Shenker v. Polage

NAZARIAN, J. This appeal arises from the Circuit Court for Baltimore City’s approval of a class action settlement of claims against 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. I. BACKGROUND CREI is 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. ARCP is 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 net leases. ⁶⁷⁶ A. The First Merger: CCPT III Acquires Its Subsidiary. In early 2013, ARCP approached CCPT III with a proposal to merge, but a special committee of CCPT Ill’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 Ill’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 financial success. During 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 Ill’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 Ill’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.

The 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 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 shareholder plaintiffs. B. The Second Merger: ARCP Acquires CREI.

In late 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. In response to the announcement, eight new class action and derivative complaints — including one action by Ms. Po-lage — 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 ⁶⁷⁸ District Court for the District of Arizona in October and November 2013. 1 The 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.

The 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 shareholders. C. The October Surprise. On 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 ⁶⁷⁹ could no longer be relied upon.

The announcement spurred an investigation by the SEC, and the company’s stock price dropped from $12.38 per share to $7.85 per share within two trading days. The announcement also spurred a series of federal securities lawsuits against ARCP in the United States District Court for the Southern District of New York. The consolidated class action complaint alleges that ARCP director defendants prepared, reviewed, and disseminated false and misleading proxy statements in order to get shareholder approval for the merger with CREI, and in violation of § 14(a) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), in addition to alleging that ARCP officers and directors fraudulently induced class members to purchase ARCP stock for artificially inflated prices in violation of § 10(b), 15 U.S.C. § 78j(b). It also asserts claims under § 11 of the Securities Act, 15 U.S.C. § 77k, alleging that statements and prospectuses issued in connection with ARCP’s stock offerings contained material misstatements and omissions about ARCP’s financial statements; under § 12(a)(2), 15 U.S.C. § 771 (a)(2), alleging that ARCP officers and directors who assisted in the sale of those securities to class members did so for personal gain, including direct payments; and under § 15, 15 U.S.C. § 77o, asserting that ARCP officers and directors who controlled the content of those prospectuses should be held jointly and severally liable for the underlying § 11 and § 12(a)(2) violations.

The complaint asserts that the defendant-directors’ wrongful conduct inflated ARCP securities prices and resulted in the subsequent decline in value of those securities when the fraud was revealed. The parties resumed their negotiations, and agreed in November 2014 to amended settlement language that carved ARCP’s director and officers out of the release. As in the original settlement, the amended settlement language still released CREI’s officers: “Released Claims” means ... [any] claims, demands, rights, actions, causes of action, liabilities, damages, losses, obligations ... against any Released Persons, relating to or ⁶⁸⁰ based upon the ARCP Announcement or ARCP Financials except that nothing in this clause (ii) shall impair the completeness of the release of any of the Director Defendants, former CREI officers or outside advisors to CREI and/or to the Director Defendants for conduct occurring before the Merger closed on February 7, 201k to the extent such Director Defendants, former officers or outside advis-ors were acting in their capacity as directors or officers of CREI.... (Emphasis added.) As a condition for releasing CREI’s officers from liability, the parties agreed that the plaintiff shareholders could take discovery to ensure that they had no knowledge of or role in ARCP’s preparation of its misstated financial statements.

To that end, the plaintiffs deposed CREI’s former CEO, Mr. Nemer, on December 2, 2014, and examined him regarding the steps CREI’s board took to ensure that ARCP’s financials were solid and that its stock was worth the market price. Stated generally, Mr. Nemer responded that CREI retained and relied on outside advisors, including Goldman Sachs and Deloitte, to conduct CREI’s due diligence for the ARCP merger and to advise CREI’s board and officers. Five shareholders, including Mr. Shenker, objected to the amended settlement. They argued that because CREI’s officers made false statements about ARCP’s finances in the Joint Proxy to shareholders, those officers, and especially Mr. Nemer, should not be released from future liability for claims arising from ARCP’s financial fraud.

