Boland v. Boland
| Decision Date | 25 October 2011 |
| Docket Number | No. 123,No. 129,123,129 |
| Parties | JOHN L. BOLAND, et. al. v. SEAN F.X. BOLAND, et al. JOHN L. BOLAND, et. al. v. BOLAND TRANE ASSOCIATES, INC., et. al. |
| Court | Court of Special Appeals of Maryland |
HEADNOTE:
John L. Boland, et. al., v. Sean F.X. Boland, et al., No. 123, September Term, 2010. John L. Boland, et. al., v. Boland Trane Associates, Inc., et. al., No. 129, September Term, 2010.
CORPORATIONS—DERIVATIVE LAWSUITS—SPECIAL LITIGATION COMMITTEES—STANDARD OF REVIEW OF A MOTION TO DISMISS OR FOR SUMMARY JUDGMENT BASED ON THE REPORT OF A SPECIAL LITIGATION COMMITTEE—Maryland rejects the so-called Zapata standard under which Delaware courts review the Special Litigation Committee's recommendation on the merits, applying their "independent business judgment." Instead, after a motion to dismiss or for summary judgment against the derivative plaintiffs, Maryland courts must review the SLC's independence, and whether it made a reasonable investigation and principled, factually-based conclusions. In this inquiry, the Special Litigation Committee is not entitled to a presumption that it was sufficiently independent from the directors.
CORPORATIONS—SHAREHOLDER DIRECT SUITS AGAINST CORPORATE DIRECTORS—RES JUDICATA—EFFECT OF EARLIER GRANT OF SUMMARY JUDGMENT IN A RELATED DERIVATIVE LAWSUIT—When a court grants summary judgment in a derivative suit based on a Special Litigation Committee's determination that continuing the lawsuit is not in the corporation's best interest, that court decision is not a final adjudication on the merits so as to preclude a direct suit under the doctrine of res judicata. The court makes no determination of the merits of the derivative allegations when reviewing a Special Litigation Committee's decision. Moreover, a direct action, which forwards individual rights, is an entirely different cause of action than a derivative action, which is brought on behalf of the corporation.
CONTRACTS—STOCK PURCHASE AGREEMENTS—CONSIDERATION—In a closely held corporation, an agreement that the corporation will repurchase stock from a deceased shareholder's estate at a set value may be valuable consideration received by the shareholder. Without such a repurchase agreement, the estate may be unable to sell the shares of the closely held corporation. Thus, the repurchase provision is enforceable.
Opinion by Adkins, J.
Section 3A, he also participated in the decision
and adoption of this opinion.
These appeals involve two lawsuits, which include a derivative claim and a direct shareholder action, both arising from a series of stock transactions in a family business owned primarily by eight siblings. Out of those siblings, three brothers served as directors and officers of two family corporations, while the other five siblings were not actively involved in their management. After the death of one of the sisters, the corporations attempted to repurchase her stock pursuant to the terms of a Stock Purchase Agreement. The sister's estate refused on the grounds that the Agreement grossly undervalued the estate's shares. The corporations filed a declaratory judgment action, seeking enforcement of the Stock Purchase Agreement, and named the other, non-director siblings as defendants and interested parties.
Meanwhile, the non-director siblings had learned of an earlier stock transaction in which the three directors had acquired additional corporate stock for themselves. Aggrieved by this transaction, two of the non-director siblings sent a demand for litigation to the corporation, and shortly thereafter filed a derivative action in the Circuit Court for Montgomery County, alleging self-dealing and a breach of fiduciary duty.1 They also filed "direct" claims, as cross-claims in the declaratory judgment action, on related grounds to the derivative action.
In response, the corporations appointed a special litigation committee ("SLC"),consisting of two newly hired "independent directors," to examine the claims. After an extended study, the SLC issued a report concluding that the stock transactions were legitimate and that the Stock Purchase Agreement was enforceable. The Circuit Court, deferring to the judgment of the SLC, granted summary judgment in favor of the corporations on the derivative action. In the declaratory judgment proceeding, the Circuit Court, relying on res judicata, dismissed the cross-claims and granted summary judgment to the corporation.
