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Oliveira v. Sugarman

Court of Special Appeals of Maryland

January 28, 2016

ALBERT OLIVEIRA, ET AL.
v.
JAY SUGARMAN, ET AL

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[Copyrighted Material Omitted]

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         Appeal from the Circuit Court for Baltimore County, Pamela J. White, JUDGE.

         ARGUED 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.

         ARGUED 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 APPELLEE.

          Kehoe, Berger, Thieme, Raymond G., Jr. (Retired, Specially Assigned), JJ.

          OPINION

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         [226 Md.App. 529] Berger, J.

         This 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.[1] (" 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

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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.[2]

         On appeal, the Shareholders presented several issues for our review, which we have consolidated and rephrased for clarity and brevity:

1. Whether the circuit court erred by granting the Appellees' motion to dismiss the Shareholders' derivative claims.
2. Whether the circuit court erred by dismissing the Shareholders' claims which were styled as " direct" claims.

         For the reasons explained herein, we shall affirm.

         FACTUAL AND PROCEDURAL BACKGROUND

         A. The 2008 Awards and 2009 Plan

         The 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.[3] The total award represented 10,164,000 restricted stock units (" RSUs" ).

          [226 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.

         In 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." [4]

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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." [5] A copy of the 2009 Plan was attached to the Proxy Statement. The 2009 Plan was approved by a shareholder vote in May 2009.

         iStar 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.[6] 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.

         Following 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.[7]

         B. The Demand and istar's Response

         In 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.[8] The Shareholders

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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.

         On June 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.

         The 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.

         On 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.

         The 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 Board:

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

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to litigate the claims alleged in the Shareholders' demand.
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 management.
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 ...

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