Impac Mortgage Holdings, Inc. v. Curtis J. Timm, et al.
No. 18
IN THE COURT OF APPEALS OF MARYLAND
September Term, 2020; Filed: July 15, 2021
Opinion by McDonald, J.
Circuit Court for Baltimore City, Case No. 24-C-11-008391; Argument: December 4, 2020
Corporations – Charter – Construction. A corporate charter is a contract between the corporation and its shareholders. When a charter provision is ambiguous as to the rights of shareholders of publicly-issued stock, the provision should be construed in a way in which a reasonable person in the shoes of the shareholders would construe it. The fact that a corporation enters into an agreement with an underwriter in connection with an initial public offering of shares of the corporation does not make the underwriter a party to the charter.
Contracts – Contract Interpretation – General Rules of Construction – Existence of Ambiguity. Under the objective approach to contract interpretation, a court considers the language of the contract alone, viewed from the perspective of a reasonable person in the position of the parties to the contract, regardless of the subjective intent of the parties. The determination of whether contract language is unambiguous or ambiguous is a question of law for a court. If the contract language is unambiguous, the inquiry ends. If the contract language is ambiguous, the court may consider extrinsic evidence that reflects the parties’ mutual understanding of the language.
Contracts – Contract Interpretation – Consideration of Extrinsic Evidence. When a court considers extrinsic evidence to interpret ambiguous language in a contract and the relevant admissible evidence does not generate a dispute of material fact, interpretation of the contract remains a question of law for the court.
Contracts – Contract Interpretation – Relevant Extrinsic Evidence. A court construing ambiguous contract language considers relevant admissible evidence of the parties’ mutual intent. To be relevant, extrinsic evidence must show the parties’ intent at the time of contract formation. The retrospective subjectivе view of a party or the party‘s counsel as to the meaning of a contract, when neither expressed to the other party at the time of contract formation nor consistent with the other party‘s understanding, does not establish the parties’ mutual intent.
Contracts – Contract Interpretation – Canons of Construction – Construing Language Against the Drafter. A court will apply the canon of construction under which a court resolves an ambiguity against the drafter of the provision only when extrinsic evidence does not resolve ambiguity in a contract provision.
Corporations – Charter – Preferred Stock – Voting Provision. A corporate charter provision specifying a procedure for voting by holders of publicly-issued preferred stock was ambiguous because it was susceptible of more than one meaning from the perspective of a reasonable investor. Extrinsic evidence related to that provision demonstrated that the requisite approval for a charter amendment affecting the rights of two series of preferred stock by the holders of at least two-thirds of the shares had to be tallied as to each series separately rather than as to the two series collectively.
Barbera, C.J.,
McDonald
Watts
Hotten
Getty
Booth
Biran,
JJ.
Petitioner Impac Mortgage Holdings, Inc. (“Impac“), a publicly-held Maryland corporation, decided to raise some capital by issuing a series of preferred stock known as Series B. A provision of Impac‘s charter seemingly prohibited it from adversely changing the special rights and preferences of Series B stock without the approval of the owners of two-thirds of Series B shares. The meaning of that provision was rendered ambiguous when Impac later issued a nearly identical series of preferred stock known as Series C. In 2009, after the company fell on hard times during the Great Recession, Impac sought to buy back the shares of both series at a severe discount and to eliminate the special rights and privileges associated with those shares. Owners of two-thirds of the
In Impac‘s view, the approval of two-thirds of the Series B and Series C shares, counted together, provided the requisite approval required by the charter provision relating to Series B shares. Respondents Curtis J. Timm and Camac Fund LP (“Camac“), who own some of the Series B shares that remain outstanding, disagree. Mr. Timm filed this action, which Camac later joined, in the Circuit Court for Baltimore City, seeking to restore the rights and preferences of Series B shares.