On appeal in the derivative action, the Court of Special Appeals upheld the Circuit Court's grant of summary judgment, agreeing that the SLC's report resolved that matter. The two non-director siblings sought certiorari from this Court, which we granted. See 417 Md. 500, 10 A.3d 1180 (2010). At the same time, we granted certiorari in the declaratory judgment action, which had been pending in the Court of Special Appeals. The questions presented for review in these two cases are as follows, rephrased for brevity and clarity:2
In the derivative action (Circuit Court Case # 282138-V, Appellate No. 123), we shall reject the Petitioners' suggestion that Maryland courts should apply their "independent business judgment" and review the SLC's substantive conclusions. Instead, we shall adhere to the business judgment rule as applied in Auerbach and limit the judicial investigation of an SLC report to the issues of whether the SLC was independent, acted in good faith based on facts, and followed reasonable procedures. Even under this more limited inquiry, however, we shall reverse the Circuit Court, as the court made an inadequate inquiry into the SLC's independence and the reasonableness of its procedures.
In the declaratory judgment action, (Circuit Court Case # 273284-V; Appellate No. 123) we shall affirm the Circuit Court's grant of summary judgment to the Respondents on the contract issue, because we agree that the Stock Purchase Agreement in this case was supported by adequate consideration and was enforceable. We shall, however, reverse the Circuit Court's grant of summary judgment with regard to Petitioners' cross-claims (the direct action). The court based its summary judgment solely on the grounds that the Petitioner's cross-claims were barred by the doctrine of res judicata because of its resolution in the derivative action. As we explain below, the resolution of a derivative claim is not necessarily a factual resolution of the merits of the claim, and the Petitioners stated aseparate, individual cause of action regarding allegedly oppressive actions by the majority shareholders.
FACTS AND LEGAL PROCEEDINGS
1. The Boland Family Business
In the early 1960s, Louis Boland Sr., the patriarch of the Boland family, entered into a franchise agreement with the Trane Company to be its exclusive sales agent in the greater Washington, D.C., market. Boland established Boland Trane Associates ("BTA"), to sell and distribute Trane's heating, ventilation, and air conditioning equipment, and Boland Trane Services, Inc. ("BTS"), to handle services and repairs.3 Boland served as the chairman of the board and president of both corporations, and along with his wife, Maureen, owned all the stock in the companies.
During the 1960s, Boland4 gave stock to each of his eight children: Colleen, Louis Jr., Sean, James, John, Kevin, Michael, and Eileen.5 Later, at Boland's request, each child signed a Stock Purchase Agreement ("SPA"), which restricted their rights regarding the stocks. Specifically, the SPA required the children to offer the stock to the corporations atbook value before selling to anyone else, and provided for a corporate repurchase of the stock upon the death of any of the children at book value plus 25 percent. Mr. Boland died on September 7, 2003. Before his death, Boland had set out his desired succession plan in a "Letter of Instruction." Pursuant to the terms of that letter, Sean became chairman of the boards and CEO of BTA and BTS, James became president and chief operating officer, and Louis, Jr. became executive vice president and chief marketing officer. The letter also directed Lawrence Cain to become senior vice president and the chief financial officer. At all times relevant in this case, Sean, James, and Louis Jr. served on the boards of BTA and BTS along with Cain.
Under the new management, BTS and BTA continued to be profitable. In 2004, the corporations issued almost $5 million in dividends to the shareholders, and in 2005, the dividends increased to almost $6 million.
2. The Stock Transactions
The dispute centers on a series of stock transactions, the first of which was a corporate repurchase of Mrs. Boland's stock. After Mr. Boland's death, Mrs. Boland owned a 20 percent share in BTS. Seeking to reduce her eventual estate for tax purposes, and to secure a more stable source of income, Mrs. Boland negotiated with BTS to exchange her stock in return for the purchase of an annuity. On June 25, 2004, she sold her holdings in BTS back to the corporation, and the corporation purchased her an annuity which provided a...
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