Howard Nathanson, et al. v. Tortoise Capital Advisors, L.L.C., et al., No. 51, September Term, 2025. Opinion by Gould, J.
CORPORATIONS AND ASSOCIATIONS – SHAREHOLDER DERIVATIVE
ACTIONS – PRE-SUIT DEMAND – FUTILITY EXCEPTION
The Supreme Court of Maryland held that, under Werbowsky v. Collomb, 362 Md. 581 (2001), whether the futility exception excuses the failure to make a pre-suit demand on the board of directors to commence litigation depends on whether the shareholders clearly and particularly allege that a majority of the board of directors could not consider a litigation demand in accordance with the standard of conduct imposed on directors under subsection 2-405.1(c) of the Corporations & Associations Article. Futility hinges on the board’s capacity to consider a demand, not on the likelihood that the board would refuse it. The Supreme Court further determined that the phrase in Werbowsky—“conflicted or committed to the decision in dispute”—describes a single inquiry, not two distinct routes to establish futility. 362 Md. at 620.
In addition, the Supreme Court determined that allegations that directors, who were disinterested when the challenged business decisions were made, face substantial or unexculpated personal liability from derivative claims, do not establish futility because that analysis would require courts to assess the merits of the derivative claims, which Werbowsky forbids. 362 Md. at 621-22. Here, the board’s conduct did not clearly and particularly show that a majority of directors could not reasonably be expected to consider the demand within § 2-405.1(c)’s standards of conduct.
CORPORATIONS AND ASSOCIATIONS – SHAREHOLDER DERIVATIVE
ACTIONS – PRE-SUIT DEMAND – FUTILITY EXCEPTION
The Supreme Court of Maryland held that a pre-suit demand is excused as futile only where the allegations or evidence clearly demonstrate, in a very particular manner, either that a demand or a delay in awaiting a response would cause irreparable harm, or that 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, in a manner the director reasonably believes to be in the best interests of the corporation, and with ordinary prudence.
Circuit Court for Baltimore City
Case No.: 24-C-23-002372
Argued: April 9, 2026
IN THE SUPREME COURT
OF MARYLAND
No. 51
September Term, 2025
HOWARD NATHANSON, et al.
v.
TORTOISE CAPITAL
ADVISORS, L.L.C., et al.
Fader, C.J.,
Watts,
Booth,
Biran,
Gould,
Eaves,
Killough,
JJ.
Opinion by Gould, J.
Filed: July 14, 2026
Pursuant to the Maryland Uniform Electronic Legal
Materials Act (§§ 10-1601 et seq. of the State
Government Article) this document is authentic.
2026.07.14
09:21:33 -04'00'
Gregory Hilton, Clerk
This is a derivative action brought by two shareholders on behalf of two Maryland
corporations operating as closed-end funds, against the funds’ investment adviser and
members of the funds’ board of directors. Maryland law requires shareholders to make a
pre-suit demand on the board of directors to initiate litigation on the corporation’s behalf
before filing a derivative action. The shareholders did not do so here, but instead invoked
what is called the futility exception to the demand requirement.
The futility exception is governed by Werbowsky v. Collomb, 362 Md. 581 (2001),
where we held that a pre-suit demand is excused only in the limited circumstances explored
below. Here, the Circuit Court for Baltimore City concluded that the shareholders did not
plead sufficient facts to bring this case within that limited exception and dismissed the
action with prejudice. The Appellate Court of Maryland affirmed.
So shall we.
In doing so, we aim to clarify two aspects of the futility exception. First, Werbowsky
asks whether a majority of the board could respond to a demand “in good faith and within
the ambit of the business judgment rule.” Id. at 620. In Maryland, that rule finds expression
in the standard of conduct imposed on directors under subsection 2-405.1(c) of the
Corporations and Associations Article. MD. CODE ANN., CORPS. & ASS’NS (“CA”) § 2-405.1(c) (2025). Expressed in those statutory terms, Werbowsky asks whether a majority
of the directors are “so personally and directly conflicted or committed to the decision in
dispute[,]” 362 Md. at 620, that they could not consider a litigation demand “in good
faith[,]” “[i]n a manner [they] reasonably believe to be in the best interests of the
corporation[]” and “[w]ith the care that an ordinarily prudent person in a like position would use under similar circumstances[,]” CA § 2-405.1(c). “Conflicted or committed”
describes a single inquiry—whether the directors could consider the demand under the
governing standard of care. CA § 2-405.1(c). If the answer to that inquiry is “yes,” then the
futility exception does not apply.
Second, futility turns on the board’s capacity to consider a demand, not on the
shareholders’ prediction—however reasonable—of the board’s probable answer. A board
that would likely say no to a demand is not necessarily incapable of considering it in
conformity with subsection 2-405.1(c). As the Seventh Circuit explained in an opinion
from which we drew in Werbowsky, a shareholder who invokes the futility exception based
on a likely refusal “confuses futility with failure.” Kamen v. Kemper Fin. Servs., Inc., 939
F.2d 458, 462 (7th Cir. 1991), aff’d, 500 U.S. 90 (1991); see Werbowsky, 362 Md. at 616-17.
I
Because this case comes to us on the grant of a motion to dismiss, we take the facts
from the operative complaint, assuming the truth of its well-pleaded allegations and the
reasonable inferences that may be drawn from them. Oliveira v. Sugarman, 451 Md. 208,
219-20 (2017).
A
Tortoise Pipeline & Energy Fund, Inc. (“TYG”) and Tortoise Energy Independence
Fund, Inc. (“NTG”) (collectively, the “Funds”) are closed-end investment funds organized
as Maryland corporations. Respondent Tortoise Capital Advisors, L.L.C. (“Tortoise”)
served as the Funds’ investment adviser, responsible for day-to-day operations and
2
management of the Funds’ portfolios under advisory contracts that paid Tortoise a fee
calculated as a percentage of the total assets under its management.
