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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.

Circuit Court for Montgomery County Case Nos. 282138-V and 273284-V

IN THE COURT OF APPEALS OF MARYLAND Nos. 123 & 129 September Term, 2010

JOHN L. BOLAND, et. al. v. SEAN F.X. BOLAND, et al.

JOHN L. BOLAND, et. al. v. BOLAND TRANE ASSOCIATES, INC., et. al.

Bell, C.J., Battaglia Greene *Murphy Adkins Barbera Eldridge, John C., (Retired, Specially Assigned) JJ.

Opinion by Adkins, J. Battaglia, J., dissents Filed: October 25, 2011 *Murphy, J., now retired, participated in the hearing and conference of this case while an active member of this Court; after being recalled pursuant to the Constitution, Article IV, 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"),

The named defendants in the derivative action, now Respondents, were the two corporations and the four director siblings. We refer to these defendants as "the corporations" or "Respondents," because they act jointly as litigants. In describing facts and legal standards, however, it is sometimes necessary to distinguish between the directors and the corporations. When necessary, we make this distinction. In all actions, the Petitioners are John and Kevin Boland.

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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

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The original questions in the derivative action were as follows: 1. Are the circuit courts powerless to consider important issues of public policy, corporate governance, the fiduciary responsibilities of corporate directors, and the rights of minority shareholders, which may be at issue in a derivative action, if a corporate litigation committee determines that continuance of the litigation and resolution of those issues would not be in the best interest of the corporation as a business entity? Under Maryland law a self-dealing transaction requires close scrutiny of the court under the "entire fairness test." May a circuit court properly find that a litigation (continued...) 2

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1) In the derivative action, did the Circuit Court apply the correct standard of review when it analyzed the report of the Special Litigation Committee under the Business Judgment Rule and awarded summary judgment in favor of the Respondents, thus rejecting Petitioners' claim? 2) Are the Petitioners' "direct" claims, brought as cross-

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(...continued) committee's review of a self-dealing transaction was reasonable--and dismiss derivative litigation based upon that review--if the committee concededly applied a lessor standard of review to the challenged transaction? 3. Minority shareholders brought individual, statutory claims of oppression against the controlling majority shareholders and board members. The circuit court expressly found that the allegations of the minority shareholders stated a claim for oppression. May the circuit court properly grant summary judgment against the minority shareholders on their oppression claims based upon asserted factual findings of a corporate litigation committee?

In the declaratory judgment action, the Petitioners presented the following questions: 1. A corporation moved a court to dismiss derivative litigation based upon an internal corporate determination that pursuit of the derivative claims would not be in the best interest of the corporation. The court deferred to the corporation's business judgment and granted summary judgment in favor of the corporation, effectively dismissing the derivative claims. Does the summary judgment constitute a judgment on the merits that bars --as res judicata--the assertion of individual, nonderivative claims arising out of the same facts? Did the Circuit Court err in granting summary judgment in favor of the corporations on their complaint for declaratory judgment, where it did so by resolving disputed facts and failing to consider defenses because it found them to be barred as res judicata? 3

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claims in the declaratory judgment action, precluded by res judicata or otherwise resolved by the Special Litigation Committee report? 3) In the declaratory judgment action, did the Circuit Court err in holding that the stock purchase agreements were enforceable and granting summary judgment to Respondents? 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 a 4

separate, 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 at

Boland Trane Associates was originally incorporated as "Louis J. Boland, Inc." The company changed its name to Boland Trane Associates, Inc., in 1971. Boland Trane Services was originally incorporated as "Boland Trane Service Agency, Inc.," changing its name to the current form in 1978. To avoid confusion, we shall refer to Louis Boland Sr. as "Boland" or "Mr. Boland," his wife as "Mrs. Boland," and the Boland children by their first name. Mr. Boland also transferred stock to certain employees of BTS and BTA, including Lawrence Cain, CFO of the corporations 5
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book 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 monthly payment of $28,544.70 for life. After the repurchase of Mrs. Boland's stock, the director siblings designed a series of 6

stock purchases that would give them an increased share in BTA and BTS. First, in January 2005, BTS approved a sale of 75,075 shares to Sean's son, Sean Jr., and 151,150 shares to James, all at the price of $2.16 per share.6 Then, in April 2005, BTA approved a sale of 282 shares of BTA to Lawrence Cain, 70 shares to Sean Jr., 566 shares to James, and 282 shares to Louis Jr., all at a price of $508 per share.7 After these transactions, the Directors and Sean Jr. all had an increased ownership in the corporations. Sean Jr., who previously owned no stock in either corporation, now held just under 2 percent in each company. James increased his share of BTS by approximately 3 percent, and his share in BTA by 14 percent. Louis Jr. and Lawrence Cain each increased their share in BTA by approximately 7 percent. The boards approved the stock sales, retroactively, on April 4, 2005, at a meeting attended by Sean, James, Louis Jr., and Cain.8 The Board's stated purpose in approving these transactions was to compensate the corporations' directors and to increase their management share to a level comparable to similar corporations. The Board recognized a "need for management incentives for both short-term financial results as well as long-term growth of shareholder value[,]" and "acknowledged [that] it was most desirable to continue the employment of the [Directors] and adequately compensate them for their efforts and reward them for their

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The stock was priced pursuant to a private appraisal, dated October 11, 2004. The valuation at $508/share was the book value as of December 31, 2004.

