Oliveira v. Sugarman

Adkins, J. Petitioners Albert F. Oliveira and Lena M. Oliveira filed suit against current and former members of iStar’s Board of Directors and senior management in the Circuit Court for Baltimore City for breach of fiduciary duty, unjust enrichment, waste of corporate assets, breach of contract, and promissory estoppel arising from the Board of Directors’ modification of performance-based executive compensation awards, which were granted in the form of stock. The Circuit Court dismissed all of Petitioners’ claims for failure to state a claim, and the Court of Special Appeals affirmed. We hold that the traditional business judgment rule applies to a board of directors’ decision to deny a shareholder litigation demand, not the heightened standard established by Boland v. Boland, 423 Md. 296 , 31 A.3d 529 (2011), Furthermore, we hold that Petitioners do not allege facts sufficient to support direct claims for breach of contract or promissory estoppel. Thus, they are derivative claims that are subject to the business judgment rule.

They were correctly dismissed. FACTS AND LEGAL PROCEEDINGS Petitioners are Albert F. Oliveira and Lena M. Oliveira, trustees for the Oliveira Family Trust, a shareholder of iStar Financial Inc. (“iStar”). iStar is a publicly traded real estate investment trust incorporated in Maryland with its principal place of business in New York. Respondents are iStar and current and former members of iStar’s Board of Directors. 1 ²¹⁵ The 2008 Awards and 2009 Plan On December 19, 2008, iStar’s Board of Directors (“the Board”) granted over ten million performance-based restricted stoek units to certain iStar executives and employees (“the 2008 Awards”). The Board intended for the awards to vest only if iStar common stock achieved any of the following average closing prices over a period of 20 consecutive days: $4,00 or more prior to December 19, 2009; $7.00 or more prior to December 19, 2010; or $10.00 or more prior to December 19, 2011.

When the Board granted these awards, iStar did not have enough authorized shares of stock to pay the awards if they vested. Thus, in 2009, the Board sought shareholder approval of an issuance of additional stock units to be used for executive compensation. On April 23, 2009, Chief Executive Officer (“CEO”) Jay Sugarman sent a letter inviting iStar shareholders to the annual shareholders meeting. The letter indicated that at the meeting shareholders would be asked to “consider and vote upon a proposal to approve the iStar Financial Inc. 2009 Long-Term Incentive Plan” (“the 2009 Plan”).

The mailing also included a notice of the annual shareholders’ meeting, which explained that shareholders were to “consider and vote” on the 2009 Plan at the meeting. The notice indicated that the 2009 Plan was “further described in the accompanying proxy statement.” Moreover, the Board included a letter introducing the proxy statement, which urged shareholders to approve the 2009 Plan. The letter told shareholders, “[I]t is crucial that we retain and motivate our senior leaders and key employees by granting long-term, performance-based equity incentive compensation.” It continued, “In particular, if the 2009 Plan is not approved, we are obligated to settle existing performance- ²¹⁶ based awards granted on December 19, 2008 in cash, rather than common stock, if the performance and vesting conditions of those awards are achieved.” The attached Schedule 14A Proxy Statement (“the 2009 Proxy Statement”) further described the 2009 Plan, which authorized the issuance of an additional eight million shares of common stock. The Proxy Statement explained that “the ongoing financial crisis and its negative impact on [iStar] business and financial results” had led to a depletion of iStar shares issued in 2006.

This new stock would allow iStar to settle the 2008 Awards—if they vested—with stock rather than cash, which would enable the corporation to preserve cash. The Proxy Statement also noted that approval of the 2009 Plan would “ensure, for federal tax purposes, the deducti-bility of compensation recognized by certain participants in the 2009 Plan which may otherwise be limited by Section 162(m) of the Internal Revenue Code.” A copy of the 2009 Plan was attached to the Proxy Statement. On April 27, 2009, Respondents filed the Proxy Statement with the United States Securities and Exchange Commission. On May 27, 2009, at the annual shareholders’ meeting, the shareholders voted to approve the 2009 Plan.