In ruling on cross-motions for summary judgment, the Circuit Court found that the charter language was ambiguous and that the extrinsic evidence and interpretive aids referenced by the parties did not resolve the ambiguity. The court then construed the provision against Impac as the drafter of the provision, under a canon of construction that courts use to construe a contract when neither the contract language nor extrinsic evidence illuminates thе parties’ intent. The court ruled that shareholders of the two series of stock were to vote separately on Impac‘s proposal to buy back the shares and eliminate their special rights and privileges. The failure to obtain the approval of owners of two-thirds of the Series B shares doomed that proposal as to Series B. On appeal, the Court of Special Appeals opined that the charter language was unambiguous, but reached the same ultimate result.
We conclude that the charter provision is ambiguous. That ambiguity is resolved by the contemporaneous and undisputed documentation of Impac‘s undertaking to the Series B shareholders that it would not amend its charter adversely as to their shares unless the requisite supermajority of shares of that series voted to approve the amendment. Accordingly, without resorting to construing the charter provision against the drafter – which, in any event, was Impac – we hold that the Circuit Court reached the correct result when it granted summary judgment in favor of the shareholders on that issue, and that the Court of Special Appeals did not err in affirming that judgment.
I
Legal Landscape
This case concerns the rights of holders of preferred stock of a corporation under the corporation‘s charter – a document that courts typically construe by reference to principles of contract law. To set the stage for a reader who does not live in that world every day, it is useful to describe some basic elements of corporate finance and basic principles of contract interpretation under Maryland law.
A. Setting the Terms for the Issuance, Sale, and Buy-back of Stock of a Corporation
1. The Authorization and Issuance of Stock
A corporation may raise funds in several ways. One way is to issue and sell stock in the company. A purchaser thereby obtains equity in the corporation. The two chief types of stock are known as common stock and preferred stock. Holders of common stock typiсally have greater voting rights in the affairs of the corporation than holders of preferred stock, but they also incur greater risk as the company‘s fortunes wax or wane. Holders of preferred stock generally come before holders of common stock in the distribution of dividends and, in the
The charter of a corporation – also referred to as its articles of incorporation – is the foundational document of the company. Maryland Code, Corporations & Associations Article (“CA“),
Thus, whenever a corporation‘s governing body (typically, a board of directors) decides that the corporation should be authorized either to issue additional stock or to change the class or terms applicable to already-authorized stock, the charter must be amended.
as witnessed or attested to by a corporate officer or agent, and filed with the State Department of Assessments and Taxation (“SDAT“).
A corporate charter is considered to be a contract between the corporation and its shareholders. Oliveira v. Sugarman, 451 Md. 208, 235-36 (2017); see also James J. Hanks, Jr., Maryland Corporation Law (2d ed.), § 3.07. Thus, when interpreting a charter provision that specifies the matters on which the owners of particular shares may vote, a court is essentially construing a provision of a contract between the corporation and the shareholders. Tackney v. U.S. Naval Academy Alumni Ass‘n, 408 Md. 700, 716 (2009) (“It is a fundamental principle that the rules used to interpret statutes, contracts, and other written instruments are applicable when construing corporate charters and bylaws.“) (citation and internal quotation marks omitted).
2. The Public Offering and Sale of Stock
A corporation that sells a new issue of its stock, including stock classified pursuant to articles supplementary, may enter into an agreement with underwriters to distribute the stock. Underwriters are typically investment banks with expertise in distributing stock in an initial offering to members of the public interested in purchasing that stock. An underwriter is thus an intermediary that assists a company in the sale and distribution of its stock to the
In connection with a public offering of stock that will be traded on a stock exchange, a company must make certain filings with the Securities and Exchange Commission (“SEC“). An important component is a prospectus that discloses to potential purchasers of that stock the material facts about the company and the stock – including the nature of the stock and the rights of shareholders of that stock under the corporate charter. The company and the underwriter use the prospectus essentially as a sales brochure. Prifti, supra, § 7.1. The information disclosed in a prospectus “enables investors to evaluate the securities offered and thus make informed investment decisions.” Marc I. Steinberg, Understanding Securities Law (7th ed. 2018) at 125. Such a document may include a summary and be supplemented as the company issues additional stock.
Maryland common law has long set an expectation that a corporation that issues a prospectus is to “state everything with striсt and scrupulous accuracy.” