The Maryland Court of Appeals recently ruled on a significant case regarding shareholder derivative actions, specifically focusing on the futility exception for pre-suit demands. The case, Howard Nathanson, et al. v. Tortoise Capital Advisors, L.L.C., et al., No. 51, September Term, 2025, was decided on July 14, 2026. This ruling affects shareholders seeking to initiate litigation on behalf of corporations and clarifies the conditions under which they can bypass the requirement to make a demand on the board of directors.
The court's decision is particularly important for shareholders and corporate governance. It establishes clearer guidelines on when a shareholder can argue that making a demand on the board is futile, thus allowing them to proceed with litigation without prior approval from the board.
Background
The parties involved in this case are Howard Nathanson and Gus Gordon, the shareholders, and Tortoise Capital Advisors, L.L.C., which served as the investment adviser for two closed-end funds, Tortoise Pipeline & Energy Fund, Inc. and Tortoise Energy Independence Fund, Inc. The shareholders filed a derivative action against Tortoise and the funds’ board of directors, alleging mismanagement and breaches of fiduciary duty.
The dispute arose after the funds suffered significant losses exceeding $1 billion due to poor management decisions, particularly related to their use of leverage in volatile energy markets. The shareholders did not make a pre-suit demand on the board, claiming that doing so would have been futile. However, the Circuit Court for Baltimore City dismissed their action, stating that the shareholders failed to provide sufficient facts to support their futility claim.
The shareholders appealed the dismissal, leading to a review by the Maryland Court of Appeals. The court aimed to clarify the futility exception established in a previous case, Werbowsky v. Collomb, 362 Md. 581 (2001), which governs when shareholders can bypass the demand requirement.
The Ruling
The Maryland Court of Appeals upheld the lower court's decision, affirming that the shareholders did not adequately demonstrate that a demand would be futile. The court ruled that the futility exception applies only in limited circumstances where shareholders can clearly show that a majority of the board is unable to consider a demand in good faith.
The court stated, "Futility hinges on the board’s capacity to consider a demand, not on the likelihood that the board would refuse it." This emphasizes that just because the board might be expected to reject a demand does not mean it is incapable of considering it.
Judge Gould, writing for the court, reiterated that the futility exception is narrowly defined. He noted that the shareholders' allegations did not sufficiently demonstrate that the board was conflicted or unable to act in the best interests of the corporation. The court emphasized that the allegations were speculative and did not meet the stringent requirements set forth in Werbowsky.
Impact
This ruling has significant implications for shareholders and corporate governance in Maryland. It reinforces the requirement for shareholders to make a pre-suit demand on the board before initiating derivative actions, except in very specific circumstances. The court's clarification on the futility exception means that shareholders must provide detailed and particular allegations to bypass this requirement.
The decision also highlights the importance of the business judgment rule, which protects directors from liability as long as they act in good faith and in the corporation's best interests. This ruling may deter frivolous lawsuits and ensure that boards retain control over corporate governance, thereby maintaining the balance of power between shareholders and directors.
What's Next
While the shareholders can no longer pursue this particular case, they may have limited options for appeal. The court's decision sets a precedent for future derivative actions in Maryland, and it remains to be seen how this ruling will influence similar cases moving forward. Details were not available in the court filing regarding any related cases pending.