In 2009, iStar did not meet its target share price for 20 consecutive days as required for the 2008 Awards to vest. In 2010, iStar achieved the target price of $7.00 for 20 consecutive days ending on December 20—eight trading days too late to vest the 2008 Awards. Following this near miss, iStar began considering modification of the 2008 Awards “to achieve a fair balance between rewarding management’s exceptional performance, as reflected by the 300% rise in the market value of iStar stock, and enforcing the terms of the 2008 Awards.” After several Board and Compensation Committee meetings, as well as discussion with legal, accounting, and compensation advisors, the Board modified the 2008 Awards to convert them from performance-based to service-based awards (the “2011 Modification”). ²¹⁷ Under the 2011 Modification, iStar executives received compensation in three installments—on January 1, 2012, 2013, and 2014—as long as the employee still worked for iStar on the vesting date. The 2011 Modification also reduced the amount of the 2008 Awards by 25 percent.

With the 2011 Modification, the Board hoped to prevent key members of iStar management from leaving the corporation. Additionally, the Board believed that modifying the existing 2008 Awards, which had already been largely expensed, would be more cost effective than issuing new awards. Demand and Response On May 23, 2013, Petitioners demanded that the Board “investigate and institute claims on behalf of [iStar] ... against responsible persons” related to the 2011 Modification. Petitioners demanded that the Board rescind all shares of stock issued under the 2009 Plan to settle the 2008 Awards, or, alternatively, “seek any other appropriate relief on behalf of [iStar] for damages sustained ... as a result of the Board’s misconduct” in modifying the 2008 Awards.

Additionally, Petitioners sought to “[e]njoin [iStar] from issuing any more shares under the 2009 Plan to settle the 2008 Awards.” In June 2013, the Board appointed Barry W. Ridings, an outside, non-management director who joined the Board after the 2011 Modification, to serve as the demand response committee (“the Committee”). The Committee was tasked with investigating Petitioners’ demand and making a recommendation to the Board as to the best course of action. The Committee hired outside counsel, Joseph S. Allerhand and Stephen A. Radin of Weil, Gotshal & Manges LLP, to assist with the investigation. In October 2013, following extensive document review and interviews with key iStar executives, the Committee recommended that the Board refuse Petitioners’ demand.

On November 11, 2013, the Board unanimously voted in accordance with that recommendation. In a letter sent to Petitioners on November 12, 2013, the Board presented several reasons for denying their demand. ²¹⁸ The Board noted that the Committee had concluded that the Board made a good faith, informed business judgment to modify the 2008 Awards, and that it had the authority to do so. Additionally, the Board explained that if it were to rescind the 2008 Awards, it would harm corporate morale and likely invite litigation from management executives. Lastly, the Board noted that even if it were to win the demanded litigation, the damages would not be enough to offset the cost of issuing new awards.

The Board concluded that it saw “no upside—and much downside—to the action and lawsuit proposed in the [djemand. iStar would probably lose, suffer substantial harm, and pay both sides’ attorneys’ fees.” Legal Proceedings On March 10, 2014, Petitioners filed a complaint in the Circuit Court for Baltimore City. They brought five claims against Respondents: (1) breach of fiduciary duty; (2) unjust enrichment; (3) waste of corporate assets; (4) breach of contract; and (5) promissory estoppel. The first three counts were alleged derivatively, and the last two were brought directly. In their motion to dismiss, Respondents argued that all of Petitioners’ claims were derivative, and they had failed to plead facts sufficient to overcome the presumption that the Board had acted with sound business judgment.

Following a hearing, the Circuit Court dismissed all of Petitioners’ claims. Petitioners filed a timely appeal to the Court of Special Appeals. In a reported decision, the Court of Special Appeals affirmed the grant of the motion to dismiss. Oliveira v. Sugarman, 226 Md.App. 524 , 130 A.3d 1085 (2016).

