Werbowsky v. Collomb

Court of Appeals of Maryland
766 A.2d 123, 362 Md. 581, 2001 Md. LEXIS 20 (2001)

ELI5:

Rule of Law:

In a shareholder derivative action, a pre-suit demand on the board of directors is excused as futile only in the very limited circumstances where the plaintiff demonstrates that either a demand would cause irreparable harm to the corporation, or a majority of the directors are so personally and directly conflicted that they cannot reasonably be expected to exercise independent business judgment in responding to the demand.

Facts:

Lafarge S.A. (LSA), a French corporation, owned a controlling 52% stake in Lafarge Corporation, a Maryland-chartered company.
Bertrand Collomb served as Chairman of the Board for both LSA and Lafarge.
In 1997, LSA executed a hostile takeover of Redland PLC, a construction materials company with significant assets in North America.
Following the takeover, LSA offered to sell certain of Redland's North American assets to Lafarge.
The Lafarge board formed a special committee of five directors to evaluate the offer from its controlling shareholder, LSA.
The special committee retained independent legal and financial advisors, including the investment banking firm Dillon Read, to conduct due diligence and provide a fairness opinion.
After negotiations between the special committee and LSA representatives, the committee recommended that the full Lafarge board approve the purchase of the Redland assets for $690 million.
On March 16, 1998, the full Lafarge board approved the special committee's recommendation and the asset purchase.
Minority stockholders Norman Werbowsky and Lenore Tom believed Lafarge had overpaid for the assets by approximately $190 million.

Procedural Posture:

Minority stockholders filed a shareholder's derivative suit against the directors of Lafarge Corporation in the Circuit Court for Montgomery County, a Maryland state trial court.
The defendants' initial motion to dismiss was granted, leading the plaintiffs to file an amended complaint.
The defendants then filed a motion to dismiss the amended complaint, arguing the plaintiffs failed to make a pre-suit demand and had not shown it would be futile.
Applying Delaware's legal standard, the trial court denied the motion to dismiss, finding the plaintiffs' allegations were sufficient to establish demand futility.
After discovery concluded, the defendants filed a motion for summary judgment, again raising the demand futility issue, but this time based on evidence rather than just allegations.
The trial court granted the defendants' motion for summary judgment, finding that the evidence did not establish that a majority of the board was interested or lacked independence, and therefore demand was not excused.
The plaintiffs appealed the summary judgment order to the Court of Special Appeals of Maryland.

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Issue:

Is a pre-suit demand by a shareholder excused as futile in a derivative action merely because a majority of the directors approved the challenged transaction or are alleged to be conflicted due to routine business relationships or their director roles?

Opinions:

Majority - Wilner, Judge.

No. A pre-suit demand is not excused as futile simply because a majority of directors approved the transaction or have alleged conflicts based on routine business ties or their director positions. Maryland's demand futility exception is a very limited one, applied only when a plaintiff clearly demonstrates, in a particular manner, that a demand would be futile. The court rejected both a broad reading of prior Maryland precedent and the specific two-prong test from Delaware's Aronson v. Lewis. Instead, the court established a new standard: futility is only shown if (1) a demand, or the delay from awaiting a response, would cause irreparable harm to the corporation, or (2) a majority of the directors are so personally and directly conflicted or committed to the decision that they cannot reasonably be expected to respond in good faith under the business judgment rule. Generalized allegations of control, director compensation, routine commercial transactions between corporations on whose boards a director serves, or mere approval of the challenged transaction are insufficient to meet this high standard. Here, the plaintiffs' evidence of director conflicts amounted to 'smoke and speculation' and did not demonstrate that a majority of the board was incapable of impartially considering a demand.

Analysis:

This decision significantly narrows the demand futility exception in Maryland, making it one of the strictest in the nation and aligning it with the modern trend favoring universal demand. By rejecting the well-known Delaware framework and establishing its own demanding two-part test, the court strengthens the authority of corporate boards and the business judgment rule. This precedent makes it substantially more difficult for plaintiffs to bypass the board and proceed with a derivative suit in Maryland, effectively requiring a demand in all but the most extreme cases of director conflict or emergency. The ruling emphasizes that courts should avoid preliminary merits inquiries into director culpability at the demand stage, focusing instead on whether the board is functionally capable of responding to the demand.

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