Maryland shareholder derivative actions must be preceded by a demand on corporate directors to bring suit

Maryland’s intermediate appellate court handed down a decision on August 28, 2025, emphasizing that, in almost all circumstances, a plaintiff must make a demand on corporate directors before initiating a corporate derivative action.[1] A principle known as the “business judgment rule” holds that shareholders in a Maryland corporation ordinarily may not use the courts to override business decisions made by corporate directors.[2] This principle is codified at § 2-405.1 of the Maryland Corporations and Associations Code.

There is, however, an “extraordinary equitable device” through which Maryland shareholders, in limited circumstances, may enforce a corporate right if the corporation itself has failed to assert its rights on its own behalf.[3] This may be accomplished through a “corporate derivative action,” which is essentially a suit by one or more shareholders of a corporation to compel the corporation to sue to protect its own rights, while at the same time also being a suit by the corporation against one or more defendants that are harming the corporation.[4]

Because a corporate derivative suit intrudes on the board of directors’ managerial control of the corporation, a shareholder bringing such a suit is required first to make a demand that the board of directors take action before initiating a shareholder derivative suit.[5]  The purpose of requiring this pre-suit demand is to afford the directors of the corporation an opportunity to exercise their reasonable business judgment to decide whether the corporation itself should bring suit.[6]

Required Internal Investigation

Once shareholders make a demand on the corporation, the corporation’s board of directors is required to conduct an investigation into the allegations in the demand and determine whether pursuing the demanded litigation is in the best interests of the corporation.[7] Often, the board will appoint a special litigation committee of independent directors to decide whether the corporation should pursue the litigation.[8] If the board refuses the demand, the complaining shareholder may then bring a lawsuit (commonly referred to as a “demand refused” derivative action).[9] A corporate board’s decision to deny a request to bring litigation would benefit from the same “business judgment rule” presumption as any other decision of the board.[10] In order to establish the right to proceed with a derivative action, the shareholder must overcome a presumption that the board’s decision not to proceed with litigation was the product of proper business judgment.[11]

Demand Excused Derivative Actions

In narrow circumstances, courts have allowed shareholders to bring a derivative action without first making a demand on the board of directors. These are called “demand excused” derivative actions.[12]  This type of derivative action – which requires showing that making a prior demand on the board of directors would have been a futile exercise –  was analyzed by the Supreme Court of Maryland in its 2001 decision in Werbowsky v. Collomb.[13]

In that case, the court established a narrow standard for allowing “demand excused” derivative actions, holding that the requirement for a prior demand should not be excused simply because a majority of the directors approved or participated in some way in the challenged transaction or board decision, or on the basis of generalized or speculative allegations of director conflicts.[14]

The court concluded that, although “demand excused” derivative actions were not entirely foreclosed, they are strictly limited to situations in which either a demand (or awaiting response to a demand) would cause irreparable harm to the corporation, or 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.[15]

In short, a demand is required in nearly every derivative action brought in Maryland. The requirement to make a prior demand is not excused simply because the majority of a corporation’s directors approved or participated in some way in the challenged transaction or decision, or on the basis of generalized or speculative allegations that the directors are conflicted or are controlled by other conflicted persons, or would be hostile to bringing a lawsuit.[16]

The Importance of Making a Demand Before Filing a Lawsuit

In its Nathanson decision[17] handed down in August 2025, the Maryland Appellate Court adhered to the Supreme Court of Maryland’s 2001 ruling in Werbowsky, but also addressed a situation in which the party seeking relief attempts to cure an earlier failure to make a demand, by sending a demand after the trial court has dismissed the asserted claims for failing to make a demand. In the Nathanson case, a lawsuit was first brought in federal court by two shareholders against an investment advisory firm and its directors, alleging that the defendants engaged in reckless borrowing practices leading to substantial losses.[18]

The shareholders alleged in their federal lawsuit that applicable Maryland law excused them from making a pre-suit demand on the grounds that making such a demand under the circumstances of the case would be futile.[19] The federal lawsuit was dismissed because a forum selection clause in the firms’ bylaws provided that disputes were to be adjudicated before the Circuit Court for Baltimore City.[20]

Following dismissal of the federal action, the shareholders brought essentially the same suit in the Circuit Court for Baltimore City.[21] On motion, the Circuit Court thereafter dismissed the state court claim, for reasons that included a failure to make pre-suit demand.[22] The shareholders noted an appeal, and a few weeks after the Circuit Court entered its order dismissing the case, the shareholders sent a demand letter to the board.[23]

The board formed a litigation committee, and pursuant to its investigation, notified the shareholders that the committee rejected the litigation demand.[24] The shareholders then brought a new lawsuit in the Circuit Court for Baltimore City, reasserting their derivative claims and asserting that the board wrongfully refused the demand.[25] In their appeal, the defendants argued that, by making the litigation demand after the dismissal of their derivative action, the shareholders rendered their second lawsuit moot.

The court applied the Werbowsky holding and found that the allegations in Nathanson did not satisfy the “very limited exception” to the demand requirement, and did not “clearly demonstrate, in a very particular manner” that “a majority of the directors are so personally and directly conflicted or committed to the decision[s] 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.”[26]

[1] Howard Nathanson, et al, v. Tortoise Capital Advisors, LLC, et al, 2025 Md. App. LEXIS 733 (2025).

[2] Boland v. Boland, 423 Md. 296, 328 (2011); Nathanson, 2025 Md. App. LEXIS 733.

[3] Werbowsky v. Collomb, 262 Md. ___ (599 (    ); Mona v. Mona Elec. Grp., Inc., 176 Md. App. 672, 698 (2007).

[4] Wasserman v. Kay, 197 Md. App. 586, 610 (2011).

[5] Oliveira v. Sugarman, 451 Md. ___, 223 (   ).

[6] Id.; quoting Kamen v. Kemper Fin. Serv., Inc., 500 U.S. 90, 96 (1991).

[7] Shenker v. Laureate Educ., Inc., 411 Md. ___, 344 (   ).

[8] Boland, 423 Md. at 332.

[9] Shenker, 411 Md. at 344; quoting Bender v. Schwartz, 172 Md. App. 648, 666 (2007).

[10] Sugarman, 451 Md. at 223.

[11] Id.

[12] Boland, 423 Md. at 331, n.25.

[13] Werbowsky v. Collomb, 362 Md. 581 (2001)

[14] Id., at 618.

[15] Id., at 620.

[16] Id., at 618.

[17] Howard Nathanson, et al, v. Tortoise Capital Advisors, LLC, et al, 2025 Md. App. LEXIS 733 (2025).

[18] Id., p. (4).

[19] Id., p. (5).

[20] Id., p. (6).

[21] Id., p. (7).

[22] Id., p. (13).

[23] Id., p. (14).

[24] Id.

[25] Id.

[26] Nathanson, 2025 Md. App. LEXIS 733, quoting Werbowsky, 362 Md. at 620.