It held that the Circuit Court correctly applied the business judgment rule to the Board’s decision to deny Petitioners’ litigation demand, and that Petitioners failed to allege facts overcoming the business judgment rule presumption. Id. at 540, 543 , 130 A.3d 1085 , It viewed Petitioners’ breach of contract and promissory estoppel claims as derivative claims that could not be asserted directly. Id. at 552 , 130 A.3d 1085 . ²¹⁹ We granted certiorari to answer the following questions: 2 1. Does the modified business judgment rule established by Boland v. Boland, 423 Md. 296 , 31 A.3d 529 (2011), apply to a disinterested and independent board of directors’ decision to deny a shareholder litigation demand? 2.

Have Petitioners alleged sufficient facts to support direct shareholder claims for breach of contract and promissory estoppel? We answer no to both questions. Therefore, we shall affirm the judgment of the Court of Special Appeals. STANDARD OP REVIEW Petitioners appeal from the Circuit Court’s grant of a motion to dismiss. “We review the grant of a motion to dismiss as a question of law.” Shenker v. Laureate Educ., Inc., 411 Md. 317, 334 , 983 A,2d 408 (2009) (citation omitted).

Therefore, we analyze whether the granting of the motion was legally correct. RRC Northeast, LLC v. BAA Maryland, Inc., 413 Md. 638, 643-44 , 994 A.2d 430 (2010) (citations omitted). In doing so, we review the Circuit Court’s decision without deference. See State v. Johnson, 367 Md. 418, 424 , 788 A.2d 628 (2002).

To determine whether dismissal was appropriate, we ask whether the facts alleged in the well-pleaded complaint, if taken as true, support a cause of action for which relief may be granted. RRC Northeast, LLC, 413 Md. at 644 , 994 A.2d 430 (citation omitted). We construe all inferences in the light most favorable to the non-moving party, and order ²²⁰ dismissal only if the allegations and permissible inferences, if true, still fail to afford the plaintiff relief. Id. at 643 , 994 A.2d 430 (citation omitted).

DISCUSSION Petitioners argue that this Court should apply the modified business judgment rule established in Boland v. Boland, 423 Md. 296 , 81 A.3d 529 (2011), to all instances where a corporate board denies a shareholder’s demand to initiate a derivative suit. In applying this heightened scrutiny, they argue, the Court should hold that Respondents improperly denied their litigation demand as to their claims of breach of fiduciary duty, unjust enrichment, and waste of corporate assets. Additionally, Petitioners claim the right to proceed on their breach of contract and promissory estoppel counts because, as direct—not derivative—shareholder claims, they are not subject to the business judgment rule. 3 Respondents, by contrast, urge this Court to review the Board’s decision to deny Petitioners’ litigation demand under the traditional business judgment rule and affirm the grant of the motion to dismiss. Regarding Petitioners’ claims for breach of contract and promissory estoppel, Respondents say ²²¹ they are derivative claims that were properly dismissed for failure to state a claim overcoming the business judgment rule.

The Business Judgment Rule Under the traditional business judgment rule, courts apply a presumption of disinterestedness, independence, and reasonable decision-making to all business decisions made by a corporate board of directors. The business judgment rule protects corporate directors from liability when the majority of directors act prudently and in good faith. Boland, 423 Md. at 328 , 31 A.3d 529 (quoting Devereux v. Berger, 264 Md. 20, 31-32 , 284 A.2d 605 (1971)). The Delaware Supreme Court described the rule as follows: It is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.

Absent an abuse of discretion, that judgment will be respected by courts. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (citations omitted), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 4 To overcome the “dangerous terrain” of the business judgment rule presumption, the plaintiff must assert facts that suggest the corporate directors did not act in accordance with the rule. Boland, 423 Md. at 329 , 31 A.3d 529 (quoting Bender v. Schwartz, 172 Md.App. 648, 666 , 917 A.2d 142 (2007)). In other words, “[t]he burden is on the party challenging the decision to establish facts rebutting the presumption.” 5 Aronson, 473 A.2d at 812 . ²²² Maryland has codified the business judgment rule in Maryland Code (1976, 2014 Repl.

Vol.), § 2-405.1 of the Corporations and Associations Article (“C & A”). Section 2-405.1(a) imposes a duty on a director to act “(1) [i]n good faith; (2) [i]n a manner he reasonably believes to be in the best interests of the corporation; and (3) [w]ith the care that an ordinarily prudent person in a like position would use under similar circumstances.” 6 Under C & A § 2-405.1(e), “[a]n act of a director of a corporation is presumed to satisfy the standards of subsection (a) of this section.” 7 Maryland courts apply the business judgment rule to “all decisions regarding the corporation’s management.” Shenker, 411 Md. at 344 , 983 A.2d 408 (citing NAACP v. Golding, 342 Md. 663, 673 , 679 A.2d 554 (1996)). To seek judicial review of a board’s business decision under the business judgment rule, shareholders must file ²²³ a derivative suit on behalf of the corporation. Werbowsky v. Collomb, 362 Md. 681, 599 , 766 A.2d 123 (2001).

The obligation of directors to perform their duties in accordance with good business judgment runs to the corporation, not directly to the shareholders. Id. Therefore, its breach gives rise to a legal right that belongs exclusively to the corporation. Id.

By bringing a derivative action, shareholders invoke “an extraordinary equitable device ... to enforce a corporate right that the corporation failed to assert on its own behalf.” Id. In a derivative suit, “[t]he corporation is the real party in interest and the shareholder is only a nominal plaintiff. The substantive claim belongs to the corporation.” Id. (quoting 13 William Meade Fletcher et al., Cyclopedia of the Law of Private Corporations § 5941.10 (1995 Rev. Vol.)).

Because a derivative lawsuit intrudes upon the board of directors’ managerial control of the corporation, shareholders are required to first make a demand that the board take action before initiating a derivative suit. Id. at 600, 766 A.2d 123 . In Kamen v. Kemper Financial Services, Inc., 500 U.S. 90 , 111 S.Ct. 1711 , 114 L.Ed.2d 152 (1991), the Supreme Court explained that “[t]he purpose of the demand requirement is to afford the directors an opportunity to exercise their reasonable business judgment and waive a legal right vested in the corporation in the belief that its best interests will be promoted by not insisting on such right.” Id. at 96 , 111 S.Ct. 1711 (citation omitted) (internal quotation marks omitted). If the board of directors denies a litigation demand, the shareholder must overcome the presumption of the business judgment rule to continue the lawsuit.

Boland, 423 Md. at 331 , 31 A.3d 529 . The corporate board’s decision to deny the litigation demand receives the same business judgment rule presumption as any other board decision. Id. at 329-30 , 31 A.3d 529 . Our decision in Boland, however, established an exception to the application of the business judgment rule to a board’s decision to deny a shareholder litigation demand.

When a board consisting of a majority interested directors ²²⁴ utilizes a special litigation committee (an “SLC”) to evaluate a litigation demand, courts apply a modified business judgment rule. Directors are considered to be interested if they either “appear on both sides of a transaction” or “expect to derive [ ] personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally.” Id. at 329, 31 A.3d 529 (quoting Werbowsky, 362 Md. at 609 , 766 A.2d 123 ). If a majority of a corporate board is interested in the challenged transaction, the board can appoint an SLC to decide whether it should accept or deny the litigation demand. Through the selection of the SLC’s members, interested boards “can retain a voice in the derivative lawsuit despite the adverse interests of board members.” Id. at 332, 31 A.3d 529 .

In Boland, we defined an SLC as a committee “composed of independent, disinterested directors, either inside the corporation or specially appointed from outside the corporation” and “vested with the authority to render a corporate decision.” Id. Unlike other demand response committees, an SLC does not make a recommendation to the board—it renders a decision itself. 8 In Boland, a corporate board comprising of four brothers executed two stock transactions that substantially increased their ownership interest in the family business. Boland, 423 ²²⁵ Md. at 313, 31 A.3d 529 . The brothers’ non-director siblings demanded the board pursue litigation for a breach of fiduciary duties, among other claims, and the board appointed an SLC to respond.

Id. at 315, 319 , 31 A.3d 529 . The SLC denied the litigation demand, and the non-director siblings contested the decision. Id. at 321-23 , 31 A.3d 529 . We held that when an interested board—a board with a majority interested directors—forms an SLC to address a shareholder’s litigation demand, the reviewing court does not presume the SLC acted with proper business judgment.

Rather, the burden of proof is on the corporation to present evidence that the SLC acted independently, in good faith, and with reasonable procedures. We explained: [T]he court should not grant summary judgment on the basis of an SLC’s decision unless the directors have stated how they chose the SLC members and come forward with some evidence that the SLC followed reasonable procedures and that no substantial business or personal relationships impugned the SLC’s independence and good faith. Id. at 340-41 . This “enhanced” scrutiny shifts the burden to prove the legitimacy of the SLC and its procedures from the shareholders to the corporate board.

Id. at 349 , 31 A.3d 529 . Our Boland SLC exception draws from two seminal decisions, one from New York, Auerbach v. Bennett, 47 N.Y.2d 619 , 419 N.Y.S.2d 920 , 393 N.E.2d 994 (1979), and one from Delaware, Zapata Corporation v. Maldonado, 430 A.2d 779 (Del. 1981). Boland, 423 Md. at 333-37 , 31 A.3d 529 . When reviewing a demand denial by an SLC, New York courts apply the same business judgment rule presumption as they do to denials made by a board of directors.

Auerbach, 419 N.Y.S.2d 920 , 393 N.E.2d at 1001 . The Delaware Supreme Court, by contrast, instructed courts to apply “[their] own independent business judgment” in evaluating these denials. Zapata Corp., 430 A.2d at 788-89 . In Boland, we adopted Auerbach’s presumption of reasonableness as to the substance of a board’s decision, but imposed “rigorous” judicial review of an SLC’s decision-making procedures.

Boland, 423 Md. at 342 , 31 A.3d 529 . We explained, “The court’s review, though not on the ²²⁶ merits, can be rigorous on the questions of good faith, independence, and procedure.” Id. With this standard, we balanced traditional judicial deference to corporate boards against our concern about a “tainted” board of directors utilizing a biased SLC to improperly benefit from the presumption of the business judgment rule. Id. at 337-42 , 31 A,3d 529.

In this case, Petitioners urge us to expand the application of the Boland rule to all board decisions denying a shareholder litigation demand, regardless of whether the board consisted of a majority of disinterested directors or used an SLC. The Application of Boland Petitioners argue that “institutional symbiosis” within a corporation requires courts to apply the enhanced Boland standard to any board decision denying a shareholder litigation demand. They contend that corporate boards are inherently biased whenever a shareholder makes a demand, and courts should not trust board members to pass judgment on other directors. Petitioners point to Boland, which noted that New York’s deferential Auerbach approach had been criticized because it “does not acknowledge the structural bias inherent in a system which allows directors to judge the actions of their fellow directors.” Boland, 423 Md. at 340 , 31 A.3d 529 (quoting Rosengarten v. Buckley, 613 F.Supp, 1493, 1500 (D. Md. 1985)).

Furthermore, Petitioners assert that enhanced scrutiny is even more appropriate in cases such as this one, when a board takes a recommendation from a committee rather than delegating the authority to make the decision exclusively to an SLC. Thus, they argue, no board decision denying a shareholder litigation demand should receive the benefit of the business judgment rule presumption. We disagree. Petitioners’ argument misperceives the rationale of the Bo-land decision.

Boland involved a board of directors who stood to benefit from the transaction being challenged. In that context we imposed on the directors the burden to prove that the SLC members were independent, acted in good faith, and followed reasonable procedures. Id. at 341, 31 A.3d 529 . We did so because the directors themselves had personal interests at stake in the resolution of the shareholder demand.

Id. at ²²⁷ 313-14, 31 A.3d 529 . In other words, in Boland, the Court declined to permit a tainted board to preserve the full presumption of the business judgment rule by using an SLC. But in this case, Respondents’ board of directors was both disinterested and independent. 9 Therefore, the concerns about the SLC’s independence, good faith, and procedure that drove the Boland Court are simply not present here. Petitioners argue that other states recognize the inherent bias involved in any shareholder litigation demand and grant shareholders greater protections accordingly.

Thus, they contend, applying enhanced scrutiny to all board decisions denying litigation demands would not place Maryland outside of mainstream corporate law. Specifically, Petitioners point to Delaware and New Jersey as states that have instituted greater shareholder protections to counteract inherent bias in the litigation demand process. In Delaware, they argue, shareholders can demand documents related to their derivative claims and any denial of their litigation demand. Petitioners also argue that New Jersey has adopted a modified business judgment rule that applies to all board demand denials.

As explained below, these arguments are misplaced. By statute, Delaware grants shareholders access to corporate documents upon a showing of a “proper purpose.” 10 Del. Code Ann. tit. 8, § 220 (b) (2010). Although Delaware’s statute might provide broader shareholder access to corporate documents than Maryland, 11 this legislative determination is hardly ²²⁸ relevant to our decision whether or not to expand our common-law business judgement rule and its Boland exception.

Furthermore, Delaware common law on this point is quite similar to ours—it only applies an additional layer of scrutiny when plaintiffs have put forth evidence demonstrating that a board was not disinterested and independent. 12 Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (citations omitted). As to New Jersey, Petitioners are correct that In re PSE & G Shareholder Litigation, 173 N.J. 258 , 801 A.2d 295, 312 (2002), applied a BolandAike standard to all cases where the board denied a shareholder litigation demand, but this holding was later overruled by statute. 13 Therefore, contrary to Petitioners’ assertion, adopting enhanced scrutiny for all corporate board decisions denying shareholder litigation demands—interested ²²⁹ or disinterested—would not put Maryland in line with either Delaware or New Jersey law. Relying on Maryland’s “demand futility exception,” Petitioners further argue that if the Court does not extend the application of Boland, enhanced scrutiny will be limited to those rare instances when shareholders are not required to make a demand on the board before bringing suit. As a result, Boland scrutiny will be rarely applied.

We are not so persuaded. First, our purpose here is not to ensure Boland’s wide footprint. Second, we do not see Boland as so limited. Boland enhanced scrutiny is a useful and practical remedy for shareholders in smaller, usually nonpublic companies in which directors are often not disinterested.

Third, Petitioner understates the narrowness of Maryland’s demand futility exception. Demand is only excused when either “(1) a demand, or a delay in awaiting a response to a demand, 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 in dispute that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule.” Werbowsky, 362 Md. at 620 , 766 A.2d 123 . This exception to the demand requirement is quite narrow and does not encompass every instance in which a majority of the board of directors is interested. A director that expects to derive a personal benefit from a corporate transaction—and is therefore not disinterested—is not necessarily “so personally and directly conflicted or committed to the decision in dispute that they cannot reasonably be expected to respond to a demand in good faith and within the ambit of the business judgment rule.” Id.

Petitioners also make an overlapping argument—contending that we only apply enhanced scrutiny to SLC decisions to balance Maryland’s narrow futility exception. Because it is difficult for shareholders to assert demand futility, Petitioners argue, the Boland court imposed enhanced scrutiny to maintain the feasibility of derivative suits. If Boland is only applied ²³⁰ to cases where the board used an SLC, Petitioners contend, this balance will be disrupted. This argument mischaracterizes Boland’s rationale.

