Boland v. Boland

EYLER, DEBORAH S., J. This is an appeal in a “demand refused” shareholder’s derivative action. In the Circuit Court for Montgomery County, John Boland and Kevin Boland, the appellants, as shareholders in Boland Trane Associates, Inc. (“BTA”), and Boland Trane Services, Inc. (“BTS”) (“the Corporate Appellees” or “the corporations”), sued four members of the corporations’ Boards of Directors — Sean Boland, James Boland, Louis Bo-land, Jr., and Lawrence Cain, Jr. (the “Director Appellees”)— and the corporations, alleging, among other things, that the Director Appellees had engaged in self-dealing transactions to the detriment of the corporations. The corporations’ Boards of Directors appointed a Special Litigation Committee (“SLC”) to investigate the derivative claims and determine whether to pursue them. After five months of study, the SLC issued a report concluding that the claims had no merit and recommending that the corporations not pursue them and seek to have them dismissed.

Ultimately, the circuit court deferred to the SLC’s decision, under the business judgment rule, and granted summary judgment in favor of the Director Appellees and the corporations. This appeal followed. The appellants pose three questions for review, which we have reworded: 1 ⁴⁸⁵ I. Did the circuit court err in reviewing the SLC’s decision under the “business judgment rule” and not by applying its own “independent business judgment,” under Zapata v. Maldonado, 430 A.2d 779 (Del.1981)?

II

Did the circuit court err in finding the SLC’s investigation reasonable even though the SLC did not review the derivative claims of self-dealing under the “entire fairness test”?

III

Did the circuit court err in granting summary judgment on the derivative complaint because there exist numerous disputes of material fact? For the reasons discussed below, we shall affirm the judgment of the circuit court. FACTS AND PROCEEDINGS BTA and BTS are related, closely held Maryland Subchap-ter S corporations with their principal place of business in Montgomery County. They are in the business of selling, distributing, and servicing heating, ventilation, and air conditioning equipment.

The corporations were founded by Louis Boland, Sr., after he contracted with the Trane Company, in the early 1960’s, to be its exclusive sales franchise agent for the District of Columbia metropolitan area. 2 Initially, Louis, Sr., and his wife, Maureen, owned all the outstanding stock of the corporations. 3 Over the years, however, the two corporations issued stock to the couple’s eight children: Colleen (deceased on June 7, 2006), Louis, Jr., Sean, James, John, Kevin, Michael, and Eileen. A few long-term employees, including Cain, also were issued stock. ⁴⁸⁶ Louis, Sr. served as the Chairman of the Boards and President of both corporations until his death on September 7, 2003. Afterwards, in accordance with a “Letter of Instruction” setting forth Louis, Sr.’s succession plan, Sean became Chairman of the Boards and Chief Executive Officer of the corporations, James became President and Chief Operating Officer, Louis, Jr. became Executive Vice President and Chief Marketing Officer, and Cain became Senior Vice President and Chief Financial Officer. At the times relevant to this case, all four served on the Boards of Directors of the corporations together with a fifth director, John Heise. 4 The BTA and BTS independent franchises with the Trane Company are the only such franchises in the United States to have survived beyond the first generation, perhaps because they were profitable long before Louis, Sr.’s death and have increased in profitability since.

The franchise agreements are subject to termination by the Trane Company without cause on 30 days notice. In 2008, the Trane Company was purchased by Ingersoll Rand. Sean is a practicing lawyer in the District of Columbia. He has served on the boards of the corporations for 28 years and as counsel to the corporations for 31 years.

His present service as Chairman of the Boards and Chief Executive Officer of the corporations is without compensation. Louis, Jr., and James have been executives with the corporations for over 30 years and have served on the boards for almost 30 years. The other children of Louis, Sr., and Maureen, including the appellants, have not been involved in the operations of the corporations. Cain has been an executive with the corporations for almost 30 years and a member of the boards for about 25 years.

Heise, who was a lawyer, had served as corporate counsel to the corporations since they were founded. In early 2004, Maureen’s financial, tax, and estate advisors recommended that an annuity be created to pay for her care, ⁴⁸⁷ which up to that time had been paid for by dividends; that the annuity be funded by BTS; and that BTS acquire Maureen’s stock in that corporation. The recommendations were implemented and on June 24, 2004, BTS acquired Maureen’s stock, which became part of the authorized but unissued shares of the corporation, i.e., treasury stock. In the first several months of 2005, two sales of treasury stock in the corporations took place that are at the heart of this case.

First, in January 2005, James Boland and Sean Boland, Jr. (Sean’s son and an Account Executive at BTS) purchased treasury stock in BTS for $2.16 per share. James purchased 151,150 shares for a total of $326,484. Sean, Jr., purchased 75,075 shares for a total of $162,162. The $2.16 share price was based upon an appraisal obtained on October 11, 2004, and a valuation date of April 30, 2004.

Second, on April 1, 2005, James, Louis, Jr., Cain, and Sean, Jr., bought treasury stock in BTA at $508 per share. James purchased 566 shares ($287,528), Louis, Jr., and Cain each purchased 282 shares ($143,256), and Sean, Jr., purchased 70 shares ($35,560). The $508 share price was higher than the most recent appraised value then available ($377/share) but, as it turned out, was lower than a later appraised value of $761/share that had a valuation date of September 20, 2004, but was not received by BTA until August of 2005. The stock sales were approved retroactively by the Boards of Directors at a special meeting on April 4, 2005.

Sean, Louis, Jr., James, and Cain attended the meeting and voted; Heise was not present. 5 The minutes of the meeting reflect that the compensation plans created by the Executive Compensation Committee for the boards recommended, and the Director Appellees acknowledged, that “it was most desirable to continue the employment” of James, Louis, Jr., Cain, and Sean, Jr., and to “adequately compensate them for their efforts”; and that to attain those goals “it was critical that the compensation plan include an appropriate ownership interest ⁴⁸⁸ in the Corporation’s stock.” The Director Appellees then passed a resolution authorizing BTA to enter into personal service contracts with James, Louis, Jr., Cain, and Sean, Jr., that would include the stock sales. The resolution called for the shares to be issued in exchange for promissory notes with 9-year terms and at interest rates no greater than those under section 7520 of the Internal Revenue Code. Each director abstained from voting on the resolution as it personally affected himself or, in the case of Sean, his son. The stock sales first became an issue in litigation in a declaratory judgment action filed by the corporations in July 2006, against the personal representative of Colleen’s estate.

In that case, the corporations were seeking a court ruling as to the validity of the stock purchase agreement (“SPA”) signed by each stockholder in the corporations that provided that, upon the death of the stockholder, the corporation shall redeem the common stock, and the personal representative shall surrender the common stock for redemption, upon payment of its determined price, as calculated by a formula provided in the agreement. The validity of the SPA had become an issue upon Colleen’s death. On March 8, 2007, the appellants sent letters to outside counsel for the corporations making demand upon the Boards of Directors to remedy the alleged self-dealing and stating their intention to file a derivative action on behalf of the corporations against the Appellee Directors if their demands were not satisfied. In particular, the appellants alleged in the letter that the Director Appellees had engaged in self-dealing by “permitting] certain Board Members to purchase stock on favorable terms at below-market values ... [and] authorizing] the ‘sale’ of stock to [Sean, Jr.].” The appellants demanded “that the Boards ... take immediate steps to retain independent counsel for the corporations, answerable to the remaining shareholders directly, to prosecute the Board Members for their breach of duties, investigate other self-serving transactions, and pursue all appropriate remedies.” ⁴⁸⁹ In response, the Corporate Appellees informed the appellants that their demand letter “would be considered in good faith and disposed of in a manner consistent with the best interests of the corporations” at the board meeting scheduled for May 2007.

Nevertheless, on May 1, 2007, the appellants filed this derivative action, setting forth four counts in their complaint. In Counts I and II, they sought to dissolve the corporations pursuant to Md.Code (2007 Repl.Vol.), section 3-413 of the Corporations & Associations Article (“CA”). They alleged that the Director Appellees were operating BTS and BTA “fraudulently, illegally and oppressively for their own benefit and not for the benefit of all of their shareholders.” In Count III, the appellants alleged that the Director Appellees had breached their duties to the minority shareholders. In Count IV, they alleged that the Director Appellees had mismanaged the corporations, engaged in self-dealing, violated the appellants’ preemptive rights, and awarded themselves excessive compensation.

That same day, in the declaratory judgment action, the appellants in the case at bar filed a cross-claim that contained the same allegations. At a special meeting of the Boards of Directors on May 25, 2007, the corporations elected two new, independent directors to function as the SLC to investigate the appellants’ demand and recommend whether the corporations should pursue the claims set forth in the derivative action complaint. The new directors were James Cromwell, Esquire, and Charles Wolfe, II, C.P.A. Neither had served on either Board of Directors, nor did either have any business relationship with the corporations, past, present, or expected. The SLC hired Albert Brault, Esquire to serve as its independent counsel.

