This appeal arises from a merger between FedFirst Financial Corporation ("FedFirst") and CB Financial Services, Inc. ("CB Financial"). After the merger agreement was announced, Larry Sutton, appellant, a former shareholder of FedFirst, filed a lawsuit against the two companies. He sought to enjoin the merger, alleging that: (1) FedFirst's directors breached fiduciary duties owed to FedFirst's shareholders; and (2) CB Financial aided and abetted the "breaches of fiduciary duty in connection with the Proposed Acquisition." On September 19, 2014, the circuit court dismissed Mr. Sutton's direct claims with prejudice.
On appeal, Mr. Sutton presents one multi-part question for our review,
CB Financial and FedFirst present an additional question for our review, which we have reworded and rephrased slightly, as follows:
For the reasons set forth below, we conclude that the appeal is not moot, and
FACTUAL AND PROCEDURAL BACKGROUND
The Merger Agreement
On April 15, 2014, FedFirst and CB Financial announced that the two corporations had executed a merger agreement that, if approved by the stockholders of a majority of the outstanding shares of stock, would result in the merger of FedFirst and CB Financial.
Pursuant to the merger agreement, FedFirst President and Chief Executive Officer Patrick G. O'Brien would become the Executive Vice President and Chief Operating Officer of Community Bank, a wholly owned subsidiary of CB Financial through which CB Financial conducted its operations. FedFirst directors John J. LaCarte, John M. Swiatek, Richard B. Boyer, and Mr. O'Brien would join the board of directors of CB Financial. The stockholders were advised that some of FedFirst's officers and directors obtained interests in the merger that were not shared by stockholders generally. For example, all outstanding stock options would be terminated and the holders of the stock options would receive a cash payment equal to the number of shares multiplied by the amount by which $23.00 exceeded the "exercise price" of the stock option. Cash payments for directors included the following: Patrick G. O'Brien (President and CEO) $446,314; Richard B. Boyer (Vice President) $193,958; Jamie L. Prah (Senior Vice President and Chief Financial Officer) $199,996; Henry B. Brown III (Senior Vice President and Chief Lending Officer) $161,862. Cash payments to all non-employee directors (5 persons) totaled $538,708.
Moreover, the agreement accelerated the vesting of FedFirst restricted stock awards, resulting in restricted stock awards becoming "fully vested upon the occurrence of a change in control and each share of restricted stock will be converted into 1.1590 shares of CB common stock."
The Merger Agreement also included covenants that protected CB Financial's interests and encouraged the completion of the merger. Initially, FedFirst agreed that it would not initiate, solicit, or knowingly encourage any other acquisition proposals (e.g., a merger or tender offer). The agreement, however, did not preclude FedFirst from considering unsolicited offers, as long as they were "superior proposals." Moreover, FedFirst agreed to promptly
Finally, "in order to induce CB to enter into this Agreement, and to reimburse CB for incurring the costs and expenses related to entering into this Agreement and consummating the transactions contemplated," the agreement included a termination fee of $2,750,000, which FedFirst agreed to pay in the event that it terminated the agreement.
The S-4 Registration Statement
On June 13, 2014, CB Financial filed a Registration Statement (Form S-4) with the United States Securities and Exchange Commission ("SEC"). On July 28, 2014, CB Financial filed an amended S-4 with the SEC (hereinafter "the S-4"), which was more than 300 pages long and included a plethora of information about the companies and the proposed merger. It included, inter alia, the following:
The S-4 also included a detailed chronological account of the negotiation of the merger. It explained that, in January 2013, Patrick G. O'Brien, President and Chief Executive Officer, of FedFirst, met with Barron P. McCune, Jr., President and Chief Executive Officer of CB, at Mr. McCune's invitation, to discuss a possible business combination of their two institutions. No price or other terms were discussed at this meeting. In February 2013, Mr. O'Brien and Mr. LaCarte met with FedFirst's financial advisor, Mufson Howe Hunter, "to examine the current [Mergers & Acquisitions ("M & A")] market in the bank and thrift industry and review the financial characteristics of a possible business combination between CB and FedFirst." In March, the FedFirst board of directors discussed the issue and "observed that there were many compelling strategic business reasons for a combination with CB, including their complementary market areas and similar corporate cultures." FedFirst did not, however, pursue a transaction with CB or any other company at that time.
In August, the following occurred:
In September, the FedFirst board of directors "authorized Mufson Howe Hunter to contact three selected parties regarding their interest in a possible business combination with FedFirst." It "determined that the business risks resulting from awareness in the local banking community of FedFirst's interest in a business combination outweighed the benefit of contacting additional companies that were unlikely to have the interest or ability to complete a transaction with FedFirst."
