McBride Law Blog

Maryland Law Update: How a Board Might Exercise Business Judgment When a Shareholder Makes a Demand (Part I)

McBride Law Blog

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In our previous blog series on Texas Double-Derivative Shareholder Suit, we introduced the concept of business judgment rule—the presumption that directors or managers, in performing their functions, were honest and well-meaning and that their decisions were informed and in the best interests of the company. We then delved a little deeper into the concept in another blog on the business judgment rule under New York law and discussed when board decisions might not be protected under the business judgment rule. Not surprisingly, the business judgment rule becomes most relevant in the context of shareholder derivative lawsuits—that’s where shareholders become dissatisfied with a corporate decision and sue board members on behalf of the corporation, claiming, in essence, that the board did not act in the best interests of the corporation. And for a shareholder to be able to file a derivative action, they, in many states, are required to make a demand on the corporation’s board of directors first, unless doing so would be futile. We have seen how this requirement plays out in Delaware (see our previous blogs Delaware Law Update: Futility of Pre-Suit Demand and When Is a Stockholder’s Pre-Suit Demand Excused?).

Oliveira v. Sugarman,[1] a recent Maryland case, is a great example of the interplay between a shareholder demand, actions that a board may take in response to a shareholder demand, and how such actions may result in protection under the business judgment rule.

This post was part of a multi-part series on pre-suit demand and business judgment rule under Maryland law. You can find the other posts by searching our blogs at www.mcbrideattorneys.com.  In our next post, we will discuss the details of Oliveira.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers, and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] Oliveira v. Sugarman, No. 1980 (Md. Ct. Spec. App., Jan. 28, 2016). Unless otherwise noted, all references to the case are from this citation.

Posted In: Business Management, Maryland Law update, Uncategorized

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