Opinion
No. 652447/13.
05-29-2015
Jeffrey L. DOPPELT, derivatively on behalf of Annaly Capital Management, Inc., Plaintiff, v. Wellington J. DENAHAN; Kevin G. Keyes; Jonathan D. Green; Michael Haylon; Kevin P. Brady; John A. Lambiase; E. Wayne Nordberg; Donnell A. Segalas; John H. Schaefer; Annaly Management Company LLC,, Defendants, and Annaly Capital Management, Inc., Nominal Defendant.
Shahmoon & Ellisen LLP, New York City (Carol S. Shahmoon of counsel), Chitwood Harley Harnes LLP, New York City (Gregory E. Keller of counsel) for plaintiff Jeffrey L. Doppelt, derivatively on behalf of Annaly Capital Management, Inc. King & Spaulding LLP, New York City (Richard A. Cirillo, Ann M. Cook, and David A. Joffe of counsel), for defendants Kevin P. Brady, Jonathan D. Green, Michael Haylon, E. Wayne Nordberg, John H. Schaefer, and Donnell A. Segalas. K & L Gates LLP, New York City (Peter N. Flocos, Joanna A. Diakos, and Brian D. Koosed of counsel), for defendants Annaly Management Company LLC, Wellington J. Denahan, Kevin G. Keyes, and John A. Lambiase, and nominal defendant Annaly Capital Management, Inc.
Shahmoon & Ellisen LLP, New York City (Carol S. Shahmoon of counsel), Chitwood Harley Harnes LLP, New York City (Gregory E. Keller of counsel) for plaintiff Jeffrey L. Doppelt, derivatively on behalf of Annaly Capital Management, Inc.
King & Spaulding LLP, New York City (Richard A. Cirillo, Ann M. Cook, and David A. Joffe of counsel), for defendants Kevin P. Brady, Jonathan D. Green, Michael Haylon, E. Wayne Nordberg, John H. Schaefer, and Donnell A. Segalas.
K & L Gates LLP, New York City (Peter N. Flocos, Joanna A. Diakos, and Brian D. Koosed of counsel), for defendants Annaly Management Company LLC, Wellington J. Denahan, Kevin G. Keyes, and John A. Lambiase, and nominal defendant Annaly Capital Management, Inc.
Opinion
SALIANN SCARPULLA, J.
In this shareholder derivative action, plaintiff Jeffrey L. Doppelt (“Plaintiff”) alleges, inter alia, that the board of directors of Annaly Capital Management, Inc. (“Annaly”) breached their fiduciary duties in making the decision to externalize management of Annaly to an outside company, Annaly Management Company LLC (“the Manager”).
Annaly's independent directors Kevin P. Brady, Jonathan D. Green, Michael Haylon, E. Wayne Nordberg, John H. Schaefer, and Donnell A. Segalas (collectively, the “Independent Directors”) move to dismiss the complaint pursuant to CPLR § 3211(a)(3) and (a)(7) (motion seq. no. 001). In a separate motion, Annaly's non-independent directors Wellington J. Denahan, Kevin G. Keyes, and John A. Lambiase; the Manager; and Annaly (collectively, “the Management Defendants”) move to dismiss the complaint pursuant to CPLR § 3211(a)(1) and (a)(7) (motion seq. no. 002). These two motions are consolidated for disposition.
All of Annaly's board members (“the individual defendants”) are considered to be independent directors, except for Denahan, Keyes, and Lambiase. The parties agree that Lambiase is a non-management director, but is not independent because his son works for Annaly.
Background
Annaly is a real estate investment trust formed in 1997, which purchases and manages an investment portfolio of mortgage-backed securities. Annaly was incorporated in Maryland, and maintains a principal office in New York, New York. In 2012, Annaly managed approximately $133.5 billion dollars in gross assets and had 147 full-time employees.
Defendant Wellington J. Denahan is Annaly's chief executive officer and chairman of the board of directors (“the Board”). Defendant Kevin G. Keyes is president of Annaly, and a member of the Board. Both Denahan and Keyes are also owners of the Manager, and Denahan serves as its managing member.
In their memorandum of law, the Independent Directors state that the Manager is owned by directors Denahan and Keyes “and others.” Denahan and Keyes shall be referred to collectively as “the Management Directors.”