By October, FedFirst had received responses from each of the three companies. The first company (Bank A) initially indicated that it had an interest in acquiring FedFirst, but by November, Bank A lost interest in pursuing a merger with FedFirst. Because "none of the other parties considered by FedFirst were likely to be more interested in a business combination with FedFirst than CB, FedFirst decided to restart discussions with CB."
After further discussions with CB Financial, the following occurred:
The directors discussed the proposal and consulted with legal counsel. They ultimately voted to accept the letter of interest, and the following occurred:
On April 14, 2014, the FedFirst board of directors met to consider the merger agreement. Representatives of Mufson Howe Hunter presented a financial analysis of the transaction and gave its opinion that "the consideration to be received by the stockholders of FedFirst under the merger agreement [was] fair, from a financial point of view, to the holders of FedFirst common stock." The board of directors then unanimously approved the definitive merger agreement.
That same day, on April 14, 2014, the CB Financial board of directors unanimously approved the definitive merger agreement, and the merger agreement was executed by officers of FedFirst and CB Financial. A joint press release was issued, announcing the execution of the merger agreement and the terms of the merger.
After providing the events leading to the merger, the S-4 set forth a discussion of FedFirst's reasons for the merger, stating that the FedFirst board of directors "unanimously determined that the merger agreement [was] in the best interests of FedFirst and its shareholders." The S-4
The S-4 contained further information, including the following:
On April 21, 2014, Mr. Sutton filed a class action and derivative lawsuit against FedFirst, its seven individual directors, and CB Financial.
He alleged that the individual directors
Mr. Sutton also alleged, inter alia, that the deal included "preclusive deal mechanisms which effectively discourage other bidders from making successful topping bids," and "the Proposed Acquisition will allow CB Financial to purchase FedFirst at an unfairly low price while availing itself of FedFirst's significant value."
The first count of the amended complaint alleged a breach of fiduciary duty against the individual defendants. It asserted that the directors had
Mr. Sutton sought to have the court enjoin the vote on the merger, stating that the plaintiff had no adequate remedy at law.
The second count alleged that CB Financial and FedFirst aided and abetted the individual directors' breach of fiduciary duty. In that regard, it alleged that CB Financial "knowingly assisted the Individual Defendants' breaches of fiduciary duty in connection with the Proposed Acquisition, which, without such aid, would not have occurred," and as a result, Mr. Sutton "will be damaged in that [he has] been and will be prevented from obtaining a fair price for [his] shares."
The third count sought declaratory relief. Mr. Sutton requested a declaration that: (1) the vote should be enjoined, (2) the proposed acquisition was unlawful and unenforceable and the merger agreement "and/or the transactions contemplated thereby, should be rescinded and the parties returned to their original position."
In the Prayer for Relief, the amended complaint stated, as follows:
On June, 19 and 20, 2014, FedFirst (the company and the individual directors) and CB Financial, respectively, filed motions to dismiss the complaint for failure to state a claim. FedFirst provided five arguments in its motion: (1) Mr. Sutton lacked standing to bring a direct claim against FedFirst's Board for breach of fiduciary duties; (2) Mr. Sutton failed to overcome the business judgment rule; (3) Mr. Sutton's allegations of omissions in the Registration Statement failed to meet Maryland's materiality standard; (4) the FedFirst Board was under no duty to maximize shareholder value; and (5) to the extent that Mr. Sutton alleged that FedFirst aided and abetted the individual directors' alleged breaches of fiduciary duties, Mr. Sutton failed to adequately allege any elements of an aiding
On July 29, 2014, after CB Financial filed the S-4 with the SEC, Mr. Sutton filed an amended complaint, adding the allegation that the S-4 "omits material information about the Proposed Acquisition that must be disclosed to FedFirst's shareholders to enable them to make a fully informed decision." On August 12, 2014, FedFirst filed an amended motion to dismiss.
On September 2, 2014, Mr. Sutton voluntarily dismissed his derivative claim, leaving only his direct claim. On September 17, 2014, Mr. Sutton filed a motion for a preliminary injunction, requesting that the court enjoin FedFirst from holding a shareholder vote on the proposed merger. On September 18, 2014, the court heard argument on the defendants' motions to dismiss. In an order dated September 19, 2014, the circuit court dismissed Mr. Sutton's direct claims, with prejudice. On October 17, 2014, Mr. Sutton filed a Notice of Appeal.