The circuit court held an all-day settlement hearing on December 12, 2014, then issued a written order approving the amended settlement, including the modified release language: The Court has closely reviewed and considered each objection, cited legal authorities, and the entire arguments offered by the parties and objectors on December 12, 2014, in view of the nature, issues, context, and circumstances of the litigation. The Court has also carefully reviewed and considered the terms and disclosures of the Joint Proxy (filed ⁶⁸¹ December 28, 2013); timing, terms and conditions of the Memorandum of Understanding (“MOU”) dated January 10, 2014; the Transaction closing date on February 7, 2014, the ARCP Forms 8-K and 10-K, with a filing date on February 27, 2014 (for the Fourth Quarter and the Fiscal Year that ended December 31, 2013); the Court’s August 25, 2014 Order and preliminary approval of the settlement terms reached on August 14, 2014; the motion papers with Amended Stipulation and Release and Agreement of Compromise and Settlement; and the December 2, 2014 deposition testimony of CREI Director Marc Nemer. (Footnote omitted.) The court found the amended settlement fair, adequate, and reasonable, and that “the scope of the revised Release, in the aftermath of ARCP’s announcement, reasonably ‘carve[d] out’ potential claims against ARCP directors and officers arising out of or relating to” ARCP’s October 2014 announcement. Moreover, the court concluded that the amended settlement language “d[id] not and need not address any such claims against Cole directors and officers.” The court cited “the chronological sequence of CREI and advisors’ examination of ARCP financial disclosures and certain audited reports in advance of the Joint Proxy, in advance of the MOU, and in advance of the Transaction date” in deciding to approve the settlement.

Mr. Shenker filed a timely notice of appeal. 2 II. DISCUSSION Mr. Shenker’s three appellate contentions (which we will address in a slightly different order) 3 boil down to a core ⁶⁸² complaint that the amended settlement was unfair to the class. First, he argues that the court failed to make adequate factual findings or articulate the standard of reasonableness on which it based its conclusions. Second, he contends that the settlement’s release of potentially valuable claims against CREI’s officers, particularly Mr. Nemer, render the settlement unfair and inadequate.

And third, in his view, those same defects demonstrate that the settlement violated the class’s due process rights. Unlike most settlements of civil actions, class action settlements must be approved by the court. See Md. Rule 2-231(h) (“A class action shall not be dismissed or compromised without the approval of the court.”). Our Rule does not state a specific standard for the court to apply.

See Boyd v. Bell Atlantic-Md., 390 Md. 60, 70-71 , 887 A.2d 637 (2005) (acknowledging that Rule 2-231 does not articulate any standards against which a court should evaluate the fairness and adequacy of a settlement proposal). But “[w]hen interpreting a Maryland Rule that is similar to a federal rule of Civil Procedure, we may look to federal decisions construing the corresponding federal rule for guidance.” Bond v. Slavin, 157 Md.App. 340 , 358 n. 30, 851 A.2d 598 (2004) (quoting Pleasant v. Pleasant, 97 Md.App. 711, 732 , 632 A.2d 202 (1993)). And Federal Rule of Civil Procedure 23(e), the federal analogue to Rule 2-231(h), does set forth a process for evaluating class action settlements and requires the court, as part of that review, to find the settlement “fair, adequate, and reasonable”: ⁶⁸³ Settlement, Voluntary Dismissal, or Compromise. The claims, issues, or defenses of a certified class may be settled, voluntarily dismissed, or compromised only with the court’s approval.

The following procedures apply to a proposed settlement, voluntary dismissal, or compromise: (1) The court must direct notice in a reasonable manner to all class members who would be bound by the proposal. (2) If the proposal would bind class members, the court may approve it only after a hearing and on finding that it is fair, reasonable, and adequate. (3) The parties seeking approval must file a statement identifying any agreement made in connection with the proposal. (4) If the class action was previously certified under Rule 23(b)(3), the court may refuse to approve a settlement unless it affords a new opportunity to request exclusion to individual class members who had an earlier opportunity to request exclusion but did not do so.

(5) Any class member may object to the proposal if it requires court approval under this subdivision (e); the objection may be withdrawn only with the court’s approval. Unlike Maryland Rule 2-231(h), Federal Rule 23(e) has been applied and analyzed thoroughly in reported decisions of Maryland’s federal district courts and the Fourth Circuit, as well as nationally. See, e.g., Berry v. Schulman, 807 F.3d 600 (4th Cir.2015); In re Jiffy Lube Securities Litig., 927 F.2d 155 (4th Cir.1991); Flinn v. FMC Corp., 528 F.2d 1169 (4th Cir.1975); In re Mid-Atlantic Toyota Antitrust Litig., 564 F.Supp. 1379