Maryland Business Litigation Lawyer Blog
In Howard Nathanson, et al. v. Tortoise Capital Advisors, LLC, the Appellate Court of Maryland (the “Court”) reinforced Maryland’s commitment to requiring shareholders to make demands upon boards of directors prior to filing a derivative suit. The Court upheld Maryland’s “very limited exception” to not making such a demand prescribed in Werbowsky v. Collomb, 362 Md. 581 (2001).
Nathanson also encouraged plaintiffs to file state-law claims in federal court when the court has supplemental jurisdiction to maximize judicial efficiency. This decision underscores how important it is for members/shareholders/directors, etc. to consult with an attorney about a plan of action if they think something untoward has occurred with the Company, as by the time litigation arises, it may be too late.
This case involved two closed-end investment companies (the “Funds”) with five members serving as Directors (the “Board”). The investment companies were managed by an investment advisory firm, Tortoise Capital Advisors, L.L.C. (“Tortoise”). During 2020, the Funds suffered substantial losses, but the Board reviewed Tortoise’s handling of the Funds and deemed it appropriate. The Board renewed the Funds’ contracts with Tortoise in November 2020, but at the end of 2020, the Funds’ reported losses of more than $1 billion.
Gus Gordon, a shareholder of one of the Funds, and Howard Nathanson, a shareholder of the other Fund, each brought suits derivatively on behalf of their respective Funds against Tortoise and the Board. Importantly, Gordan and Nathanson (the “Shareholders”) initially sued Tortoise and the five Directors in federal court, but the case was dismissed under the doctrine of forum non conveniens. The Shareholders then brought suit in the Circuit Court for Baltimore City. The Circuit Court dismissed the case, and only then did the Shareholders send a demand letter to the Board setting forth their allegations that the Directors and Tortoise breached their fiduciary duties.
The core issues on appeal were whether the Shareholders’ action was brought timely given the statute of limitations tolling provision under 28 U.S.C. § 1367(d), and whether the Shareholders’ circumstances did not require them to make a demand prior to bringing their derivative suit.
The Court concluded that 28 U.S.C. § 1367(d) does apply to a claim that is dismissed in federal court for forum non conveniens, construing the statute broadly to include claims dismissed for any reason. The Court relied on statutory interpretation and policy reasons, noting that the statute’s purpose is to promote judicial efficiency. The Court reasoned that plaintiffs should be dissuaded from filing duplicative claims in federal and state courts simultaneously because they can bring a state-law claim in state court for any reason, even if already dismissed by a federal court.
The Court also reinforced the importance of shareholders making a demand to directors prior to filing suit, upholding the “very limited exception” to this rule articulated in Werbowsky v. Collomb, 362 Md. 581 (2001). The Court concluded that shareholders who make a demand after filing suit against the Board of Directors do not waive their futility claims. The Court cited to Boland v. Boland 423 Md. 296 (2011) and reasoned that the exception is so narrow, shareholders should expect to have to make a demand, and thus, making a demand does not waive their claims that the board cannot act independently on the demand.
The Court evaluated the Shareholders’ allegations, which included the Board’s inability to consider a demand because directors could face personal liability for the damages, the Board being committed to the decisions the Shareholders dispute exhibited through the Board’s behavior, and the Board being hostile to the Shareholders’ initial complaint in federal court. The Court concluded that it could not examine many of the Shareholders’ allegations because it was not entitled to evaluate the underlying merits of the claims. The Court also concluded, from what it could surmise from the allegations, that the Shareholders failed to demonstrate in a very clear and particular manner that the Directors’ behavior deviated from behavior characteristic of the business judgment rule, and thus, the Shareholders were required to make a demand prior to bringing litigation.
In sum, in Maryland shareholders must submit demands to their boards of directors prior to filing litigation, and plaintiffs should bring eligible state-law claims in federal court to streamline the judicial process, as they can bring their state-law claims in state court should their claims be dismissed in federal court.
Silverman Thompson has deep experience in advising and litigating shareholder derivative and oppression claims. To learn more, please contact Bill Sinclair, head of the firm’s business litigation practice, at bsinclair@silvermanthompson.com or at (410) 385-1115.