On January 14, 2015, the circuit court issued its Memorandum Opinion. The court explained that it was granting the motions to dismiss for the following reasons: (1) Mr. Sutton "failed to assert a direct injury necessary to bring [a] direct claim" because he "failed to demonstrate how the alleged injury [was] `separate and distinct' from that suffered from other shareholders"; (2) Shenker v. Laureate Education, Inc., 411 Md. 317, 983 A.2d 408 (2009), "only applies in the limited context of a cash-out merger that will result in a change of control, which [was] not contemplated by the Proposed Transaction," and therefore, the case does not provide Mr. Sutton with a direct cause of action against the FedFirst Board for breach of common law duties of candor and maximization of shareholder value; (3) even if Mr. Sutton could maintain his direct claim against the FedFirst Board, his allegations were insufficient to rebut the presumptions afforded to the directors by the business judgment rule; (4) "the alleged omissions in the Registration Statement are wholly immaterial"; and (5) Mr. Sutton "failed to allege an underlying breach of fiduciary duty," and therefore, his "aiding and abetting claims fail as a matter of law." On January 15, 2015, Mr. Sutton filed an amended notice of appeal.
Mr. Sutton did not move to stay the merger pending his appeal, and the parties have represented that, on October 31, 2014, FedFirst and CB Financial completed the merger.
On November, 21, 2014, Mr. Sutton filed an opposition to the motions to dismiss, arguing that the "consummation of the merger does not make it impossible for the trial court to grant the relief requested." He argued that, even if the merger could not be undone, he "made clear in his complaint that he would seek damages that he. . . suffered as a result of Defendants' conduct." In an order filed on December 16, 2014, this Court denied appellees' motions with leave to seek that relief in their briefs.
Additional facts will be discussed as necessary in the discussion that follows.
Before addressing the merits of Mr. Sutton's claims, we address appellees' argument in their initial motions, and reiterated in their briefs, that this case should be dismissed because it is moot. "A case is moot when there is no longer an existing controversy when the case comes before the Court or when there is no longer an effective remedy the Court could grant." Prince George's Cnty. v. Columcille Bldg. Corp., 219 Md.App. 19, 26, 98 A.3d 1043 (2014) (quoting Suter v. Stuckey, 402 Md. 211, 219, 935 A.2d 731 (2007)). "This Court does not give advisory opinions; thus, we generally dismiss moot actions without a decision on the merits." Green v. Nassif, 401 Md. 649, 655, 934 A.2d 22 (2007) (quoting Dep't of Human Res., Child Care Admin. v. Roth, 398 Md. 137, 143, 919 A.2d 1217 (2007)). "In rare instances, however, we `may address the merits of a moot case if we are convinced that the case presents unresolved issues in matters of important public concern that, if decided, will establish a rule for future conduct.'" Roth, 398 Md. at 143-44, 919 A.2d 1217 (quoting Coburn v. Coburn, 342 Md. 244, 250, 674 A.2d 951 (1996)).
Appellees argue that this Court "should dismiss this appeal as moot because the only meaningful relief sought by the amended complaint—enjoining the merger—cannot be granted because the merger has already occurred and cannot be unwound." They assert: "FedFirst's Merger into CB Financial was finalized in October 2014 and the proceeds have been distributed to the shareholders. There is nothing more that this Court can do, other than find that the appeal is moot."
If Mr. Sutton's sole claim for relief was to enjoin the merger, we would agree that the appeal was moot. In that regard, National Collegiate Athletic Association v. Tucker, 300 Md. 156, 476 A.2d 1160 (1984), is instructive. In Tucker, two students of Johns Hopkins University filed a complaint and motion for injunction against the National Collegiate Athletic Association (NCAA), arguing that, pursuant to the NCAA's bylaws, they had not "used up one of their four seasons of eligibility for intercollegiate competition by participating in Fall lacrosse scrimmages prior to transferring to Hopkins." 300 Md. at 157, 476 A.2d 1160. The circuit court granted the students' motion for an injunction, ordering
Other cases reiterate the rule that, once the act sought to be enjoined has occurred, any appeal of the issue is moot. See Hagerstown Reprod. Health Servs. v. Fritz, 295 Md. 268, 271, 454 A.2d 846 (appeal from injunction prohibiting abortion moot where abortion performed), cert. denied, 463 U.S. 1208, 103 S.Ct. 3538, 77 L.Ed.2d 1389 (1983); Banner v. Home Sales Co. D., 201 Md. 425, 428, 94 A.2d 264 (1953) ("[T]he general rule is `that the court should confine itself to the particular relief sought in the case before it, and refrain from deciding abstract, moot questions of law which may remain after that relief has ceased to be possible.") (quoting Montgomery Cnty. v. Maryland-Washington Metro. Dist., 200 Md. 525, 530-31, 92 A.2d 350 (1952)).