Since its formation, Annaly has been a self-advised and self-managed real estate investment trust. On March 14, 2013, the Independent Directors voted to approve a proposal under which Annaly would enter into a management agreement with the Manager, and thus be externally managed (“the externalization”).
On April 10, 2013, Annaly issued a proxy statement (“the Proxy”) to solicit shareholder approval of the externalization at the annual shareholder meeting on May 23, 2013. The Proxy included a copy of the proposed management agreement between Annaly and the Manager. Under the management agreement, the Manager would be responsible for providing a management team to Annaly that would “devote their full business time, energy and ability” to managing Annaly, in exchange for a fee equal to 1.05% of stockholders' equity.
The Proxy explained that the Manager is a Delaware limited liability company “owned by our [Annaly's] management.” Under the externalization proposal, Annaly expected to terminate all employment agreements with its executive officers upon their consent, and that Annaly would have “no employees following the externalization.”
According to the Proxy, the Independent Directors “reviewed a significant amount of information,” including Credit Suisse's financial advice regarding the material terms of other management agreements between competing real estate investment trusts and their external managers. The Independent Directors projected that the externalization would save Annaly approximately $210.9 million dollars over the next five years, and that the Manager's fee would be the lowest fixed percentage fee paid to any external manager in Annaly's industry. The Proxy also noted a number of risks to the externalization: that the management agreement was not negotiated on an arms-length basis because the Manager is owned by Annaly's management; that the management fee is payable to the Manager regardless of performance; and that any future proxy statements would not disclose the compensation paid by the Manager.
Given the benefits and risks, the Proxy stated that the Independent Directors determined that the externalization was in the “best interests” of Annaly, and that they unanimously approved the externalization prior to submitting it for a shareholder vote. The Proxy further stated that, if the shareholders did not approve the externalization, Annaly would “continue to operate within our current structure as an internally managed company.”
At the annual meeting, the shareholders voted 82% in favor of the externalization. Thereafter, Plaintiff sent a demand letter to the Board on June 3, 2013, urging it to “take immediate action to remedy the harm to Annaly” that would result from the externalization. Plaintiff alleged in the demand letter that the Board breached its fiduciary duties of care, loyalty, and good faith and committed corporate waste by approving the externalization. By letter from their counsel dated June 26, 2013, the Independent Directors refused Plaintiff's demand.
Plaintiff then commenced this derivative action on behalf of Annaly on July 11, 2013, asserting five causes of action: (1) breach of the fiduciary duties of good faith, loyalty, care and candor against the individual defendants; (2) corporate waste against the individual defendants; (3) usurpation of corporate opportunity against the individual defendants; (4) unjust enrichment against the Management Directors and the Manager; and (5) aiding and abetting breach of fiduciary duties against the Manager.
In the first and second causes of action, Plaintiff alleges that the individual defendants violated their fiduciary duties and committed corporate waste by failing to inquire into the value of Annaly's management capability before transferring it to the Manager, without receiving any consideration in return.
In addition, Plaintiff claims that the individual defendants breached their fiduciary duties when they approved the externalization because the transaction was not conducted at arms-length and they did not obtain an independent fairness opinion from their financial advisor, Credit Suisse.
Plaintiff further alleges that the individual defendants breached their duty of candor by failing to disclose material terms about the transaction, including the identity of the Manager's owners, the management team's inherent value, and that Annaly previously entered into two similar transactions to purchase the management capability of Fixed Income Discount Advisory Company (“FIDAC”) and Merganser for approximately $90 million and $42.5 million dollars, respectively.
In the remaining causes of action, Plaintiff asserts that the individual defendants usurped a corporate opportunity by permitting the Manager to provide investment management services to third-party investors (third cause of action); that the Management Directors and the Manager were unjustly enriched because they obtained Annaly's management capability for free (fourth cause of action); and that the Manager aided and abetted the individual defendants' breach of fiduciary duties (fifth cause of action).
Independent Directors' Motion to Dismiss
In their motion, the Independent Directors argue that the complaint should be dismissed because Plaintiff cannot show that his demand was wrongfully refused, and the complaint fails to state a claim. Specifically, they argue that Plaintiff's breach of fiduciary duty claim fails because: (1) Plaintiff does not allege that they acted in bad faith or engaged in fraud or self-dealing as required to overcome the business judgment rule; and (2) the shareholders ratified the externalization.
