ROBERT SHENKER, ET AL.
BERNICE POLAGE, ET AL
from the Circuit Court for Baltimore City, Pamela J. White,
BY Richard S. Gordon (Martin E. Wolf, Gordon, Wolf &
Carney Chtd. of Baltimore, MD. James S. Notis, Meagan Farmer,
Gardy & Notis, LLP of New York, NY) all on the brief FOR
BY David A. P. Brower (Brian C. Kerr, Brower, Piven of New
York, NY. Charles J. Piven, Yelena Trepetin, Brower Piven of
Stevenson, MD. Lee D. Rudy, Michael C. Wagner, J. Daniel
Albert, Justin O. Reliford, Kessler, Topaz, Metzler &
Check, LLP of Radnor, PA.) Adam S. Hobson (William Savitt,
Andrew J. H. Cheung, Wachtell, Lipton, Rosen & Katz of
New York, NY. G. Stewart Webb, Jr., Maria E. Rodriguez,
Venable, LLP of Baltimore, MD. Scott H. Marder, Laurie B.
Goon, Duane Morris, LLP of Baltimore, MD. Rebecca M.
Lamberth, Duane Morris LLP of Atlanta, GA) all on the briefs
Wright, Nazarian, Hotten, [*] JJ.
Md.App. 674] Nazarian, J.
appeal arises from the Circuit Court for Baltimore City's
approval of a class action settlement of claims against [226
Md.App. 675] Cole Real Estate Investments, Inc. ("
CREI" ), American Realty Capital Properties, Inc.
(" ARCP" ), and both companies' directors and
officers, relating to their February 2014 merger. Certain
CREI shareholders brought derivative and class action claims
alleging that the CREI board breached its fiduciary duties in
negotiating and completing due diligence for the merger. The
parties reached a settlement that the circuit court approved
preliminarily, but before the circuit court conducted its
settlement approval hearing, ARCP announced that certain
financial results had
been misstated and that others were not (yet) reliable. After
further negotiations, the parties agreed to an amended
settlement that, among other things, released CREI's
officers and directors from future liability, but carved the
officers and directors of ARCP out of the release. Five class
members, including Robert Shenker, objected to the amended
settlement, arguing that the release was overbroad because it
precluded the objecting shareholders from bringing federal
securities claims against CREI's officers and directors.
The circuit court held a hearing and approved the amended
settlement. Mr. Shenker appeals and we affirm.
incorporated in Maryland and maintains its principal
executive offices in Phoenix, Arizona. CREI was previously
known as Cole Credit Property Trust III (" CCPT
III" ) and operated as a non-traded real estate
investment trust that acquired commercial retail properties
throughout the country. Christopher H. Cole is chairman of
CREI and was CEO of CCPT III until the first merger (which we
describe in greater detail below) in April 2013. Mark Nemer
became CEO and President of CREI after the first merger.
a Maryland corporation that maintains its principal offices
in New York City. It became a public company in September
2011. ARCP acquires and owns single-tenant freestanding
commercial real estate, principally subject to medium-term
Md.App. 676]A. The First Merger: CCPT III
early 2013, ARCP approached CCPT III with a proposal to
merge, but a special committee of CCPT III's board
decided not to pursue a merger with ARCP at that time.
Instead, on March 6, 2013, CCPT III announced that its board
had unanimously approved the acquisition of one of CCPT
III's subsidiaries, Cole Holdings Corporation. The
combined company would be called CREI. As consideration for
the acquisition, CCPT III would make upfront payments of $20
million in cash, subject to adjustment, as well as 10,711,225
shares of CCPT III common stock, plus 2,142,245 shares of
common stock after listing on the New York Stock Exchange.
Additional shares of common stock were potentially payable in
2017 as an earn-out, contingent on the new company's
March 2013, CCPT III shareholders filed, in the Circuit Court
for Baltimore City, three separate putative derivative and
class action lawsuits challenging the proposed acquisition.
