BOLAND v. BOLAND

hat under Maryland law a board of directors who are interested may appoint a special litigation committee to evaluate a derivative suit brought against the corporation and that the recommendation of that committee can form the basis for the court's decision to dismiss or grant summary judgment in favor of the corporation. Id. The court predicted that, if faced with the question of what test should apply for a trial court in deciding whether to dismiss a derivative action when a special litigation committee has recommended not pursuing the derivative claims, Maryland courts would follow Zapata. As one commentator has observed, particularly given the 1999 amendment to CA section 2-405.1, which added subsection (e) setting forth the presumption that a director of a corporation has satisfied the standards of the business judgment rule, as set forth in subsection (a), the Rosengarten court's prediction "turned out to be wrong." Hanks, § 7.21[c], p. 276.20.

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 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[s] under the entire fairness test[,]" instead of "simply apply[ing] 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."

According to the appellants, "the [SLC] admitted it did not even consider whether the terms of the transaction were fair to the corporations." In the Report, however, after finding that enhanced control in the hands of the managing directors was a "positive benefit for the corporations" and "the price received for those shares is more than in dollars . . . [i]t rewards and expects services to be performed for the corporation," the SLC made a specific finding that "the price paid for the stock was appropriate."

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.

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 engineering program and was the second non-engineer to complete it. His present position was as an Account Executive, and he was in the process of obtaining his MBA.

The SLC studied the salaries paid to the directors (except Sean, who receives no compensation) for the years 2003 (when Louis, Sr., died) through 2007. For James (President and Chief Operating Officer), total salary and bonus was $450,000 in 2004, $615,000 in 2005, $635,000 in 2006, and not set for 2007 (although his regular salary for that year was $353,500). Louis, Jr.'s total compensation was $300,000 in 2004, $335,000 in 2005, $345,000 in 2006, and not set for 2007 (although his regular salary for that year was $327,700). Cain's total compensation was $300,000 in 2004, $410,000 in 2005, $425,000 in 2006, and not set for 2007 (although his regular salary was $237,500). The SLC found that the top salesperson for the corporations in 2007 earned over $1.2 million dollars — substantially more than any of the Director Appellees; that the next highest income sales person earned slightly over $590,000; and that five more sales people earned between $400,000 and $500,000.

In concluding that the salaries of the Director Appellees were reasonable, the SLC stated:

In sum, each individual's salary is commensurate with his education, experience, position, and tenure with the company. In addition, the salaries are commensurate with industry practices. The salaries are reasonable given the companies' growth, which is reflected in the net income. At least one sales person is earning more than the companies' President, and several employees' salaries are in the same range as the Officers and Directors. The compensation of the two top officers was set by the [Compensation Committee]. The former President's salary, with which no one ever took issue, exceeded the current President's. The Board exercised sound business judgment in approving this compensation, particularly since the companies paid $27,215,500 million in dividends to their shareholders between 2002 and 2007. Plaintiffs shared in the receipt of these dividends and performed no services for the corporations.

Report, at 16 (footnote omitted).

The shareholders in BTA as of the time of the SLC's investigation were the Louis J. Boland Trust B-1 (600 shares), Colleen (deceased), Eileen, John, Kevin, Michael, and Sean (200 shares each), James (766 shares), Louis, Jr., and Maureen (482 shares each), Sean, Jr. (70 shares), and Cain (282 shares). The shareholders in BTS at that time were Colleen (deceased), Eileen, John, Kevin, Michael, Sean, and Cain (300,300 shares each), James (902,400 shares), Louis, Jr. (751,250 shares), Sean, Jr. (75,075 shares), and Judith Guiliano (74,320 shares).

Guiliano was a former employee. Over the years, Louis, Sr., had authorized the distribution of shares to other longtime employees of the companies, including Peggy Byrnes, whose shares were redeemed in 1994, upon her death; Eleanor Baker, whose shares were redeemed in 2004, upon her death; and Judith Punghorst, whose shares were redeemed in 1994.

The SLC further, traced the history leading up to the redemption of Maureen's stock in connection with her estate plan, noting that "the purpose of the acquisition was to fulfill the Instruction[s]" of Louis, Sr., that Maureen's needs be taken care of. The SLC concluded that the annuity plan established for Maureen

was an excellent estate plan, prepared, approved, and recommended by Mrs. Boland's estate attorney. Its effect on the other shareholders was beneficial and fair. BTS was benefited by the return of its stock to the treasury and by the improvement of the status of its management as will be discussed hereafter. . . .

The SLC further concluded that the price paid for Maureen's stock was fairly set by the Board of Directors, as it relied upon an independent appraisal. (The SLC noted as well that, if there were any inadequacy in the price paid for that stock, it would be her claim to make, not that of the shareholders.)

The SLC stated that "[t]he sales of treasury stock to Louis Boland, Jr., Lawrence Cain, James Boland, and Sean Boland, Jr., after the acquisition of Maureen Boland's stock is the complaint of self dealing in stock." It found as follows respecting the reasons behind the stock sales to the Director Appellees:

The sales represented the Boards' providing an opportunity for some of the officers and directors to obtain more stock in the corporations. The goal was to provide management with a similar percentage of ownership as exists with others in the industry. . . .

* * *

The Board determined that the stock sales were to further solidify successful management for the future well being of the corporation. It goes with out saying that it is common for corporations to give stock or stock options as part of compensation. Here, it has the purposes of further binding management and encouraging performance to enhance personal dividend income. The difference with stock or stock options as part of the income package is that these shares were purchased. It is clear that Louis Boland, Sr. over many years had planned for the future management of the corporations and to facilitate that plan was offering stock to Louis Boland, Jr. and James Boland. This is demonstrated by [Louis's] Letter of Instruction directing that James and Louis, Jr. assume prominent leadership roles within the corporations upon his death, but also by his sale of stock to them prior to his death. In 1985 he sold each of them 100 shares in BTS. Again in 1986 he sold them each 100 additional BTS shares. In 1998, Mr. Boland, Sr. and his wife sold an additional 750 BTS shares to James and Louis, Jr. The 1998 transaction was based on an appraisal which was less than 125% of book value and with promissory notes. The SLC notes that by this 1998 transaction, Louis Boland, Sr. and Maureen Boland vested majority control of the voting stock of BTS in Louis, Jr. and James Boland. BTS is the major income producer and dividend source. In January and April of 2005, the sale of stock in BTS and BTA resulted in approximately the same majority percentage ownership in both corporations. . . . Report at 19-20 (footnotes omitted). With respect to Sean, Jr., the SLC found that the intent behind the stock sales was "to encourage his career goal to be with the corporation for its future stability and management."

In assessing the stock sales, the SLC applied a business purpose, i.e., business judgment rule, test. It quoted from Mountain Manor Realty, Inc. v. Buccheri, 55 Md.App. 185, 198, 461 A.2d 45 (1983), that "`an issue of . . . stock that has the collateral effect of enhancing the power of incumbent management is not invalid if the transaction has as its principal purpose some proper corporate goal.'" Report at 21. The SLC concluded with respect to the stock sales that "[t]he enhancement of control is a positive benefit for the corporations" and the stock sales were "well within the business judgment rule and done in good faith for the benefit of the corporation."

Finally, the SLC concluded that there was no merit to the appellants' claim that the stock sales had violated their preemptive rights as shareholders, i.e., the rights of minority shareholders in a corporation not to have their ownership interests "diluted by the issuance of stock to others." Report at 23. From a comparison of the percentage stock ownerships before and after the stock sales, the SLC found that "[t]he change in ownership percentage is minimal at best and certainly has no material effect on the Plaintiffs' minority status." Id. (John and Kevin each had stock ownership in BTA of 5.6% at the end of 2004 and 5.2% at the end of 2005; and stock ownership in BTS of 8.2% at the end of 2004 and 7.7% at the end of 2005.)

The SLC noted, moreover, that Maryland had statutorily eliminated preemptive rights, unless provided for by a corporation's charter. The statute doing so was enacted after the formation of the corporations in this case, however. See CA § 2-205.

As we already have observed, the SLC's investigation took five months. There never has been a serious assertion by the appellants of lack of independence or good faith on the part of Cromwell or Wolfe or their counsel, Brault. The SLC met with Michael, Eileen, John, Kevin, Cain, Louis, Jr., James, Heise, Sean, Jr., Sean, and counsel for Maureen. The interviews were at least 45 minutes and lasted up to 5 hours, with the longest interviews being with the appellants. The interviews were conducted separately and with the interviewees signing confidentiality agreements, to promote frankness. The SLC also gave counsel for the appellants and for the corporations the opportunity to submit memoranda stating their differing positions. Counsel for the corporations submitted such a memorandum, while counsel for the appellants submitted the complaint in the derivative action. Pursuant to a request by Brault, the appellants' attorney met with the SLC to discuss the allegations in the derivative suit. The SLC reviewed and summarized a total of 131 documents in the course of its investigation.

In their briefs in this Court, the appellants allude to a lack of independence on behalf of the SLC, but they do not point to any evidence in support. They suggest that the SLC members may not have been independent because the Director Appellees selected them. They do not offer any legal support for their suggestion, however, and the law does not support it. See Rosengarten v. Buckley, 613 F.Supp. at 1499 (stating, Maryland law "permits an interested board of directors to appoint a special litigation committee of independent directors to review a pending derivative suit").

We return to the appellants' contention that the SLC should have applied the "entire fairness test," instead of the business judgment rule, in assessing whether the stock sales were reasonable; and therefore the circuit court erred in deferring to the decision of the SLC under the business judgment rule. In Bender, we explained that the "entire fairness" rule is a "judicial review standard" that inquires into "fair process and fair price." Bender, 172 Md.App. at 670, 917 A.2d 142. When used, "if at all," it "is employed to evaluate transactions when directors are `on both sides of a transaction.'" Id. at 670, 917 A.2d 142 (quoting Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983)). Like the independent business judgment test of Zapata, the entire fairness test is a product of Delaware law. See generally Weinberger, 457 A.2d 701. Contrary to the argument advanced by the appellants, the issue in Bender was not whether the demand committees in that case erred by not applying an "entire fairness" test in investigating the transactions at issue. The issue was whether the circuit court, in assessing the demand committees' investigations and conclusions for reasonableness, erred by applying the business judgment rule to each transaction instead of applying an entire fairness test.

As the Bender Court explained, "Demand [c]ommittees, as disinterested persons, are required to conduct reasonable investigations of the claims asserted in a demand letter and, in making their decisions, exercise reasonable business judgment." 172 Md.App. at 671, 917 A.2d 142. Demand committees are not required to apply judicial standards of review, as they do not function as judicial panels. Rather, a demand committee is charged with deciding whether pursuit of the derivative claim is in the corporation's best interests. See Shenker, 411 Md. at 344, 983 A.2d 408 (stating, "[o]nce 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 ") (citations omitted; emphasis added).

We held in Bender that the circuit court, in reviewing the decisions of the two corporations' demand committees for purposes of deciding whether to dismiss the derivative action, was not required to apply the entire fairness test. We explained that the entire fairness test will apply to self-dealing transactions that affect the ownership status of a minority shareholder — such as a transaction eliminating or changing a minority shareholder's ownership interest, a self-dealing merger transaction, or a cash-out merger between parent and subsidiary that eliminated minority shareholders. The one example in Maryland case law that we cited — and indeed the only one that exists — was Lerner v. Lerner Corp., 132 Md. App. 32, 750 A.2d 709 (2000). That case illustrates the type of situation in which the entire fairness test appropriately is applied on judicial review.

Lerner involved a reverse stock split in a closely held Maryland corporation in which the two shareholders were brothers who had been at odds, and in litigation, for years. In the early 1980's, the acrimony between the brothers became so intense that the majority shareholder tried to freeze out the minority shareholder. Litigation ensued, which was settled by an agreement in which the minority shareholder promised not be to involved in the activities of the business. Disputes over the implementation of the agreement spawned additional litigation. The assets of the business were being drained by the funds spent in litigation between the brothers. In 1998, the majority shareholder owned 89.9% of the stock in the company. At a special shareholders meeting, the corporation's charter was amended "to reclassify and convert each of the [c]orporation's common shares to 1/68th of a share, a `reverse stock split,' which would have the effect of reducing [the minority shareholder's] interest to less than one share" and, in lieu of issuing a fractional share, to convert the minority shareholder's interest to cash. 132 Md.App. at 38, 750 A.2d 709. The end result was to eliminate the minority shareholder's interest.

In a declaratory judgment action challenging the reverse stock split, the minority shareholder argued, among other things, that the transaction was illegal and amounted to a breach of the majority shareholder's fiduciary duty to him, as the minority shareholder. The minority shareholder asserted that the proper standard for judicial review of the transaction was the "entire fairness" test. The majority shareholder argued that the proper standard of review was "business purpose."

We held that the transaction was legal and that "the fairness rule is the appropriate test under these circumstances, i.e., a reverse stock split in a closely held corporation with the effect of eliminating a minority stockholder, because it permits intervention on the facts of any given case when intervention is justified." 132 Md.App. at 57, 750 A.2d 709. Quoting extensively from Hanks, section 7.20, 264-66 (Supp. 1996), we adopted the view that, whether the transaction is in the form of a merger or a reverse stock split, because the majority is freezing out the minority, the concern is not whether the transaction has a business purpose but whether it is fair to the minority shareholders. We concluded that under the entire fairness test (or under a business purpose test) the reverse stock split was fair because there were good reasons, in the interest of the corporation, to pursue it "other than the desire, in and of itself, to oust a minority shareholder." Id. at 59, 750 A.2d 709.

Unlike Lerner, Bender did not involve direct claims for breach of fiduciary duties between majority and minority stockholders or a freeze-out transaction that eliminated the minority. It was a derivative action involving closely held corporations, in which plaintiff stockholders had alleged the corporations had been harmed by certain actions of their directors, including the directors' approval of particular fees and loans as part of their own compensation, and in which demand committees had investigated the transactions in question and recommended against the corporations' pursuing the derivative claims. We held that the circuit court properly had applied the business judgment rule, and not the entire fairness rule, in deciding whether the demand committees reasonably had investigated the derivative claims and recommended against pursuing them.

In the case at bar, the appellants point out that the circuit court in Bender reviewed the recommendations of the demand committees respecting three transactions for entire fairness and argue, from that fact, that the transactions must have been self-dealing and that Bender therefore stands for the proposition that, whenever a demand committee is investigating a "self-dealing" transaction, the entire fairness test must be applied to assess its work. We disagree. One of the corporations in Bender was a Delaware corporation, and the entire fairness test would have been relevant to some of the transactions involving that corporation because the entire fairness test is a creature of Delaware law.

We conclude that the case at bar, like Bender, is one in which the standard of review for the circuit court, in assessing the reasonableness of the SLC's investigation and recommendations concerning the derivative claims, and in particular the claims that the stock sales were self-dealing transactions that in some way harmed the corporations, properly was the business judgment rule. These stock sales do not implicate the minority rights of shareholders the way freeze-out transactions of the kind dealt with in Lerner do. Moreover, as the SLC explained, the stock sales were a one-time benefit to the Director Appellees and to Sean, Jr. They were made available to the directors most intimately involved in the running of the corporations and to Sean, Jr., who was being groomed to play the lead role in the Boland family's effort to have their franchise extend to three generations. The continuation of the franchise was in the best interests of all the stockholders, including the appellants and other stockholders who did not perform any services for the corporations, as they all received substantial dividend income.