In Brill v. General Industrial Enterprises, Inc., 234 F.2d 465 (3d Cir.1956), the Court of Appeals for the Third Circuit addressed an issue similar to the one presented here. In that case, stockholders of a corporation sought to enjoin a shareholder vote on the sale of the corporation's physical assets, asserting that the sale price was inadequate. Id. at 467. The trial court dismissed the complaint, and the sale occurred. Id. at 468. The appellate court dismissed the appeal, explaining that "an appeal from a decree dismissing a complaint seeking an injunction, or refusing to grant an injunction, will not disturb the operative effect of such a decree, and where the act sought to be restrained has been performed, the appellate courts will deny review on the ground of mootness." Id. at 469.
Mr. Sutton recognizes these mootness principles. He concedes that he "can no longer enjoin the Stockholders' vote on the Transaction or the Closing," but he contends that the case is not moot because "the trial court can order the unwinding of the merger transaction or grant other relief. . . if the case is remanded." With respect to such "other relief," Mr. Sutton asserts that, although "rescission of the [t]ransaction (versus rescissory damages) is admittedly unlikely, it is plausible that, on remand, [he] will convince the Circuit Court to `impose a constructive trust,'" in his favor "upon any benefits improperly received by [appellees] as a result of their wrongful conduct." He further asserts that, although no monetary damages claims appear in the ad damnum section of the complaint, there was "explicit reference to [his] claim of damages" throughout the complaint, and on remand, the court has "the power . . . to allow an award of money in the form of compensatory damages
Unwinding the Merger
With respect to the argument that this case is not moot because the circuit court on remand could "unwind" the merger between FedFirst and CB Financial, Mr. Sutton raised this contention in his response to appellees' initial motion to dismiss the appeal, which he adopts by reference in his brief. In his brief, he concedes that this relief "is admittedly unlikely," but he has not abandoned the claim, so we will address it.
Mr. Sutton contends that, in his complaint, he requested that the court rescind the merger agreement. Accordingly, he contends his claim to rescind the agreement, and therefore any resulting merger, preserves a remedy precluding this court from dismissing this case as moot.
Neither party cites any Maryland case addressing whether, or under what circumstances, a court can "unwind" a completed corporate merger. Accordingly, we look to other courts for guidance.
Delaware courts addressing this issue repeatedly have held that, once a merger is consummated, it generally is impracticable for it to be undone.
Based on this case law, it is clear that the unwinding of a long-ago completed corporate merger generally is not practicable. Although that determination, in some cases, would be one for the trial court, several appellate courts have concluded, on the facts of the case, that rescission is not a viable remedy. See Bank of New York Co. v. Northeast Bancorp, Inc., 9 F.3d 1065, 1066 (2d Cir.1993); Coggins, 492 N.E.2d at 1119. We similarly conclude here. In light of the representation that the agreement involved a 54.5 million dollar merger, with more than two million shares of publicly traded stock and an integration of corporate management, that occurred almost a year ago, we hold that rescission is not a potential remedy that would preclude a finding that the appeal is moot.
Although rescission is not practicable, there is a possibility that, if Mr. Sutton prevailed on his claim, he could be awarded rescissory damages. In In re Orchard Enterprises, Inc. Stockholder Litig., 88 A.3d 1, 38 (Del.Ch.2014), the Court of Chancery of Delaware explained: "Rescissory damages are `the monetary equivalent of rescission' and may be awarded where `the equitable remedy of rescission is impractical.'" (quoting Strassburger v. Earley, 752 A.2d 557, 579-81 (Del.Ch. 2000)). Accord Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1144 (Del.Ch. 1994), aff'd, 663 A.2d 1156 (Del.1995). The court explained: "[T]he Weinberger court held that when a merger has been successfully challenged, the possible forms of monetary relief include an out-of-pocket measure of damages equal to what a stockholder would have received in an appraisal, viz., the fair value of the stockholder's shares." Orchard Enter., 88 A.3d at 40. Because rescissory damages in lieu of actual rescission is a possible form of relief if Mr. Sutton were to prevail on his claims, we hold that this case is not moot. Accordingly, we proceed to address Mr. Sutton's claims on the merits.
Mr. Sutton contends that the circuit court erred in granting the motions to dismiss filed by FedFirst and CB Financial. We will address the claims with respect to each of the appellees separately. Before doing so, however, we will address the proper standard of review of a motion to dismiss and discuss generally shareholder lawsuits against corporations.