At all relevant times, each fund was governed by a board of directors comprised of
the same five individuals. Four of the directors—Conrad S. Ciccotello, Rand C. Berney,
Jennifer Paquette, and Alexandra Herger—are alleged to have been independent from
Tortoise. The fifth, H. Kevin Birzer, was not independent from Tortoise—he was its chief
executive officer. The board was responsible for overseeing Tortoise and for setting
controls over the Funds’ investment risks and the conflict of interest created by Tortoise’s
fee structure (discussed below).
B
A closed-end fund issues a fixed number of shares that then trade on an exchange;
unlike an open-end mutual fund, it does not continuously issue new shares or stand ready
to redeem outstanding ones on demand. Thus, an open-end fund must keep cash reserves
on hand to meet redemptions, while a closed-end fund need not—and so, a closed-end fund
ordinarily carries little inherent liquidity risk. The Funds used that structure to hold, for the
long-term, interests in master limited partnerships in the energy sector—partnerships that
own and operate pipelines and related infrastructure for transporting, gathering, processing,
and storing natural gas, natural gas liquids, crude oil, and refined products. The energy
sector is volatile, and the closed-end structure was meant to let the Funds weather the
volatility without being forced to sell holdings in a falling market.
The Funds used leverage to increase their returns. Leverage in this context means
that a fund borrows money and invests the proceeds alongside its own capital, which
3
magnifies its returns when the market goes up and its losses when the market falls. A simple
example demonstrates how that works. Assume you buy a share of the fictitious ABC
corporation for $10. The next day, you sell the stock for $11, locking in a $1 profit. Basic
math shows you made a 10% return on your money. And if you sold the stock for $9, you
lost 10% of your money.
But suppose that, in addition to your $10, you used $90 of borrowed funds so that
you could invest $100 instead of just $10. So, now you buy 10 shares of ABC Corporation
instead of just one share. The next day, when you sell those 10 shares for $11 each, you
lock in a $10 profit—a 100% return on your money. However, if you sold the stock the
next day for $9, you would have to use the entire sales proceeds of $90 to repay the loan,
leaving you with nothing—a 100% loss to you.
That is why borrowing is called leverage: just as a lever permits a smaller amount
of force to move a larger load, financial leverage permits a smaller amount of a fund’s
capital to acquire a larger base of assets, magnifying the gains when those assets increase
in value and the losses when their value falls.
The Funds’ borrowing agreements required them to maintain set ratios of assets to
debt, and to pay down debt if the value of their assets fell below the agreed thresholds. If
the Funds lacked sufficient cash, they would have to raise cash by selling their holdings.
Thus, the Funds’ use of leverage reintroduced a liquidity risk that the closed-end structure
is designed to avoid. In public filings, the Funds stated their policy of using leverage in the
range of 20 to 30% of assets, averaging about 25%. But the Funds exceeded that range for
years, reaching roughly 37% at TYG and nearly 40% at NTG by the end of 2019, with no
4
policies or controls to enforce the target range or measure liquidity risk along the way. This
served Tortoise’s interest, because Tortoise’s fee rose with the Funds’ total assets,
including those purchased with borrowed money—so more leverage meant more fees.
In early 2020, when energy prices fell sharply, so too did the value of the Funds’
holdings, thus putting the Funds in violation of their assets-debt ratio requirements. This
forced Tortoise to sell hundreds of millions of dollars of the Funds’ holdings into a
declining market to raise cash and reduce debt, locking in losses. By the end of the first
quarter of 2020, the Funds reported combined losses exceeding $1 billion.
After the Funds’ collapse in value, the board renewed Tortoise’s advisory contracts
and publicly described Tortoise’s management as “responsible” and the Funds’
performance as “reasonable[.]” In October 2020, it adopted by-laws restricting shareholder
voting and nomination rights; supported, through the Funds, the dismissal of an earlier
action filed in Kansas (discussed below), calling the claims “meritless”; rejected a booksand-records inspection request by the two shareholders who brought this action; and
rejected a proposal from a third party to discuss acquiring the Funds’ claims against
Tortoise.
C
The two shareholders who brought this action are Petitioners Howard Nathanson
and Gus Gordon (the “Shareholders”). They first sued the board and Tortoise in the United
States District Court for the District of Kansas in August 2022. In February 2023, that court
dismissed the case based on a forum selection clause in the Funds’ by-laws. The
Shareholders refiled in the Circuit Court for Baltimore City in May 2023 and amended
5
their complaint in November 2023. The amended complaint included multiple claims
brought individually and derivatively on behalf of the Funds against the directors and
Tortoise. Only Count II, a derivative claim against the directors and Tortoise for breach of
their duties, is before us.1 The Shareholders did not make a demand on the board to bring
suit before filing the action.
D
The circuit court dismissed Count II on two independent grounds, one of which was
the Shareholders’ failure to make a pre-suit demand. On that issue, the court pointed out
that under Werbowsky, demand is the default rule and futility is the exception. The court
then turned to each allegation in the amended complaint, considered whether the
allegations, if true, established that a demand would be futile, and determined that none of
the allegations satisfied the futility exception. The court concluded that the allegations were
conclusory, pleaded without specificity, impermissibly required an analysis of the
underlying merits of the suit, and otherwise failed to establish that the directors could not
consider a demand under the governing standard of conduct.