For closely held corporations, such as BTA and BTS, there is no market for the shares of stock, and therefore the value of the stock is in the dividends it produces.

To the extent an Appellee Director had a personal interest in the outcome of the stock sale votes, each abstained. Moreover, enhancement of control, which the SLC found to be the primary purpose behind the stock sales, was particularly important given that the Trane Company recently had been sold to Ingersoll Rand and the franchise agreement on which the corporations depended remained terminable for no reason at all upon 30 days notice.

Under the business judgment rule, in assessing the reasonableness of a litigation committee's investigation and conclusions, the focus must be on the fact gathering methodology employed by the committee as opposed to its substantive decisions. Bender, 172 Md.App. at 671-72, 917 A.2d 142 (quoting Levine v. Smith, 591 A.2d 194, 213 (Del. 1991)) (stating, "[r]easonableness implicates the business judgment rule's requirement of procedural due care; that is, whether [the directors, through the demand committee] acted on an informed basis in rejecting [the shareholder's] demand").

There are several non-exclusive factors courts look to in determining whether a demand committee conducted a reasonable investigation into a derivative claim:

(i) whether the committee engaged independent counsel to assist in the investigation; (ii) whether the committee produced a report, its length, and whether it documented the committee's procedures, reasoning, and conclusions; (iii) whether the committee properly identified the claims at issue; (iv) whether the committee reviewed the testimony of or interviewed directors, officers, and employees; (v) whether the committee (or counsel hired to assist it) reviewed documents regarding the questionable transaction; and (vi) the number of times the committee met.

Scalisi, 501 F.Supp.2d at 363 (citing Bender, 172 Md.App. at 672-73, 917 A.2d 142). These factors all were satisfied in the case at bar. As noted, the SLC hired independent counsel to aid in the investigation and report writing. It produced a 30-page report with 33 exhibits. Within the Report, it discussed the process used in its investigation and addressed each of the issues raised by the appellants in their demand letter and derivative complaint. The SLC interviewed all the relevant witnesses and reviewed hundreds of pages of documents including the Boards of Directors' meeting minutes, court pleadings, stock purchase agreements, personal and corporate correspondence, audited corporate financial statements, certified corporate appraisals, and stock redemption documents. The investigation lasted five months and, according to Cromwell's deposition testimony, he spent approximately 150 hours participating in the SLC's work.

The appellants assert that the SLC's investigation of the stock transactions was unreasonable because:

The [SLC] did not ask what the purpose of the stock transaction was The [SLC] did not include the dividends to be received from the additional stock in determining the reasonableness of the Board Members' compensation. . . . The [SLC] could not articulate any objective standard that was utilized to conclude that the level of stock ownership by the Boards Members was "appropriate," or if 200 additional shares was reasonable, whether 400, or 600 more would also be reasonable.

The appellants also challenge the investigation of stock sale to Sean, Jr., stating that the SLC "did not state what, if any, binding `commitment' [Sean, Jr.] made to the corporation[s] in consideration [for his stock purchase]." They state "[i]f one removes the fact that [Sean, Jr.] is the Chairman's son from the analysis, the lack of business justification is apparent."

We see no merit in these assertions. The Report discloses, contrary to what the appellants maintain, that from the interviews the SLC conducted and the documents it reviewed, it was able to determine that the stock sales "provide[d] management with a similar percentage of ownership as exists with others in the industry" and, by allowing the recipients to purchase the stock, to afford them a benefit with the goal "of further binding management and encouraging performance to enhance personal dividend income." As noted above, the SLC found that it was particularly important to bind management given that the Trane Company's recent purchase by Ingersoll Rand could bring the performance of the Boland franchise under scrutiny by new eyes in circumstances where the franchise could be terminated abruptly and for no reason.

