983 A.2d 408 (Md. 2009), 8, Shenker v. Laureate Educ., Inc.

Docket Nº:8.
Citation:983 A.2d 408, 411 Md. 317
Opinion Judge:HARRELL, J.
Party Name:Nathan SHENKER, et al. v. LAUREATE EDUCATION, INC., et al.
Attorney:Charles J. Piven, David Brower (Brower Piven, Baltimore), on brief, for Petitioners. David Clarke, Jr. (Sara Z. Moghadam, DLA Piper LLP (US), David J. Cynamon, Alvin Dunn, Pillsbury, Winthrop, Shaw, Pittman, LLP, Washington, DC, Eric A. Kuwana, Catherine S. Wood, Katten, Muchin, Rosenman LLP, Was...
Judge Panel:Argued before BELL, C.J. HARRELL, BATTAGLIA, GREENE, MURPHY, JOHN C. ELDRIDGE, (Retired, Specially Assigned), and IRMA S. RAKER, (Retired, Specially Assigned), JJ.
Case Date:November 12, 2009
Court:Court of Appeals of Maryland

Page 408

983 A.2d 408 (Md. 2009)

411 Md. 317

Nathan SHENKER, et al.

v.

LAUREATE EDUCATION, INC., et al.

No. 8.

Court of Appeals of Maryland.

November 12, 2009

Page 409

[Copyrighted Material Omitted]

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Charles J. Piven, David Brower (Brower Piven, Baltimore), on brief, for Petitioners.

David Clarke, Jr. (Sara Z. Moghadam, DLA Piper LLP (US), David J. Cynamon, Alvin Dunn, Pillsbury, Winthrop, Shaw, Pittman, LLP, Washington, DC, Eric A. Kuwana, Catherine S. Wood, Katten, Muchin, Rosenman LLP, Washington, DC Mark D. Gately, Scott R. Haiber, Hogan & Hartson, LLP, Baltimore), on brief, for Respondents.

John B. Isbister, Gregory M. Garrett, Tydings & Rosenberg, LLP, Baltimore, Amici Curiae.

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Argued before BELL, C.J. HARRELL, BATTAGLIA, GREENE, MURPHY, JOHN C. ELDRIDGE, (Retired, Specially Assigned), and IRMA S. RAKER, (Retired, Specially Assigned), JJ.

HARRELL, J.

[411 Md. 326] This case is about certain modalities of accountability in a corporate business setting.

Petitioners are shareholders 1 of Laureate Education, Inc. (" Laureate" ), a successful publicly-held Maryland corporation headquartered in Baltimore. Laureate's primary business is licensing its educational technology overseas and acquiring management interests in foreign colleges and universities. During 2006 and 2007, Laureate underwent a private acquisition process whereby certain members of Laureate's Board of Directors, namely, Board Respondents Douglas L. Becker and R. Christopher Hoehn-Saric, and several private equity investors (" Investor Respondents" ),2 purchased Laureate through a cash-out merger transaction.3 Petitioners challenged the [411 Md. 327] transaction in the Circuit Court for Baltimore City on the grounds that, during the process of negotiations between the Board and the erstwhile purchasers regarding the price Laureate's shareholders would receive in the cash-out merger transaction, (1) the Laureate Board of Directors (the " Board Respondents" ) 4 breached the fiduciary duties they owed to Petitioners as shareholders, (2) Board Respondents and Investor Respondents conspired to breach those duties, and (3) Board Respondents and Investor Respondents aided and abetted that breach. Petitioners' action was dismissed, on Respondents' motions, by the Circuit Court principally because it was seen as an impermissible direct shareholder suit. The Court of Special Appeals affirmed.

We must determine, among other things, whether Board Respondents, in the course of negotiating with the acquiring

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entity the price that Petitioners would receive for their shares in the cash-out merger transaction, owed fiduciary duties directly to Petitioners as shareholders, thus enabling Petitioners, who claim breach of those duties, to bring a direct action against Board Respondents, rather than pursue a derivative action initiative (or demonstrate the futility of such pursuit) on behalf of the corporation. On direct appeal, the Court of Special Appeals held that [411 Md. 328]§ 2-405.1 5 of the Corporations and Associations Article6 bars all direct shareholder claims and affirmed the Circuit Court's dismissal of Petitioners' claims for civil conspiracy and aiding and abetting. For reasons we shall explain, we reverse in part the judgment of the Court of Special Appeals and hold that, where corporate directors exercise non-managerial duties outside the scope of § 2-405.1(a), such as negotiating the price that shareholders will receive for their shares in a cash-out merger transaction, after the decision to sell the corporation already has been made, they remain liable directly to shareholders for any breach of [411 Md. 329] those fiduciary duties. We affirm that part of the Court of Special Appeals's judgment that upheld the Circuit Court's dismissal of Petitioners' claims against Investor Respondents for civil conspiracy and aiding and abetting.