E
On appeal, the Appellate Court affirmed. Nathanson v. Tortoise Cap. Advisors,
LLC, 267 Md. App. 1, 61 (2025). The court held that the Shareholders’ allegations showed,
at most, that a demand was unlikely to succeed—not that it was futile. Id. at 60-61. The
1
The amended complaint pleaded several counts, and the circuit court dismissed all counts with prejudice. The Shareholders appealed only the dismissal of Count II. We express no view on the other counts, or on the alternative grounds on which the circuit court dismissed the amended complaint with prejudice.
6
court rejected the Shareholders’ principal futility theory—that the directors’
mismanagement exposed them to over $1 billion in personal liability—because liability
exposure, even when substantial, does not excuse demand under Werbowsky. Nathanson,
267 Md. App. at 52-54.
The court likewise rejected the Shareholders’ theory that the Board’s post-collapse
conduct—renewing Tortoise’s contracts, praising Tortoise’s performance, adopting
defensive by-laws, declining to pursue claims on its own, rejecting a third-party proposal
to discuss buying the claims, and opposing the earlier federal action—showed that a
majority of directors could not reasonably consider a demand. Id. at 55-60. Those
allegations were speculative, insufficiently tied to the challenged decision, or showed only
hostility to litigation. Id. Because the amended complaint did not particularly plead a
disabling conflict or commitment, the court held that the Shareholders’ failure to make a
pre-suit demand was not excused. Id. at 60-61.
We granted certiorari to determine whether the Appellate Court erred in its
application of the demand futility rule established in Werbowsky. Nathanson v. Tortoise
Cap. Advisors, L.L.C., 492 Md. 698 (2025).
II
Because a derivative action takes a corporate decision out of the board’s hands, the
law requires the shareholder, in all but the rarest cases, to ask the board to act before the
shareholder acts on its behalf. Oliveira, 451 Md. at 222-23. That request is the pre-suit
demand. We begin by explaining the rationale behind the demand requirement and why
the futility exception is narrowly drawn.
7
A
A corporation is owned by its stockholders but managed by its directors.
Werbowsky, 362 Md. at 599. By statute, “[a]ll business and affairs of a corporation, whether
or not in the ordinary course, shall be managed by or under the direction of a board of
directors,” and “[a]ll powers of the corporation may be exercised by or under authority of
the board of directors[,]” except as reserved to the stockholders by law or by the
corporation’s charter or by-laws. CA § 2-401(a), (b). In addition, the board acts as a single
body; individual directors do not act on their own. See CA § 2-408(a) (providing that an
“action of the board of directors” ordinarily requires the affirmative vote of “a majority of
the directors present at a meeting”).
The standards that govern a director’s conduct, once grounded in common law, have
been codified in section 2-405.1 of the Corporations and Associations Article. Subsection
(c) provides that a director shall act:
(1) In good faith;
(2) In a manner the director 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.
A director “who acts in accordance with [that] standard of conduct” enjoys statutory
immunity from liability. CA § 2-405.1(e). “An act of a director of a corporation is presumed
to be in accordance with subsection (c)[.]” Id. § 2-405.1(g). And the statute “[i]s the sole
source of duties of a director to the corporation or the stockholders of the corporation[.]”
Id. § 2-405.1(i)(1); see also Eastland Food Corp. v. Mekhaya, 486 Md. 1, 24-25 (2023)
(explaining that section 2-405.1 is the exclusive source of a director’s duties, displacing
8
any common-law duties that had previously governed.) Thus, what practitioners and courts
have long called the “business judgment rule” now finds expression in section 2-405.1.
The board has broad authority “except as conferred on or reserved to the
stockholders by law or by the charter or bylaws of the corporation.” CA § 2-401(b). Thus,
shareholders maintain some, albeit limited, supervisory authority under Maryland
corporate law. Shareholders hold the statutory power to elect directors and remove them
“with or without cause,” id. §§ 2-404(b)(1), 2-406(a); vote their shares on matters placed
before them, id. § 2-507(a); move for special meetings, id. § 2-502(b)(1); inspect the
corporate books, id. §§ 2-512, 2-513; and adopt, alter, or repeal by-laws unless that power
has been vested elsewhere, id. § 2-109(b). Shareholders also retain approval rights over
certain fundamental corporate changes. See, e.g., id. §§ 2-604(d)-(f) (charter amendments),
3-105(d), (e) (mergers), & 3-403(c)-(e) (dissolution). Thus, shareholders are not strangers
in the corporate structure; they maintain some tools to hold the board accountable for its
stewardship of the corporation.
B
The allocation of authority between the shareholders and the board provides the
backdrop against which a derivative action must be understood, and it explains why we
have called a derivative action an “extraordinary equitable device[.]” See Werbowsky, 362
Md. at 599.
Investors who buy stock accept certain risks. They accept the risk that the business
idea was a poor one from the start. They accept the risk that the people running the company
will prove unable to execute even a good idea. And they accept the risk that the directors,
9
and the officers they appoint, are incompetent, or, even if competent, will make decisions
that turn out badly.
Courts do not insure against those risks. Courts do not sit to manage the internal
affairs of corporations, see NAACP v. Golding, 342 Md. 663, 673 (1996), and they do not
second-guess, with the benefit of hindsight, business decisions that disappointed the
investors. Shareholders know this when they buy their stock. They likewise know that their
role in the company is limited—that the responsibility for managing the corporation’s
business and affairs lies with the board, not with them.
One of the business decisions entrusted to the board is whether the corporation
should sue. Werbowsky, 362 Md. at 598-99. A corporation may hold a claim that is both
meritorious and valuable and yet decide, in the sound exercise of its business judgment,
not to pursue it—perhaps because the litigation would cost more than it is worth, distract
management from more profitable endeavors, damage a relationship the corporation
wishes to preserve, or for any number of other reasons that have nothing to do with the
strength of the claim. See id. at 601 (directors may “waive a legal right vested in the
corporation” if they believe the corporation’s “best interests will be promoted by not
insisting on such right” (quoting Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 96
(1991))).
Thus, it is no small thing to let a shareholder take that decision out of the board’s
hands. Yet, a derivative action does just that: it allows a single shareholder—who is not
bound by the standard of conduct that constrains directors—to seize control of a claim that
belongs to the corporation and litigate it in the corporation’s name, over the board’s
10
objection. The pre-suit demand requirement exists so that this does not happen before the
board, the corporation’s ordinary and default decision-maker, has had the chance to
consider the question for itself. The pre-suit demand requirement is designed to keep this
one business decision—to sue or not to sue—on the same footing as all other business
decisions entrusted to the board.
C
So the futility exception is a narrow one. Aggrieved shareholders may prefer not to
make a demand out of concern that the board would refuse it and decline to pursue the
litigation. But a demand, once made and refused, does not necessarily end the matter. A
demand refused is subject to judicial review—under the same statutory standard of conduct
applicable to all board decisions. Thus, to understand why the futility exception is narrow,
it helps to understand what happens when a demand is refused.
1
We look first at Boland v. Boland, which involved two corporations with fourperson boards owned primarily by eight siblings. 423 Md. 296, 308, 312 (2011). Three of
the siblings were directors, and five were not. Id. at 308. The non-director siblings learned
of a stock transaction in which the director siblings had acquired additional corporate stock
for themselves. Id. Alleging self-dealing and breach of fiduciary duty, the non-director
siblings sent a litigation demand to the board but, without waiting for a response, filed suit.
11
Id. at 308-09. Recognizing that a majority of the directors were interested2 in the transaction
at issue, the board appointed a “special litigation committee” (“SLC”), consisting of two
newly hired independent directors to investigate the demand. See id. at 319. After a fivemonth investigation, the SLC concluded that “none of the derivative claims have merit and
the actions on behalf of the corporations should be terminated.” Id. at 320. Relying on the
committee’s report and applying deferential business-judgment review, the court granted
summary judgment against the shareholder plaintiffs on the derivative counts. Id. at 324.
The principal question before this Court was which standard of review should apply
to the SLC’s demand refusal. We noted the general rule that disinterested boards receive
the protection of the business judgment rule, which means that “the court considering a
demand refused action limits its review to whether the board acted independently, in good
faith, and within ‘the realm of sound business judgment.’” Id. at 329-30 (quoting George
Wasserman & Janice Wasserman Goldsten Fam. LLC v. Kay, 197 Md. App. 586, 611
(2011)). The premise behind that rule is that ordinary business-judgment deference belongs
to decision-makers who can act for the corporation without a self-dealing interest in the
outcome.
The reality is, however, that “many business dealings[,]” like the one at issue in
Boland, “are approved by directors who are not entirely disinterested[,]” and thus the
board’s refusal may not be entitled to deference. Id. at 332. In such a scenario, the board
2
A director is “interested” when the director appears on both sides of a transaction or expects to derive a personal financial benefit from it, rather than a benefit shared by the corporation or shareholders generally. Oliveira, 451 Md. at 224; Boland, 423 Md. at 329; Werbowsky, 362 Md. at 609.
12
would lose the protection of the business judgment rule, and shareholders would find it
quite easy to wrest control of corporate litigation from the board. To avoid that scenario,
we recognized “a vehicle, usually known as a special litigation committee . . . , through
which corporations can retain a voice in the derivative lawsuit despite the adverse interests
of board members.” See id. (citing Gall v. Exxon Corp., 418 F. Supp. 508 (S.D.N.Y. 1976)).
We noted that “[b]y isolating the tainted directors and delegating the corporation’s
decision-making ability to an independent committee, the directors may be able to insulate
themselves from a derivative lawsuit.” Id. The remaining question was the level of scrutiny
to be applied to the SLC’s recommended refusal: the standard business judgment rule or
something more rigorous.
After surveying out-of-state case law, we settled on a “modified” business judgment
rule. Id. at 340-41. We held that, although the SLC’s substantive decision whether to accept
the demand would be entitled to deference, when the SLC is appointed by an interested
board, there is no presumption that “the SLC was independent, acted in good faith, or
followed reasonable procedures.” Id. at 340. Thus, courts should not automatically credit
an SLC’s refusal of a litigation demand “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. The shareholder plaintiff, for its part, can
challenge the board’s evidence that the SLC’s members were disinterested. Id. at 350. This
procedure, we held, was consistent with “Maryland’s business judgment rule, which ‘can
13
be claimed only by disinterested directors whose conduct otherwise meets the tests of
business judgment.’” Id. (quoting Werbowsky, 362 Md. at 609).
We were careful to say that this review, “though not on the merits, can be rigorous
on the questions of good faith, independence, and procedure.” Id. at 342. And, in fact, we
vacated the summary judgment entered against the plaintiffs because the directors had
never stated how the committee was chosen. Id. at 352-53.
We explained
that a procedural review under the business judgment rule, although clearly
the more deferential standard, nonetheless provides for a thorough review of
an SLC’s independence, good faith, and methodology, and such inquiry gives
trial courts the ability to scrutinize SLC decisions and protect shareholders
against collusive practices or inadequate investigations. Moreover, this
approach protects against the danger of judicial overreach and “avoid[s] the
problem in the second level of the Zapata[ Corp. v. Maldonado, 430 A.2d
779 (Del. 1981)] test, which requires the judge to exercise his or her own
business judgment.”
Id. at 348 (quoting Houle v. Low, 556 N.E.2d 51, 59 (Mass. 1990)).