As noted, the appellants complain that the SLC's analysis of the reasonableness of the Director Appellees' and Sean, Jr.'s compensation was deficient in that it did not include the dividends they will be paid from the stock that was sold to them. The SLC's Report addresses the issues of compensation and stock sales separately, at the same time acknowledging that stock options, and in this case actual stock sales, are a form of compensation. To the extent that the stock sales are a type of compensation, we note that "`a board's decision on executive compensation is entitled to great deference. It is the essence of business judgment for a board to determine if "a particular individual warrant[s] large amounts of money." `" Bender, 172 Md.App. at 681-82, 917 A.2d 142 (quoting Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000) (in turn quoting Grimes v. Donald, 673 A.2d 1207, 1215 (Del. 1996))).

In any event, whether the SLC included the dividends that the Director Appellees and Sean, Jr., will receive in their compensation when assessing it is not of consequence. The appellants have not challenged any of the compensation assessments made by the SLC; below, they only challenged Cain's compensation, and they have not pursued that challenge on appeal. And it always has been clear that, just as the appellants receive dividends from their stock holdings, the Director Appellees and Sean, Jr., will receive dividends from their stock holdings. Indeed, the value of the stock, especially the stock in BTS, is in large part a function of the dividends it produces, not only for the individual appellees but also for the appellants and all the stockholders. The fact that the stock produces dividends does not undermine the reasonableness of the SLC's conclusion that the stock sales were a benefit conferred for the purpose of binding management at a time when, given the changes in the Trane Company, strong management of the Boland franchise was critical.

In regard to the appellants' complaint that the SLC did not articulate an objective standard to apply in assessing the appropriate level of stock ownership for the Director Appellees, we disagree that that was necessary. The SLC compared the level of stock ownership to that of similarly situated companies, and in part on that basis, concluded that the stock sales to the Director Appellees served a reasonable corporate goal. It was not necessary for the SLC to craft a formula. It had to determine only whether "any rational business person" could have reached the same decision as the Director Appellees. Bender, 172 Md.App. at 667, 917 A.2d 142.

Finally, the appellants also complain that they did not learn, until Louis, Jr., made an offhand reference in June 2005, of the April 4, 2005 decision by the boards approving the stock sales, and that this "hiding" of important information from them was not taken into account by the SLC in its investigation. The minutes of a shareholders' meeting of BTA, held on April 18, 2005, reveal, however, that Sean, Jr., was present and that "[c]opies of a listing of all shareholders and their interests" were "made available for the shareholders' review." The appellants were present at that shareholders' meeting.

The SLC acted properly in assessing the transactions at issue for business purpose, Le., in evaluating whether, in bringing the transactions about, the Director Appellees were acting for the benefit of the corporations, and not merely to benefit themselves. The circuit court then properly reviewed the SLC's work under the business judgment rule. We agree with the circuit court that the appellants failed to rebut the presumption that the SLC's investigation into the derivative claims was reasonable and that its conclusions were within the realm of sound business judgment.

III.

Finally, as to the stock sale transactions, the appellants contend the circuit court erred by not holding an evidentiary hearing in which they could introduce evidence; by not disposing of this case under Rule 2-602, instead of Rule 2-501; and by granting summary judgment sua sponte and when there were "substantial disputes of material fact." See Rule 2-501(f) (stating, "[t]he court shall enter judgment in favor of or against the moving party if the motion [for summary judgment] and response show that there is no genuine dispute as to any material fact and that the party in whose favor judgment is entered is entitled to judgment as a matter of law"). The appellants also complain that the court erred in granting summary judgment on their claim of "oppression," which pertained to the SPAs.

As mentioned above, after the SLC released its Report, the Corporate Appellees filed a motion to dismiss pursuant to Rule 2-502. Under that rule, entitled "Separation of questions for decision by the court," a court may rule on a question that is within its sole province to decide in the manner it deems expedient, including by accepting stipulated facts and finding facts after receiving evidence. The motion and the appellants' opposition to it were accompanied by numerous exhibits. The Director Appellees filed a motion to dismiss or in the alternative for summary judgment.

At the outset of the hearing on pending motions on June 12, 2008, counsel for the appellants stated that it was his position that he was entitled to an evidentiary hearing. The judge replied that he wanted to hear argument of counsel first. Counsel for the appellants said he thought he would be able to convince the court to deny the motion to dismiss by argument, but that the court could not "go the other way without an evidentiary hearing." The arguments then proceeded.

In the course of his argument, counsel for the Corporate Appellees sought to move into evidence the binders of documents that were given to the SLC for its review; the Report; and the depositions of Cromwell and Wolfe. These items all were accepted into evidence without objection. The arguments continued to conclusion without counsel for the appellants offering any evidence, asking to offer evidence, or proffering what evidence would be offered if the court would so allow. The court did not rule at the conclusion of the hearing. Thus, the outcome of the hearing was not known to the appellants at the hearing's conclusion, but no steps were taken by their counsel to put evidence before the court. In that circumstance, the appellants cannot now complain that the court erred by refusing to hold a hearing in which they could introduce evidence. There is nothing in this record to support the notion that they would not have been permitted to offer evidence if they had taken steps to do so. Accordingly, this argument has been waived.

The court properly ruled on summary judgment in any event. Although the appellants assert, in their primary brief, that there were disputes of material fact that precluded the entry of summary judgment, they have not given even one example of such a fact. Rather, they cite to their "opposition to the corporations' motion for summary judgment and the exhibits and affidavit submitted therewith[,]" apparently to adopt the disputed facts identified within that filing. The disputed facts contained in that document are not material, however, because none of the facts have anything to do with the independence and good faith of the SLC members and whether their investigation and conclusions were reasonable. Furthermore, at the June 12, 2008 hearing the appellants did not argue that there were material facts in dispute.

As we have explained, in a wrongful refusal action in which the business judgment rule prevails, the facts material to the court's decision are whether the litigation committee was independent and acted in good faith, conducted a reasonable investigation, and reached reasonable conclusions. See Hanks, § 6.8, p. 193-94 (stating, "The principal benefit of the presumption established by the business judgment rule is to enable the defendant to prevail on a motion for summary judgment without presenting any evidence in a case where the plaintiff presents no evidence on the issue of the defendant director's conduct"); see also Auerbach, 419 N.Y.S.2d 920, 393 N.E.2d at 1003 (stating, "In addition to the issue of the disinterested independence of the special litigation committee, addressed above, the disposition of the present appeal turns, then, on whether on [the directors'] motions for summary judgment predicated on the investigation and determination of the special litigation committee, [the derivative plaintiff] by tender of evidentiary proof in admissible form has shown facts sufficient to require a trial of any material issue of fact as to the adequacy or appropriateness of the modus operandi of that committee or has demonstrated acceptable excuse for failure to make such tender. "). Thus, it was appropriate for the circuit court to grant summary judgment unless the appellants had evidence to show a disputed fact as to the SLC members' independence, good faith or reasonableness. There is nothing in this record to suggest that there was any such evidence.

As this Court explained in Bender, a Rule 2-502 hearing functionally is a bench trial. 172 Md.App. at 663-64, 917 A.2d 142. When asked to dismiss claims by deciding an issue within its purview to decide, the court not only rules on the law but sits as a trier of fact. Obviously, if there are no material facts in dispute, the court will rule on the undisputed material facts, which is the same as ruling on a motion for summary judgment. That is what happened here. Moreover, the court pointed out that the Corporate Appellees' motion was one to dismiss, and, on a typical motion to dismiss under Rule 2-322(c), when materials are submitted outside the four corners of the complaint, the motion is to be treated as one for summary judgment. That too is what happened here. For both of these reasons, the court properly disposed of the derivative matter by way of summary judgment.