Boland was concerned with the situation in which a board that does not have a disinterested majority appoints an SLC to address a litigation demand. The Boland Court expressed concern about SLCs serving as a puppet for the interested board, not the feasibility of shareholder derivative suits more broadly. 14 We decline to apply the Boland standard to all corporate boards that have refused a shareholder demand. Direct or Derivative Claims Petitioners argue that their claims for breach of contract and promissory estoppel are direct shareholder claims, which are not subject to the business judgment rule. Thus, Petitioners contend, they should not have been dismissed for the failure to overcome the business judgment rule presumption.

Whether a claim is direct or derivative depends on (1) “the nature of the wrong alleged” and (2) the relief that the plaintiff would receive if successful. 15 Shenker , 411 Md. at ²³¹ 346, 983 A.2d 408 . To assert a direct claim, a plaintiff must have suffered a “distinct injury” separate from any harm suffered by the corporation. Id. at 345 , 983 A.2d 408 . The remedy that a shareholder seeks must benefit the shareholder as an individual, not the corporate entity.

Id. at 346 , 983 A.2d 408 . Petitioners allege three harms that they argue give rise to direct claims: (1) the failure of the 2011 Modification to qualify for a tax deduction under 26 U.S.C. § 162 (m) (2012); (2) the casting of an uninformed vote on the 2009 Plan; and (3) dilution in the value of their shares. As we shall explain, none of these harms give rise to a direct shareholder claim. Increased Tax Liability Petitioners argue that they suffered harm when the 2008 Awards failed to qualify for a tax deduction under § 162(m) of the Internal Revenue Code. 26 U.S.C. § 162 (m).

Section 162(m)(l) prohibits corporations from deducting compensation paid to the CEO or the four other highest paid corporate officers exceeding one million dollars. Section 162(m)(4)(C), however, provides an exception for executive compensation paid to reward the achievement of shareholder-approved performance goals. The 2009 Proxy Statement indicated that the 2009 Plan was meant “to ensure, for federal tax purposes, the deductibility of compensation recognized by ²³² certain participants in the 2009 Plan which may otherwise be limited by Section 162(m).” When Respondents distributed the 2008 Awards in accordance with the 2011 Modification, the Awards did not qualify for the § 162(m)(4)(C) exception because they were no longer based on a shareholder-approved performance plan. Presumably, iStar paid taxes on the Awards in accordance with § 162(m)(l).

But this financial loss to the corporation does not give rise to a direct shareholder claim. Petitioners have not alleged any harm related to this tax cost distinct from that suffered by the corporation. In fact, Petitioners’ Prayer for Relief asked for the damages sustained by the corporation. Petitioners nevertheless attempt to maintain their direct claims by arguing that the 2009 Plan grants them contract rights that they may enforce directly.

In support of their argument, they point to NAF Holdings, LLC v. Li & Fung (Trading) Limited, 118 A.3d 175 (Del. 2015), as an example of when the Delaware Supreme Court allowed a shareholder to bring a breach of contract claim directly even though the shareholder’s loss derived from the corporation’s loss. 16 In NAF Holdings, the shareholder entered into a contract with a third party to serve as the sourcing agent for the shareholder’s subsidiary corporation. When the third party defendant breached the contract, the subsidiary corporation suffered financial loss, and its stock value decreased. Consequently, the shareholder also suffered economic harm. Even though the shareholder’s harm flowed directly from the corporation’s loss, ²³³ the court declined to require the shareholder to bring a derivative suit.

It explained, “[I]t is of course true that [the shareholder] cannot bring direct contractual claims belonging only to its subsidiaries without first proving demand futility. But this does not mean that [the shareholder] must proceed derivatively as to contract claims [the shareholder] itself possesses.” Id. at 180 . The court allowed the shareholder to bring the claim because its commercial contract granted it distinct rights separate from those of the corporation. Id. at 179 .

The court concluded, “It would be inconsistent with [corporate] legal principles to subject commercial parties to a burdensome demand excusal process before allowing them to sue on their own commercial contracts.” Id. at 181 . Petitioners argue that the 2009 Plan constitutes a contract between the Board and the shareholders, and Respondents breached that contract when they implemented the 2011 Modification. Thus, they argue, in accordance with NAF Holdings, they can assert their breach of contract claim directly. Petitioners put forth two theories under which the 2009 Plan is a contract.

First, they argue that because the Plan contains “all the essential material terms” of the agreement between the shareholders and the Board, it constitutes a contract. Second, Petitioners argue that the “intra-corporate contract” consisting of a corporation’s certificate of incorporation and bylaws includes equity compensation plans such as the 2009 Plan. Because the 2009 Plan was approved in New York, and it expressly provides that it is to be governed by New York law, we will apply New York law in determining whether the Plan constitutes a contract. 17 Petitioners argue that a contract can be created if a written document contains “all the essential material terms” of ²³⁴ an agreement. 18 This definition misstates New York law. Under New York law, “[t]o establish the existence of an enforceable agreement, a plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound.” 19 Kolchins v. Evolution Mkts,, Inc., 128 A.D.3d 47 , 8 N.Y.S.3d 1, 9 (2015) (citing 22 N.Y. Jur. 2d, Contracts § 9).

The New York Court of Appeals has further explained, “A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent.” Mencher v. Weiss, 306 N.Y. 1 , 114 N.E.2d 177, 181 (1953). An examination of the language of the 2009 Plan reveals that it does not constitute a contract. The 2009 Plan does not contain any provision extending a contract offer to the shareholders. Unlike the Proxy Statement and its accompanying letters, the 2009 Plan does not address the shareholders.

It does not make a promise to shareholders in exchange for any action or promise in return. See Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105 , 436 N.Y.S.2d 247 , 417 N.E,2d 541, 543 (1981) (“[A] contract is a private ‘ordering’ in which a party binds himself to do, or not to do, a particular thing.”). Furthermore, several provisions of the 2009 Plan suggest that the Board did not intend to be strictly bound by its terms. For example, Section 12(b) authorizes the Board or a committee it appoints to “make such changes to the Plan as may be necessary or appropriate to comply with the rules and regulations of any government authority or to obtain tax benefits applicable to an Award.” Section 13(iii) provides that ²³⁵ the Board or a committee may “take any other actions and make any other determinations or decisions that it deems necessary or appropriate in connection with the Plan or the administration or interpretation thereof.” Section 13(iii) also states, subject to certain limitations, “The Board may amend the Plan as it shall deem advisable .... ” Additionally, the 2009 Plan specifically allows the Board to terminate the 2009 Plan at any point.

This language weighs heavily against the finding of a contract. Petitioners also argue that the 2009 Plan is part of a larger “intra-corporate contract” between the directors and the shareholders. Both Maryland and New York recognize a corporation’s certificate of incorporation as a contract between shareholders and the corporation. See McQuillen v. Nat’l Cash Register Co., 27 F.Supp. 639, 645 (D. Md. 1939) (describing a corporate charter as a contract between the corporation and shareholders); Warren v. Fitzgerald, 189 Md. 476, 485 , 56 A.2d 827 (1948) (corporate charter is a “contract between stockholders” and “between the corporation and the State”); Mgmt.

Techs., Inc. v. Morris, 961 F.Supp. 640, 646 (S.D.N.Y.1997) (“[A] company’s certificate of incorporation and by-laws in substance are a contract between the corporation and its shareholders.”). Delaware also recognizes that a company’s certificate of incorporation and bylaws make up a contract between directors, officers, and stockholders, and that shareholders can bring direct claims to enforce that contract when they have been distinctly harmed. See STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (“[A] corporate charter is both a contract between the State and the corporation, and the corporation and its shareholders.”); Allen v. El Paso Pipeline GP Co., 90 A.3d 1097, 1107-08 (Del. Ch. 2014) (“[T]he certification of incorporation, and the bylaws [ ] constitute a multi-party contract among the directors, officers, and stockholders of the corporation” that shareholders can directly enforce, (footnote omitted)).

Equity compensation plans, however, have not been