2
Then came Oliveira v. Sugarman. 451 Md. 208. The question there was whether
Boland’s “modified” business judgment rule applies to “a disinterested and independent
board of directors’ decision to deny a shareholder litigation demand[.]” Oliveira, 451 Md.
at 219. We held that this decision should be reviewed under the ordinary business judgment
rule. We distinguished Boland on the ground that it “involved a board of directors who
stood to benefit from the transaction being challenged[,]” while “in this case, Respondents’
board of directors was both disinterested and independent.” Id. at 226-27 (footnote
omitted). The concerns animating Boland—the SLC’s independence, good faith, and
14
procedure—were “simply not present[.]” Id. at 227. In so holding, we reaffirmed the
primacy of the board in corporate decision-making and the deference owed to disinterested
boards.
3
Together, Boland and Oliveira demonstrate why the futility exception is so narrow.
If the board is interested and hides behind a committee, the corporation must prove the
committee’s independence before the refusal earns any deference, and that proof can be
rigorously tested. Shareholders turned away by a board are not without recourse—if a
demand is made, and the board refuses, that refusal is subject to judicial review under the
standards codified in section 2-405.1. Rather than take that chance, shareholders often
prefer to skip the demand and plead futility instead. So—to preserve the allocation of
managerial responsibility that all shareholders accept when they make their investment—
Maryland law does not permit a shareholder to bypass the demand requirement except in
the narrow circumstances described in Werbowsky, to which we now turn.
III
A
In Werbowsky, minority shareholders of Lafarge Corporation brought a derivative
action challenging Lafarge’s purchase of assets from its “majority and controlling
shareholder[,]” Lafarge S.A. (“LSA”). 362 Md. at 586. The shareholders sued Lafarge and
its directors, alleging that Lafarge had overpaid LSA to the tune of $165 million to $210
million, and that the directors breached their fiduciary duties, committed gross negligence,
15
and wasted corporate assets. Id. at 591-92. The amended complaint alleged that no pre-suit
demand was necessary because:
(1) a majority of the allegedly independent directors actively participated in
the wrongful conduct, which was the direct and proximate result of their
grossly negligent failure to inform themselves adequately as to the
company’s affairs and harmful effects of the proposed purchase; (2) the
directors of Lafarge received substantial compensation as board members
and, in light of LSA’s domination and control of Lafarge, had an incentive
to appease LSA in order to maintain their position on the board; and (3) in
light of the corporate insurance policies, neither the directors nor the
company could be expected to pursue the claims made by the plaintiff.
Id. at 592.
Lafarge and the director defendants moved to dismiss because, among other reasons,
the shareholder plaintiffs failed to make a demand on Lafarge’s board. Id. Applying the
reasoning that the Supreme Court of Delaware used in Pogostin v. Rice, 480 A.2d 619, 624
(Del. 1984),3 the circuit court denied the motion because “there was a reasonable doubt as
to whether at least 12 of Lafarge’s 16 directors were independent, disinterested directors.”
Werbowsky, 362 Md. at 593.
After discovery, Lafarge moved for summary judgment, asking the court to revisit
the demand issue. Id. at 594. Again, applying Pogostin, the court concluded that “the
plaintiffs had failed to establish a reasonable doubt that a majority of the Lafarge board
3
The circuit court understood the Pogostin test to require “a bifurcated analysis in which the facts alleged in the complaint are examined to determine whether they create a reasonable doubt that (1) the directors are disinterested and independent, and (2) the challenged transaction was the product of a valid exercise of business judgment.” Werbowsky, 362 Md. at 593. Under that test, if the plaintiff alleges facts that support reasonable doubt as to either factor, the demand is excused. Id.
16
lacked independence” and therefore dismissed the action for failure to make a pre-suit
demand on the Lafarge board. Id. at 597-98.
Before this Court, the question was whether the circuit court erred in concluding
that pre-suit demand was not futile, either under this Court’s holding in Parish v. Maryland
& Virginia Milk Producers Ass’n, 250 Md. 24 (1968), or under the Delaware standard
applied by the circuit court. Werbowsky, 362 Md. at 598. We explained that Maryland, like
other states, recognizes the shareholder’s derivative action as “a justifiable, but limited,
intrusion upon the general authority of the directors to manage the business affairs of the
corporation[.]” Id. at 602. The intrusion is permitted, however, only after a pre-suit demand
is made, unless such a demand would be futile. Id. (citing Parish, 250 Md. at 81-82).
Because nearly 40 years had passed without a word on demand futility from this
Court, we surveyed the case law on the futility exception in Maryland and cataloged
developments elsewhere. Id. at 602-15. We recognized our prior formulation of the
demand-futility rule in Davis v. Gemmell, 70 Md. 356 (1889), in which we stated that “it
would be against the plainest principles of justice to permit the perpetrators of the wrong
to conduct a litigation against themselves[,]” and demand would therefore be excused when
“useless.” See Werbowsky, 362 Md. at 604 (quoting Gemmell, 70 Md. at 376). We observed
that nearly 80 years later, in Parish, we excused demand where the directors would be
asked to sue themselves because “(1) it was not likely that the culpable directors would, in
fact, agree to permit the company to sue them; and (2) even if they would so agree, because
of their conflicted status, a court should not permit them to do so.” Werbowsky, 362 Md. at
606.
17
We noticed, however, that since Parish, “the national trend had been to enforce
more strictly the requirement of pre-suit demand and at least to circumscribe, if not
effectively eliminate, the futility exception.” Id. at 607 (citation modified). We observed
that both the American Bar Association (“ABA”) and the American Law Institute (“ALI”)
recommended scrapping the futility exception and requiring a demand in all cases. Id. at
611-14. Many states did so. Id. at 614-15.
We expressed general agreement with this trend, writing that “[t]here is much to be
said for the ABA/ALI approach[.]” Id. at 617. But because such an approach would be a
“radical departure from [Maryland’s] current common law,” we concluded that such a
change should be made, if at all, by the General Assembly. Id. at 618. So, we preserved the
futility exception to the demand requirement, but only as a “very limited exception[.]” Id.
at 620.
In so doing, we emphasized that the “demand requirement is important.” Id. at 618.
We recognized that directors enjoy the “benefit and protection of the business judgment
rule,” and that their “control of corporate affairs should not be impinged based on nonspecific or speculative allegations of wrongdoing.” Id. at 619. We concluded that a demand
is not futile “simply because a majority of the directors approved or participated in some
way in the challenged transaction or decision,” “on the basis of generalized or speculative
allegations that they are conflicted or are controlled by other conflicted persons,” or
“because they are paid well for their services as directors, were chosen as directors at the
behest of controlling stockholders, or would be hostile to the action.” Id. at 618. We found
that pre-suit demand was “not an onerous requirement[,]” and explained that a demand
18
may be the first time a director learns of a dispute and “gives the directors—even interested,
non-independent directors—an opportunity to consider, or reconsider, the issue in dispute.”
Id. at 619.
Against that backdrop, we held that demand is excused only where the allegations
or evidence “clearly demonstrate, in a very particular manner,” either that a demand or a
delay in awaiting a response would cause irreparable harm, or that:
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.
Id. at 620. We held that the directors were not conflicted or subject to the control by LSA
such that a demand would have been futile, and thus affirmed the court’s summary
judgment in favor of the defendants. Id. at 620.
B
As noted above, CA § 2-405.1 applies to all acts taken by directors and supplies the
sole source of the duties that directors owe to a corporation and its shareholders. See
Eastland, 486 Md. at 25. It is time, then, to restate Werbowsky’s futility test using the
standard of care codified in CA § 2-405.1(c): A demand is excused as futile only where the
allegations or evidence clearly demonstrate, in a very particular manner, either that a
demand or a delay in awaiting a response would cause irreparable harm, or that 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, in a
19
manner the director reasonably believes to be in the best interests of the corporation, and
with ordinary prudence.
Two points about this reformulation require clarification before we apply it here:
first, what counts as “the decision in dispute,” and second, what it means for a director to
be “conflicted or committed” to that decision.
1
Because the futility exception speaks to a director’s personal conflict or
commitment to “the decision in dispute,” we must identify the “decision” to which this
phrase refers. The “decision in dispute” is the transaction or conduct that the derivative
claim challenges—here, the Funds’ use of leverage and the board’s oversight decisions that
the Shareholders say cost the Funds $1 billion. A director’s capacity to consider a demand
hinges on his relationship with those underlying transactions or events. Even a director
who “expects to derive a personal benefit” from a transaction “is not necessarily ‘so
personally and directly conflicted or committed to the decision in dispute that [he] cannot
reasonably be expected to respond to a demand in good faith[.]’” Oliveira, 451 Md. at 229
(quoting Werbowsky, 362 Md. at 620). The question is whether his connection to the
challenged conduct is such that he cannot weigh, in conformity with the statutory standard,
whether the corporation should sue over it.
2
We now explain what it means for directors to be, in the words of Werbowsky, so
“conflicted or committed” to the decision in dispute that they cannot be expected to
consider a demand in conformity with section 2-405.1’s standard of conduct.
20
The Shareholders read “committed to the decision in dispute” as a second and more
forgiving route to futility than “conflicted”—and thus one that a shareholder may travel
whenever the board has taken and defended a position consistent with the challenged
decision. That is not what the phrase means.
“[S]o personally and directly conflicted or committed to the decision in dispute”
describes a single condition: a connection to the underlying decision so personal and so
direct that the director cannot consider the demand in accordance with subsection 2-405.1(c). Werbowsky, 362 Md. at 620. “Conflicted” and “committed” are two ways of
describing one disabling condition, not two different tests. To read “committed” as the
Shareholders do—to mean that a director is disabled whenever he has approved a decision,
staunchly defended it, or said so in public—would resurrect the very considerations
Werbowsky rejected when it announced the standard. Approval and participation do not
excuse the lack of a demand, nor does hostility to the action. Werbowsky, 362 Md. at 618-19. “Committed to the decision in dispute” refers to the rare case in which a director’s
entanglement with the challenged decision is so personal and direct that he cannot weigh a
demand to undo or rectify it—not the ordinary case of a director who made a decision and
then defends it.
That focus explains why, when faced with a shareholder demand to direct the
corporation to sue its directors, a director who was interested in the underlying transaction
is viewed differently under a futility analysis than an uninterested director, even though
both are asked to authorize a lawsuit against themselves. A director with an interest in the
underlying transaction does not enjoy the presumption of having complied with section 2-21
405.1’s standard of conduct at the time the challenged decision is made, and thus it cannot
be presumed that he would comply with that standard later, if faced with a shareholder
demand to bring suit.
But a director who has no stake in the decision in dispute is presumed to have
complied with subsection 2-405.1(c)’s standard of conduct when the initial decision was
made, and that presumption will apply to subsequent decisions related to the initial one.
Some business decisions made by corporate boards are revisited, reconsidered, and
reevaluated when circumstances warrant. Among other things, boards may revisit a prior
decision to change course or learn from prior mistakes. Thus, directors are presumed not
only to exercise sound judgment when they make business decisions, but to bring that same
judgment to bear when, for whatever reason, such decisions are subsequently reviewed or
scrutinized. Werbowsky, 362 Md. at 619 (explaining that the demand gives directors “an
opportunity to consider, or reconsider, the issue in dispute”). As the Seventh Circuit, whose
reasoning we largely adopted in Werbowsky, put it: “[p]articipants who are not
‘wrongdoers’ may evaluate their acts and change their minds.” Kamen, 939 F.2d at 461.
Thus, a disinterested director gets the benefit of the presumption that he will investigate a
shareholder demand in compliance with subsection 2-405.1(c)’s standard of conduct just
as he would if called upon to revisit a past decision for some other reason. And if the
director fails to comply with that standard when faced with a demand, the board’s refusal
would be subject to judicial review. Were it otherwise, demand would be futile in every
22
derivative case in which a director is a named defendant, an approach we rejected in
Werbowsky.4 362 Md. at 618.
C
Two procedural aspects of the futility exception warrant emphasis.
First, a shareholder who files a derivative action without making a pre-suit demand
must plead the facts that excuse the demand with particularity. Werbowsky requires that
these facts “clearly demonstrate, in a very particular manner[]” that a demand would be
futile, 362 Md. at 620, and the Maryland Rules now say the same: a derivative complaint
must state “with particularity” either the efforts the plaintiff made “to obtain the desired
action from the business entity” or “the reasons for not making an attempt to obtain the
desired action[,]” Md. Rule 15-1601(b)(3).
Second, although futility is often raised and decided on a motion to dismiss, as it
was here, it need not be. Werbowsky, 362 Md. at 620. The exception is fact-specific, and
the issue “may be resolved as a factual matter.” Id. at 621 (citation modified). A complaint
that alleges enough to survive dismissal does not thereby conclusively establish futility;
the question may be revisited on a fuller record. Id. at 620-21. Where the material facts
bearing on futility are not genuinely disputed, a court may resolve the issue on summary
judgment; where they are disputed, the issue “is a perfect candidate for resolution pursuant
to Maryland Rule 2-502[,]” under which the court “may isolate the futility issue, take
4
This does not mean a director can never be disabled by something that happens after the transaction. The presumption can be overcome—but only by particularized facts showing a genuine, disabling entanglement, not by the bare litigation exposure common to every defendant in a derivative lawsuit.
23
evidence on it, and make ultimate findings of fact with respect to it.”5 Id. at 621 (footnote
omitted). We note this because it underscores a point central to the exception: futility is a
question for the court, not the jury, and the court resolves it without trying the merits. See
id. at 621-22.
IV
We turn now to the amended complaint to determine whether the Shareholders’
allegations satisfy the futility exception test.
The board has five members, so the Shareholders had to plead particularized facts
showing that at least three of them could not consider a demand under the standard set forth
in subsection 2-405.1(c). They did so as to Mr. Birzer, who was Tortoise’s chief executive
officer. The question before us is whether the amended complaint pleads facts that establish
that at least two of the remaining four directors are unable to evaluate a pre-suit litigation
demand under section 2-405.1’s standard of conduct. We hold that it does not.
5
Rule 2-502 provides that:
If at any stage of an action a question arises that is within the sole province
of the court to decide, whether or not the action is triable by a jury, and if it
would be convenient to have the question decided before proceeding further,
the court, on motion or on its own initiative, may order that the question be
presented for decision in the manner the court deems expedient. In resolving
the question, the court may accept facts stipulated by the parties, may find
facts after receiving evidence, and may draw inferences from these facts. The
proceedings and decisions of the court shall be on the record, and the
decisions shall be reviewable upon appeal after entry of an appealable order
or judgment.
24
A
At the outset, we note that the Shareholders’ liability theory—that the directors face
substantial unexculpated liability—does not apply to the derivative claim against Tortoise.
Count II, the only count before us, pleaded claims against both the directors and Tortoise.
Only the claim against the directors, though, threatens to impose liability on the directors.
The Shareholders’ principal theory is that demand is excused because the directors
face unexculpated personal liability exceeding $1 billion—more than their insurance and
their combined assets—for the losses they allegedly caused. Their demand-futility
allegations begin by reciting the Werbowsky standard, alleging that a majority of the
directors are so personally and directly conflicted or committed that they cannot consider
a demand within the ambit of the business judgment rule. But that conclusion must be
pleaded with factual particularity; stating the conclusion does not suffice. See Werbowsky,
362 Md. at 620.
In any event, that the remaining four directors allegedly face significant
unexculpated liability does not establish futility. As explained above, a director who was
disinterested relative to the initial decision will continue to enjoy the presumption of
compliance with subsection 2-405.1(c)’s standard of conduct, and that does not change just
because potential liability is unexculpated. To decide whether directors face a substantial
or ruinous likelihood of unexculpated liability, a court would have to decide whether the
directors were grossly negligent and whether the board has any defenses. That cannot be
done without delving into the merits of the underlying claim. But Werbowsky directs courts
to focus on the “real, limited, issue” of demand futility and avoid “injecting into a
25
preliminary proceeding issues that go more to the merits of the complaint—whether there
was, in fact, self-dealing, corporate waste, or a lack of business judgment with respect to
the decision or transaction under attack.” Id. Thus, the potential for unexculpated liability
does not establish futility.
B
The Shareholders contend that the board’s conduct after the Funds’ collapse shows
that a demand would have been pointless—that the directors had, in the words of their
amended complaint, “made clear beyond any conceivable doubt that they will oppose the
assertion of any claims on behalf of the Funds[.]” That allegation speaks to how the board
would answer a demand—that the answer would be no. But as we have explained, demand
is not futile because it would likely be refused; it is futile only when the board cannot
consider it under subsection 2-405.1(c)’s standard of conduct. See id. at 616-17; Kamen,
939 F.2d at 461-62.
We take up each aspect of the post-collapse conduct, as alleged by the Shareholders,
in turn.
