WPC4w r X-{InSD"/:S^=K '@~ʹtYjOl 0$* ˵BH<K|$5 ,zZqoiah a+0Fꓭ1qG Dgi+}~hj bZMfk^%+ M 6'R 1jkt쭴, `]/5c]߯SUg@ 䡎vtd$H`0${͏LZ\Y5u_=;W*Cj|ɍ )OGK1YǣiBWM} ç;,j4rOH9M'X֬#2|\Qw'tTƘ:7Cc֤ (ZX"Y=Gm*C!9}UO8'Ů8L[nyۇ h ںզb-MfvkVw-@ג#l U N- %{ 0( ^ w 4   m N 1 72~ 1u 72% 0'cW 0 w 11 72 1 72w 1 728 1j 0l 0D] 72 1 72p 1 72) 0 [ 0  0  0 9 0  0  0 D 1 72 1 72N 1 72 19 72 1 72rv B 1*$ 72$ 1$ 72j% 1% 72#& 1U& 72& 1' 72' 1' 72N(( 0x* 0l+ 0], 0K- 06. 0/ 00 00 01 02 03 0a4 0=5 06 06 07 08 0\9 0&: 0; 0; B< 0< 0= 0> 0\? 0+@ 0@ 00A 0<A 0,B 0>B 0v(C 0`C 0`C 0`^D 0`D 0`E 08~E 0E 02F 0F 0:G 0YG 0_IH 0 H 0jI 0K B*L D/L D+L 0$M D/N 0N 06O 0O 0:P 0^Q 0<{QU6QU>QU*+RUR 1sTDT/>VmWXC\\]_Ha*c"gXj^lmnp 1Br 72r 72r-ssguAdobe PDF0(hH  Z6Times New Roman RegularX($p8 {bH8:i+003|x#U0\CEKSY_ekqAutoList11.(a)1.1.1.1.1.1. 1.3#37=CIQYag1.a.i.(1)(a)(i)1)a)i)(;3$2#  0  .3  0  (O;$0  2#  a  .3  0` (#(#( CEMU]emu}AutoList2(a)(a)(a)(a)(a)(a)(a)(a)(a)(UhCEKQW]cioAutoList31.1.1.1.1.1.1.1.1. (ehCEKQW]cioAutoList41.1.1.1.1.1.1.1.1.(hCEKQW]cioAutoList61.1.1.1.1.1.1.1.((3$ !      0  (#$  0  1. e (uhCEKQW]cioAutoList5I.I.I.I.I.I.I.I.I."#$%&'h,CEIMQUY]aAutoList7""""""""i)1)a) ("(b$0  0` (#(#2#   .3  0 ` (#` (#(xir$0  0` (#(#0 ` (#` (#2#(  0  )3  0 (# (#($0  0` (#(#0 ` (#` (#0 (# (#2#(  a  )3  0h(#(#(F$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#2#(   )3  0h(#h(#($0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#2#  0  )3  0(#(#({$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#0(#(#2#  a  )3  0p(#(#(F$0  0` (#(#0 ` (#` (#0 (# (#0h(#(#0h(#h(#0(#(#0p(#(#2#     )3  0p(#p(# 0CEKQW]cioAutoList8i.i.1.i.i.i.i.i.)i.(hCEKQW]cioAutoList91.1.1.1.1.1.1.1.+1.(գEGMSY_ekqAutoList10I.I.I.I.I.I.I.I.-I.0EGMSY_ekqAutoList11I.A.I.I.I.I.I.I./I. $    5    _ԀTeloshasarguedthatallremainingclaimsareessentiallyderivativeandshouldbe e dismissed,buttheCourtdeclinestosoholdhere.0JEGMSY_ekqAutoList12A.A.A.A.A.A.A.A.2A. l $    7    _ԀPlaintiffsalsosuggestedaproblemwithMr.McGoniglereceivingacopyofthe e complaintinthisactionbeforethe1st_SLC_Ԁwasformed,buttherewasnoevidencetosupportany N untowardmotiveortaint. $    9    _ԀTheindependenceofthe1st_SLC_Ԁanditslegaladvisorsisnotchallenged. 8 $    10    _ԀThisanalysisisconsistentwiththestatementinBenderv.Schwartz,172Md.App. e 648,666(2007): Bymakingademand,theshareholder(s)aredeemedtohavewaivedany N claimtheymightotherwisehavehadthattheboardcannotindependentlyactonthedemand. 7 ScatteredCorp.v.ChicagoStockExchange,Inc.,701A.2d70,71,74(1997).Theplaintiffmay   stillallege,however,thattheboardinfactdidnotactindependentlyorthatdemandwaswrongly   refused.Bender,172Md.App.at666(citingScatteredCorp.,701A.2dat71)(emphasisin  original).0EGMSY_ekqAutoList13A.A.i.A.A.A.A.A.7A."#$%&'hEGKOSW[_cAutoList14"""""""")1)a)9(""#$%&'hEGKOSW[_cAutoList15"""""""")1)a);(""#$%&'hEGKOSW[_cAutoList16"""""""")1)a)=(""#$%&'hEGKOSW[_cAutoList17"""""""")1)a)?(""#$%&'hEGKOSW[_cAutoList18"""""""")1)a)A("  $    13    _ԀTheunexecutedDraftProxyAgreementwithRespecttoCapitalStockofTelos e Corporation,datedSeptember19,2006,pursuanttowhichbothAdm.TuttleandGen.Harris N weretoserveasproxiesforJohnPorter,byitstermsrequiresindependentjudgmentandcannot 7 formthebasisforavalidbiasclaim.DraftProxyAgreementat7(September19,2006).2J+M 0_level1  X 2( ` hp x 223  ..  5+ ` hp x 5  2G+M 0_level2   /%` ` hp x /23  ..  5+ ` hp x 5  2D+M 0_level3   ," hp x ,23  ..  5+ ` hp x 5  2A+M 0_level4  ` ) hp x )23  ..  5+ ` hp x 5  2>+M 0_level5   &hhp x &23  ..  5+ ` hp x 5  2;+M 0_level6   #p x #23  ..  5+ ` hp x 5  28+M 0_level7  h  p x 23  ..  5+ ` hp x 5  25+M 0_level8   pp x 23  ..  5+ ` hp x 5  22+M 0_level9    x 23  ..  5+ ` hp x 5  2JM 0_levsl1  X 2( ` hp x 223  Ԁ  5+ ` hp x 5  2GM 0_levsl2   /%` ` hp x /23  Ԁ  5+ ` hp x 5  2DM 0_levsl3   ," hp x ,23  Ԁ  5+ ` hp x 5  2AM 0_levsl4  ` ) hp x )23  Ԁ  5+ ` hp x 5  2>M 0_levsl5   &hhp x &23  Ԁ  5+ ` hp x 5  2;M 0_levsl6   #p x #23  Ԁ  5+ ` hp x 5  28M 0_levsl7  h  p x 23  Ԁ  5+ ` hp x 5  25M 0_levsl8   pp x 23  Ԁ  5+ ` hp x 5  22M 0_levsl9    x 23  Ԁ  5+ ` hp x 5  2JM 0_levnl1  X 2( ` hp x 223   5+ ` hp x 5  2GM 0_levnl2   /%` ` hp x /23   5+ ` hp x 5  2DM 0_levnl3   ," hp x ,23   5+ ` hp x 5   d2AM 0_levnl4  ` ) hp x )23   5+ ` hp x 5  2>M 0_levnl5   &hhp x &23   5+ ` hp x 5  2;M 0_levnl6   #p x #23   5+ ` hp x 5  28M 0_levnl7  h  p x 23   5+ ` hp x 5  25M 0_levnl8   pp x 23   5+ ` hp x 5  22M 0_levnl9    x 23   5+ ` hp x 5  0.Normal<:Definition T<AA:Definition L , 5+ ` hp x 5  5+ ` hp x 586Definition(''&H1   XXX   (&H2 XXX (&H3 XXX (&H4 XXX XXX(&H5 XXX (&H6 XXX 20Address8MM6Blockquote , , 5+ ` hp x 5   5+ ` hp x 5,*CITE,dl*CODEK<6X9`(Courier NewKXXXS\  `&Times New RomanS42Emphasis64Hyperlink    <:FollowedHype    4go2Keyboard K<6X9`(Courier NewKXXXS\  `&Times New RomanS <:Preformatted/%  ,Kk %#/K<6X9`(Courier NewKXXXS\  `&Times New RomanS/%  ,Kk %#/<:zBottom of 7u(X7  ?%2A`Arial?  XXXS\  `&Times New RomanS7v(X7&  d dt)1dxd'dxd<:zTop of For7x(X7  ?%2A`Arial?  XXXS\  `&Times New RomanS7v(X7t)2dxd0KS.SampleK<6X9`(Courier NewKS\  `&Times New RomanS0.Strong 8dl6TypewriterK<6X9`(Courier NewKXXXS\  `&Times New RomanS42Variable: 8HTML MarkupB      2 0CommentB  <6X9`(Courier New\  `&Times New Roman%2A`Arial  $    16    _ԀItisworthyofnotethattheSteincourtreadZapatatorequireatwopronganalysisonly e indemandexcusedshareholdercases.Asforcaseslikethisone,eventheZapataanalysis N concedesmoredeferencetothewilloftheboardofdirectorsbecausetheshareholdersnever 7 acquiredtheabilitytosue.Stein,531_F.Supp_.at692.(EGMSY_ekqAutoList20I.I.I.I.I.I.I.I. : $    18    _ԀTheSecondAmendedComplaintalsocontainedaCountVagainstJohnPorterfor e shareholderoppression,buttheCountwasdismissedwithprejudicebythisCourtsOrderdated N June6,2007. % $    19    _ԀTheClassDdirectorsare,ofcourse,Seth_Hamot_ԀandAndrewSiegel,bothofwhomare e principalsofCostaBravaand,consequently,plaintiffsinthisaction. | $    1    _ԀCostaBravaownsapproximately15.9%oftheoutstanding12%Cumulative  ExchangeableRedeemablePreferredstock( _ERPs_)in_Telos_.SecondAmendedComplaint47  (Feb.27,2007).  $    20    _ԀCostaBravacitestheCourttoajuryverdictintheVirginialitigationfindingthat e Telosoutsideauditorsaidedandabettedbreachesoffiduciarydutiesbyitsofficersand N directors.Thisfindingisrecentandwasnotincludeddirectlyintheclaimswhichthe2nd_ SLC_  7 wasauthorizedtoinvestigate.TotheextentthatitmayindicatemisstatementsofTelos_ ERPs_    obligationsinthecompanyspublicfilings,plaintiffshaveraisedtheissuehere.TheRevised    Reportdoesnotaddressthatissue,presumablybecauseanysuchmisstatementisnotmaterialto e plaintiffsafterTelosJune2005admissionoferror. 9 $    21    _ԀThetermsofthesubordinatednotewerenotnegotiatedbyPorterdirectly,butratherby e PerryChapmanofGraphiteCapital,aEuropeanleveragedbuyoutfirm,accordingtoPorterand N Wood.  $    23    _ԀAsthe2nd_SLC_ԀnotedinitsRevisedConclusions,thepresentlawsuitservedtoimpair e fullaccesstowitnesses,specificallyTelosformerdirectors,butintheCourtsjudgmentthisis N notalegitimategroundtocriticizetheinvestigation.RevisedConclusionsat1.  $    24    _ԀNotonlydidthe2nd_SLC_Ԁrenderconclusionswhichcomportwithreasonablebusiness e judgment,butitalsomadeimportantrecommendationstoensurebettergovernancepracticesin N thefutureandtoprotecttheinterestsofallTelosstakeholders.RevisedConclusionsat4.  $    8    _ԀGen.HarristestifiedinhisdepositionthatthefirstthingheandAdm.Tuttleaskedtheir e lawyerstodowastodetermineifCEOJohnWoodwasguiltyofthechargesagainsthimmade N bytheplaintiffs.Gen.HarrisDepositionat5657.IntheCourtsview,thisinquirywasdirectly 7 linkedtoplaintiffsderivativeclaims.  $    11    _ԀThereisalackofclarityinthecaselawastowhichanalysisaMarylandcourtwill e apply.Underdifferingcircumstances,federalcourtsfacedwiththisdeterminationhavegonein N  differentdirections.CompareGrossmanv.Johnson,89_F.R.D._Ԁ656,664(D.Mass.1981)and e _Strougo_ԀonBehalfofBrazilFund,Inc.v._Padegs_,1_F.Supp_.2d276,281(_S.D.N.Y._Ԁ1998)with N _Rosengarten_Ԁv.Buckley,613_F.Supp_.1493,1504(D.Md.1985).TheCourtbelieves,however, 7 thattheMarylandappellatecourtshavenowcomedownontheAuerbachsideofthedebate.See   _Werbowsky_Ԁv._Collomb_,362Md.581(2001);Benderv.Schwartz,172Md.App.648(2007).  $    4    _ԀTheRevisedReportconcludedthatitwasnotinthecompanysbestintereststosupport e theplaintiffsderivativeclaims,thattheadditionalexpenseanddistractioninvolvedwasnot N justifiedandthattheclaimswouldnotlikelyresultinsignificantnetrecoveryforTelos.Revised 7 Reportofthe2ndSpecialLitigationCommittee41(July20,2007)(hereinafterRevisedReport). N $    6    _ԀThomas_McGonigle_Ԁtestifiedthat_LeClair_ԀRyanhadbeenrecommendedalsobyWilliam e _ McLucas_ ,formerdirectorofdivisionofenforcementatthe_ SEC_ .Mr._ McLucas_ Ԁcurrentlyworks N at_ Wilmer_ ԀHale.HearingTestimonyofMr._ McGonigle_ Ԁ(Nov.21,2007).  $    15    _ԀThe2nd_SLC_sdelegationofthedirectcontactwithintervieweestoitslegaladvisors e didnotrenderitsprocessunreasonable,accordingtoProfessorFairfaxstestimonyandExpert N WitnessReport.FairfaxReport7. $    14    _ԀAsindictedsupra,atpage1213,theRevisedReportaddressedthesignificantissues e raisedbyplaintiffsandwasnotundulylimitedinscope.  $    17    _ԀTheCourtdoesnotfindthatthe2nd_SLC_ԀhadanobligationtointerviewMr.Borlandor e representativesoftheRobertTrentJonesGolfClubeither.Ithadthefactsbeforeitconcerning N nondisclosureofhismembershipandhispersonalandbusinessuseofit.  $    22    _ԀTheplaintiffscriticizedthe2nd_SLC_Ԁforfailingtokeepminutesorsummariesoftheir e interviews,buttheCourtfindsthattherecordhereisadequatetosupportthe2nd_SLC_sfindings N andconclusions.(eEGMSY_ekqAutoList19I.I.I.I.I.I.I.I.I.I. $    3    _ԀTheboardsresolutioncreatingthe2nd_SLC_ԀisdatedOctober19,2006.  $    12    _ԀSteinv.Baileyisinstructiveastotheattitudeofthemembersofthe2nd_SLC_, e particularlyAdm.Tuttle.Thatdecisionspecificallyfindsan_SLC_sdeterminationto putthis N episodebehindittohavebeenmadeingoodfaith.Id.at695. ] $    2    _ԀWynnefieldPartnersownsapproximately4.1%oftheoutstanding12%Cumulative  ExchangeableRedeemablePreferredstock( _ERPs_)inTelos.SecondAmendedComplaint48  (Feb.27,2007). !  _8BXXdd8OCOSTABRAVAPARTNERSHIPIII,  *0  INTHE(#(# L.P.,etal.  Ѐ   `     h   *0  CIRCUITCOURT(#(#   Plaintiffs, k Ѐ0 ` 0 ` (#` (#   h   *0 (# (#FORT(#(# v. =    0 `     h   *0` (#` (#BALTIMORECITY& v(#(# _TELOS_ԀCORPORATION,etal.  _    `     h   *0  Part20 H(#(#   Defendants.  1     `     h   *0  CaseNo.:24C05009296  (#(#    `     "#$%&'((,x3  *0 ` *0 ` (#` (#*0 (# (#*0h(#(#*0h(#h(#*0(#(#*0p(#(#*0p(#p(#*0 (#(#*0x (# (#* x(#x(# _TELOS_ԀCORPORATION0  0h(#(#0h(#h(#*n (#(#   CounterPlaintiff,0  0h(#(#0h(#h(#*@(#(#  )(0x "#$%&'(! !"3"  32  v  .3  0     `     h   *3݌b(#(# Ќ  COSTABRAVAPARTNERSHIPIII,0  *4(#(# L.P.     `     h   *    CounterDefendant.0  0h(#(#0h(#h(#(#(#  A"#$%&'((x0)  *0 ` *0 ` (#` (#*0 (# (#*0h(#(#*0h(#h(#*0(#(#*0p(#(#*0p(#p(#*0 (#(#*0x (# (#*qx(#x(# @ MEMORANDUMANDOPINION  C  -(գ8xA"#$%&'("3"  3= 2գ  I  .3  0    Background3=  ݌f(#(# Ќ    TheinstantlitigationwasinitiatedinthisCourtonOctober17,2005.Theplaintiffwas  8 CostaBravaPartnershipIII,L.P.( CostaBrava),aDelawarelimitedpartnership,_ #  1      _Ԁandthe " !  defendantswere_Telos_ԀCorporation( _Telos_),aMarylandcorporation,andcertainofitsofficers $# _anddirectors.WynnefieldPartnersSmallCapValue,L.P.( Wynnefield), #  2      ׀wasgrantedleaveto   interveneasanadditionalpartyplaintiffonMay24,2006,andanAmendedComplaintwasfiled  onMay31,2006,includingWynnefield.ASecondAmendedComplaintwasfiledonFebruary T 27,2007.Itcontainedsevencountsandajurydemand.FollowingtheCourtsconsiderationof & v amotiontodismiss,CountsI,IIandVweredismissedbyOrderofJune6,2007,andthe  H litigationcontinuedinanticipationofaFebruary2008trialdate.      Fromitsinception,theissuesinthiscasehavebeenhotlycontested,andtheCourthas   conductedcountlesshearingsonrequestsforpreliminaryinjunction,emergencyrelief,including n  arequestfortheappointmentofareceivertomanageTelos,discoverydisputesandrequestsfor @ protectiveorders.RelatedlitigationhasbeeninitiatedinMontgomeryCountyCircuitCourt,the b FairfaxCounty,VirginiaCircuitCourtandinthisCourt.Plaintiffs,whoclaimtheyareowedat 4 least$79millioninaccruedandunpaiddividendsontheirpublicpreferredstockinTelos,see  SecondAmendedComplaint52,havebeenrelentlessintheircomplaintsaboutthe  managementandcontrolofTelosanditsallegedeffortstobenefittheholdersofitscommon Z stockattheexpenseoftheholdersofthepublicpreferredstock.Teloshasbeenequallyadamant ,| initsdefenseofitscorporateacts. N   Priortofilingthislitigation,plaintiffsmadedemandonTelosboardofdirectorsbyletter !   datedSeptember9,2005.AseconddemandletterwasdirectedtotheTelosboardonDecember #" 27,2005,aftersuitwasfiled.TelosboardestablishedaSpecialLitigationCommittee( 1st t% $ SLC)onDecember22,2005,composedofoutsidedirectorsBruceStewartandThomas F'"& O e   Owsley,toinvestigateCostaBravasclaims.ABoardResolutionwasadoptedandthe1stSLC e engagedcounselfromtheFulbright&Jaworskilawfirmasindependentlegaladvisors.A 7 significantamountofworkwascompletedbythe1stSLCanditscounsel,withanearlyfinal   draftreportintheworksonAugust16,2006,whenStewart,Owsleyandfourotherboard  v memberssuddenlyresigned.Itappearsthatthe1stSLCsfinaldraftreport,inconjunctionwith  H anInterimReportissuedonMay12,2006,wouldhaverecommendeddismissalofplaintiffs    derivativeclaims,butnofinaldecisionwasmade. Q    WhenTelosboardwasreconstitutedinthefallof2006,itestablisheda2ndSLC #  composedofindependentdirectorsViceAdmiral(ret.)JerryO.TuttleandLt.General(ret.)  BruceR.Harris. #  3      ׀The2ndSLCengagedlegalcounselfromtheLeClairRyanlawfirmtoassistit b initsinvestigativeefforts.Buildingonthesubstantialinvestigativeworkcompletedbythe1st 4 SLCanditsattorneys,the2ndSLCperformedadditionalworkandreviewedthousandsof k documents.ItreachedapreliminaryconclusiononMay2,2007,torecommenddismissaland = issuedaRevisedReportonJuly20,2007,findingnoevidencetosupportplaintiffsderivative  claims.y #  4       |   OnAugust24,2007,Telosfiledthepresentmotiontodismissplaintiffsderivative N claimsonthebasisoftheRevisedReportandrecommendationsofthe2ndSLC.Theissueshave !   beenfullybriefedandarguedbycounselfortherespectiveparties.TheCourtconductedtwo W#" evidentiaryhearings,onNovember21,2007,andDecember4,2007,atwhichitreceived )% $ testimonyfrombothLeClairRyanlawyers,ThomasJ.McGonigleandAndrewJ.Frisch,expert e opiniontestimonyfromProfessorLisaFairfaxoftheUniversityofMarylandSchoolofLaws 7 BusinessLawprogramandadocumentaryrecordofliterallyhundredsofpages.Thepartiesalso   designatedportionsofdepositiontestimonyfortheCourtsreviewandhighlightedthat  v testimonyduringthecourseoftheirargumentsonthemotion.  H   Thus,theCourthasbeforeitawelldevelopedandrathercompleterecordofthe    investigativeworkofthe1stSLCand2ndSLC.Thequestionpresentedatthistimeiswhetherthe Q  CourtshoulddefertothebusinessjudgmentofTelosboardanddismissplaintiffsderivative #  claimswithoutatrialontheirmerits.  "3"  3Z%2գ  II  .3  0    PlaintiffsDerivativeClaims3Z%%݌b(#(# Ќ    PlaintiffsSecondAmendedComplaintcontainstwoderivativeclaims.CountVIalleges 4 breachesoffiduciarydutiesbytheTelosdirectordefendants,RobertMarino,JohnWood, k GeoffreyBaker,DavidBorland,NormanByers,FredIkl,LanghorneMotleyandMalcom = Sterrett.CountVIIallegesbreachesoffiduciarydutiesbytheTelosofficerdefendants,Michael  Flaherty,RobertMarino,EdwardWilliams,JohnWood,JohnMcDuffie,MicheleNakazawaand | RichardTracy. N   Besidesgenerallyallegingthatthenameddirectorandformerdirectordefendantsfailed !   toactingoodfaithandinthebestinterestsofthecorporation,plaintiffsmakespecificclaims W#" thatwillbediscussedinfraatpages2133inmoredetail,butwhichessentiallychargethe )% $ defendantdirectorswithseveralschemestodivertTelosassetstoJohnPorterandTelos &"& managementwhilecontendingthatthecompanywasunabletopaydividendstotheERPs (h$( holdersortoproceedwithredemptionoftheirpublicpreferredshares. *:&*   SimilarclaimsaremadeabouttheTelosofficersandformerofficersinCountVII.A e consistentthemeoftheSecondAmendedComplaintisrepeated,namelythatthedirectorsand 7 officersabdicatedtheirresponsibilitiesandpermittedTeloslargestinvestor,JohnPorter,andits   CEO,JohnWood,tocontrolthecorporation.  v   TheCourtmustdetermineherewhetheritwasunreasonableforthe2ndSLCtodeclineto  H pursueplaintiffsclaims.    "3"  3-2գ  III  .3  0    TheCourtsStandardofReview3--݌Q (#(# Ќ    Thecriticalissue,whichhaspermeatedallofthepartiesargumentstotheCourtand #  coloredtheiranalysis,istheappropriatestandardofreviewtobeappliedbyaMarylandcourtin  passingondefendantsmotiontodismiss.Thedeterminationofthisquestionwilllikewise b establishtheproofburdenstobemetbythepartiesandmaywellbeoutcomedeterminativeof 4 themotion. k   ThepartiesherehavefocusedontwoverydifferentstandardsandurgedtheCourtto = adoptoneortheother.XBXXXAsStephenM.Bainbridgeexplainsinhisarticle, TheBusiness  JudgmentRuleasAbstentionDoctrine:#XBXXXB1#Ԁ | XBXXXB   Twoconceptionsofthebusinessjudgmentrulecompeteinthecase N law.Oneviewsthebusinessjudgmentruleasastandardofliability  7 underwhichcourtsundertakesomeobjectivereviewofthemeritsof !   boarddecisions.Thisviewisincreasinglywidelyaccepted,especially n" ! bysomemembersoftheDelaware[S]upreme[C]ourt.Theother W#" conceptiontreatstherulenotasastandardofreviewbutasadoctrine @$# ofabstention,pursuanttowhichcourtssimplydeclinetoreview )% $ boarddecisions.#XBXXXB1# &!%  #2 2 21XBXXXBStephenM.Bainbridge,#XBXXXB)5#XBXXXBLawandEconomicsResearchPaper,"TheBusinessJudgmentRuleas '#' AbstentionDoctrine"2(2003)#XBXXXB5#XBXXXB.Thisphilosophicaldisputeisattheheartofthedebate )Q%) presentlybeforetheCourt.#XBXXXBK6# +#'+ Ї  Plaintiffsassertthatthemostappropriatestandardofreviewisthatarticulatedbythe e SupremeCourtofDelawareinZapataCorp.v.Maldonado,430A.2d779(Del.1981).The 7 CourtadmitsthatthereismuchtoadmireintheZapataopinion.Itforthrightlycharacterizesthe   realtensionbetweenacorporationsuseofanindependentSLCtoridthecorporationoftime  v consumingandexpensiveshareholderlitigationwithoutmeritandtheneedtoprotect  H shareholdersrightstopolicedirectorsactionsthroughderivativelitigation.Asexplainedby    theDelawareSupremeCourt: Q       Attheriskofstatingtheobvious,theproblemisrelatively #  simple.If,ontheonehand,corporationscanconsistentlywrestbona    fidederivativeactionsawayfromwellmeaningderivativeplaintiffs  throughtheuseofthecommitteemechanism,thederivativesuitwill y losemuch,ifnotall,ofitsgenerallyrecognizedeffectivenessasan b intracorporatemeansofpolicingboardsofdirectors.If,ontheother K hand,corporationsareunabletoridthemselvesofmeritlessor 4 harmfullitigationandstrikesuits,thederivativeaction,createdto  benefitthecorporation,willproducetheopposite,unintendedresult. k Itthusappearsdesirabletoustofindabalancingpointwherebona T fidestockholderpowertobringcorporatecausesofactioncannotbe = unfairlytrampledonbytheboardofdirectors,butthecorporation & canriditselfofdetrimentallitigation.   : !:/:Id.at78687(citationsomitted). |   Whilenotconsideringthe interesttaintoftheboardmajoritywhoselectstheSLCaper N selegalbartothedelegationoftheboardspowertoanindependentcommitteecomposedof !   disinterestedboardmembers,theDelawarecourtfoundsufficientriskintherealitiesofthe W#" situationtojustifycautionbeyondadherencetothetheoryofbusinessjudgment.Inotherwords, )% $ theinherentstructuralbiasintheSLCmechanismcallsformorethanmeredeferencetothe &"& businessjudgmentrule. (h$(   Asaconsequence,theZapatacourtfashionedatwopronganalysis.Thefirstprong *:&* requirestheChanceryCourttoinquireintotheindependenceandgoodfaithofthecommittee e andthebasessupportingitsconclusions.Theburdenofproofatthisstageistobebornebythe 7 corporation.Ifnotsatisfiedwiththeproofonanyoftheseissues,theChanceryCourtistodeny   themotiontodismiss.Ifthecorporationmeetsitsburdenofproof,theChanceryCourtisto  v applyitsownindependentbusinessjudgmentindeterminingwhetherthemotionshouldbe  H granted.Whenappropriate,theChanceryCourtistogivespecialconsiderationtomattersoflaw    andpublicpolicyinadditiontothecorporationsbestinterests.Id.at78889. Q    UnlikeDelaware,Marylandhasastatutorybusinessjudgmentrule,codifiedasMaryland #  CodeAnnotated,CorporationsandAssociationsArticle,2405.1(2007),whichestablishesa  presumptionthatcorporatedirectorsactinaccordancewiththebestinterestsofthecorporation. b Ourappellatecourtshaveconsistentlydeferredtothebusinessjudgmentofcorporateboardsof 4 directors.See,e.g.,Werbowskyv.Collomb,362Md.581,61819(2001);Benderv.Schwartz, k 172Md.App.648,66668(2007).Recognizingsuchdeference,thecircuitcourtssittingin = businesscaseshavefollowedsuit.See,e.g.,Hudsonv.PrimeRetail,Inc.,No.24C035806,  2004WL1982383,at*11(8thCir.Md.April1,2004);SekukGlobalEnter.ProfitSharingPlan | v.Keveaides,Nos.24C03007496,24C03007876,24C03008010,2004WL1982508,at N *3(8thCir.Md.May25,2004);Jasinoverv.RouseCo.,No.13C0459594,2004WL3135516, !   at*9(5thCir.Md.November4,2004). W#"   Recognizingthatshareholderderivativesuitsaregovernedbythestateofincorporation, )% $ Telos,aMarylandcorporation,insiststhatitscorporateactsareentitledtobusinessjudgment &"& deference.ThisextendslogicallytothejudgmentofanindependentSLCtoterminatesuch (h$( litigationinthecorporationsbestinterests.Telosarguesthattheappropriatestandardofreview *:&* isthatsetforthinademandrefusedcontextbyMarylandsintermediateappellatecourtin e Benderv.Schwartz,172Md.App.648(2007): 7    [A]courtreviewstheboardsinvestigationunderthebusiness   judgmentrule,deferringtothedecisionoftheboardorcommitteenot  topursuelitigationunlessthestockholderscanshoweitherthatthe  v boardorcommitteesinvestigationordecisionwasnotconducted  _ independentlyandingoodfaith,orthatitwasnotwithintherealm  H ofsoundbusinessjudgment.Thecourtaskswhetheranyrational  1  businesspersoncouldhavereachedthatresult,proceeding    independentlyandingoodfaithwiththebestinterestsofthe h  corporationinmind.Astockholdermustshowmorethanmere Q  suspicionsandmuststateaclaiminparticular,ratherthanconclusory :  terms. Theburdenisonthepartychallengingthedecisionto #  establishfactsrebuttingthepresumptionthatthedirectorsacted    reasonablyandinthebestinterestsofthecorporation.    M LLId.at66667(internalcitationsomitted). b   IntheCourtsjudgment,theMarylandcasescitedaboveindicatethatMaryland 4 corporatelawfollowstheabstentiondoctrinelineofcaseswhenfacedwithevaluatingcorporate k directorsbusinessjudgment.Althoughdecidedlypositionedonthatsideofthephilosophical = debate,however,itisnotclearhowmuchdeferenceisowedtothedecisionofanSLCto  terminateshareholderlitigation.Whileitappearstobeaccuratethatamajorityofcourtsaccept | thesocalled speciallitigationcommitteedefensetoshareholderderivativeclaims,thatdoes N notmeanthattheywillturnablindeyetotheproblemsinherentinthescheme.Inthejudgment !   ofthisCourt,ithasaspecialobligationtobasesuchanimportantdecisionasthatpresentedhere W#" onanadequaterecordandtoprovideplaintiffswithasufficientopportunitytoraiselegitimate )% $ challengestotheSLCsindependenceandinvestigativeefforts.AstheCaliforniaappellate &"& courtnotedinDesaigoudarv.Meyercord,108Cal.App.4th173,187(2003),thecourtsscrutiny (h$( ofindependenceandreasonablenessisnotaperfunctoryone.ThisCourt,althoughfunctioning *:&* withinthebusinessjudgmentdeferenceschemeadoptedbytheMarylandappellatecourts,will e notgrantsuchdeferencewithoutacloseexaminationoftheevidenceontheissuesbeforeit.The 7 Courthasnointerestininterferinginthebusinessandaffairsofacorporation,managedunder   thedirectionofitsboardofdirectors.TheCourtmusttakeseriously,however,anyevidencethat  v continuationofthelitigationisactuallyinthecorporationsbestinterests.  H   TheCourt,therefore,findsthatplaintiffsbeartheburdenofproofontheissuesof    independence,goodfaithandreasonableness.Iftherecordsupportsthe2ndSLCsRevised Q  Reportandrecommendations,theplaintiffsderivativeclaimswillbedismissedwithprejudice.1 #  5      ׀   #   (e88-! !"3"  30\2e  IV  .3  0    ProceduralPosture30\`\݌(#(# Ќ    TelosfileditsmotiontodismissplaintiffsderivativeclaimspursuanttoMd.Rule2502. b Therulereadsasfollows: 4     Ifatanystageofanactionaquestionarisesthatiswithinthesole k provinceofthecourttodecide,whetherornottheactionistriableby T ajury,andifitwouldbeconvenienttohavethequestiondecided = beforeproceedingfurther,thecourt,onmotionoronitsown & initiative,mayorderthatthequestionbepresentedfordecisioninthe  mannerthecourtdeemsexpedient.Inresolvingthequestion,the  courtmayacceptfactsstipulatedbytheparties,mayfindfactsafter | receivingevidence,andmaydrawinferencesfromthesefacts.The e proceedingsanddecisionsofthecourtshallbeontherecord,andthe N decisionsshallbereviewableuponappealafterentryofanappealable  7 orderorjudgment. !    ] ]]    DefendantcitesthestatementoftheCourtofAppealsinWerbowskyv.Collomb,362 W#" Md.581,621(2001),thatademandfutilityquestionis aperfectcandidateforresolution )% $ pursuanttoMarylandRule2502tosupportitsviewthatthepresentmotionshouldbetreated &"& similarly.DefendantpointsaswelltotheCourtofSpecialAppealsapprovaloftheuseofthis (h$( proceduraldevicetodetermineananalogousquestioninBenderv.Schwartz,172Md.App.648, e 66364(2007).TheCourtconcurs. 7   HavingdeterminedthataMarylandcourtfacedwithamotiontodismissshareholder   derivativeclaimsupontherecommendationofanindependentboardspeciallitigationcommittee  v willnotadoptthestandardsandburdensassignedthepartiesunderDelawarecorporatelaw,  H Zapatav.Maldonado,430A.2d779,78889(Del.1981),thisCourtwilllikewiserejectthe    Zapatacourtssuggestiontotreatthepresentmotionasoneforsummaryjudgment.Id.at788. Q  a  IntheCourtsjudgment,Md.Rule2502isamoreappropriatevehiclefordetermination #  ofthepresentmotion.Limiteddiscovery,theevidentiaryhearingsconductedandtherecord  beforetheCourtareentirelyconsistentwiththerulespurpose.SeeNiemeyerandSchuett, b MarylandRulesCommentary36163(3ded.2003). 4 "3"  3h2e  V  .3  0    TheMotiontoDismisstheDerivativeClaims3hh݌k(#(# Ќ    ThefactualdeterminationstobemadebytheCourtinconnectionwiththepresent = motionare:(1)werethe2ndSLCmembersindependentanddidtheyperformtheirdutiesingood  faith?;(2)didthe2ndSLCundertakeareasonableinvestigationofplaintiffsderivativeclaims?; | and(3)arethefindingsandconclusionofthe2ndSLCreasonable? N ! ! 2(J88"3"    3k2J  A  .3  0 `   The2ndSLCsIndependenceandGoodFaith3k8l݌!  ` (#` (# Ќ    TheRevisedReportoftheSpecialLitigationCommitteeofTelosCorporationdatedJuly W#" 20,2007,setsforthatpages1114thebasesforitsfindingthatthe2ndSLCmembersandtheir )% $ legaladvisorswereindependentfromTelos,itsofficersanddirectors,anddisinterestedinthe &"& presentlitigation. (h$(   TheplaintiffshaveraisedissuesconcerningDirectorDavidBorlandsmilitaryservice *:&* underGeneralHarriscommandandtheselectionoftheLeClairRyanlawfirm.Theyassertthat e thelawfirmwasrecommendedbydefendantFlaherty #  6      ׀andhastwoformerpartnersfromthe 7 McGuireWoodsfirmwhichrepresentsTelos,includingThomasMcGonigle.4K #  7      ׀Butneitherclaim   wassupportedbyevidencethatthe2ndSLCsindependencewascompromisedthereby.  v   Therealfocusofplaintiffsattackonthe2ndSLCsindependencerelatedtoAdm.  H TuttlesdepositiontestimonyandtoThomasMcGoniglesandAndrewFrischshearing    testimony.InthedepositionportionofAdm.Tuttlestestimony,reviewedbytheCourtand Q  highlightedbyplaintiffsinargument,heappearstoviewhisrole,inpart,asrequiringhimto #   makethelitigationgoawayinorderforTelostogetbacktobusinessandmakeprofits.  DepositionTestimonyofAdm.Tuttleat10809(Oct.24,2007).Hecharacterizedhimselfasa b formerNavyofficerwhohasdevelopedatalentasabusinessmantosavetroubledcompanies, 4 likeTelos.Plaintiffsassertthatthis biasinformedtheinvestigativeworkofthe2ndSLC,with k Adm.TuttleandGen.Harrisessentiallyrubberstampingthefindingsandrecommendationsof = counselwithoutcarefulscrutiny.    PlaintiffsalsoquestiontheindependentjudgmentoftheLeClairRyanlawyersonthe | basisoftheiralmosttotaldeferencetotheworkofthe1stSLCscounselfromFulbright& N Jaworski,whoseexpertisetheyextolled.HearingTestimonyofMessrs.McGonigleandFrisch !   (Nov.21,2007).PlaintiffscontendthatMcGonigleandFrischbroughttotheirworkaclearbias W#" infavorofthepreliminaryconclusionsofthe1stSLCandthattheyreceivedmarchingordersto e lookforsignsof dishonesty #  8      ׀onthepartofTelosmanagementanddirectorsratherthanto 7 focusonthesubstanceofthederivativeclaims.     Teloscountersthatthemembersofthe2ndSLC54 #  9      ׀werenewtoitsboard,hadnoprior  v connectionswithTelos,werenotdefendantsinthelitigation,andobviouslydidnotparticipatein  H theactionsformingthesubjectmatterofplaintiffsclaims.TelosfurtherarguesthatAdm.Tuttle    andGen.Harrisdonotstandtobenefitpersonallyfromthedismissalofthederivativeclaimsand Q  thattheymaintainednoclosepersonalrelationshipwithanyofthenameddefendants.Ԁ{ #    While[qԀ|Gen.HarrisdidhavesomepriorassociationwithindividualsinTelosexecutive  management,aswellasDirectorDavidBorland,nobiasappearedtocolorthe2ndSLCsfindings b withrespecttoBorlandorTelosofficers.Infact,the2ndSLCstatedthatthefailureofBorland 4 andWoodtodisclosethefactthatBorlandhadbeenprovidedacorporatemembershipatthe k RobertTrentJonesGolfClubcreatedan appearanceofimproprietyduetoBorlandsroleas = chairoftheTelosCompensationCommittee,whichauthorizeda$750,000bonustoWoodin  February2005.RevisedReport16n.13.The2ndSLCwentontorecommendcomplete | disclosureofallcorporateperquisitesinitsRevisedConclusions.RevisedConclusions4.The N 2ndSLCalsofoundthisissuetobeacontributingfactortotheTelosboardresignationsin !   August2006.RevisedReport14. W#"   Asdescribedinmoredetailinfra,pages2133,the2ndSLCdidnotlimitthescopeofits )% $ inquirymerelytoallegationsofbreachoffiduciarydutiesbydefendants.  Finally,and e importantly,bothAdm.TuttleandGen.HarrishadexcellentcredentialstoundertakeanSLC 7 investigationasindependentboardmembers.     DefendantdeniesanybasistochallengetheLeClairRyanlegaladvisorsaswell.It  v contendsthatpotentialconflictswerefullydisclosedandproperprecautionswereputinplaceto  H avoidanyactualconflicts.Mr.McGonigleleftMcGuireWoodsin2001,hasnorecollectionof    performingworkforTelos,andtheevidenceindicatesdeminimisrepresentationatmost.The Q  otherformerMcGuireWoodspartneratLeClairRyan,WilliamDonnolly,wascarefullyisolated #  fromtheworkofthe2ndSLC.    ItappearstotheCourtthatplaintiffsbiasclaimsregardingthe2ndSLCanditscounsel b arenotactuallychallengestotheabilityofthe2ndSLCtobeindependentinanobjectivesense.6 #  10      ׀ 4 Theyareratherassertionsthatasubjectivebiasaffectedthe2ndSLCmembersabilitytoact k independently. =   Thecaselaw,whetheritembracestheprocessofAuerbachv.Bennett,393N.E.2d994  (N.Y.1979)(abstentiondoctrine)orZapataCorp.v.Maldonado,430A.2d779(Del.1981) | (standardofliability),focusesitsanalysisofanSLCsindependenceonthebenchmarkconcepts N of goodfaith, objectivityandlackof bias. #  11      ׀Unlikesituationswhereinteresteddirectors !   maintaincontroloftheSLCsdecisionmakingorwheretheSLChasanobviousconflictof e interest,subjectivebiasclaimsaredifficulttoassess.Here,theCourtisaskedtodetermine 7 whetherAdm.Tuttlescandorabouthisdesiretogetpastthelitigationsoimpairedhisjudgment   astocausehimtoignoreevidenceinsupportofplaintiffsderivativeclaims. #  12      ׀Also,theCourtis  v todecidewhethertheLeClairRyanattorneysviewsofthequalityoftheworkperformedby  H theirpredecessorsfromFulbright&Jaworskicausedthemtooverlookevidencethatdefendants    hadbreachedtheirfiduciaryduties. Q    TherecordbeforetheCourt,however,provideslittledirectevidencethatbias #  underminedthefindingsandconclusionsofthe2ndSLC.CitingStrougov.Bassini,112F.Supp.  2d355,362(S.D.N.Y.2000),andtheAmericanLawInstitutesPrinciplesofCorporate b Governance,Telosexpertwitness,ProfessorLisaFairfax,opinedthatthe2ndSLCmetgood 4 corporategovernancestandardsforindependence.Ԁ:Prof.LisaFairfax,ExpertWitnessReport35 k (November7,2007)(hereinafterFairfaxReport).Notably,shequotedMcLaughlinonClass = Actions9:18: Atbottom,anSLCisindependentifitisinapositiontobaseitsdecisiononthe  meritsoftheissuepresentedratherthanbeinggovernedbyextraneousconsiderationsor | influences.JosephM.McLaughlin,McLaughlinonClassActions9:18(3ded.2006).Other N thanthetestimonynotedearlier,plaintiffscanpointtonothingelseintheextensiverecord !   beforetheCourtwhichsupportstheirtheoryofabiased2ndSLC,C #  13      ׀withtheexceptionofthe e processundertakentoinvestigateplaintiffsclaims.Thus,thisissue,asframedbyplaintiffs 7 arguments,bleedsoverintothesecondfactorthattheCourtmustconsideronthemotionto   dismiss.SeeStrougov.Bassini,112F.Supp.2d355,365(S.D.N.Y.2000)( TheCourtsfocus  v inthisareaisintertwinedwithitsanalysisofwhethertheSLCconductedareasonable  H investigation.).Ontheevidencepresentedontheissueofthe2ndSLCsindependencealone,    theCourtisnotpersuadedthatAdm.Tuttle,Gen.Harrisortheirlegaladvisorswere Q  compromisedtothepointwheretheycouldnotbasetheirdecisiononthemeritsofplaintiffs #  derivativeclaims.   7(082! !"3"    32  B  .3  0 `   TheReasonablenessofthe2ndSLCsInvestigation3݌b` (#` (# Ќ    The1stSLC,createdinDecember2005,wascomprisedofdirectorsThomasOwsleyand 4 BruceStewart.ItretainedcounselfromFulbright&Jaworskiasindependentlegaladvisorsand k conducteditsinvestigationuntilmidAugust2006,reviewingover70,000pagesofdocuments = andinterviewing16witnesses,includingmostofthedefendants,Telosmanagementand  investmentbankersfromJefferies&Co.,Inc.SevendraftsofanSLCreportwereprepared | addressingtheissuesraisedbyplaintiffsclaims.The1stSLCissuedaninterimreportonMay N 12,2006,anditsfinaldraftreportwasdatedAugust16,2006,thedateuponwhichdirectors !   Owsley,StewartandfourothersresignedfromTelosboard.Thatdraftcontaineda W#" recommendationthatcontinuingthelitigationwasnotinthebestinterestsofthecorporation. )% $   WhenTelosboardwasreconstitutedinOctober2006,the2ndSLCwasestablishedand &"& composedofLt.Gen.(Ret.)BruceHarrisandViceAdmir.(Ret.)JerryTuttle.Theyretainedthe e lawfirmLeClairRyanasindependentlegaladvisors.TheLeClairlawyersobtainedand 7 reviewedapproximately35boxesofmaterialsfromFulbright&Jaworski,includingwitness   interviewnotesanddraftsofthepreliminaryreportsofthe1stSLC.Boththemembersofthe2nd  v SLCandtheircounselbelievedthatdirectorsOwsley,StewartandFulbright&Jaworskihad  H conductedanextensiveinvestigationandelectednottoredoalloftheirwork.Instead,theysaw    theirtaskasevaluatingtheworkofthe1stSLCandsupplementingitwithadditionalinterviews Q  anddocumentreview.Additionalworkwascreatedwhenplaintiffsfiledasecondamended #  complaintonFebruary27,2007,containingallegationsaboutTelosinvestmentinits  Enterworkssubsidiary. b   OnMarch29,2007,the2ndSLCpresentedadraftsummaryofitsconclusionstothe 4 Telosboard.OnMay3,2007,itpresentedareporttotheboard.The2ndSLCsreport k concludedthatitwasnotinthecorporationsbestintereststopursuethelitigation.Thereafter, = the2ndSLCcollectedandreviewedadditionaldocumentsandconductedadditionalinterviewson  issuesrelatingtotheEnterworksallegations.Whenthisadditionalworkwascompleted,the2nd | SLCsubmittedaRevisedReport,datedJuly20,2007,reachingthesameconclusion. N   Plaintiffsherechallengethethoroughness,directionandpremisesuponwhichthe2nd !   SLCsinvestigationwasconducted.CostaBravaassertsthatthe2ndSLCengagedin onlya W#" subjectiveinquiryoftheirderivativeclaims.Theircontentionisthattheindependentdirectors )% $ essentiallydelegatedtheentireinvestigationtotheirlegaladvisorsfromLeClairRyanand,in &"&  doingso,skewedtheinvestigationtoissuesof dishonestybyofficersanddirectorsratherthan (h$( tothemeritsoftheirclaims. #  14      ׀Accordingtoplaintiffs,the2ndSLCglossedovertheserious e  allegationsofmismanagementbyCEOJohnWood,whichalmostresultedinhistermination. 7 Moreover,plaintiffsassertthatthe2ndSLCreliedtooheavilyonthedepositionstakenin   connectionwiththereceivershipmotion,whichthisCourtdisposedofbyOrderdatedNovember  v 29,2006.Theychallengethetimingofthe1stSLCsinvestigativeworkbecauseitpredatedthe  H filingofthesecondamendedcomplaint,theactionsconcerningthepotentialterminationofJohn    Wood,theAugust2006resignationsandtheinformationconcerningdirectorDavidBorlandand Q  hiscorporategolfclubmembership.Plaintiffsfurtherchallengetherecorduponwhichthe2nd #  SLCbaseditsconclusions,chargingthattheLeClairRyanlawyersfailedtoobtainthe  documentssoughtfromdefendantsbyFulbright&Jaworskiinconnectionwiththe1stSLC, b merelyengagedina verificationprocesswithTelosmanagementoncriticalissuesandhadno 4 directcontactwithdirectorsOwsleyorStewart,eventhoughthe2ndSLCreliedsoheavilyupon k theirefforts.PlaintiffscontendthatAdm.TuttleandGen.Harriswerenotadequatelyinformed, = notascarefulaboutthedualrolesthattheyplayedasSLCmembersanddirectorsofthe  corporation,andthattheirlackofdirectinvolvementintheinvestigationsignificantlyimpaired | thatprocess.b #  15       N   AsastartingpointfortheCourtsanalysisofthereasonablenessofthe2ndSLCs !   investigation,itappearsthattheheartofthematterisreallythereasonablenessofthe2ndSLCs W#" decisiontorelysoheavilyontheworkconductedbythe1stSLCanditscounsel.InSteinv. )% $ Bailey,531F.Supp.684,694(S.D.N.Y.1982),thefederalcourtinNewYork,applyingaZapata e analysisunderDelawarelaw, #  16      ׀heldthatitwasreasonableforanSLCtoreviewthe 7 investigativeworkalreadyperformedbythecompanysAuditCommitteeonshareholderstock   planclaimswithoutredoingthatcommitteeswork.Inherreport,ProfessorFairfaxnotedthis  v caselawandpointedoutthatthe1stSLChereundertookitsinvestigationformorethansix  H months,thatitwasextensiveandthatitswork,althoughincomplete,wasrecentlyperformed.    FairfaxReport5.Infact,the1stSLCleftoffinAugustof2006andthe2ndSLCpickedupon Q  October19,2006,merelytwomonthslater.Theevidenceisthatthe2ndSLCmetsixtotwelve #  timesoverthecourseofninemonthsandthatAdm.TuttleandGen.Harriscommunicatedwith  theirattorneysfromLeClairRyanviatelephoneandemailanaverageof12timespermonth. b HearingTestimonyofMr.McGonigle(Nov.21,2007).TheRevisedReportissuedJuly20, 4 2007,isofadequatelength,demonstratessufficientidentificationofplaintiffsclaimsand k analysisthereofand,inthisCourtsjudgment,isnotfatallyflawedbyeithertheselectionofthe = LeClairRyanindependentlegaladvisorsorthedelegationtothemofmostofthework.    Inorderforplaintiffstoestablishalackofgoodfaithorabiasedinvestigation,theymust | comeforthwith [p]roof...thattheinvestigationhasbeensorestrictedinscope,soshallowin N execution,orotherwisesoproformaorhalfheartedastoconstituteapretextorsham[.]Stein, !   531F.Supp.at695(XBXXXBquotingAbramowitzv.Posner,513F.Supp.120,132(S.D.N.Y.1981) W#" (quotingAuerbach,393N.E.2dat1002))#XBXXXB3#.Therecordinthepresentcasedoesnotapproachthat )% $ kindofproof.PlaintiffscomplaintshereincludethefactthatneitherAdm.TuttlenorGen. &"& Harrispersonallyattendedwitnessinterviews,althoughtheywerebriefedonthesubstanceof e thoseinterviewsbyLeClaircounsel;thatthe2ndSLCand/oritsattorneysfailedtointerviewthe 7 1stSLCoritslegaladvisorsabouttheproposedterminationofJohnWood,aterminationwhich   didnotoccur;thatthedepositionsreviewedweretakeninconnectionwithplaintiffs  v unsuccessfulreceivershipmotionandwereundulylimited;thatthe2ndSLCfailedtoobtain  H informationsoughtbythe1stSLCbutnotreceived;andfinally,thatthe2ndSLC verified    informationprovidedbythe1stSLCbysubmittingsametoTelosmanagement. Q    Noneofthesecharges,individuallyorcollectively,issufficienttoconvincetheCourt #  thatthe2ndSLCconductedafatallyflawedinvestigationoractedinbadfaith.Thescopeofthe  workperformedbythecombinedeffortsofthe1stand2ndSLCswasextensive,evenifitdidnot b turnovereverystone.Themembersofthe2ndSLCwereadequatelyinformeddespitethefact 4 thattheydidnottakea handsonapproachtotheinvestigation.Moreover,the2ndSLCdid k investigatethecircumstancessurroundingthesocalled billofparticularsagainstCEOJohn = Wood.Becausemuchofthoseclaimsweredirectlyrelatedtootherplaintiffsclaimsconcerning  XactastockoptionsandthegolfclubmembershipofDirectorBorland,therewaslimited | evidenceofindependentwrongdoingbyJohnWood.Indeed,itseemsinconsistentforplaintiffs N tocomplainaboutacurtailedinvestigationofWoodsactivitieswhilealsocriticizingthe2nd !   SLCfordirectingitscounseltolookfor dishonestyonthepartofTelosofficersanddirectors. W#" The2ndSLCdidnotstandtogainmuchfrominterviewingOwsley,Stewartortheirlawyers #  17      ׀on )% $ thesepointsbecausetheyhadwhatlittleevidenceexistedbeforethemanddeterminedthatthe &"& claimswereinsubstantial.Inlightofthelargevolumeofdocumentsactuallyreviewedinthis e case,theCourtisnotpreparedtofindthattherecordisinadequate,evenifallrecordssought 7 werenotreceived.Atsomepointinanyinvestigation,itisreasonabletoconcludethatthe   investigationiscomplete,ifnotexhaustive.Finally,theCourtisnotpersuadedthatthe  v  verificationprocessutilizedwithrespecttocertaincompanyinformationunfairlyhandedthe  H responsibilitiesofthe2ndSLCovertocompanymanagement.The2ndSLCsRevisedReport    demonstratesasufficientunderstandingofthefactstoprovethatanindependentanalysiswas Q  undertaken. #    ProfessorFairfaxwaspermittedtoofferexperttestimonyonthepresentmotionwith  respectto bestpracticesofcorporategovernance.Whilenotamountingtolegalstandardsof b conduct, [a]spirationalidealsofgoodcorporategovernancepracticesforboardsofdirectors 4 thatgobeyondtheminimallegalrequirementsofthecorporationlawarehighlydesirable,often k tendtobenefitstockholders,sometimesreducelitigationandcanusuallyhelpdirectorsavoid = liability.ddInreWaltDisneyCo.DerivativeLitigation,907A.2d693,745n.399(Del.Ch.  2005),affdenbanc, SXBXXXB906A.2d27(Del.2006) S#XBXXXB#(citingBrehmv.Eisner,746A.2d244,256(Del. | 2000)).InherExpertWitnessReport,ProfessorFairfaxnotes: ThereasonablenessofanSLCs N investigationdependsonavarietyoffactorsincluding(1)whetherthecommitteesoughtthe !   assistanceofindependentcounsel,(2)thelengthandnatureoftheSLCreport,(3)whetherthe W#" SLCproperlyidentifiedrelevantclaims,(4)whethertheSLCinterviewedorreviewedthe )% $ testimonyofrelevantwitnesses,(5)whethertheSLCanditscounselreviewedrelevant &"& documents,and(6)thenumberoftimesthecommitteemet.FairfaxReport5.SeeBender,172 (h$( Md.App.at67074;McLaughlin,supra;Am.LawInst.PrinciplesofCorporateGovernance *:&* 7.09(1992).Takingthosefactorsintoconsiderationhere,ProfessorFairfaxopinedthatthe2nd e SLCsatisfiedthecriteriaforareasonableinvestigationperformedingoodfaith.FairfaxReport 7 5.Hertestimonywastothesameeffect,HearingTestimonyofProf.Fairfax(Dec.4,2007),and   theCourtconcurs.  v "3"    3~2  C  .3  0 `   TheReasonablenessofthe2ndSLCsFindingsandConclusions3~݌ H` (#` (# Ќ    TheDirectorsResignations        TheRevisedReportofthe2ndSLCtracesthehistoryofthefailedeffortsoftheTelos M  boardtoinvolveplaintiffsinaStrategicGrouptoaddressthedisparateinterestsofthe   companyscommonshareholdersanditspublicpreferredshareholders.Itdetailsthecreationof  TelosTransactionCommitteeanditsunsuccessfuleffortstoresolvethedisputethrougha ^ strategictransaction,leadingtothewithdrawaloftheDLAPiperlawfirmascounseltothe 0 directorsontheTransactionCommitteeand,inshortorder,totheresignationsofthesix g directorsconstitutingtheTransactionCommitteeandthe1stSLC. 9   Threeissuesareidentifiedascontributingdirectlyorindirectlytotheresignations:(1)an   impasseonhowtoresolvethecompetinginterestsofthecompanysstakeholders;(2)arift x amongboardmemberscausedbyDirectorBorlandsfailuretodisclosehisuseofacompany J golfmembership;and(3)thewithdrawalofDLAPiperascounseltocertaindirectors.The !  RevisedReportgoesontoaddresstheseissuesandtheirimpactonthedecisionsofthesix S#" directorstoresignfromTelosboard.RevisedReport1518. %% $   Lyingattheheartofthedirectorresignationsis,ofcourse,thedisputewhichtriggered &"& thepresentlawsuit.Plaintiffscontendthat,inresistingasaleofTelosandananticipated (d$( paymentofthedividendsontheirpublicpreferredshares,Telosmanagementinthepersonof *6&* CEOJohnWoodviolateditsfiduciarydutiestothecompany. #  18      ׀Woodsinvolvementwiththe e threeabovecitedissuesemergedfromtheSLCinvestigation.Theevidenceshowedthatinthe 7 faceofoppositionbyJohnPortertoasaleofthecompany,Woodattendedaboardmeetingon   August15,2006,andsuggestedanalternativecourseofactioninvolvingavaluationand  v potentialsaleofTelosbusinesslinesandassets.RevisedReport15.Ifthisinvolvedasaleof  H Xacta,however,itwouldtriggerstockoptionsforWoodattheexpenseofERPsholders.Bythe    timeWoodmadethissuggestiontotheboard,the1stSLChadalreadyaddressedtheXactastock Q  optionissueinitsInterimReportofMay12,2006.Thus,theboardwasawareoftheproblem #  andhadthebenefitofthe1stSLCsrecommendationsregardinganysaleofXacta.The2ndSLC  adoptedthoserecommendations,RevisedConclusions34,andfoundnobreachofdutyby b Wood. 4   AstotheBorlandgolfmembership,itsnondisclosurebyWoodorBorlandcausedboard k contention,compoundedbyBorlandsrefusaltoresignfromTelosboard.The2ndSLC = consideredthisasignificantfactorcontributingtotheotherboardresignations.Italsofoundthat  BorlandsreceiptofuseoftheRobertTrentJonesGolfClubmembershipcreatedanappearance | ofimproprietybecausehewaschairofthecompanysCompensationCommitteewhenit N authorizeda$750,000bonustoJohnWoodonFebruary8,2005.Butthe2ndSLCreviewedthe !   availableevidenceonthetimingoftheseeventsandfoundnoproofofcorruptmotives W#" attributabletoBorlandorWood. )% $   Thefinalissue,DLAPiperswithdrawalofrepresentationtocertaindirectors,arosefrom &"& aperceivedconflictofinterestinitsdualrepresentationofthedirectorsandofEnterworks,Inc., e onesubjectoftheTeloscorporatestructurecontroversy.Inthecourseoftheinvestigationof 7 thisissue,the2ndSLCfoundthatEnterworkshadrecentlyacquiredaSeattlebasedwebdesign   companycalledSaltmine,ofwhichJohnWoodwasadirector.The2ndSLCdetermined,  v however,thatWoodhadmadeatimelydisclosureofhisinterestsinSaltmine,RevisedReport  H 17,againfindingnobreachofdutytoTelos.      InconnectionwiththeinvestigationofDLAPiperswithdrawalascounsel,the2ndSLC Q  lookedintotheclaimsagainstJohnWoodoutlinedintheDavidClarkeemailofAugust5,2006. #  ThismatterisaddressedmerelybyfootnoteatpageeighteenoftheRevisedReportandplaintiffs  allegeaninadequateinvestigationoftheclaims.Anumberofthemrelate,however,tothe b proposedXactasaleand/ortotheBorlandgolfmembershipandwereinvestigatedseparately. 4 NonefoundsubstantialsupportintheavailableevidenceandthereconstitutedTelosboardhas k takennoactiontoterminateorsanctionJohnWood.Itisreasonable,therefore,tofindno = evidenceofabreachoffiduciarydutyontherecordreviewedbythe2ndSLC.    Inadditiontothewrittenrecord,the2ndSLCreviewedthedepositionsoftheresigned | directorsconcerningtheirreasonsforleavingtheTelosboard.The2ndSLCconcludedthatthe N directorsinabilitytoresolvetheongoingdisputewithplaintiffswastheprimaryreasonfor !   theirresignations.CoupledwiththeevidenceconcerningtheBorlandgolfmembershipandthe W#" DLAPiperwithdrawal,theinvestigatorsconcludedthatthedirectorsresignationsdidnot )% $ warrantcontinuedpursuitofplaintiffsderivativeclaims.TheCourtfindsthatconclusion &"& rationalandsupportedbytherecord. (h$(   CorporateStructureandXactaStockOptions *:&*   The2ndSLCsinvestigationrevealedthatTeloshasacomplexcorporatestructurenot e fullyunderstoodbyitsdirectors.TheRevisedReportsetsforththehistoricaldevelopmentof 7 thiscorporatestructure.RevisedReport1822.Asnowconstituted,andsinceJuly2000,Telos   whollyownsanumberofsubsidiarycorporationsthroughthevehicleofaholdingcompany  v knownas ubIQuity.com.TheRevisedReportdescribesthebusinessplanasfollows:  H f   Putanotherway,theplanwasforthecorporateaspectsofthe    operationtoremainwithTelos,andforthebusinessaspectstobe h  placedinthesubsidiaries,suchasEnterworksandlaterXacta,which Q  wouldmatureanddevelopvalue,andthenbesoldmoreeasily :  becausetheywereseparateentities(meaningthepurchaserwouldnot #  beconcernedwithTelosfinancialsituationtothesameextentas    theywouldiftheyweredealingwithTelosdirectly.).Partoftheplan  to incubateandeventuallyspinoffbusinesseswouldnecessarily y entailtransferringassetsfromTelostoitssubsidiaries. b   RevisedReport2122. 4   The2ndSLCsinvestigationconcludedthattheavailableevidencedidnotsupport k plaintiffsclaimsthatTeloscorporatestructurewasintendedtoenrichseniormanagementor = JohnPorterattheexpenseoftheERPsholders.Itfoundthattheavailableevidencedidnot  contradictTelospositionthattheelementsofcorporatestructurechallengedbyplaintiffs(e.g., | XactaandEnterworks)wereintendedtoadvancethecompanyandtoproducethetypeofcapital N eventthatwouldbenefitallcompanystakeholders,includingtheERPsholders.The2ndSLC !   recognizedthatuponasaleofXactaandatransferofassetsfromTelostoXacta,optionholders W#" wouldenjoypriorityoverERPsholdersandthatafuturecapitaleventmaynotproduce )% $ sufficientliquidityinTelostosatisfyallitsstakeholders.ButtheCourtnotesthatnosuchevent &"&  isintheworksandanyproposedtransactionwillbereviewedbyTelosboard,includingthe (h$( ClassDdirectors. #  19      ׀Moreover,theboardhascommitteditselftoperformthatreviewinlightof e  theRevisedReportsrecommendationstoservethelegitimateinterestsofeachholderofthe 7 companyssecuritiestotheextentpossible.TheCourtcannotsaythat,underthese   circumstances,pursuitofplaintiffsderivativeclaimswouldresultinanysignificantrecoveryto  v thecorporation.Thus,the2ndSLCsconclusiononthisissueisreasonable.  H   TheRevisedReportalsorecountstheallocationofXactastockoptionstoTelos    management,primarilytoMessrs.Wood,Flaherty,Marino,WilliamsandTracy.Revised Q  Report2425.The2ndSLCsinvestigationsrevealedthatifallXactaoptionsheldbyTelos #  executivesandemployerswereexercisedtheywouldamounttoover30%ofthethenissuedand  outstandingXactacommonstock.RevisedReport25. b   PlaintiffshavechallengedthisconcentrationofXactastockoptionsinTelosinsiders, 4 allegingthatthecompanyanditsofficersareengagedinaschemetodivertTelosassetsand k profitablebusinessesawayfromthecompanyinorderforWoodandotherstoexercisetheir = optionstothedetrimentoftheERPsholders.Theychargethatthe2000XactaStockIncentive  PlanwasnotdisclosedtoTelosstakeholdersortotheSEC.Plaintiffsquestionthegrowthin | valueoftheXactastockoptionsfromapproximately$4.875millionin2004tobetween$3050 N millionin2006,accordingtoJohnWood.Finally,plaintiffsallegeaccountingimproprietiesin !   TelospublicfilingswiththeSEC.b #  20      ׀ W#"   TheCourtagreeswithPlaintiffsthattheRevisedReportglossesovermanyoftheissues e raisedbytheminconnectionwiththevaluation,disclosureoftheXactastockoptionsandTelos 7 accountingpractices.Butthe bottomlineontheXactaquestioniswhetherthe2ndSLCmadea   reasonablebusinessdecisionnottopursueplaintiffsderivativeclaimsbasedontheabovelisted  v allegations.  H   TheRevisedReportfindsthattheavailableevidencedoesnotsupportthescheme    plaintiffsallegetodivertassetsandtoavoidmeetingTelosobligationstoitspublicpreferred Q  shareholders.RevisedReport27.ItreferencesTelosboardresolutionsofJanuary1,2003,and #  January31,2003,totheeffectthatXactaoptionsoutstandingandunexercisedunderthe2000  XactaStockIncentivePlanmaynowonlybeexercisedupontheoccurrenceofachangeof b control.RevisedReport26.The2ndSLCalsoacceptedTelospositionthatthequantityof 4 optionsawardedwaslargebecauseasaleofXactawouldnecessarilyrequireatransferofTelos k assetstoXactaforitsstock,therebydilutingtheholdingsofXactastockholders.RevisedReport = 27.    AsTelosargueshere,the2ndSLChadthebenefitofthe1stSLCsextensivereviewofthe | Xactastockoptionissues.FollowingtheissuanceofitsinterimreportonMay12,2006,Telos N boardapprovedaresolutionofthesamedateimplementingitsrecommendationsandallowing !   forTelosboardtoreviewandevaluateanyfuturesaleorassettransferinvolvingXacta.These W#" actionsforeclosedthepossibilityofthealleged schemebecomingsuccessful.TheCourtcan )% $ conceiveoflittlepurposeinpursuingthebreachoffiduciarydutyclaimsrelatedtoXacta,given &"& thesedevelopments,whichwereoccasionedbytheinvestigationperformedbythe1stSLC. (h$( Underthecircumstances,thedecisionofthe2ndSLCisreasonable. e   ManagementCompensation 7   The2ndSLCalsoinvestigatedplaintiffsclaimthattheTelosofficersreceivedexorbitant  salariesandbonusesandlucrativestockoptionsdespitetheirassertionthatthecompanywas  r insolventandunabletopaydividendstotheERPsholders.Itdeterminednottosupport  D plaintiffsderivativeclaimsonthisground. {     Theexpressedbasisforthe2ndSLCsconclusionisthatTeloshasemployeda M  CompensationCommitteesince1995,whichsetscompensationfortheCEOandapproveshis   recommendationsforthesalariesofotherofficersandemployees.TheCommitteeapparently  feltthatthiswasareasonableandstandardcorporatepracticegiventhewidediscretiontheboard ^ hasinsettingcompensation.ProfessorFairfaxagreedthatitiscompatiblewithgoodcorporate 0 governancepractice.FairfaxReport10. g   Moreover,theTelosCompensationCommitteehadengagedthefirmofWatsonWyattin 9 2006toreviewthecompensationofitseightmostseniorexecutives.Itsfindingsconfirmedthat   theircompensationwasnotexcessiveforcomparablecorporateexecutives.The2ndSLCrelied x onthisreporttoconcludethattherewasnoevidenceofaschemetodivertbenefitstotheTelos J executivesandawayfromplaintiffs.RevisedReport31. !    Finally,the2ndSLCdeclinedtopursueplaintiffsclaimsrelatedtocompensationbased S#" onXactastockoptions,findingthattheoptionshavelittleornocurrentvalueandcannotbe %% $  quantitativelyconsidereduntiltheconsummationofacapitaleventmakingthemexercisable. &"& Itcharacterizedsuchanoccurrenceasa hypotheticalfutureevent.RevisedReport28.The (d$( Courtconcursthatthisisaninadequatebasisuponwhichtopursuederivativeclaims. *6&*   PlaintiffscomplainthattheWatsonWyattreportofSeptember6,2006,ignoresthe e historyofexorbitantexecutivecompensationfrom1998to2005whilethecompanywas 7 reportingoperatinglosses.Theycontendthatthisissufficientevidenceofaschemetosupport   theirderivativeclaims.TheCourt,however,disagrees.TheCompensationCommitteestructure  v inplaceduringthoseyears,combinedwiththeindependentanalysisofcomparableexecutive  H compensationperformedin2006,establishedareasonablebasisforthe2ndSLCsconclusionon    thisissue.PlaintiffswereunabletomeettheirburdenofprooftoconvincetheCourttothe Q  contrary. #    TheERPs    The2ndSLCdeterminedthataderivativeclaimbaseduponTelosfailuretopay ^ dividendsonortoredeemtheERPswasnotjustified.Itpredicatedthatconclusionuponfour 0 findings:(1)thetermsoftheERPsthemselves;(2)thestatutoryrestrictionsondividend g paymentscontainedinMarylandCodeAnnotated,CorporationsandAssociationsArticle,2 9 311(2007);(3)theNovember7,2005,McGuireWoodsopinionconcerningTelosloan   agreementwithWellsFargo;and(4)afindingofnofalseormisleadingconductbyTelos x relatingtoitsearlierstatedintentiontopaytheERPsholderspaymentinkind( PIK) J dividends,whichwerenotpaid,anditsaccountingtreatmentofthoseproposedPIKdividends. !    TheCourtcannotdisagreewiththefirsttwofindings,whicharebasedinpartonits S#" rulingofNovember29,2006,thatpaymentofthedividendsandredemptionoftheERPswere %% $ subjecttotheavailabilityoffunds.The2ndSLCsthirdbasisconcerningtheimpairmentof &"& TeloscreditlinewithWellsFargowasalsothesubjectofearlierproceedingsbeforethisCourt. (d$( TelosrelianceontheMcGuireWoodsopiniontowithholdERPsdividendswhiledebtonthe *6&* creditfacilityremainsoutstandingisbothreasonableandsupportedbytherecord.Lastly,the e companychangeditspositiononpaymentofPIKstoplaintiffswhenitreceiveda1992legal 7 opinionindicatingthattheywerenotpermittedunderitsexistingcorporatecharter.Although   notcorrectingitsstatedintentions,thecompanyneveramendeditscharterand,instead,turned  v itsfocustoothermeanstosolveitsdisputewiththeERPsholders.AstheRevisedReportpoints  H out,thisultimatelyamountstoavaluationissue,whichispremature.Thedecisionnottopursue    plaintiffsclaimsonthisissueisreasonableaswell. Q    JohnPortersNoteandConsultingAgreement #  "  TheessenceoftheplaintiffsclaimsregardingJohnPortersnoteandconsulting  agreementarethat:(1)the17%interestrateonthe1995subordinatednoteissuedtoPorterin ^ exchangefora$5millionloanisexcessive;(2)theprepaymentpenaltyofupto$13.5million 0 inhibitsthecompanysabilitytoconsummateastrategictransactionwhichwouldallowpayment g ofERPsdividends;and(3)Portersconsultingfeesarebogus. 9   The2ndSLCsinvestigationoftheseissuesrevealedthatPortersnotewasobtainedata   pointinitshistorywhenTeloscouldnotaccessothersourcesofcapital.Itshighinterestrateisa x reflectionoftheleverageacquiredbyPorterasthecompanysprincipalbenefactor.Thenote J anditsprepaymentpenaltieshavebeenextendedseveraltimessincewiththeconsentofWells !  Fargo,whichinsistedthatTelosindebtednesstoPorterremainsubordinatetoitsobligationsto S#" WellsFargo.The2ndSLCalsofoundthatPortersconsultingfeesreflectcompensationforhis %% $ servicestothecompanyaswellasacorporatedesiretorewardhimforhisgoodwilland &"& historicalbeneficence. (d$(   Plaintiffspointout,however,thatPorterhasreceivedmorethan$20millioninpayments *6&* fromTelos,representingprincipalandinterestonhisnoteandconsultingfees.Hehasalso e received$15.2millioninprepaymentpenaltiesonthenote.Theconsultingagreementhas 7 apparentlynotbeensubjecttoboardreviewuntilrecentlyandthereisscantevidenceofservices   actuallyrendered.TheRevisedReportoffersnorealanalysisofthecompanyscreditsituation  v oritsabilitytoretirethePorternoteandeliminateanobstacletoitscapitalrestructuring.  H   TheCourtagreesthattherecordbeforeitisthinonevidencethatthePorternoteand    consultingagreementcontinuetobeviablebusinesscommitmentsforTelos.Ontheotherhand, Q  the1stSLChadinterviewedJohnPorterandanumberofotherwitnessesconcerningthe #  companysongoingrelationshipwithhim.The2ndSLCraisedtheseissuesagainwithJohn  WoodandMichaelFlaherty.Basedupontheevidenceobtained,the2ndSLCconcludedthatthe b interestrateonthePorternotereflectedtheriskundertakenbyPorteratthetimeitwasexecuted 4 andhisstatusasalenderoflastresort.Theextensionsoftheprepaymentpenalties #  21      ׀were k requiredtosecurefinancingfromWellsFargo.Finally,therewaswitnessinterviewevidence = frombothPorterandWoodthatPorterhadcontributedsignificantconsultingservicestoTelosin  termsofbusinesscontacts,financialsupport,marketingandbusinessstrategies,and |  ambassadorialserviceswithvendors,customersandthirdparties,asoutlinedintheconsulting N agreementitself. !     WhilethenoteprepaymentpenaltiesremainanobstacletoasaleofTelos,Porterhas W#" expressedtheviewthatsuchatransactionnowwouldbeprematureandthatthecompanywill )% $ bringmorevalueovertime. &"&   Forthesereasonsandonthebasisoftheadmittedlysparserecordcompiledconcerning e thePorterissues,the2ndSLCdeterminedthatTelosrelationshipwithPorterrepresents 7 reasonablebusinessjudgmentandisnotagroundtosupportplaintiffsderivativeclaims.   PlaintiffssuspicionsconcerningPorterandWoodareinsufficienttomeettheirburdenofproof  v onthisissue.Thus,theCourtdoesnotdisagreewiththe2ndSLC.  H   Enterworks    +  TheSecondAmendedComplaintfirstraisedissuesconcerningTeloswhollyowned M  subsidiary,Enterworks,Inc.The2ndSLCinvestigatedplaintiffsclaimsandlearnedthat   Enterworkswasincorporatedin1994andwasconsideredaprospectforaninitialpublic  offering,butthatopportunitywaslostin2000whenthevalueof techstocksdeclinedrapidly. ^   TheissuesraisedconcerningEnterworksgotothecompanysinitialinvestmentinit,its 0 continuinginvestmentsinitanditsvalue.PlaintiffscontendthatEnterworksrepresentsafailed g investmentandthatitwasconceivedasyetanotherschemetoenrichJohnPorter,JohnWood 9 andothersattheexpenseofERPsholders.     TelosclaimsthattheplannedEnterworksIPOwouldhavesatisfiedtheclaimsofall x Telosstakeholders,includingtheERPsholders. J   Becausethateventdidnotoccur,theinvestigationnaturallyfocusedonTelosongoing !  investmentinEnterworks.ThecompanyproducedevidencetoshowthatEnterworks S#" representedanetgainof$19,853,000asofMay2007.ItfurtheradvisedtheCommitteethat %% $ Enterworkswasvaluedthisyearatbetween$25and$35million.Telosprovidedthe2ndSLC &"& withasummaryofownershipinterestsinEnterworks,fromwhichtheCommitteewasableto (d$( calculatestockoptionvaluestoJohnWoodintheeventofasaleofEnterworks.Thesefigures *6&* satisfiedthe2ndSLCthatEnterworksisareasonablebusinessinvestmentforTelosandnota e schemetodivertcompanyassetsfromplaintiffs. 7   Plaintiffstakeexceptiontothe2ndSLCsanalysisandconclusionsregardingEnterworks.   TheychargethatTelosinvestmentandexpensesrelatedtoEnterworksamountto$39million,  v butthatTelosfilingswiththeSECshowanequityvalueofthatinvestmentatunder$200,000.  H Further,theyclaimthattheinterestonEnterworksdebttoTeloshasbeendeemeduncollectible    andwrittendowntozeroandthattheamountofthatinterestexceeds$7million. Q    Duringthemotionhearing,the2ndSLCscounsel,AndrewFrisch,wasquestionedabout #  thisdiscrepancyinvaluations.Heindicatedthatthefiguresprovidedbythecompanytothe2nd  SLCrepresentedanhistoricalpictureofthecostandreturnsassociatedwithEnterworksovera b periodofseveralyears.TheTelosSEC10Kuponwhichplaintiffsbasetheirallegations, 4 however,ismerelyafinancialsnapshotofthecompanyatthetimerepresentedandpursuantto k GAAPaccountingstandards.Hecharacterizedthetwofinancialanalysesas applesand =  orangesanddeniedthattheywereinconsistent.HearingTestimonyofMr.Frisch(Nov.21,  2007).Itdoesnotappearthatthiscomparisonwasdeemedrelevantbythe2ndSLCoritscounsel | ininvestigatingtheEnterworksissues. N   Ontheevidence,the2ndSLCdidnotfindabasistosupporttheEnterworksclaims.The !   Courtbelievesthatconclusiontobereasonable. W#"   TheSecureInfoLawsuit )% $ :  PlaintiffspointtolitigationinstitutedinafederalcourtinVirginiabyaTeloscompetitor, &"& SecureInfoCorporation,asevidenceofTelosillegitimatebusinesspractices.Theyclaimthat (d$( thesebusinesspracticessubjectthecompanytounnecessaryriskandhighlegalfees.See *6&* PlaintiffsFirstAmendedComplaintat7883;LetterfromLewisT.StevenstoLawrenceStorch e 7(April3,2006). 7   Whilethecomplaintinthatactioninitiallysetforthelevencounts,onlytwosurvived   Telosmotiontodismiss:copyrightinfringementandcommonlawdetinue.Theseremaining  v countsweresettledbeforetrialanddismissed,withprejudice,onMarch22,2006.The  H settlementcontainedongoingbusinessagreementsbetweenTelosandSecureInfo.      TheRevisedReportstatesthattheavailableevidencedoesnotshowany unusually Q  egregiousactivitiesoractionsthatwouldconstitutebreachesoffiduciaryduty,undertakenby #  themanagementordirectordefendantsinconnectionwithorgivingrisetotheSecureInfo  lawsuit.RevisedReport39.TheseallegationsweredeletedfromplaintiffsSecondAmended b Complaintandplaintiffsappeartohaveabandonedtheseclaimsasabasistodenythecurrent 4 motion.Inanyevent,the2ndSLChadlittleornoevidentiaryrecordtoconsiderinconnection k withtheSecureInfoclaimsandreasonablyconcludedthattheydidnotconstituteabasisfor = actionbythecompanyagainsttheofficersordirectorsnamedasdefendantsinthatcase.   (807! !"3"  3B2  VI  .3  0    Conclusion3B!C݌|(#(# Ќ    BecauseofthedeferenceowedtocorporateboarddecisionsunderMarylandlaw,the N Courtwassensitivetotheneedtoprovideplaintiffswithadequatediscoveryondefendants !   motiontodismissthederivativeclaimsandtocreateasufficientrecorduponwhichtorule.At W#" thecompletionofthetwohearingsconductedonthemotion,theCourthadbeforeitthe2nd )% $ SLCsRevisedReportofJuly20,2007(41pagesinlength),andRevisedConclusions(4pages &"& inlength),aswellastwentyfivedocumentexhibitsappendedtotheRevisedReportand (h$( Conclusions.Additionally,therecordwascomposedofallpleadingspreviouslyfiledinthe *:&* litigationwhichwererelevanttotheissuesposedbythepresentmotion;allhearingexhibits e pertainingtotheworkofthe1stand2ndSLCs,includingtheFulbright&JaworskiSLCproposal 7 ofJanuary11,2006,correspondence,handwrittennotesofmembers,witnessinterviewlists,   memorandaandnotesofthe1stand2ndSLC,meetingminutes, #  22      ׀sevenpriordraft1stSLC  v Reportsandoneinterim1stSLCReporttotheboard,the2ndSLCRevisedReportand  H Conclusions;depositiontranscriptsanddvdsofthedepositionsofMessrs.Tuttle,Harris,    Owsley,Stewart,Motley,Baker,Sterrett,andByers;internalTelosdocumentsincluding Q  AmendedandRestatedBylaws,theCertificatesofResolution,alistofcommitteemembersand #  theirpowersandduties,draftminutesofmeetingsoftheboardofdirectors,Transaction  Committeemeetingminutes,salaryscheduleofdefendants;TelosCorporationForms10Q,10 b Kand8K;Telosdraftproxyagreements,boardmeetingagendaandminutes;TelosCorporation 4 CertificateofResolutionsandubIQuity.comunanimouswrittenconsentsregardingTelosand k Xacta;deposition,hearingtestimonyandreportofProfessorFairfax;hearingtestimonyof = Messrs.McGonigleandFrisch;andvariouscorrespondenceinemail,letterandfaxformamong  andbetweentheparties. |   TheCourtreviewedasubstantialportionoftherecordandisfamiliarwiththeissues N presentedduetoitsmanagementofthepresentlitigationformorethantwoyears.Onthebasis !   ofthiswelldevelopedrecordandtheextensivebriefsandargumentsofcounselforthe W#" respectiveparties,theCourtfindsthatthemembersofthe2ndSLC,Adm.TuttleandGen.Harris, )% $ andtheirlegaladvisors,wereindependent,disinterestedandperformedtheirdutiesingoodfaith; &"& thatthe2ndSLCundertookareasonableinvestigationofplaintiffsderivativeclaims; #  23      ׀andthat e the2ndSLCsfindingsandconclusionsarereasonable.K #  24      ׀Again,plaintiffshavefailedtoprove 7 otherwise,andtheCourtbelievesthatitsproperroleisnottosecondguessthe2ndSLCifits   findingsandconclusionsrepresentreasonablebusinessjudgment.  v   Accordingly,theCourtwillenteranOrderthis7thdayofJanuary,2008,dismissingwith  H prejudiceCountsVIandVIIoftheplaintiffsSecondAmendedComplaint,thederivativecauses    ofaction. Q     `     h     ______________________     `     h     AlbertJ.Matricciani,Jr. y    `     h     Judge b cc:allcounselviaLexisNexisFileandServe