Standard of Review
"A trial court may grant a motion to dismiss if, when assuming the truth of all well-pled facts and allegations in the complaint and any inferences that may be drawn, and viewing those facts in the light most favorable to the non-moving party, `the allegations do not state a cause of action for which relief may be granted.'" Latty v. St. Joseph's Soc. of Sacred Heart, Inc., 198 Md.App. 254, 262-63, 17 A.3d 155 (2011) (quoting RRC Northeast, LLC v. BAA Md., Inc., 413 Md. 638, 643, 994 A.2d 430 (2010)). The facts set forth in the complaint must be "pleaded with sufficient specificity; bald assertions and conclusory statements by the pleader will not suffice." RRC, 413 Md. at 644, 994 A.2d 430.
"`We review the grant of a motion to dismiss de novo.'" Unger v. Berger, 214 Md.App. 426, 432, 76 A.3d 510 (2013) (quoting Reichs Ford Road Joint Venture
Shareholder Suits Against Corporate Boards of Directors
The board of directors of a corporation generally manages the business of the corporation. Werbowsky v. Collomb, 362 Md. 581, 598-99, 766 A.2d 123 (2001); George Wasserman & Janice Wasserman Goldsten Family LLC v. Kay, 197 Md.App. 586, 609, 14 A.3d 1193 (2011). Shareholders ordinarily are not permitted to interfere in the management of the company because they are owners of the company, not managers. Werbowsky, 362 Md. at 599, 766 A.2d 123; Wasserman, 197 Md. App. at 609, 14 A.3d 1193.
Corporate directors, however, do not have unlimited authority. They are subject to the fiduciary duties set forth in Md.Code (2014 Repl.Vol.) § 2-405.1 of the Corporations and Associations Article ("CA"). CA § 2-405.1(a) provides that directors must perform their duties in good faith in a manner that he or she reasonably believes to be in the best interests of the corporation, and "[w]ith the care that an ordinarily prudent person in a like position would use under similar circumstances."
Because director fiduciary duties relating to management do not extend
The Court of Appeals has explained a shareholder's derivative action as follows:
Werbowsky, 362 Md. at 599, 766 A.2d 123 (quoting 13 William Meade Fletcher et al., Cyclopedia of the Law of Private Corporations § 5941.10 (1995 Rev. Vol.)). "In a derivative action, any recovery belongs to the corporation, not the plaintiff shareholder." Shenker, 411 Md. at 344, 983 A.2d 408.
There are situations, however, where a shareholder may bring a direct action against alleged corporate wrongdoers. Such a cause of action arises "when the shareholder suffers the harm directly or a duty is owed directly to the shareholder, though such harm also may be a violation of a duty owing to the corporation." Shenker, 411 Md. at 345, 983 A.2d 408. Accord Matthews v. Headley Chocolate Co., 130 Md. 523, 526, 100 A. 645 (1917) (shareholders may sue directly where "they have suffered some peculiar injury independent of what the company has suffered"); Mona v. Mona Elec. Group, Inc., 176 Md.App. 672, 697, 934 A.2d 450 (2007) (shareholder may bring direct action to enforce a right that is personal to him or her). See also Boland v. Boland, 423 Md. 296, 316-17, 31 A.3d 529
The Court of Appeals has explained:
Shenker, 411 Md. at 345, 983 A.2d 408.
In Shenker, the Court addressed whether shareholders of a corporation that was purchased in a cash-out merger had a direct cause of action against the directors for failure to maximize the amount they would receive for their shares in the transaction. The Court rejected the argument that, pursuant to CA § 2-405.1, shareholder claims against directors for breaches of fiduciary duty may be pursued only by a derivative action. Id. at 335-36, 983 A.2d 408. The Court agreed with Shenker's argument that, although § 2-405.1 addresses duties involving the management of the business of the corporation, such as the decision whether a corporation should be sold, which are enforceable only by the corporation, there are additional common law duties that are triggered once a decision to sell the corporation has been made that are personal to the shareholders and give a direct cause of action to the shareholders. Id. at 337, 983 A.2d 408. The Court of Appeals held that,
Id. at 328-29, 983 A.2d 408 (emphasis added). The Court held that, "in a cash-out merger transaction where the decision to sell the corporation already has been made, shareholders may pursue direct claims against directors for breach of their fiduciary duties of candor and maximization of shareholder value."
The Scope of
The argument in the parties' briefs primarily addresses the significance of the holding in Shenker. Indeed, FedFirst states that "[t]his appeal turns on whether the Court of Appeals' decision in Shenker applies to this case."