Brault also has had no relationship with the corporations, nor did he expect to. The appellants were told of the formation of the SLC the same day it was established. ⁴⁹⁰ On August 2, 2007, upon motion of the Corporate Appellees, the circuit court stayed this action “pending the investigation and issuance of the report from the [SLC].” On February 1, 2008, the SLC completed its investigation and issued its “Report of the Special Litigation Committee” (the “Report”). The SLC concluded that the Director Appel-lees had acted within their statutorily defined duties under the business judgment rule with respect to the allegations made by the appellants and recommended that the derivative action be terminated. (We shall discuss certain of the conclusions of the SLC in detail infra.) On February 11, 2008, the Corporate Appellees filed a motion to dismiss the derivative action under Rule 2-502 based on the SLC’s recommendation that the corporations not pursue the litigation.

The Director Appellees thereafter filed a motion to dismiss or in the alternative for summary judgment. The appellants filed an opposition to the motions. On June 12, 2008, the court held a hearing on all pending motions. Counsel for the appellants took the position that the court should hold an evidentiary hearing.

Counsel for the Corporate Appellees countered by moving into evidence the Report and its Exhibits and depositions of Cromwell and Wolfe and taking the position that the court had before it all of the information it needed to decide the motion to dismiss under Rule 2-502. The Corporate Appellees then urged the court to apply the business judgment rule to the SLC’s recommendation to terminate the derivative action, stating that “[the appellants] have the burden of proving that the proceedings were unreasonable, in bad faith, and that there does not exist a reasonable basis to support the committee’s findings and their conclusions.” The appellants responded that “the committee process is, in fact, subject to abuse, which is why the law requires [the circuit court] to objectively and independently review the work product.” They argued that the circuit court should have applied its own independent judgment, instead of the business judgment rule, in reviewing the decision of the ⁴⁹¹ SLC, and that the SLC should have applied the “entire fairness” test when assessing the stock sales and what the appellants characterized to be other self-dealing transactions. In a Memorandum Opinion entered on September 5, 2008, the circuit court granted summary judgment in part, leaving in place the claim that Cain had engaged in self-dealing in setting excessive compensation for himself, and the claim that the Appellee Directors had engaged in self-dealing with respect to the stock sales. 6 The court employed a three-part test to determine whether the SLC wrongfully had refused the appellants’ demand. First, it assessed whether the members of the SLC had acted independently and in good faith.

The court answered in the affirmative, commenting that neither committee member had “ever been employed by, done business with or provided services for either corporation.” Second, the court assessed the reasonableness of the SLC’s investigation. It found that the SLC, with assistance of independent counsel, had conducted a “comprehensive” 5 month investigation in which it reviewed approximately 1,716 pages of materials and interviewed 11 people with knowledge pertaining to the claims, all of which resulted in a 30 page report with an appendix and 32 exhibits, and that the investigation was reasonable. Finally, the court considered whether the SLC’s findings and conclusions were reasonable. The court stated that “the legal standard to be applied [in answering that question] depends on the allegation^] each alleged wrong-doing must be looked at individually to determine which standard need be applied for each separate allegation.” The court reviewed each categorical finding detailed in the Report, applying the business judgment rule to all claims except the claim regard ⁴⁹² ing Cain’s compensation and the claim regarding the stock sales.

To those claims, it applied the “entire fairness test,” reasoning that it was required to do so by this Court’s opinion in Bender v. Schwartz, 172 Md.App. 648 , 917 A.2d 142 (2007). The court concluded that it could not find the transactions on which the claims of self-dealing were based “entirely fair,” and therefore denied summary judgment on them. On September 29, 2008, the Corporate Appellees and the Director Appellees filed a joint motion for reconsideration or, in the alternative, for clarification of the September 5, 2008 order. They argued, as they had initially, that under Bender the court was required to apply the business judgment rule in assessing the SLC’s recommendation as to all claims in the derivative action, including the claims alleging self-dealing.

On December 12, 2008, the court issued a memorandum opinion and order granting the joint motion for reconsideration and further granting summary judgment in favor of all the appellees on all counts of the derivative complaint. The court concluded that it had erred in applying the “entire fairness” standard in reviewing the SLC’s demand refusal respecting the claims of self-dealing by directors; rather, under Bender , it should have applied the business judgment rule in reviewing the SLC’s demand refusal as to all of the derivative claims. It also concluded that it had erred in concluding that the SLC had not investigated the claim of self-dealing respecting Cain’s compensation; in fact, that claim had been investigated by the SLC. The court concluded that the transactions underlying the self-dealing claims were acceptable under the business judgment rule, and therefore, in deference to the SLC’s decision not to pursue the derivative claims, dismissal was appropriate.