The Independent Directors further assert that the externalization was supported by valid consideration because the Manager agreed to undertake responsibility for managing Annaly's assets in exchange for a fee. They also contend that Plaintiff's corporate waste claim fails because Annaly's management team is not a corporate asset that may be wasted.
In opposition, Plaintiff argues that the Board breached its fiduciary duties by allowing the Manager to acquire Annaly's management for no consideration, failing to engage in arm's length negotiations or obtain an independent fairness opinion, and by failing to inquire into the value of Annaly's management assets.
Plaintiff further asserts that, even though the Board sought shareholder approval of the externalization, shareholders were not fully informed about the value of Annaly's management assets and Annaly's prior transactions to purchase the management capability of FIDAC and Merganser. Lastly, Plaintiff argues that he states a corporate waste claim based on his allegation that Annaly transferred valuable management assets to the Manager without receiving any consideration.
Management Defendants' Motion to Dismiss
In their motion to dismiss, the Management Defendants argue that Plaintiff's claims should be dismissed because: (1) they did not make the decision to enter into the externalization; and (2) both the Independent Directors and the shareholders approved the externalization.
In addition, the Management Defendants contend that “the complaint is based on an unsubstantiated premise that Annaly gave something away for nothing.” The Management Defendants argue that the alleged “management assets” transferred to the Manager are in fact, Annaly's executives, who had the right to leave Annaly and form their own company. According to the Management Defendants, Annaly's executives had the right to terminate their employment with Annaly on ninety days notice, subject only to a non-compete clause.
The Management Defendants further assert that Plaintiff fails to state a claim for usurpation of a corporate opportunity because the Manager's opportunity to earn management fees from third parties was an opportunity that was first presented to the Independent Directors. Finally, they argue that the unjust enrichment claim should be dismissed because the management agreement governs Annaly's relationship with the Manager, and that there is no basis for an aiding and abetting a breach of fiduciary duty claim because no underlying breach of fiduciary duty can be established.
In opposition, Plaintiff asserts that the Management Directors “cannot escape liability for breaches of fiduciary duty arising from a transaction that they proposed and executed, and in which they received Annaly's investment management business for nothing.” Plaintiff also claims that the approval of the Independent Directors and shareholders does not immunize the externalization because they were not fully informed of material information concerning the externalization.
Lastly, Plaintiff argues that he states a claim for unjust enrichment based on the transfer of Annaly's investment management business for no consideration, and that he adequately alleges an aiding and abetting breach of fiduciary duty claim because the Manager proposed and encouraged the Independent Directors to approve the externalization.
Plaintiff's Standing to Assert Derivative Claims
Under Maryland law, prior to commencing an action on behalf of the corporation, a shareholder is required to “either make a demand on the board of directors that the corporation bring the suit, or show that demand is excused as futile.” Bender v. Schwartz, 172 Md.App. 648, 666 (Md.Ct.Spec.App.2007) ; Boland v. Boland, 423 Md. 296, 329 (2011).
Issues of corporate governance are “governed by the law of the State in which the corporation is chartered.” Hart v. General Motors Corp., 129 A.D.2d 179, 182 (1st Dep't 1987) ; see Simon v. Becherer, 7 AD3d 66, 71 (1st Dep't 2004). Here, Maryland corporate law applies because Annaly is a Maryland corporation. Where particular issues of Maryland corporate law have not been fully developed, Maryland courts apply Delaware case law. See, e.g ., Werbowsky v. Collomb, 362 Md. 581, 593 (2001).
If a demand is made upon the Board to bring suit, 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.” Shenker v. Laureate, Educ., Inc., 411 Md. 317, 344 (2009). If the “corporation, after an investigation, fails to take the action requested by the shareholder ... the shareholder may bring a demand refused' action.” Bender, 172 Md.App. at 666 (internal citation omitted).
The parties do not dispute that this is a “demand refused” action. In a “demand refused” action, the Court must review the board's investigation into plaintiff's demand under the business judgment rule and defer to the board's decision not to pursue litigation, unless the plaintiff can show that the board's decision was “not conducted independently and in good faith, or that it was not within the realm of sound business judgment.” Bender, 172 Md.App. at 666. Plaintiff here argues that the Board wrongfully refused his demand because it “provided no information about the method, process and self-interest of the decision-makers” in its letter rejecting the demand.
