to members of the board and associates of the majority shareholder. In intervening, we recognized the risk of inefficiency and continued fraudulent and wrongful conduct were we not to act and maintained that a receiver appointed by the circuit court, rather than the court itself, would review the corporation’s actions:
It is not for us to say what particular assets or property a receiver can, when appointed, recover. It is enough for the purposes of this case for us to be able to see from the record that wrong and fraud have been perpetrated, and that wrong and that this is an eminently fit case for the appointment of a receiver to unmask and rip open whatever is not beyond the reach of a successful assault.
Id. at 442, 33 A. at 895.
In 1907, in Sloan v. Clarkson, 105 Md. 171, 66 A. 18, we applied the business judgment rule to review a demand refusal in a shareholder derivative action. In that case, the corporation refused the demand of a minority shareholder and director, Frank S. Clarkson, to require majority director, majority shareholder, and corporate officer, E. Eugene Sloan, to produce accounting records of his work for the corporation. As the managing agent of the corporation, Sloan was entrusted with overseeing its entire business, collecting its profits and taking a commission for himself before handing over the *380remainder to the corporation. Clarkson’s bill alleged, and neither Sloan nor the corporation in their demurrer denied, that the refusal of his demand by the majority of directors was the result of fraudulent and improper motives. The circuit court overruled the demurrer and we affirmed, holding that the corporation and Sloan must provide an answer because the business judgment rule enunciated in Shaw and Du Puy did not insulate the corporation where, if proven, the demand was refused with a fraudulent or improper motive.
Thus, our business judgment rule is premised on the belief that the will of the majority, and the decisions of experienced business professionals on the board of directors, should be afforded a presumption of validity, unless a minority shareholder shows that such acts are fraudulent, illegal, conduct of ultra vires, or grossly negligent. McQuillen v. National Cash Register Co., 112 F.2d 877, 883 (4th Cir.1940) (applying Maryland law); see also Williams v. Salisbury Ice Co., 176 Md. 13, 23, 3 A.2d 507, 512 (1939) (“There must be proof of fraud, and the onus of that proof is upon the complainant.”).
When the Maryland General Assembly enacted the Director’s Standard of Care provision, Section 2-405.1(a) of the Corporations & Associations Article, Maryland Code, in 1976, it embodied the business judgment rule. Section 2-405.1(a) requires a director to act “(1) In good faith; (2) In a manner he reasonably believes to be in the best interests of the corporation; and (3) With the care that an ordinarily prudent person in a like position would use under similar circumstances.” Maryland Code, (1975, 2007 Repl.Vol.), Section 2-405.1(a) of the Corporations & Associations Article. At the time the Section 2-405.1(a) was enacted, it was “well established that courts generally will not interfere with the internal management of a corporation.” Devereux v. Berger, 264 Md. 20, 31-32, 284 A.2d 605, 612 (1971). In 1999, the General Assembly expressly enacted the business judgment presumption by adopting Section 2-405.1(e), which states that “[a]n act of a director of a corporation is presumed to satisfy the *381standards of subsection (a) of this section.”4
In 2001, in Werbowsky v. Collomb, 362 Md. 581, 766 A.2d 123, we reviewed the application of the business judgment rule in shareholder derivative actions. We declined to fully adopt the approach in Aronson v. Lewis, 473 A.2d 805, 814 (Del.1984), which held that a shareholder’s pre-suit demand on the corporation may be excused where there is a reasonable doubt as to whether the directors were independent and whether the challenged transaction was the product of proper business judgment. In so doing, we reasoned that the value in the demand requirement is tied to business judgment rule protection enjoyed by directors against inappropriate challenges of minority shareholders:
The demand requirement is important. Directors are presumed to act properly and in the best interest of the corporation. They enjoy the benefit and protection of the business judgment rule, and their control of corporate affairs should not be impinged based on non-specific or speculative allegations of wrongdoing. Nor should they, or the corporation, be put unnecessarily at risk by minority shareholders bent simply on mischief, who file derivative actions not to correct abuse as much to coerce nuisance settlements.
Id. at 618-19, 766 A.2d at 144. We concluded that, “If demand is made and refused, that decision, and the basis for it, can be reviewed by a court under the business judgment rule standard.” Id. at 619, 766 A.2d at 144.
The robustness of the business judgment rule is now being questioned by the majority’s adoption in shareholder deriva*382tive actions of what it calls a middle ground in the application of the business judgment rule to acts of an SLC. Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979), and Zapata Corporation v. Maldonado, 430 A.2d 779 (Del.1981), are the two leading approaches nationally to judicial review of demand refusals. The Auerbach standard adheres to the New York business judgment rule and limits judicial review to the disinterested independence of the SLC members and the reasonableness of the investigation’s procedures and conclusions. See 3 93 N.E.2d at 1001-02. Delaware’s Zapata standard utilizes a two-prong approach, placing the burden on the corporation to demonstrate the SLC’s independence, good faith and the reasonableness of its investigation and conclusion and when met, then permits the court to use its own “independent business judgment” to determine whether the SLC decision was in the best interests of the corporation. See 430 A.2d at 788-89.
The majority’s adoption of “enhanced Auerbach,” also known as the first prong of the Zapata standard, removes the presumption of our traditional business judgment rule in favor of the corporation. This ruling is contrary to our jurisprudence and the goal of acknowledging the will of the majority, absent a showing of director abuse by the plaintiff shareholder; our standard, like New York’s Auerbach standard, has placed the burden on the plaintiff shareholder to demonstrate that the director action, including a demand refusal, was made unreasonably, in bad faith, or while the director was on both sides of the transaction and thus interested.
In the case sub judice, the circuit court reviewed the SLC’s report under the deferential business judgment rule as recognized by the Court of Special Appeals as one to defer “to the decision of the board or committee not to pursue litigation unless the stockholders can show either that the board or committee’s investigation or decision was not conducted independently and in good faith, or that it was not within the realm of sound business judgment.” Boland, 194 Md.App. at 499, 5 A.3d at 119, quoting Bender, 172 Md.App. at 666, 917 A.2d at 152. The SLC members and counsel were disinterest*383ed and independent, the circuit court found, because each individual had never “been employed by, done business with or provided services for either corporation.” The trial judge also found that the SLC’s investigation and conclusions were made in good faith and reasonably in light of their “comprehensive investigation lasting approximately 5 months,” including interviews with John and Kevin as well as 9 other individuals, a 30 page report and 32 exhibits. The circuit court held, and the Court of Special Appeals agreed in its reported opinion, that John and Kevin as derivative plaintiffs failed to rebut the presumption that the SLC, as the disinterested directors for the corporations, acted in the best interests of the companies. Just as did our colleagues on the Court of Special Appeals, I would affirm the reasoned application by the circuit court of the business judgment rule.