As noted above, because the court had considered material outside the record in deciding the motion to dismiss, it treated the motion as one for summary judgment, under Rule 2-322(c), and granted it. 7 ⁴⁹³ We shall include additional facts as necessary for our discussion. DERIVATIVE ACTIONS “The business and affairs of a corporation, including the decision to institute litigation, are managed generally under the direction of its board of directors.” Shenker v. Laureate Educ., Inc., 411 Md. 317, 342 , 983 A.2d 408 (2009) (citing Bender v. Schwartz, 172 Md.App. 648, 665 , 917 A.2d 142 (2007)). A shareholder cannot bring suit, in his or her individual capacity, to “redress an injury to the corporation resulting from directorial mismanagement.” Id. (citing Mona v. Mona Elec.

Group, Inc., 176 Md.App. 672, 697-98 , 934 A.2d 450 (2007)). “[A]ny exercise of the corporate power to institute litigation and the control of any litigation to which the corporation becomes a party rests with the directors or, by delegation, the officers they appoint.” Werbowsky v. Collomb, 362 Md. 581, 599 , 766 A.2d 123 (2001). In Werbowsky , the Court of Appeals described the nature and purpose of the shareholder’s derivative action: The shareholder’s derivative action was developed in the mid 19th Century as an extraordinary equitable device to enable shareholders to enforce a corporate right that the corporation failed to assert on its own behalf. That right could include the recovery of losses occasioned by self-dealing or fraudulent or grossly negligent misconduct on the part of the corporate directors or officers. As Fletcher describes it: “The nature of the derivative proceeding is two-fold.

First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is [a] suit by the corporation, asserted by the shareholder on its behalf, ⁴⁹⁴ against those liable to it. The corporation is the real party in interest and the shareholder is only a nominal plaintiff. The substantive claim belongs to the corpora-tion____The proceeding typically is brought by a minority shareholder, because a majority or controlling shareholder can usually persuade the corporation to sue in its own name.” 13 WILLIAM MEADE.

FLETCHER ET AL., CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 5941.10 (1995 Rev. Vol.); see also Aronson v. Lewis, 473 A.2d 805, 811 (Del.1984). The fact that the action is on behalf of the corporation, rather than the shareholder, has significant implications, not the least of which is the extent to which the corporation can control the litigation after it has been filed. 362 Md. at 599-600 , 766 A.2d 123 (alteration in original). Before filing a derivative action, a shareholder “either must make a demand on the corporation’s board of directors to pursue the claim against the offending parties or demonstrate to the court that such demand would be futile due to the conflicting interests of the members of the board.” Shenker, 411 Md. at 344 , 983 A.2d 408 (citations omitted). “Once demand is made, the corporation’s board of directors must conduct an investigation into the allegations in the demand and determine whether pursuing the demanded litigation is in the best interests of the corporation.” Id. (citations omitted).

The board may appoint a demand committee to conduct the investigation. Bender, 172 Md.App. at 666 , 917 A.2d 142 (citing Aronson, 473 A.2d at 813 ). “If the corporation, after an investigation, fails to take the action requested by the shareholder(s) (ie., to bring the suit) the shareholder(s) may bring a ‘demand refused’ action.” Bender, 172 Md.App. at 666 , 917 A.2d 142 (citations omitted). DISCUSSION I. The appellants first contend the circuit court erred because, in ruling on the motion to dismiss, it applied the wrong ⁴⁹⁵ standard to the conclusions of the SLC. Specifically, they assert that in reviewing the SLC’s decision not to pursue the derivative claim alleging self-dealing by the Director Appellees in the sales of stock, the court should not have applied the business judgment rule. 8 Rather, it should have followed the Delaware Supreme Court’s lead in Zapata v. Maldonado, 430 A.2d 779 -89 (Del.1981), and exercised “its own independent business judgment.” They maintain that this Court’s holding in Bender did not mandate that a circuit court reviewing the decision of a demand committee in a wrongful refusal case should apply the business judgment rule, and that Bender does not control in any event because this case and Bender are distinguishable. 9 The appellants further assert that the additional scrutiny that comes with the Zapata “independent business judgment” standard was necessary here, in particular, because the corporations are “small, closely held, family corporations” as opposed to “large publically traded corporations,” and therefore the relationships among the shareholders are like those among partners.

For that reason, there are greater fiduciary duties owed by shareholder directors to the other shareholders. The appellants maintain that “[t]he actions of the [Director Appel-lees], the self-dealing nature of the [alleged] transaction^], and the willingness of the [SLC] to so easily overlook their conduct required the close scrutiny of the circuit court.” The Corporate Appellees respond that Bender does control and, under its holding, the circuit court correctly applied the ⁴⁹⁶ business judgment rule to the SLC’s conclusion that the corporations should not pursue any of the claims alleged in the derivative action, including the claims related to the stock sales. They state that because the appellants “failed to persuade the circuit court that the SLC’s investigation or decision lacked independence or good faith ... [and] failed to demonstrate that the conclusions reached by the [SLC] fell outside the realm of sound business judgment” the circuit court properly deferred to the decision of the SLC, under the business judgment rule. The Director Appellees join in this response and also argue that the appellants fail to recognize the distinction between a derivative action and a direct action, stating, “[the appellants’] arguments about duties allegedly owed to them individually have no relevance to this appeal.” The standard for a circuit court to apply in deciding whether to grant a motion to terminate litigation in a demand refused derivative action is a pure question of law.

Therefore, we review the circuit court’s decision on the issue de novo. Bender, 172 Md.App. at 664 , 917 A.2d 142 . As is obvious, the Zapata case was decided under Delaware law. Unlike the case at bar, it was not a demand refused case.

Rather, it was a demand excused case, in which the court held that the alleged breaches of fiduciary duty on the part of all the corporation’s directors made any demand on the board futile. After the derivative litigation in Zapata was initiated, the board established an independent litigation review committee to make recommendations as to whether to pursue the derivative claims. When the committee recommended that the corporation not pursue the claims, the corporation moved to dismiss the derivative action. The trial court — Delaware’s Chancery Court — granted the motion to dismiss, applying the deferential business judgment rule.

On review, the Delaware Supreme Court reversed, holding that the Chancery Court should have decided the motion to dismiss in a two-step process, by applying the business judgment rule and then exercising its own independent business judgment. We quote at length the reasoning of the Zapata court: ⁴⁹⁷ [T]he Court of Chancery ... is faced with a stockholder assertion that a derivative suit, properly instituted, should continue for the benefit of the corporation and a corporate assertion, properly made by a board committee acting with board authority, that the same derivative suit should be dismissed as inimical to the best interests of the corporation. At the risk of stating the obvious, the problem is relatively simple. If, on the one hand, corporations can consistently wrest bona fide derivative actions away from well-meaning derivative plaintiffs through the use of the committee mechanism, the derivative suit will lose much, if not all, of its generally-recognized effectiveness as an intra-corporate means of policing boards of directors____ If, on the other hand, corporations are unable to rid themselves of meritless or harmful litigation and strike suits, the derivative action, created to benefit the corporation, will produce the opposite, unintended result.... [T]he question has been treated by other courts as one of “business judgment” of the board committee.

If a “committee composed of independent and disinterested directors, conducted a proper review of the matters before it, considered a variety of factors and reached, in good faith, a business judgment that (the) action was not in the best interest of (the corporation)”, the action must be dismissed. See, e.g., Maldonado v. Flynn, [ ] 485 F.Supp. [274] at 282, 286 [S.D.N.Y.1980]. The issues become solely independence, good faith, and reasonable investigation. The ultimate conclusion of the committee, under that view, is not subject to judicial review.

We are not satisfied, however, that acceptance of the “business judgment” rationale at this stage of derivative litigation is a proper balancing point. While we admit an analogy with the normal case respecting hoard judgment, it seems to us that there is sufficient risk in the realities of a situation like the one presented in this case to justify caution beyond adherence to the theory of business judgment. ⁴⁹⁸ The context here is a suit against directors where demand on the board is excused. We think some tribute must be paid to the fact that the lawsuit was properly initiated. It is not a board refusal case.

Moreover, this complaint was filed [four years before the litigation investigation committee was established]. Situations could develop where such motions could be filed after years of vigorous litigation for reasons unconnected with the merits of the lawsuit. Whether the Court of Chancery will be persuaded by the exercise of a committee power resulting in a summary motion for dismissal of a derivative action, where a demand has not been initially made, should rest, in our judgment, in the independent discretion of the Court of Chancery. 430 A.2d at 786-88 (footnotes omitted) (some citations omitted) (emphasis added). The court concluded that, to balance the competing interests of the derivative plaintiffs and the corporation, the Chancery Court, in ruling on a motion to dismiss, first should apply the business judgment rule and then should exercise its independent judgment to decide whether dismissal of the derivative claims based upon the demand committee’s recommendation would produce a “result [that] does not appear to satisfy [the business judgment rule’s] spirit” or the “premature[ ] termination of] a stockholder grievance deserving of further consideration in the corporation’s interest.” Id. at 789 .

The Zapata court also held that, with respect to the first, business judgment, prong of the two-step process, the burden was on the corporation defendants, not the derivative plaintiffs, to show that the litigation committee had acted independently and in good faith, that its investigation had been reasonable, and that its conclusions were reasonable. Id. at 788 . In the Bender case, unlike in Zapata , but as in the case at bar, a demand was made and refused, and the assertion was that the refusal was wrongful. Two corporations were involved in Bender ; the board of each established a demand ⁴⁹⁹ committee that investigated the plaintiffs’ derivative claims.

The committees each recommended that the claims not be pursued, and on that basis, the corporations moved to dismiss all the derivative claims. The court applied an “entire fairness” test in reviewing the demand committee’s recommendations as to three claims, and applied the business judgment rule in reviewing the demand committee’s recommendations as to the remaining claims. It granted the motion to dismiss as to all claims. On appeal, we explained that, “[i]n determining whether a demand was wrongly refused, a court reviews the board’s investigation under the business judgment rule.” Bender, 172 Md.App. at 666 , 917 A.2d 142 .

We pointed out that the business judgment rule is codified in Maryland. It states that “[a]n act of a director of a corporation is presumed to satisfy the standards of subsection (a) of this section.” CA § 2-405.1(e). See Mona, 176 Md.App. at 696 , 934 A.2d 450 (commenting that “the business judgment rule is a presumption that corporate directors acted in accordance with the standard of care imposed upon them”) (citations and quotations omitted). Subsection (a) states, “[a] director shall perform his duties as a director, including his duties as a member of a committee of the board on which he serves: (1) In good faith; (2) In a manner he reasonably believes to be in the best interests of the corporation; and (3) With the care that an ordinarily prudent person in a like position would use under similar circumstances.” CA § 2-405.1(a).

We further explained in Bender that when the business judgment rule applies to a demand committee’s decision not to pursue derivative litigation, the circuit court, in ruling on a motion to dismiss, must defer “to the decision of the board or committee not to pursue litigation unless the stockholders can show either that the board or committee’s investigation or decision was not conducted independently and in good faith, or that it was not within the realm of sound business judgment.” Bender, 172 Md.App. at 666 , 917 A.2d 142 (citations omitted). See also Werbowsky, 362 Md. at 619 , 766 A.2d 123 (stating, “[i]f a demand is made and refused, that decision, and the ⁵⁰⁰ basis for it, can be viewed by a court under the business judgment rule standard”). Stated another way, deference must be granted the demand committee’s investigation if “any rational business person could have reached that result, proceeding independently and in good faith with the best interests of the corporation in mind.” Id. at 667 , 917 A.2d 142 (citation omitted). See also James J. Hanks, Maryland Corporation Law § 7.21 [c], p. 276.9 (2009 Supp.) (hereinafter “Hanks”) (stating, “[t]he directors’ action in considering whether to pursue a possible claim is, like any other action, governed by the standard set forth in [the statutory business judgment rule].

If the demand is properly reviewed and refused, then that is the end of the matter and the stockholder will not be permitted to proceed.”) (footnote omitted). We also explained in Bender that the party challenging the demand committee’s decision not to pursue the derivative claims bears the burden “‘to establish facts rebutting the presumption’ that the directors acted reasonably and in the best interests of the corporation.” Bender , 172 Md App. at 667, 917 A.2d 142 (quoting Aronson, 473 A.2d at 812 ). Our ultimate holding in Bender concerned the proper application vel non of the “entire fairness test,” an issue we shall discuss infra, as it is pertinent to the appellants’ second question presented. It was implicit in our express approval in Bender of the business judgment rule as the generally applicable standard for assessing a demand committee’s recommendations in a wrongful refusal case, however, that we do not require the circuit court to engage in the Zapata two-step “independent business judgment” analysis when ruling on a motion to dismiss in a demand refused case.

We shall make express today what was implicit in Bender . 10 ⁵⁰¹ The Zapata independent business judgment standard calls upon the trial court to review the demand committee’s conclusions not only for fairness of process, but also for substance so that, even when the requirements of the business judgment rule — independence and good faith of the demand committee, reasonableness of the committee’s investigation, and reasonableness of the committee’s conclusions — have been satisfied, the trial court may substitute its own judgment for that of the corporation. 430 A.2d at 789 (“This means, of course, that instances could arise where a committee can establish its independence and sound bases for its good faith decisions and still have the corporation’s motion denied.”). Thus, under the Zaipata test, the court’s business judgment, not the corporation’s, prevails, regardless of how fair and reasonable the corporation’s investigation and decision have been. In exercising its final business judgment, the court “should, when appropriate, give special consideration to matters of law and public policy in addition to the corporation’s best interests.” Zapata, 430 A.2d at 789 . When the business judgment rule, and not the two-step enhanced process adopted in Zapata , prevails, the reviewing court will not substitute its judgment for that of the corporation’s directors on a matter of corporate management, e.g., a decision whether the corporation should pursue litigation.