The circuit court similarly relied on Shenker. In granting the motion to dismiss, the court agreed with Mr. Sutton "that under Shenker a shareholder may, under certain circumstances, bring direct claims against a corporation's board of directors for breaches of common law duties of candor and maximization of shareholder consideration." The court concluded, however, that Mr. Sutton's
In support of its conclusion that the Court intended to so limit its holding, the circuit court pointed to footnote 3 in the Court of Appeals' opinion in Shenker, finding that the footnote "expressly distinguish[ed] a cash-out merger from a traditional stock-for-stock merger." Accordingly, the court determined that Mr. Sutton did not have a claim against FedFirst, or CB Financial for aiding and abetting, with regard to a breach of the common law duties of candor and maximization of shareholder value.
Mr. Sutton argues that the circuit court's conclusion in this regard was erroneous. He asserts that the court
He contends that, once the directors make the decision that the company is for sale, they act, not only as a director engaged in managing the business of the unsold corporation, but also as an agent trustee, with the non-managerial common law duty to maximize shareholder value and to disclose all material information regarding how maximization was pursued. Mr. Sutton contends that the circuit court erred in deciding that a direct action can be brought by a shareholder only "if 100% of the consideration the stockholders of the target company will receive consists of cash." He asserts that, although the Court in Shenker "discussed its holding
FedFirst argues that "Shenker does not apply to this case," and therefore, "the FedFirst Board owed no duty of candor above or apart from their statutory fiduciary duties under the Maryland General Corporation Law." It asserts that the circuit court "correctly held that the Court of Appeals' decision in Shenker applied only in the limited context of a cash-out merger that resulted in a change of control, and that the [m]erger in this case was not a cash-out merger and there was no change in control."
Given the parties' contentions, it is clear that a thorough analysis of the decision in Shenker is warranted. In that case, shareholders of Laureate Education, Inc. ("Laureate"), a publicly-held Maryland corporation, challenged a cash-out merger transaction between Laureate and several private equity investors. Shenker, 411 Md. at 326, 983 A.2d 408. The Court described the mechanics of the transaction in issue as follows:
Id. at 331, 983 A.2d 408.
Several shareholders objected to the deal and filed a direct lawsuit against Laureate's board of directors, arguing that the directors breached their fiduciary duties
The Court of Appeals reversed. Id. at 354, 983 A.2d 408. Although it agreed that CA § 2-405.1(a) "governs the duty of care owed by directors when they undertake managerial decisions on behalf of the corporation," id. at 338, 983 A.2d 408, it disagreed that § 2-405.1(a) was the sole source of duties owed by corporate directors, id. at 335, 983 A.2d 408. The Court held "that § 2-405.1(a) does not provide the sole source of directorial duties, and that other, common law fiduciary duties of directors remain in place and may be triggered by the occurrence of appropriate events." Id. at 339, 983 A.2d 408.
The question presented in this case is what constitutes "appropriate events" that trigger common law duties of directors to shareholders. This is important because a critical factor in determining whether a shareholder has a direct, as opposed to a derivative, action against the directors is whether there is a duty to the shareholder individually.
We previously have explained that Shenker has "a narrow application." Wasserman, 197 Md.App. at 620, 14 A.3d 1193. FedFirst agrees, but it argues that Shenker's holding regarding the common law duties of directors to stockholders is limited to one situation, i.e., a cash-out merger. We disagree that the decision is so limited.
To be sure, the specific holding of Shenker was confined to the facts of the case, "a cash-out merger transaction." Id at 336, 983 A.2d 408. The language in Shenker as a whole, however, indicates that the principles set forth were not limited to that specific factual scenario.
In discussing the events that would trigger common law duties that give rise to a direct stockholder action, the Court focused on the scenario where corporate directors act outside their typical managerial duties after the decision is made to sell the corporation. In determining that CA § 2-405.1 did not control in that case, the Court explained:
Shenker, 411 Md. at 338-39, 983 A.2d 408.
The Court of Appeals noted that its decision was consistent with the Delaware Supreme Court's holding in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del.1986). The Court stated:
Shenker, 411 Md. at 340, 983 A.2d 408. The Court of Appeals explained that "Revlon and the duties that it described are aimed at the duties involved in a situation where sale of the corporation is a foregone conclusion and the primary remaining interests are those of the shareholders in maximizing their share value in a sale." Id. at 341, 983 A.2d 408.
The Court concluded that CA § 2-405.1 did not supersede the common law duties "in Maryland, including those characterized in Revlon, that, when faced with an inevitable or highly likely change-of-control situation, corporate directors owe their shareholders fiduciary duties of candor and maximization of shareholder value." Id. It held that, "[o]nce the threshold decision to sell Laureate was made, Board Respondents owed fiduciary duties of candor and maximization of shareholder value to Petitioners, common law duties not encompassed or superseded by § 2-405.1(a)." Id. Thus, pursuant to Shenker, the events triggering the common law duties of maximization of value and candor, which are owed to a shareholder and permit a direct action, are when "the decision is made to sell the corporation," the "sale of the corporation is a foregone conclusion," or the sale involves "an inevitable or highly likely change-of-control situation." Id. at 338, 341, 983 A.2d 408.
The Court of Appeals did not, in Shenker or in any subsequent case, explain what factual scenarios satisfy the above triggering events. Accordingly, in assessing whether the FedFirst directors had duties of maximization of value and candor owed to the shareholders in the merger transaction here, we look to other jurisdictions for
The Delaware Supreme Court has made clear that not every corporate combination triggers a duty to maximize shareholder value. See Paramount Commc'ns v. Time Inc., 571 A.2d 1140, 1151 (Del.1989) (Revlon duties do not arise simply because a company is "in play" or "up for sale."). In Time, the court held that the Time Board did not put the corporation up for sale, or make the dissolution of the corporate entity inevitable, and therefore trigger Revlon duties, merely by entering into a merger agreement with Warner Communications, Inc., even where the agreement contained a "no-shop" clause and other structured safety devices to protect the agreement. Id.
Rather, the Revlon duties have been held to apply in only limited circumstances. To date, Revlon duties have been found to apply only in the following scenarios:
Arnold v. Soc'y for Sav. Bancorp, Inc., 650 A.2d 1270, 1289-90 (Del.1994). We thus address these facts in the context of the claims raised in this case.
In assessing whether Revlon duties, referred to by the Court of Appeals in Shenker, apply to the directors in the case, we note that there is no allegation that FedFirst initiated an active bidding process or abandoned a long-term strategy to seek to break up the company. Rather, the directors merely explored options for a potential merger, which they would then present to the stockholders for approval.
These facts do not support a conclusion, pursuant to Shenker, 411 Md. at 338, 341, 983 A.2d 408, that Revlon duties applied because "the decision [had been] made to sell the corporation" or "the sale of a corporation [was] a foregone conclusion." See Arnold, 650 A.2d at 1290 (Revlon duties applicable to directors "seeking to sell" the corporation apply in the context of the directors "initiat[ing] an active bidding process"); Time, 571 A.2d at 1151 (directors did not put corporation up for
In that regard, the Delaware courts have addressed when a merger, other than a cash-out merger, constitutes a "change of control" that triggers Revlon duties. In Equity-Linked Investors, LP v. Adams, 705 A.2d 1040, 1055 (Del.Ch.1997), the court determined that Revlon duties apply in a stock-for-stock merger where there is "no tomorrow for the shareholders (no assured long-term)" because the stock received is subject to the control of a single individual or associated group who has majority control over the merged entity. Id. By contrast, in the context of a stock-for-stock merger where control of the merged entity will remain in a large, fluid, public market, Revlon duties do not apply because there is no change-of-control. See Arnold, 650 A.2d at 1290 (No "sale or change of control" triggering Revlon duty to maximize value in stock-for-stock merger when "`[c]ontrol of both [companies] remain[s] in a large, fluid, changeable and changing market.'") (quoting QVC, 637 A.2d at 47). Accord In re Santa Fe Pacific Corp. S'holder Litig., 669 A.2d 59, 71 (Del.1995) (plaintiff failed to state a claim that the board had a duty to seek the best value where the board was committed to a stock-for-stock merger and plaintiff failed to allege that control of the company after the merger would not remain in a large, fluid, changing market); Krim v. ProNet, Inc., 744 A.2d 523, 528 (Del.Ch.1999) ("Revlon duties are not triggered when ownership remains with the public shareholders and no change of control results."). See also James J. Hanks, Maryland Corporation Law, § 6.6A at 195 ("A sale of the business for cash—whether through merger, sale of assets or otherwise—will always result in a change of control. Conversely, a stock-for-stock merger will not be a change of control so long as there is no single stockholder or affiliated group of stockholders who did not have effective voting control of the target before the transaction but who will hold a majority of the voting power of the combined company after the transaction.").
