Monday, April 2, 2018

Laidlaw v. Beneficial Bancorp, Inc. (Cir. Ct. Balto. Cnty)

Filed:  August 8, 2017
Opinion by: Judge Pamela J. White

Holding: A stockholder can file a derivative claim action against a corporation, without serving a pre-suit demand on a board, if it can shown that a demand would be futile.

Facts: Plaintiff brought suit against company Board of Directors in a derivative suit on behalf of company alleging that the individuals named breached a fiduciary duty owed to the company and were unjustly enriched as a result. After company completed a mutual stock conversion, the Board voted to award themselves more than 1 million shares as a part of a compensation package. The company provided its non-employee directors an average total compensation of $77,521 per non-employee director, while the CEO received $1,712,899 in compensation during the same period. A stock plan was approved by stockholders at the corporations annual meeting. Under the stock plan the Board reserved 3,500,000 shares of company stock. They later awarded themselves 1,043,416 of the reserved stock as a bonus for their role in the mutual-to-stock conversion. The value of the stock due to be disbursed was more than $14 million.

Plaintiff filed suit derivatively on behalf of the company less than a year after the stock plan was approved without making a demand. Defendants filed a Motion to Dismiss.


Plaintiff alleged that the Board breached their fiduciary duty of loyalty to the company by engaging in impermissible self-dealing. He argued that as result the Board was unjustly enriched and disgorgement was warranted. The Defendants argued for a dismissal on the grounds that a pre-suit demand was never submitted on the Board prior to the lawsuit. Plaintiff’s complaint gave inference that the demand would’ve been futile in this case because the board could not have objectively decided on a pre-suit demand due to its’ self-dealing in the stock plan.

“In order to maintain this balance of managerial power, a complaining stockholder generally speaking….must make demand upon the corporate board to commence the action and show that this demand has been refused or ignored before he may file a suit derivatively behalf of the company” Parish v. Md. & Va. Milk Producers Ass’n, 250 Md. 24, 81-82 (1968).  “Failure to serve a pre-suit demand can result in a dismissal of a derivative complaint.” Werbowsky v. Collomb, 363 Md. 581, 620-21(2001).  Here, Plaintiff argued that the demand should be excused because the board was personally and directly conflicted or committed to preserving their self-compensation.

Defendants argued that no member of the board was disqualified because of the fact that a director expected to derive a personal benefit from a corporate transaction. They argued that demand was not futile because the stock award was recommended by the Board’s four-member Compensation Committee and that a bare majority of the nine-member Board  could have fairly considered the Plaintiff’s pre-suit demand.  The Court decided that due to the outsized nature of the award at issue, one could reasonably infer that the Defendants were conflicted to a degree sufficient to excuse demand under Werbowsky.

In its’ analysis of one the counterarguments of the Defendants, the Court went on to state that “the question is whether a majority of the Board has a personal interest in not disturbing the decision that is sufficiently significant to overwhelm their better judgment.” In re Regions Morgan Keegan Securities, Derivative Erisa Litig., 694 F. Supp. 2d 879, 884 (W.D. Tenn. 2010).  Here, each member of the Board has a personal financial interest in the stock award with the stock award being more than four times the salary the President/CEO earned in the year prior to the stock award. The non-employee defendants’ interest in the stock was more than eleven times larger than their compensation from the previous year.

Defendants tried to rely upon the presumption of good faith of the business judgment rule. and that was deemed by the Court to be inapplicable to the circumstances. However since the Board’s actions were not from a disinterested position, they could not enjoy the protection’s of the rule.

The Defendants also argued that because the stockholders ratified the stock award, they were well within their rights to distribute the stock award. Under Md. Code Ann., Corps & Ass’ns § 2-419 (a) & (b)(1)(ii) Maryland law shields transactions between a corporation and its directors against stockholder derivative suits if, after the directors’ interest is disclosed, the “transaction is authorized, approved or ratified by a majority of votes cast by the disinterested stockholders entitled to vote.” The Court stated that the Board abused its power when it adopted the stock award and therefore could not adopt this protection. “The grant of authority for directors to set their compensation, is not a statutory safe harbor for director compensation decisions.” Sample v. Morgan, 914 A. 2d 647, 664 (Del. Ch. 2007). The Court cited that the stock plan did not inform stockholders the Board intended to give themselves a one time stock award of 1 million shares of stock. The Court decided that since stockholders were not properly informed the protection of shareholder approval under § 2-419 would not apply.

The Defendants also failed to provide a defense that would warrant a dismissal of the unjust enrichment claim.

The full opinion is available in PDF.