See Auerbach v. Bennett, 47 N.Y.2d 619 , 419 N.Y.S.2d 920 , 393 N.E.2d 994, 996 (1979) (stating, “the substantive aspects of a decision to terminate a shareholders’ derivative action against defendant corporate directors made by a committee of disinterested directors appointed by the corporation’s board of directors are beyond judicial inquiry under the business judgment doctrine, the court may inquire as to the disinterested ⁵⁰² independence of the members of that committee and as to the appropriateness and sufficiency of the investigative procedures chosen and pursued by the committee”). In his article, “The Business Judgment Rule as Abstention Doctrine,” Stephen M. Bainbridge describes the difference in approach between the traditional business judgment rule and the enhanced independent business judgment rule followed in Delaware as two conceptions ... competing] in the case law. One views the business judgment rule as a standard of liability under which courts undertake some objective review of the merits of board decisions.... The other ... treats the rule not as a standard of review but as a doctrine of abstention, pursuant to which courts simply decline to review board decisions.

Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 Vand. L.Rev. 83 (2004). In Maryland and elsewhere in this country Delaware corporations law is properly accorded respect. Werbowsky, 362 Md. at 618 , 766 A.2d 123 .

There are two distinctions between Maryland corporations law and Delaware corporations law, however, that militate strongly against the application of the Zapata two-step enhanced version of the business judgment rule in Maryland. First, as mentioned above, Maryland’s business judgment rule, being statutory, is a product of legislation and, absent ambiguity or constitutional infirmity, is not subject to interpretation or revision by judicial gloss. In contrast, Delaware’s business judgment rule remains a creature of common law, liable to judicial alteration. By its plain language, our statutory business judgment rule applies to decisions by a board of directors or its committees, which would include a special litigation committee such as the SLC in this case.

See CA § 2-405.1(a) (stating that “[a] director shall perform his duties as a director, including his duties as a member of a committee of the board on which he serves ... (1) In good faith; (2) In a manner he reasonably believes to be in the best interests of the corporation; and (3)With the care that an ordinarily prudent person in a like position would use under similar circumstances.”) (emphasis added). See also CA § 2-411(a) ⁵⁰³ (“The board of directors of a corporation may: (1) Appoint from among its members ... committees composed of one or more directors; and (2) Delegate to these committees any of the powers of the board of directors [with exceptions not here applicable].... ”). Likewise, by its plain language, the Maryland statutory business judgment rule places the burden on the derivative plaintiff to prove that a decision by a board of directors or by a committee of the board was not made independently and in good faith, was not investigated reasonably, or was not based upon reasonable conclusions.

This is directly contrary to the assignment of the burden of proof in Zapata . Second, as noted, Zapata was a demand excused case, not a demand refused case. The Delaware Supreme Court emphasized the nature of the case repeatedly, pointing out that the derivative suit in Zapata was “properly initiated” by the plaintiff shareholders. The requirement of a demand most frequently is excused when the board members are so personally interested in the subject of the litigation or so bound to a position about it that demand would be futile.

In such a situation, the shareholder plaintiff retains control over the litigation; thus the Zapata court’s observation about the suit having been properly brought. Zapata, 430 A.2d at 785 . By contrast, when a shareholder makes a demand, as was done in the case at bar, and in Bender , the shareholder has “ ‘waived any claim [he] might otherwise have had that the board cannot independently act on the demand.’ ” Bender, 172 Md.App. at 666 , 917 A.2d 142 (quoting Scattered Corp. v. Chicago Stock Exchange, Inc., 701 A.2d 70, 74 (Del.1997)) (emphasis in Bender). In that instance, control of the litigation is with the corporation, as usual, and, also as usual, the corporation’s decision, through the appointed committee, whether to pursue the derivative claims, is protected by the business judgment rule. 11 ⁵⁰⁴ We see no merit in the appellants’ argument that, because their claims are based upon allegations they characterize as self-dealing by directors, the court should apply the Zapata test and decide the motion to dismiss by application of its own business judgment.

In a demand refused action, where demand was not excused under the futility doctrine based upon the self-interest of directors, the court is reviewing the demand committee’s decision not to pursue the derivative litigation, not the underlying actions that prompted the investigation. The business judgment rule “applies to all decisions regarding the corporation’s management,” which “insulate[s] ⁵⁰⁵ the business decisions made by the director from judicial review, absent a showing of fraud, self-dealing, unconscionable conduct, or bad faith.” Shenker, 411 Md. at 344 , 983 A.2d 408 (emphasis added). The SLC’s decision not to pursue the derivative claims was a business decision separate and apart from the underlying business decisions that the SLC was investigating. Thus, the circuit court was obligated to apply the business judgment rule to the decision not to pursue the derivative claims unless the appellants introduced evidence that the SLC members themselves engaged in fraud, self-dealing, unconscionable conduct, or bad faith in conducting their investigation and making their recommendations.