These suits were ultimately consolidated; two federal
securities claims were filed as well in the United States
District Court for the District of Arizona. Opposing
shareholder Bernice Polage also served what came to be known
as " The Polage Demand" on CCPT III's board in
April 2013. She alleged that CCPT III directors breached
their fiduciary duties to shareholders by pursuing the
internalization merger rather than merging with ARCP. CCPT
III's board formed a special committee to investigate
these allegations, as well as the opposing shareholders'
demands: disgorgement of the cash and shares that Defendant
CEO Mr. Cole received in connection with the transaction;
rescission of Mr. Cole and Mr. Nemer's employment
agreements entered into in connection with the transaction,
and damages to compensate shareholders for losses sustained
as a result of the transaction.
acquisition ultimately closed in April 2013, and the circuit
court dismissed the actions challenging it after the parties
reached a settlement that reduced the contingent [226 Md.App.
677] payments to Messrs. Cole, Nemer, and other CREI
executives. The shareholders filed a Notice of Appeal in this
Court, and the appeal was dismissed on July 31, 2014 after
the defendant executives agreed to reimburse $100,000 to the
The Second Merger: ARCP Acquires
August or September 2013, ARCP's CEO again approached
Messrs. Cole and Nemer and expressed interest in a potential
merger. CREI retained Goldman Sachs to advise the Board about
ARCP's business, to review ARCP's financial results
and financial projects, and to review the terms of the merger
proposal. CREI also retained the law firm Morris Manning
& Martin LLP to conduct due diligence on ARCP's real
estate investments, including leases and portfolio
information, as well as environmental, tax and litigation
issues; the law firm Venable to advise the Board on the
applicable law in Maryland; and the accounting firm Deloitte
& Touche LLP to conduct a financial and accounting due
diligence investigation of ARCP. The companies announced a
merger agreement on October 23, 2013, under which ARCP would
exchange 1.0929 shares of ARCP common stock or $13.82 in cash
for each share of CREI common stock (the cash option was
available for up to 20% of CREI's outstanding shares).
The transaction was valued at $11.2 billion.
response to the announcement, eight new class action and
derivative complaints--including one action by Ms.
Polage--were filed in the Circuit Court for Baltimore City
between October 30, 2013 and November 14, 2013. These
lawsuits alleged that CREI's directors breached their
fiduciary duties to the stockholders and sought, among other
things, an order enjoining the transaction. The court
consolidated these actions as Polage v. Cole on
December 12, 2013, and a few days later, the Polage
plaintiffs filed a consolidated complaint that, again,
asserted both derivative and class action claims challenging
the merger. Several federal securities class action
complaints were also filed in the United States [226 Md.App.
678] District Court for the District of Arizona in October
and November 2013.
parties also engaged in negotiations regarding a possible
settlement, and on January 10, 2014--the day of the
injunction hearing--the plaintiff shareholders and CREI
directors entered into a Memorandum of Understanding
containing the material terms of a settlement. Among other
things, the agreement permitted the plaintiff shareholders to
engage in additional discovery to confirm that the settlement
was fair and adequate. The CREI stockholders voted to go
through with the merger at a special meeting on January 23,
2014, and the merger closed in February of that year.
parties submitted a settlement agreement for approval to the
circuit court on August 18, 2014. As consideration for
dismissing the claims against them, the CREI directors and
executives agreed to relinquish $50 million in personal
payments, and to establish a $14 million settlement fund for
distribution to class members. In addition, the CREI
executives agreed to provide shareholders with previously
undisclosed material information concerning the merger via a
Form 8-K they would file with the Securities and Exchange
Commission (" SEC" ). The
CREI defendants also agreed not to oppose the plaintiff
shareholders' application for $7 million in
attorney's fees and reimbursement of expenses, and the
settlement released both CREI and ARCP from future liability.
The court issued a preliminary approval of the settlement on
August 25, 2014, preliminarily certified the class, and
ordered that notice be distributed to CREI's
The October Surprise.
October 29, 2014, ARCP announced that it had overstated the
operating funds and understated the net losses it reported in
its first and second quarter 2014 financial results.
According to ARCP, financial information as far back as 2013
[226 Md.App. 679] could no longer be relied upon. The
announcement spurred an investigation by the SEC, and the