In considering whether the board conducted a reasonable investigation into the demand, the court may take into account such factors as: (a) whether independent counsel was hired; (b) whether a report was produced, including the length of the report and whether it contained any explanation of the board's procedures, reasoning, and conclusions; (c) whether the claims at issue were properly identified; (d) whether the testimony of directors, officers, employees was reviewed; and (e) the number of times that the board met regarding the demand. Bender, 172 Md.App. at 672 ; Kautz v. Sugarman, No. 10 Civ. 4312, 2011 WL 1330676 at * 6 (S.D.NY 2011) (interpreting Maryland law).
Here, the Independent Directors responded to Plaintiff's demand in a one-page letter written by their outside counsel. Counsel states in the letter that the Independent Directors reviewed and considered the demand letter, and “have determined that no change in the Management Externalization Proposal or the management agreement is necessary or appropriate.” Counsel further noted in the second and final paragraph of the letter that the “Independent Directors undertook a detailed analysis of whether Annaly should consider externalizing its management” from 2012 to March 2013 prior to issuing the Proxy, and after a number of meetings, the Independent Directors unanimously determined that the externalization “is fair to, and in the best interests, of Annaly.”
The Independent Directors rely solely on counsel's one-page letter, and presumably their consideration of the externalization plan prior to voting to approve it, to show that they made a good faith effort to examine Plaintiff's claims.
Based on the sparse record before me, I can not conclude, as a matter of law, that the business judgment rule shields the Independent Directors' decision not to pursue the litigation demanded by Plaintiff. Although the Independent Directors hired outside counsel to advise them regarding the demand, defendants have submitted no evidence to show that they actually conducted any post-demand investigation into the specific claims asserted by Plaintiff.
In his demand, Plaintiff made numerous, specific allegations of how the Board breached their fiduciary duties in approving the externalization—none of which were directly addressed in the perfunctory Independent Directors' letter to Plaintiff. Instead of providing a direct response to Plaintiff's claims, the Independent Directors appear to have relied on their pre-demand analysis of the externalization, which analysis does not indicate any consideration at all of Plaintiff's specific claims.
Because I am unable to conclude, based on the record before me, that the Independent Directors' decision not to pursue the litigation demanded by Plaintiff is shielded as a matter of law by the business judgment rule, I deny defendants' motion to dismiss for Plaintiff's lack of standing at this time. See Kautz, 2011 WL 1330676 at * 7 (the Court, noting that “demand refused cases are frequently decided after some modicum of discovery rather than solely on the pleadings,” denied motion to dismiss and directed the parties to engage in limited discovery on the reasonableness of the investigation into plaintiff's claims); see also Scalisi v. Grills, 501 F.Supp.2d 356, 360 (E.D.NY 2007).
The Adequacy of Plaintiff's Claims
Having determined that defendants have not demonstrated Plaintiff's lack of standing as a matter of law, I must next review the adequacy of Plaintiff's causes of action under CPLR § 3211 and substantive Maryland law. See Werbowsky, 362 Md. at 621 ; Garnitschnig v. Horovitz, 48 F.Supp.3d 820, 832 (D.Md.2014).
Breach of Fiduciary Duty
Under Maryland law, a corporate director must perform his or her fiduciary duties to the corporation in: (1) good faith; (2) in a manner that 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. Md.Code. Corps. & Assn's § 2–405.1(a) ; Shenker, 411 Md. at 337.
A director's business decisions are presumed to be made in good faith, on an informed basis, and in the honest belief that the decision was made in the best interests of the company. Boland v. Boland, 423 Md. at 328. This presumption serves to insulate “business decisions from judicial review absent a showing that the officers acted fraudulently or in bad faith.” N.A.A.C.P. v. Golding, 342 Md. 663, 673 (1996).
In the complaint, Plaintiff alleges that in approving the externalization, the individual defendants acted in bad faith, thereby breaching their fiduciary duties to Annaly, because: (1) the externalization was not an arms-length transaction between Annaly and the Manager; and (2) the Board failed to inform themselves and the shareholders of material terms regarding the externalization.
It is undisputed that the externalization was not an arms-length transaction. Although Maryland's common law historically prohibited transactions between a corporation and one of its directors, it is well-settled that Maryland law now “permits directors to participate in transactions in which they may have conflicting interests” if the safe harbor provisions set forth in Section 2–419 of the Maryland's Corporations and Associations Article are met. Tackney v. U.S. Naval Acad. Alumni Ass'n, Inc., 408 Md. 700, 721 (2009) ; Independent Distributors, Inc. v. Katz, 99 Md.App. 441, 455 (Ct.Spec.App.Md.1994). Moreover, if the requirements of Section 2–419 are met, the directors may not be held liable for a breach of fiduciary duty based on the proposed transaction. Wittman v. Crooke, 120 Md.App. 369, 377 (Ct.Spec.App.Md.1998) ; Storetrax.com, Inc. v. Gurland, 397 Md. 37, 58 (2007).
Under Section 2–419, a transaction between a corporation and any other corporation may be ratified by the board of directors/shareholders if: (1) the director's interest is disclosed to the board of directors and a majority of disinterested directors approves the transaction; or (2) the director's interest is disclosed to shareholders entitled to vote and a majority of the shareholders vote to approve the transaction other than the votes of shares held by any interested director. Md.Code. Corps. & Assn's § 2–419(b).
Section 2–419 also provides that an interested director transaction is not void if the “transaction is fair and reasonable to the corporation.” Md.Code. Corps. & Assn's § 2–419(b)(2).
Annaly's decision to enter into a management agreement with the Manager is an interested director transaction within the meaning of Section 2–419. The externalization at issue here was approved by a unanimous vote of Annaly's independent directors, and more than eighty percent of Annaly's shareholders. Accordingly, the safe harbor provisions of Section 2–419 applies so long as the Management Directors' interest in the Manager was disclosed to either the Independent Directors or to the shareholders prior to their approval of the externalization.
The Proxy states that the “independent directors, without participation of directors who are or are related to members of management, unanimously approved” the externalization. The Independent Directors also submit a copy of Annaly's Form 8–K filed with SEC on May 23, 2013, which shows that shareholders voted 82% in favor of the externalization.
Here, the Proxy expressly states that the Manager is “a Delaware limited liability company ... owned by our management.” The Proxy also contained a list of Annaly's management, which included Denahan as chief executive officer and chairman of the Board, and Keyes as president and member of the Board. I find that the Management Directors' interest in the Manager was adequately disclosed to shareholders, prior to their approval of the externalization.
Plaintiff contends that the shareholders' vote in favor of the externalization is not dispositive of the breach of fiduciary duty claim because the shareholders were not fully informed of material information, such as the value of Annaly's management assets that were transferred to the Manager, and that Annaly had previously acquired two management businesses, FIDAC and Merganser, before they voted.
Under Maryland law, directors “owe a duty to disclose to stockholders material information within the directors' control regarding transactions on which the stockholders will vote,” which requires directors to disclose “sufficient information to enable a reasonable investor to make an informed decision on the matter presented.” Hudson v. Prime Retail, Inc., 2004 WL 1982383, at *13–14 (Md. Cir. Ct. April 1, 2004) (internal citation omitted); see also Paskowitz v. Wohlstadter, 151 Md.App. 1, 13 (Ct.Spec.App.Md.2003) (applying Delaware law).
Contrary to Plaintiff's assertion, the Board was not required to inform shareholders about the alleged “value” of Annaly's management capability, or the previous FIDAC and Merganser transactions, because this information was either not factual or not material to the externalization proposal submitted for the shareholders' vote.
Plaintiff's characterization of the externalization as a “transfer of an asset” is simply Plaintiff's characterization. The facts underlying the transaction, including that: 1) Annaly would terminate the current employment agreements of the executive officers; 2) that Annaly's employees would most likely be employed by the Manager; 3) that Annaly would enter into a management contract with the Manager; 4) that the Manager would be paid a fixed fee to manage Annaly (as opposed to paying the former employees salaries and benefits); 5) that the externalization was not an arms-length transaction; and 6) that Credit Suisse had reviewed with the Independent Directors other management agreements, for purposes of comparison to the management agreement, were all disclosed in the Proxy. The Proxy also included a copy of the proposed management agreement. As the material facts underlying the externalization were concededly disclosed, the directors were under no obligation to include Plaintiff's characterization of the externalization in the Proxy materials submitted to shareholders.
Further, the FIDAC and Merganser transactions were not required to be compared to the externalization, as Plaintiff claims. The FIDAC transaction was a merger, and the Merganser transaction was a purchase of a business as alleged by Plaintiff in the complaint. Plaintiff submits a copy of Annaly's 2004 annual report (SEC Form 10–K), which states that Annaly entered into a merger agreement with FIDAC on December 31, 2003. A past merger and/or purchase of a business are not transactions that are closely analogous to the externalization, and therefore the Board had no obligation to include information about these transactions in the Proxy.
Based on the statements made in the Proxy, I find that there was sufficient disclosure made to the shareholders as a matter of law. The Proxy explained that, if the externalization was approved by shareholders, Annaly would be managed by the Manager, a company owned by Annaly's management. The Proxy further stated the reasons why the Independent Directors recommended the externalization, and most importantly, the potential risks of externalization, including that the management agreement was not negotiated on an arms-length basis, that the management fee is payable to the Manager regardless of performance, and that any future proxy statements would not disclose the compensation paid by the Manager. As the material information concerning the externalization was provided to shareholders, their vote was made on a fully informed basis. Wittman, 120 Md.App. at 378.
Lastly, Plaintiff argues that the Independent Directors failed to obtain an independent fairness opinion from Credit Suisse prior to their approval of the transaction. However, the Independent Directors are not required to obtain a fairness opinion, nor is there any requirement to prove fairness once shareholders ratified the externalization. Under Section 2–419, the shareholders' ratification rendered the externalization a valid transaction, and extinguished Plaintiff's fiduciary duty claims against the individual defendants. Md.Code. Corps. & Assn's § 2–419(b) ; Wittman, 120 Md.App. at 377 ; Storetrax.com, Inc., 397 Md. at 58.
The Independent Directors' decision to approve the externalization is further protected by the business judgment rule because Plaintiff's allegations that the externalization transferred something of value to the Manager without consideration are meritless. Plaintiff also does not make any particularized allegations that the Independent Directors could not act independently in approving the externalization.
For the above stated reasons, I grant the Independent Directors' and the Management Defendants' motions to dismiss the breach of fiduciary duty claim. I further grant the Manager's motion to dismiss the fifth cause of action for aiding and abetting a breach of fiduciary duty because Plaintiff has not sufficiently pled an underlying breach of fiduciary duty.
Corporate Waste and Unjust Enrichment
To assert a claim for corporate waste, a plaintiff must allege that “what the corporation has received is so inadequate in value that no person of ordinary, sound business judgment would deem it worth what the corporation has paid.” Werbowsky, 362 Md. at 611 (quoting Saxe v. Brady, 40 Del. Ch. 474, 486 (Del. Ch.1962) ).
To assert an unjust enrichment claim, a plaintiff must allege that: (1) the plaintiff conferred a benefit upon the defendant; (2) the defendant appreciated or had knowledge of the benefit; and (3) the defendant accepted or retained the benefit “under such circumstances as to make it inequitable for the defendant to retain the benefit without payment of its value.” Richard F. Kline, Inc. v. Signet Bank/Maryland, 102 Md.App. 727, 731–732 (Ct.Spec.App.Md .1995).
The parties argue that Plaintiff's unjust enrichment claim should be governed by New York law. However, Maryland law applies because the unjust enrichment claim is predicated on corporate governance issues. Concord Capital Mgt., LLC v. Fifth Third Bank, 2011 WL 10564345, at *12 (Sup.Ct. New York County).
Plaintiff's second cause of action for corporate waste and fourth cause of action for unjust enrichment are premised on the theory that Annaly transferred management assets to the Manager, which had an economic value, without receiving anything in return. As stated above, Plaintiff's characterization of the externalization as the transfer of corporate assets is simply that-his characterization. It is undisputed that the Board and the shareholders considered the projected economic value of externalizing management of Annaly before approving the externalization. Accordingly, the corporate waste and unjust enrichment claims are dismissed as unsupported.
Plaintiff argues, in his memorandum of law, that Annaly transferred “equipment, hardware, software” to the Manager, but the complaint does not contain any allegations that Annaly transferred tangible assets to the Manager without receiving consideration. And although Plaintiff argues that the externalization is unfair because Annaly is responsible for paying the Manager's business expenses, Annaly's agreement to reimburse the Manager for certain business expenses was a negotiated part of the management agreement.
Usurpation of Corporate Opportunity
In the third cause of action, Plaintiff alleges that the individual defendants usurped Annaly's opportunity to provide investment management services to third parties. Plaintiff asserts that Annaly could have established a subsidiary to provide investment management services instead of allowing the Manager to usurp this opportunity.
The Management Defendants argue that they did not usurp a corporate opportunity because the opportunity was presented to the Independent Directors. Separately, the Independent Directors argue that this claim should be dismissed because there is no allegation that they took a corporate opportunity for themselves.
In “determining whether an opportunity is a corporate opportunity, Maryland follows the interest or reasonable expectancy test,” which focuses on whether a corporation could realistically expect to seize and develop the opportunity. Independent Distributors, 99 Md.App. at 458 (internal quotations omitted); Shapiro v. Greenfield, 136 Md.App. 1, 16 (Ct.Spec.App.Md.2000). If the corporation reasonably expected to seize and develop an opportunity, it is deemed a corporate opportunity that must be presented to the corporation before a director or officer can pursue it on his or her own. Ebenezer United Methodist Church v. Riverwalk Development Phase, II, LLC, 205 Md.App. 496, 502 (Ct.Spec.App.Md.2012) (internal quotations omitted).
Plaintiff claims that the management agreement allows the Manager to provide investment management services to third parties, although Plaintiff does not identify any contract provision in particular. Presumably, Plaintiff is referring to the non-compete provision, which states that neither the Manager nor Annaly's executive officers will manage or operate “any private or public investment firm, broker dealer or real estate investment trust ... in any geographical region in which the Company engages in the Business” without Annaly's consent. Management Agreement § 3(b) and (c).
Here, I find that the Manager's ability to provide investment management services to entities outside the geographic scope where Annaly operates is not a corporate opportunity. For “a corporation to have an interest or expectancy in the opportunity, there must be some connection between the opportunity and the plans, purposes or businesses of the corporation.” R. Franklin Balotti and Jesse A. Finkelstein, Del. L. of Corp. and Bus. Org., § 4.16 (2015). In the complaint, Plaintiff does not allege that Annaly intended to expand the geographic scope of its business such that it reasonably expected to seize and develop the opportunity, which it granted to the Manager. Indeed, an opportunity is not a corporate opportunity if it “involves a geographic market in which the corporation is not doing business and has no reasonable expectancy of doing business.” James J. Hanks, Maryland Corporation Law § 6.23 (Aspen 2015); Ebenezer United Methodist Church, 205 Md.App. at 505 ; Broz v. Cellular Information Systems, Inc., 673 A.2d 148, 155 (Del.1996) (finding no opportunity if a corporation holds no interest or expectancy in the opportunity).
The Court also notes that the Manager could not act on this opportunity without Annaly's consent.
Moreover, even if it were a corporate opportunity, the opportunity was presented to Annaly. The Proxy states that the Independent Directors approved the management agreement, which specifically allows the Manager and Annaly's executives to engage in management business not within the geographic scope of Annaly's business. Because the Independent Directors demonstrate that the corporate opportunity was presented to them in the proposed management agreement, the corporate opportunity claim is dismissed.
Plaintiff's corporate opportunity claim against the Independent Directors also fails because there is no allegation that the they took a business opportunity for their own benefit. Bender v. Schwartz, 172 Md.App. at 666.
In accordance with the foregoing, it is
ORDERED that (in sequence number 001) the motion of defendants Kevin P. Brady, Jonathan D. Green, Michael Haylon, E. Wayne Nordberg, John H. Schaefer, and Donnell A. Segalas to dismiss the complaint is granted; and it is further
ORDERED that (in sequence number 002) the motion of defendants Annaly Management Company LLC, Wellington J. Denahan, Kevin G. Keyes, John A. Lambiase, and nominal defendant Annaly Capital Management, Inc. to dismiss the complaint is granted; and it is further
ORDERED that the Clerk is directed to enter judgment in favor of defendants dismissing this action.
This constitutes the decision and order of the Court.