Bender, 172 Md.App. at 666-68 , 917 A.2d 142 . Accordingly, in a Maryland demand refused derivative action, the business judgment rule serves as one of abstention, by which the courts will defer to the decision of a special litigation committee on whether to pursue the claims at issue, so long as the committee acted independently and in good faith, conducted a reasonable investigation, and reached reasonable conclusions. The circuit court therefore correctly applied the business judgment rule in deciding whether the SLC properly refused the appellants’ demand that the corporations pursue the claims alleged in the derivative suit. 12 Under the rule, it was the appellants’ burden to produce ⁵⁰⁶ evidence that the SLC either (1) was not independent, (2) did not operate in good faith, or (3) did not conduct a reasonable investigation that reached reasonable conclusions. See Hanks, supra, § 7.21 [c], p. 276.20 (stating, “[t]hus, in applying Maryland law in determining whether to uphold the decision of a board or board committee to terminate a derivative proceeding, a court may not review the merits of the derivative claim unless the presumption of [the business judgment rule] is rebutted”).

The appellants’ arguments pertaining to the duties owed by majority stockholders to minority stockholders are misplaced. The derivative suit is a means by which the shareholders can enforce the director’s duties owed to the corporation, not the duties that the directors/majority shareholders owe to other shareholders. See Shenker, 411 Md. at 342 , 983 A.2d 408 (stating, “the derivative form of action permits an individual shareholder or group of shareholders to bring suit to enforce a corporate cause of action against officers, directors, and third parties where those in control of the company refuse to assert a claim belonging to it”) (quotations and citations omitted); Paskowitz v. Wohlstadter, 151 Md.App. 1, 9 , 822 A.2d 1272 (2003). A derivative action is not the proper vehicle to seek redress for an alleged breach of a majority stockholder’s fiduciary duties to a minority stockholder.

See Bender, 172 Md.App. at 674 , 917 A.2d 142 (stating, “[t]he claim regarding any harm to [shareholder’s children] is personal to them, and not a cause of action that [the corporation] could pursue as a corporation; thus it was not a matter appropriate for a stockholder derivative action. The Demand Committee was not obligated to investigate any harm personal to appellants.”). Finally, there likewise is no merit in the argument that, because the corporations are small, closely held entities, the business judgment rule should not apply, and the circuit court should exercise its independent business judgment in deciding whether to dismiss the derivative action. CA section ⁵⁰⁷ 2-405.1 equally applies to the corporations in this case as it does to larger entities.

II

The appellants next contend the circuit court erred in deferring to the SLC’s decision not to pursue the derivative claims because the SLC’s investigation and conclusions were not reasonable. Specifically, they argue that, because the derivative action complaint alleged what they characterize as self-dealing transactions by the Director Appellees, the SLC should have “critically examine[d] the stock transaction^] under the entire fairness test[,]” instead of “simply applying] their personal business judgment.” Asserting that “[i]t is axiomatic that the ‘investigation’ of a corporate litigation committee cannot be deemed reasonable if the committee failed to apply a proper standard of review to the transactions it was charged to investigate,” they argue that “[t]he failure of the [SLC] to apply the proper level of review required that the circuit court find that neither the [SLC’s] investigation nor its conclusions were reasonable.” 13 To put this contention in perspective, we shall go into some detail about the conclusions the SLC reached about the stock sales and its investigation as related to those sales. As noted above, the SLC summarized the derivative claims of self-dealing as involving allegations of excessive compensation for the Director Appellees and other board members; acquisition of Maureen’s stock and issuance of the stock to the Director Appellees and an employee (Sean, Jr.); and violation of preemptive shareholder rights. ⁵⁰⁸ With respect to compensation, the SLC reviewed the history of the corporations and their management and summarized for each of the Director Appellees his education, training, and experience as relevant to the business of the corporations. James holds bachelors and masters degrees in business, was the first non-engineer to complete the Trane sales and training program, worked in sales and then parts and then, in 1986, took over all of the corporations’ operations.

Louis, Jr. holds a bachelor’s degree in business administration, attended the Trane sales and management dealer program, completed “numerous graduate sales and marketing courses,” and within the corporations has worked as an outside salesman, account executive, manager of the existing sales group, vice president, and senior vice president. Cain is a CPA who began with the companies virtually at their inception, became chief financial officer in 1985, and is the manager to whom two-thirds of the companies’ associates report. As noted already, Sean is a lawyer. Sean, Jr. holds a bachelor’s degree from Duke University.

At the time of the SLC’s investigation, Sean, Jr., had been employed full-time by the corporations for 5 years. (He had started working for the companies when he was 13.) During his full-time employment, he had worked performing filing, shipping oil samples, and in accounting and sales. He had attended the Trane graduate