In QVC, the Delaware Supreme Court explained why a stock-for-stock merger does not result in a change of control where the remaining corporation is owned by a "fluid aggregation of unaffiliated voters." 637 A.2d at 46. In that regard, it noted its prior decision in Time, 571 A.2d at 1150, where it approved the Chancellor's conclusions regarding when a change of control occurs, as follows:
QVC, 637 A.2d at 46-47 (quoting Paramount Commc'ns Inc. v. Time Inc., No. 10866 (Del.Ch. July 17, 1989)). The Court explained that a key reason behind imposing Revlon duties is concern regarding actions where the shareholder's voting power is diminished. Id. at 45.
Here, Mr. Sutton does not allege, for good reason, that control of the company after the merger would not remain in a large, fluid, changing market. Thus, the merger did not result in a "sale or change of control." Arnold, 650 A.2d at 1270. Unlike the scenario involved in the cash-out merger transaction in Shenker, FedFirst's shareholders in this case, by virtue of the stock portion of the merger agreement, have a continuing interest, including voting power, in the combined company, and they can participate in the future successes of CB Financial.
Direct Action By Stockholders
Although the Court of Appeals in Shenker recognized an exception to the general rule that a shareholder must bring a derivative action when challenging a merger transaction, the exception was limited to situations where "the decision [was] made to sell the corporation," "the sale was a foregone conclusion," or the sale involved "an inevitable or highly likely change-of-control situation." 411 Md. at 338, 341, 983 A.2d 408. None of these scenarios are presented here where the directors merely entered into a merger agreement involving a stock-for-stock transaction in which the combined corporation continued to remain in a large, fluid, public market in which FedFirst's stockholders were left with a continuing interest in CB Financial.
Rather, given the circumstances of the merger agreement here, the FedFirst directors were acting pursuant to their managerial duties, and the duties owed were those set forth in CA § 2-405.1, i.e., to perform in good faith, in the best interest of the corporation, and with the care that an ordinarily prudent person would use. With respect to those duties, the directors were entitled to the business judgment rule, which provides that the officers acted
The Shenker exception that allows a shareholder to bring a direct action based on the common law "non-managerial" duties of candor or maximization of value does not apply here. Accordingly, Mr. Sutton did not have a direct shareholder action against the directors, and because he dismissed his derivative action, the circuit court properly granted the motion to dismiss Mr. Sutton's claim against FedFirst and its directors.
CB Financial—Aiding and Abetting
CB Financial argues that "the circuit court correctly held that the Amended Complaint failed to state a claim for `aiding and abetting' against CB Financial because there was no underlying breach of fiduciary duties." We agree.
As the Court of Appeals has explained:
Alleco Inc. v. Harry & Jeanette Weinberg Found., Inc., 340 Md. 176, 200-01, 665 A.2d 1038 (1995) (citations omitted). As previously indicated, we have concluded that Mr. Sutton did not state a cognizable cause of action against the FedFirst directors for breach of fiduciary duties. Accordingly, his claim against CB Financial for aiding and abetting any such breach similarly fails.
In any event, even if the claim against the FedFirst directors survived, Mr. Sutton failed to state a claim against CB Financial. To state a claim for aiding and abetting a non-fiduciary, a plaintiff must allege, inter alia, facts that the aider and abettor "knowingly and substantially assist[ed] the principal violation." Holmes v. Young, 885 P.2d 305, 308 (Colo.Ct.App. 1994). Sufficient facts in that regard were not alleged here.
In Shenker, 411 Md. at 353-54, 983 A.2d 408, the Court of Appeals addressed a similar claim. It stated:
Id. We similarly conclude here. Accordingly, the circuit court properly dismissed Mr. Sutton's claims against CB Financial for aiding and abetting.
Mr. Sutton next contends that the declaratory judgment count in his amended complaint should not have been dismissed. He asserts that he is entitled to a
In Popham v. State Farm Mutual Insurance Co., 333 Md. 136, 158 n. 2, 634 A.2d 28 (1993), the Court of Appeals explained that, where the circuit court is presented with an issue in a declaratory judgment action that is also presented in another count of the complaint, resolution of the other count renders moot the need for a declaration. Here, because the circuit court resolved the issues raised in Count III, seeking declaratory relief, in Counts I and II, asserting claims against FedFirst and CB Financial, the resolution of the count seeking declaratory relief was moot. Accordingly, the circuit court properly dismissed the Amended Complaint without specifically addressing that claim.
Restricted Stock Unit Definition, Investopedia, http://perma.cc/T4D7-7MZ4.
Conversely, if stock elections were undersubscribed, the agreement provided the following procedure:
Shenker, 411 Md. at 326 n. 3, 983 A.2d 408.
Shenker, 411 Md. at 328-29, 983 A.2d 408 (emphasis added).