In addition to removing the presumption of business judgment rule, however, the majority also further requires the judiciary to enter the bowels of the corporation to determine the SLC independence. The majority defines the standard of independent business judgment to require an individual on the SLC to have no consequential formal, informal, professional or personal ties with the directors who are parties to the case, to the extent that the circuit court is required to conduct a background check on the SLC members and its independent counsel and require the SLC and the board of directors to disclose to the court their social, personal and other business affiliations. This standard is unworkable and intrusive.
We review the independence of SLC members, specifically their care, attention and sense of individual responsibility, to ensure that each member is “in a position to base his decision on the merits of the issue rather than being governed by extraneous considerations or influences.” Kaplan v. Wyatt, 499 A.2d 1184, 1189, quoting Aronson, 473 A.2d at 816. The SLC members, James J. Cromwell, Esq., and Charles J. Wolf, II, CPA, and their independent counsel, Albert D. Brault, Esq., each asserted their disinterest and independence from the Board Defendants in the SLC report. There was no proof *384of any financial interest or involvement in the stock purchases at issue.
In affirming the circuit court’s finding of SLC independence, the Court of Special Appeals observed that “[tjhere never has been a serious assertion by the appellants of lack of independence or good faith on the part of Cromwell or Wolfe or their counsel, Brault.” 194 Md.App. at 512, 5 A.3d at 127. As the opinion stated, the SLC members could not be disqualified merely because the corporations and their directors were based on the fact that SLC members were appointed by the board of directors, as interested directors may appoint the SLC under Maryland law. Id. at 512 n. 16, 5 A.3d at 127 n. 16, quoting Rosengarten v. Buckley, 613 F.Supp. 1493, 1499 (D.Md.1985).
The majority, though, asserts that the circuit court’s review of professional ties of the corporations and the SLC members was inadequate. Rather, the majority opines that the corporation must demonstrate that the SLC members experienced no influence from the interested directors, emanating from any professional, recreational, social, religious, or non-profit organization affiliations. Six degrees of separation, however, could potentially remove the “influence” from participating on an SLC.
The majority’s independence inquiry beckons the question: how far must the circuit court go in order to establish the independence of the SLC members? For that matter, as the corporation now must bear the burden of proving the SLC’s independence under the majority’s standard, how much must the SLC members and Board Defendants disclose to show the SLC’s ability to make an independent decision? Will the circuit court review the per stirpal lineage of each SLC member and explore whether an SLC member is within six degrees of separation from the members of the board of directors? Where a minority shareholder was once required to prove fraud, illegality or ultra vires on the part of the board of directors to proceed beyond a demand refusal, Sloan v. Clarkson, 105 Md. 171, 66 A. 18 (1907), the majority now *385encourages the shareholder to pursue a derivative action, upon a simple showing that the SLC members and interested directors are members of collegial groups, such as, for example, the Maryland State Bar Association.
The independence of the SLC members and their counsel only should turn on whether they are financially interested in the board of directors’s action or decision at issue. Rather than a review of the multifarious personal and professional relationships that will become unworkable and unnecessarily intrusive, a review of the members’ financial relationship with the challenged transaction selves as a bright-line per capita approach to director independence. In this case, the Circuit Court for Montgomery County and the Court of Special Appeals properly concluded that, having no prior employment, business and thus financial connection to the boards’ approval of stock purchases, Mr. Cromwell, Mr. Wolfe and Mr. Brault were all sufficiently disinterested to reach a decision regarding John and Kevin’s demand without the inappropriate influence of the defendant directors. As to the derivative action, the circuit court properly applied the business judgment rule to the SLC report and granted summary judgment in favor of the corporations and the defendant directors.
The circuit court also correctly applied the doctrine of res judicata to John and Kevin’s counterclaim and cross-claim that alleged the same facts as those underlying the derivative action. “Res judicata literally means ‘a thing adjudicated,’ and generally indicates ‘[a]n affirmative defense barring the same parties from litigating a second lawsuit on the same claim....’” Lizzi v. Washington Metropolitan Area, Transit Authority, 384 Md. 199, 206, 862 A.2d 1017, 1022 (2004), quoting Black’s Law Dictionary 1336-37 (8th ed.2004). “The doctrine embodies three elements: (1) the parties in the present litigation are the same or in privity with the parties to the earlier litigation; (2) the claim presented in the current action is identical to that determined or that which could have been raised and determined in the prior litigation; and (3) there was a final judgment on the merits in the prior litiga*386tion.” R & D 2001, LLC v. Rice, 402 Md. 648, 663, 938 A.2d 839, 848 (2008).
In this case, there is no dispute that the parties are identical or that the factual basis for John and Kevin’s direct action do not diverge from that of the derivative action. Rather, the majority maintains that the circuit court’s grant of summary judgment did not reach the merits of the derivative claim, but only the independence, good faith and reasonableness of the SLC and its investigation. I disagree.
A case need not reach trial before a court’s resolution serves as a final judgment on the merits for res judicata purposes. See deLeon v. Slear, 328 Md. 569, 616 A.2d 380 (1992); Adkins v. Allstate Insurance Co., 729 F.2d 974, 976 n. 3 (4th Cir.1984) (“For purposes of res judicata, summary judgment has always been considered a final disposition on the merits.”). In deLeon v. Slear, 328 Md. 569, 616 A.2d 380 (1992), we observed that “summary judgment for the defendant is a valid and final judgment” and that the doctrine of res judicata barred subsequent identical claims between the same parties or parties sharing privity with those of the earlier litigation. 328 Md. at 580, 616 A.2d at 385, citing Section 19, Comment g, of the Restatement (Second) of Judgments (1980).
In the case sub judice, the circuit court’s prior grant of summary judgment against John and Kevin’s derivative claims, which mirror the claims raised directly,5 serve as a final judgment on the merits for purposes of res judicata.
I respectfully dissent.

. William Shakespeare, Julius Caesar, act 2, sc. 1.

. In a derivative action, shareholders pursue corporate rights, including challenging the actions of a board member as a breach of a fiduciary duty owed to the corporation, that the corporation itself did not assert on its own. Werbowsky v. Collomb, 362 Md. 581, 599, 766 A.2d 123, 133 (2001). As this is an extraordinary check on the power of the board of directors to manage and make decisions on behalf of the corporation, the shareholder generally must “first make a good faith effort to have the corporation act directly and explain to the court why such an effort either was not made or did not succeed,” or demonstrate that such a demand would be futile, before pursuing a derivative action. Id. at 600, 766 A.2d at 133. The pre-suit demand is reviewed by the board of directors, who may accede to the demand and permit the shareholder derivative action or refuse demand to pursue it. Following a demand refusal, the shareholder may proceed in a "demand refused” action. Shenker v. Laureate Education, Inc., 411 Md. 317, 983 A.2d 408 (2009). The corporation may seek to have the derivative action dismissed, as not within the best interests of the corporation, and the shareholder may challenge that the demand was wrongfully denied.

. A matter of “common practice,” a special litigation committee of independent directors ("SLC”) is formed to review a shareholder’s demand and then recommend to the board of directors whether pursuit *376of the shareholder derivative action is in the best interests of the corporation. See Werbowsky v. Collomb, 362 Md. 581, 766 A.2d 123 (2001).

. Senate Bill 169 included section (e)’s presumption its Bill Analysis reiterated the connection between the business judgment rule and the director's statutory duty of care:
Under current law, the standard of conduct for a corporate director in Maryland is the "business judgment rule”, which creates a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interests of the company. Zimmerman v. Bell, 800 F.2d 386, 392 (4th Cir.1986).
Senate Judicial Proceedings Committee Bill Analysis for Senate Bill 169, at 4 (1999).

. The majority characterizes John and Kevin’s oppression claim as a direct claim, citing Edenbaum v. Sckwarcz-Osztreicherne, 165 Md.App. 233, 885 A.2d 365 (2005). We reviewed the application of the business judgment rule to direct claims in Shenker v. Laureate Education, Inc., 411 Md. 317, 983 A.2d 408 (2009), and determined that the business judgment rule did not apply to direct claims, but Shenker addressed only whether the board of directors owes the common law fiduciary duties of candor and maximization of shareholder value to shareholders directly in the context of a cash-out merger transaction following the board’s decision to sell the corporation.