I. BACKGROUND

In June 2006, at a regularly scheduled meeting of Laureate's Board of Directors, Board Respondent Becker, Laureate's Chairman and CEO, spoke to the Board about the possibility of exploring a transaction between Laureate and private equity investors that would cause Laureate to " go private." The Board authorized Becker

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to investigate the potential valuation of Laureate's stock in such a transaction. In August 2006, Becker contacted members of the Board's conflicts committee and requested permission to approach Sterling Capital Partners II, L.P. (" Sterling Capital" ), a private equity firm in which Becker held an interest, regarding the proposed transaction. The committee granted permission.

On 8 September 2006, Becker informed the Board that he intended to make an offer to purchase Laureate, at which time the Board created a Special Committee composed of three independent directors, Board Respondents McGuire, Pollock, and Wilson, with the authority to retain independent advisors and make independent assessments of any proposed offers. The Special Committee retained the law firm Pillsbury Winthrop Shaw Pittman LLP as its legal counsel, and Morgan Stanley and Merrill Lynch as its financial advisors.

Three days later, Becker submitted a letter to the Board stating that he and Sterling Capital proposed to acquire Laureate for $55 per share. On 22 September 2006, the Special Committee requested that Becker withdraw his proposal so that an appropriate process or set of procedures could be put into place regarding Becker's development of proposals and the Special Committee's evaluation of those proposals. Becker withdrew the first offer the next day and, on 29 September 2006, the Special Committee adopted a set of procedures intended to govern the due diligence process Becker [411 Md. 330] and other potential financing sources would be required to follow in order to submit an offer.

Becker thereafter submitted a second offer to the Special Committee, on behalf of Investor Respondents (which included Sterling Capital) to purchase Laureate for $60.50 per share. That price constituted an 11.1 % premium over Laureate's then most recently traded stock price. The proposal included a 45-day " go shop" provision which allowed Laureate to solicit other offers, but required that Laureate pay Investor Respondents a $55 million termination fee if it reached an agreement with another acquirer during the go-shop period, or $110 million if it reached such an agreement afterwards. Morgan Stanley and Merrill Lynch concluded that the offer was fair financially, although that conclusion was disputed contemporaneously by several of Laureate's largest institutional shareholders.

The Special Committee unanimously recommended on 28 January 2007 that the Board approve the proposed transaction. The Board unanimously agreed, and Laureate announced the news. Neither Becker nor Hoehn-Saric, another Laureate director who held an interest in Sterling Capital, participated in the Board's meeting that lead to approval of the offer.

On 30 January 2007, Petitioners filed two direct shareholder complaints in the Circuit Court for Baltimore City relating to the proposed merger at the $60.50 per share price. The Circuit Court consolidated the complaints into a single complaint, and Petitioners thereafter filed a Consolidated Amended Complaint on 5 April 2007. That complaint alleged that, during the course of the acquisition, (1) Board Respondents breached the fiduciary duties that they owed to Petitioners as shareholders, (2) Board Respondents and Investor Respondents conspired to breach those fiduciary duties, and (3) Board Respondents and Investor Respondents aided and abetted that breach.

[411 Md. 331] Respondents filed motions to dismiss.7 On 11 May 2007, the Circuit Court issued

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an order granting the motion to dismiss of Investor Respondents (excluding Sterling Capital), with prejudice, on the ground that Petitioners had " failed to allege a cognizable duty owed them" by Investor Respondents. The court deferred ruling on the remaining motions.

Laureate announced on 3 June 2007 that it accepted an increased offer from Investor Respondents to acquire Laureate at a price of $62 per share by way of a tender offer and second-step (or " short-form" ) merger, a process whereby Investor Respondents would purchase, at a price per share equal to the offer price, a number of newly issued shares of Laureate's common stock sufficient to provide the Investor Respondents with ownership of one share more than 90% of the total shares outstanding and then, by virtue of their 90% ownership, convert all remaining shares of Laureate's common stock into the right to receive the same price paid per share in the tender offer.8 The Special Committee's financial advisors again concluded that the offer was fair financially, but several of Laureate's institutional shareholders disagreed. The Special Committee unanimously recommended that the Board approve the transaction, and the Board, interested Board Respondents Becker and Hoehn-Saric excluded, approved unanimously the transaction. The tender offer commenced on 8 June 2007. On 13 June 2007, Petitioners filed a Second Amended Consolidated Complaint naming Board Respondents [411 Md. 332] as defendants, and alleging but one count-that Board Respondents breached their fiduciary duties owed to Petitioners.9 On 18 June 2007, Laureate and Board Respondents filed a joint motion to dismiss.

The Circuit Court heard argument on the motion and, on 26 June 2007, granted the motion to dismiss the Second Amended Complaint, with prejudice. In its order, the court stated that Petitioners' claims " suffer from a threshold flaw that is fatal to their efforts," namely that " the vehicle they have chosen to utilize for those purposes, i.e., a direct action against corporate directors for alleged violations of fiduciary duties, is...

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