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Each director abstained on the vote to approve their purchase, and Sean abstained on the stock sale to his son. 7

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accomplishments." In order to accomplish these goals, "the Board agreed it was critical that the compensation plan include an appropriate ownership interest in the Corporation's stock." The Boards structured the payments for these stocks in a way that required no money up front. Instead, in exchange for the stocks, the recipients gave promissory notes with nineyear terms and a set interest rate. At the rate the corporations were issuing dividends, these newly issued stocks would eventually pay for themselves.9 3. Dispute over the Transactions The directors' stock purchases came to the attention of the non-director siblings, specifically John and Kevin, in June 2005.10 From that point, relations between the two factions of siblings quickly deteriorated.11 The straw that broke the camel's back, and brought the whole family into court, was the corporations' attempt to exercise their rights
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For example, in exchange for the stocks, Sean Jr. promised to pay $162,162, plus interest, to BTS and $35,560, plus interest, to BTA. Yet, in 2005 alone, the year following Sean Jr.'s stock purchases in which the corporations paid out nearly $6 million in total dividends, his nearly 2 percent share in BTS and BTA would have resulted in almost $120,000 of dividend payments, significantly more than half of the total he would have owed under the promissory notes. Apparently, Louis complained to his brother Michael that Sean Jr. was receiving stock through the transactions, a result not otherwise permitted by the Stock Purchase Agreements. John and Kevin alleged, in their derivative complaint and cross-complaint, a series of increasingly heated personal confrontations between the director siblings and the nondirector siblings. Moreover, the non-director siblings exacted temporary revenge, in July 2005, by taking over a related family business. The non-director siblings took control of Boland Properties II, LLC, a real property company, which was owned by the siblings and controlled by majority, by voting to remove James as a managing Member of the LLC and to replace him with two of their own, Michael and John. Four of the five non-director siblings voted to reinstate James in September 2005. 8
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under the SPA, after the death of Colleen. Colleen died on June 7, 2006, and the corporations sent notice of their intention to repurchase the stocks on June 16, 2006. The valuation of her stock, pursuant to the stock purchase agreement, was significantly lower than some estimations of its market value. Upset at the low valuation of the stock, Colleen's personal representative resisted the corporations' attempts. On July 19, 2006, the Respondents filed a complaint for declaratory judgment, seeking to enforce the repurchase provisions in Colleen's SPA, naming all the Boland siblings as defendants/interested parties. Ten months later, on May 1, 2007, John and Kevin responded on two fronts. First, they filed a cross-claim in the corporation's declaratory judgment action, alleging breach of fiduciary duty, self-dealing, and oppression from threats to enforce buy-back provisions in the SPAs. This was a "direct" action. Second, after sending the requisite demand for litigation to the corporations, John and Kevin filed a derivative complaint, on behalf of both BTS and BTA, naming Sean, James, Louis, and Lawrence Cain as the defendants.12 Their

In the initial "demand" filed, Kevin and John hedged as to whether such demand was required, stating that any requirement for demand was "arguable" in this case. Similarly, in their complaint, Kevin and John fashioned the derivative suit as a "demand refused" action, but hedged on whether demand could have been excused. They stated in the complaint that "the defendants demanded in early March 2007 that the Board of Directors of BTS take action to remedy the wrongs committed by the defendants[,]" and that "[t]he Board has refused to act as demanded." They also stated, however, that "[i]t would be futile to make further demand upon the defendants and it is not reasonable to expect the defendants to direct BTS to sue them for their misconduct." (continued...) 9

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allegations included fraudulent conduct, oppression of minority shareholders, and breaches of the duties of good faith and loyalty, and they requested, inter alia, rescission of the stock transactions, compensatory damages, attorney's fees, and dissolution of the corporations. Maryland courts have distinguished between direct and derivative claims by looking at the nature of the right claimed to be violated, and the remedy sought. In Shenker v. Laureate Educ., Inc., 411 Md. 317, 983 A.2d 408 (2009), for example, the shareholders brought claims after the corporation approved a cash-out merger, alleging that the directors "violated the fiduciary duties of candor and maximization of value" resulting in "a lesser value that shareholders received for their shares in the cash-out merger[.]" Id. at 346, 983 A.2d at 425. We held that claim to be direct, as the fiduciary claims were "based on a breach owed directly to the shareholder[,]" and the injury was "suffered solely by the shareholders and not by [the] corporate entity. . . . A higher or lower price received by shareholders for their shares in the cash-out merger in no way implicated [the corporation's] interests and causes no harm to the corporation." Id., 411 Md. at 346

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