Nor do we find merit in the appellants' argument that "[t]he corporations never moved for summary judgment on the derivative complaint [and therefore] [i]t was error for the circuit court to grant summary judgment, effectively sua sponte and without the appellants ever having been advised and given an opportunity to respond and defend against the consideration." To be sure, the Corporate Appellees did not move for summary judgment and, generally, courts are prohibited from granting summary judgment sua sponte. In Hartford Ins. Co. v. Manor Inn, 335 Md. 135, 147, 642 A.2d 219 (1994), the Court of Appeals explained that courts may grant summary judgment in favor of a non-moving party if the opposing party sought summary judgment, but not if neither party sought summary judgment.

Here, however, the Director Appellees in fact filed a motion to dismiss, or in the alternative, for summary judgment on the derivative claims. Given the nominal defendant status of the Corporate Appellees, summary judgment in favor of the Director Appellees and against the appellants effectively would be summary judgment in favor of the Corporate Appellees. Granting summary judgment in favor of the Corporate Appellees did not run afoul of Md. Rule 2-501. See McNees v. City of Mountain Home, 993 F.2d 1359, 1361 (8th Cir. 1993) (stating, "[i]n those instances where the party against whom judgment was entered is provided sufficient notice and opportunity to contest summary judgment and where the liability of the party who did not file a motion is merely derivative, such that no genuine issues of material fact exist, a sua sponte grant of summary judgment is permissible").

The record does not support the appellants' assertion that they were not "given an opportunity to respond and defend against the consideration." On the contrary, they had several opportunities to do so, including in responding to the Director Appellees' motion to dismiss or in the alternative for summary judgment; and they took advantage of these opportunities, as evidenced by their opposition papers and the oral argument their counsel presented at the June 12, 2008 hearing. Thus, both because the Director Appellees moved for summary judgment and because the Corporate Appellees' motion to dismiss properly was treated as a motion for summary judgment, the court did not sua sponte grant summary judgment in favor of the appellees.

The appellants' last argument is that "the court's dismissal of the appellants' oppression claim was in error" because the court "improperly resolved a disputed fact." In support, they cite the following from the circuit court's September 5, 2008 Memorandum Opinion:

Moreover, although we need not decide the issue, we note that in alleging oppression and seeking dissolution, the appellants were asserting a direct shareholder claim and requesting a shareholder remedy, which is not permitted in a derivative action.

If the [Director Appellees] did in fact threaten to use the SPAs against [the appellants] in an effort to manipulate them, then that would constitute oppression and that action would not receive the benefit of the business judgment rule. However, there is insufficient evidence to support such allegations. [Footnote omitted, but discussed below.] On that basis, the decision not to pursue litigation on the ground of shareholder oppression was within the sound province of the business judgment rule.

(Emphasis added.)

The appellants argue that by stating that "there is insufficient evidence to support such allegations" the circuit court improperly resolved a disputed fact, and granted summary judgment on that basis. Read in context, however, the circuit court's finding was that the SLC's decision not to pursue an oppression claim was reasonable because, as the SLC explained in the Report, there was insufficient evidence to support the allegation. The appellants overlook the footnote in the quoted passage, which states, "The SLC has stated in its Report that although there were discussions about enforcing the SPAs in order to regain control of management of the real estate LLCs, no action was ever taken." Thus, the appellants' argument was, and is, without factual basis. The circuit court did not improperly resolve a disputed material fact. Rather, it determined that the SLC's investigation and recommendation regarding the oppression claim were reasonable and deferred to its judgment that the claim not be pursued. The court acted properly in that regard.

In particular, there was no evidence that the boards had taken any action to enforce the SPAs with respect to the appellants, and therefore there could not be oppression as to them. The only action to enforce any SPA was as to Colleen's estate, and that was the subject of the declaratory judgment action.

JUDGMENT AFFIRMED. COSTS TO BE PAID BY THE APPELLANTS.