Friday, March 2, 2007

Bender v. Schwartz (Ct. of Special Appeals)

Filed March 1, 2007--Opinion by Judge James R. Eyler.

This is an appeal from an order dismissing a shareholder derivative action. The action stems from a dispute between various family members who are shareholders in two corporations. One of the corporations is a Maryland corporation and the other is a Delaware corporation. The issues were tried on a documentary record and the circuit court's decision was made pursuant to Maryland Rule 2-502.

Each of the corporations in question had formed "Demand Committees" --special committees to investigate allegations made by the plaintiffs in their demand letter and in the first amended complaint filed in the action.


1. The conclusions reached by the Demand Committees must be evaluated to determine whether the their were reasonable and whether the Committees had reasonable bases for their conclusions, i.e., within the ambit of the business judgment rule. The burden to rebut the presumption that they acted in the best interests of the corporations is on the plaintiffs.

2. To require investigation by the Demand Committees, the plaintiff's claims must have been "articulated in the demand." Each claim must be articulated specifically enough to give directors a fair opportunity to initiate the action requested by appellants. With respect to the claims made by the plaintiffs, the plaintiffs did not provide sufficient allegations in their demand letter or first amended complaint to alert the Demand Committees to the existence of the claims.

3. The plaintiffs failed to rebut the presumption that the Demand Committees' investigations were reasonable and the conclusions of those Committees within the realm of sound business judgment.

4. Certain claims made by the plaintiffs were not properly brought via a derivative action, but, rather, were individual claims.

5. The Court upheld the rejection of other claims on the basis that the claims were not articulated specifically enough to give the directors a fair opportunity to initiate the action requested by the plaintiffs.

6. The plaintiffs had also made individual claims claim that the appellees (1) had a fiduciary duty to offer all stockholders the opportunity to participate in various ventures outside the corporation and (2) had a fiduciary duty to inform them of the availability of contiguous land. The Court concluded that these claims are outside the duties of majority shareholders and directors to minority shareholders and upheld the lower court's dismissal of the claims.

This is a lengthy opinion that is heavily fact-specific.

A copy of the opinion is available in PDF.

No comments: