ALBERT OLIVEIRA, ET AL.
JAY SUGARMAN, ET AL
[Copyrighted Material Omitted]
from the Circuit Court for Baltimore County, Pamela J. White,
BY: Adam M. Apton (Donald J. Enright, Nicholas I. Porritt,
Alexander A. Krot III, Levi & Korsinsky, LLP on the brief)
all of Washington, D.C., FOR APPELLANT.
BY: Daniel J. Leffell (Daniel J. Kramer, Jesse S. Crew, Paul,
Weiss, Rifkind, Wharton & Garrison LLP of New York, NY. Craig
A. Benson, Paul, Weiss, Rifkind, Wharton & Garrison LLP of
Washington, D.C.) Stephen A. Radin (Joseph S. Allerhand,
Weil, Gotshal & Manges LLP of New York, NY. G. Stewart Webb,
Jr., Venable, LLP of Baltimore, MD.) all on the briefs, FOR
Berger, Thieme, Raymond G., Jr. (Retired, Specially
Md.App. 529] Berger, J.
appeal arises from an order of the Circuit Court for
Baltimore City dismissing various claims filed by Albert F.
Oliveira and Lena M. Oliveira, Trustees for the Oliveira
Family Trust, appellants (" the Shareholders" ),
for failure to state a claim. Nominal Defendant-Appellee
istar Financial Inc. (" istar" ) is a registered
Maryland corporation headquartered in New York.
Defendants-Appellees include current and former members of
the istar Board of Directors as well as current and former
members of istar's senior management. Jay Sugarman is the
Chairman and Chief
Executive Officer of istar and also serves on istar's
Board of Directors. Robert [226 Md.App. 530] W. Holman, Jr.,
John G. McDonald, Dale Anne Reiss, and Barry Ridings are
current members of the istar Board of Directors. Glen August,
George R. Puskar, and Jeffrey A. Weber are former members of
the istar Board of Directors. Nina B. Matis, R. Michael
Dorsch, Michelle M. MacKay, Barbara Rubin, and David Distaso
are current and former istar executives.
appeal, the Shareholders presented several issues for our
review, which we have consolidated and rephrased for clarity
1. Whether the circuit court erred by granting the
Appellees' motion to dismiss the Shareholders'
2. Whether the circuit court erred by dismissing the
Shareholders' claims which were styled as "
reasons explained herein, we shall affirm.
AND PROCEDURAL BACKGROUND
The 2008 Awards and 2009 Plan
alleged wrongdoing in this case centers upon istar's 2011
modification of restricted stock unit performance awards
granted to istar executives in 2008 (the " 2008
Awards" ). The 2008 Awards, as originally issued,
provided certain employees cash or istar stock if certain
conditions were met. The terms of the 2008 Awards provided
that the awards would vest if istar's stock achieved any
one of three average closing price targets over twenty
consecutive trading days. The targets were a price of $4 per
share by December 19, 2009, $7 per share by December 19,
2010, or $10 per share before December 19,
2011. The total award represented 10,164,000
restricted stock units (" RSUs" ).
Md.App. 531] At the time the 2008 Awards were granted, istar
did not have sufficient authorized shares of stock to pay the
awards in istar stock. For this reason, in 2009, istar sought
and obtained shareholder approval of a new Long-Term
Incentive Plan (the " 2009 Plan" ), which increased
the number of shares that could be issued for incentive
compensation, allowing for issuance of up to 8,000,000 shares
of common stock. The terms of the 2008 Awards permitted the
awards to be settled in either cash or istar shares. The
awards were to be settled in shares if the anticipated 2009
Plan was approved by shareholders the following year, or
alternatively, if the 2009 Plan was not approved by
shareholders, in cash.
April 2009, istar filed a Schedule 14A Proxy Statement
(" the Proxy Statement" ) with the United States
Security and Exchange Commission. The Proxy Statement
included language explaining that " the ongoing
financial crisis and its negative impact on our business and
financial results have resulted in a sharp decline in
[istar's] share price" which " has led to a
more rapid depletion of shares under the 2006 Plan than we
had anticipated in 2006," resulting in " virtually
no remaining shares available under the 2006 Plan."
The Proxy Statement explained that shareholder approval of
the 2009 Plan would " ensure that we will have a
sufficient number of shares to settle the performance-based
awards made in December 2008 using shares of common stock
rather than cash." The Proxy Statement further explained
that " [i]f the 2009 Plan is not approved by
shareholders," the 2008 Awards " will be settled in
cash rather than in common stock." The Proxy Statement
included language noting that approval of the 2009 Plan would
" ensure, for federal tax purposes, the deductibility of
compensation recognized by certain participants in the 2009
[226 Md.App. 532] Plan which may otherwise be limited by
Section 162(m) of the Internal Revenue Code."
A copy of the 2009 Plan was attached to the Proxy Statement.
The 2009 Plan was approved by a shareholder vote in May 2009.
did not achieve the $4 per share target for twenty
consecutive trading days by the December 19, 2009 deadline
set forth in the 2008 Awards. istar's stock price
also failed to meet the December 19, 2010 deadline. istar
reached the $7 per share target for twenty consecutive days
on December 30, 2010, eight trading days after the December
19, 2010 deadline.
the near miss of the 2010 target, istar undertook a six-month
process to consider modification of the 2008 Awards. The
Board sought to reach a balance " between rewarding
management's exceptional performance, as reflected by the
300% rise in the market value of istar stock, and enforcing
the terms of the 2008 Awards in light of the near miss of the
$7 price target." After four Board meetings and eleven
Compensation Committee meetings, as well as discussions with
legal, accounting, and compensation advisors, istar's
Board of Directors modified the 2008 Awards in July 2011
(" the 2011 Modification" ). The 2011 Modification
converted the 2008 Awards from performance-based to
service-based awards. The Modification reduced the amount of
the award by 25% and required specific years of service.
Pursuant to the 2011 Modification, employees would receive
the reduced award in three installments on January 1 of 2012,
2013, and 2014, as long as the employee remained employed by
istar on the vesting dates. According to istar, the 2011
Modification addressed concerns that key employees would
leave istar for better paying opportunities with competitors
and hedge funds if the 2008 Awards resulted in no
compensation [226 Md.App. 533] despite the 300% rise in
istar's stock price. The Board considered forfeiting the
2008 Awards and issuing new awards, but this option was
rejected due to the accounting expense associated with
issuing new awards.
The Demand and istar's Response
letters dated May 23, 2013 and July 30, 2013, the
Shareholders demanded that istar's Board of Directors
" investigate and institute claims on behalf of [istar]
. . . against responsible persons" relating to the 2011
Modification. The Shareholders
demanded that the Board of Directors " [r]escind all the
shares that were issued under the 2009 Plan to settle the
2008 Awards" or, alternatively, " seek any other
appropriate relief on behalf of [istar] for damages sustained
. . . as a result of the Board's misconduct." The
demand further sought to " enjoin [istar] from issuing
any more shares under the 2009 Plan to settle the 2008
Awards" and demanded that the Board of Directors adopt
internal procedures to " prevent a recurrence of the
wrongdoing described" in the demand letter.
28, 2013, the Board formed a committee (" the
Committee" ) to investigate the allegations in the
demand letter and make a recommendation to the Board
concerning the demand. The Committee consisted of a single
member, Barry W. Ridings, who was an outside, non-management
director who joined the Board in August 2011, after the
occurrence of the alleged wrongdoing that was the subject of
the demand. Mr. Ridings is the Vice Chairman of Investment
Banking at Lazard Freres & Co. LLC (" Lazard" ).
Lazard had formerly performed restructuring work for istar in
2010 and early 2011, before Mr. Ridings joined the Board, but
had no continuing business relationship with istar. According
to istar, Mr. Ridings had no business, personal, social, or
other [226 Md.App. 534] relationships with any member of the
Board apart from his service on the Board. The Committee
retained outside counsel, Joseph S. Allerhand and Stephen A.
Radin of Weil, Gotshal & Manges LLP (" Weil" or
" Counsel" ) to assist with the investigation of
the content of the Shareholder's demand letter. Weil does
not currently represent and has never in the past represented
istar or any of its Board members.
Committee and Counsel met eight times between July and
October 2013, reviewed relevant documents, and conducted
multiple interviews. Counsel interviewed three members of
istar management, including Mr. Sugarman, three of
istar's outside, non-management directors, and
representatives of Kirkland & Ellis LLP, counsel to the istar
Board's compensation committee, Clifford Chance LLP,
istar's corporate and disclosure counsel, and
TowersWatson, an outside consultant to the compensation
committee. Following the investigation, on October 23, 2013,
the Committee made a presentation to the Board, recommending
that the Board refuse the Shareholders' demand. The Board
asked Counsel to draft a letter for the Board's
consideration, explaining the Board's reasons for
refusing the demand.
November 6, 2013, a draft letter was circulated to the Board.
The Board met on November 11, 2013 and, after discussing the
draft letter, unanimously determined that pursuing the
litigation demanded by the Shareholders would not serve the
best interests of istar and its shareholders. Accordingly,
the Board unanimously voted to refuse the demand and directed
Counsel to send the letter which had been drafted on the
Board's behalf to the Shareholders.
Board's 10-page letter to the Shareholders explained in
detail the reasons supporting the Board's conclusion that
the litigation demanded by the Shareholders would be
detrimental to the best interests of istar and its
shareholders. Although we do not set forth the letter in
full, we summarize several of the reasons set forth by the
o The Board believed that istar would lose -- and incur
attorney's fees pursuing a losing lawsuit -- if it were
to [226 Md.App. 535] seek
to litigate the claims alleged in the Shareholders'
o The Board believed that any effort to rescind or stop
issuing shares under the 2009 Plan to settle the modified
2008 Awards or to rescind the modified 2008 Awards would harm
istar and its shareholders.
o The Board believed that failure to honor the modified 2008
Awards would create serious morale and retention problems and
potentially lead to the departure of key members of
o The Board believed that the modified awards appropriately
rewarded exceptional performance, were necessary to motivate
and ensure retention of key personnel, and secured an
additional three years of service for a 25% reduction in the
original amount of the 2008 Awards.
o The Board believed that failure to honor the modified 2008
Awards would likely embroil istar in litigation with key
members of management, which the key members of management
would likely win.
o The Board believed that, even if istar won in pursuing the
claims raised in the Shareholders' demand, there might be
no damages because the cost of new grants would exceed the
cost of the modified 2008 Awards. The Board explained that
the modified 2008 awards saved istar tens of ...