The Shareholders contend that the board failed “to take action to investigate, much
less pursue,” claims to recover the Funds’ losses after the collapse, and that this inaction
shows that pre-suit demand would have been pointless. But a board’s failure to sue itself,
on its own initiative, does not excuse failure to make pre-suit demand—if it did, the
requirement would seldom apply, because a derivative action by its nature asserts a claim
the corporation has not asserted for itself.
26
The Shareholders also rely on a books-and-records inspection demand they served
as part of their investigation, contending that the demand—together with the third-party
offer discussed below—put the board on notice and obligated it to investigate the potential
claims. A request for books and records may signal that shareholders are looking into
possible wrongdoing, but it is not the same as a request that the corporation file a lawsuit.
It is the litigation demand, not an inspection request, that the law requires before filing a
derivative suit. That the board did not respond to the inspection demand as the Shareholders
wished tells us nothing about whether the board could have considered a litigation demand
consistent with the statutory duty of care.
C
The Shareholders contend that by renewing Tortoise’s advisory contracts after the
collapse and publicly touting Tortoise’s leverage management as “responsible” and the
Funds’ performance as “reasonable,” the directors wedded themselves to the decision in
dispute, as suing would be repudiating their own words.
Demand is not excused because directors approved the challenged decision, and it
is not excused because they defended in public the relationship they approved. We would
expect directors to speak well of their own stewardship, particularly to the investing public.
A demand asks the directors to reconsider in private what they may feel bound to defend
in public, and the fact that they defended it does not demonstrate that they cannot reconsider
it. At most, these allegations show that the directors would be “hostile to the action”—a
ground for futility Werbowsky rejected. 362 Md. at 618.
27
D
The Shareholders also rely on the October 2020 by-laws, which they allege were
“illegal” under the Investment Company Act, 15 U.S.C. §§ 80a-1 to 80a-64, and were
adopted for the “single purpose” of entrenching the directors and Tortoise against
shareholder accountability.
But “illegal” is a legal conclusion, and adoption for the “single purpose” of
entrenchment is a conclusory assertion of motive; neither is a well-pleaded fact we must
accept under Werbowsky’s particularity requirement. Two facts concerning the by-laws
were well-pleaded: that the board adopted the by-laws after the Funds’ collapse and that
they restricted shareholder voting and nomination rights. Even crediting that these actions
were defensive, the Shareholders never connected them to the board’s capacity to consider
a demand. The amended complaint pleads no proxy contest, no pending nomination, no
concrete threat to any director’s seat, and no particularized facts showing that the by-laws
were adopted to fend off litigation over the Funds’ losses. A director may wish to keep his
seat and still bring his honest judgment to a pre-suit demand; generalized allegations that
directors are self-protective do not show otherwise. Werbowsky, 362 Md. at 619-20.
E
The Shareholders point to the board’s treatment of an “offer” from a third party to
acquire or prosecute the Funds’ claims against Tortoise, which they call a “risk-free
opportunity to monetize the claims” that no faithful fiduciary would have let pass.
The board’s refusal to pursue such a transaction did not excuse the Shareholders’
failure to demand that the board cause the Funds to sue Tortoise, let alone the directors.
28
First, the “offer” as pleaded, was merely a proposal to discuss acquiring the Funds’ claims
against Tortoise, not a request that the board cause the Funds to pursue specified litigation.
Thus, the proposal to discuss an assignment of the Funds’ claims triggered none of the
duties that attach to a pre-suit demand. Second, the objection to the board’s response goes
to its wisdom, not its capacity: The board’s counsel gave reasons for declining—fiduciary
concerns, cost, confidentiality, the proposal’s lack of specificity, and questions of legal
permissibility. Had the Shareholders made a litigation demand and been refused, a court
could review the refusal as explained above. They made no demand, and the board’s
handling of the proposal does not excuse that failure.
F
The Shareholders allege that Tortoise had a conflict of interest—its fees rose with
the Funds’ leveraged assets, so “more leverage means more fees”—and that Mr. Birzer, as
Tortoise’s chief executive, was an interested director.
Those allegations establish a disabling conflict for Mr. Birzer, which we have
already credited. But Tortoise’s fee conflict is Tortoise’s; it is not automatically imputed
to the four directors alleged to be independent. The amended complaint does not allege that
they received Tortoise’s fees, were employed or controlled by Tortoise, or had a
relationship with Tortoise resembling Mr. Birzer’s. That the independent directors should
have watched Tortoise’s management more closely may matter to the Shareholders’ claim
on the merits, but it does not show that they were disabled from considering a demand.
29
G
The Shareholders’ last argument is that the allegations must be weighed together
rather than one at a time, and on that, we agree. Futility is assessed on the whole of the
particularized facts, not by considering each fact in isolation. Taken together, the
Shareholders’ allegations do not meet that standard. They describe directors who presided
over heavy losses, renewed the adviser’s contracts, praised the adviser, adopted defensive
by-laws, opposed an earlier suit, declined a third party’s overture to discuss an assignment
of claims, and sat on a board that included the adviser’s chief executive. That is a narrative
of a board resistant to the Shareholders’ claims, but resistance does not prove incapacity.
What the Shareholders have, in the end, is a strong disagreement with how the directors
managed the Funds and a confident prediction that the directors would have refused a
demand. Werbowsky requires more: particularized facts showing that a majority of the
board could not have considered the demand within the standard set forth in subsection 2-405.1(c). The Shareholders do not meet this standard; as such, their argument fails.
JUDGMENT OF THE APPELLATE
COURT OF MARYLAND
AFFIRMED. COSTS TO BE PAID BY
PETITIONERS.
30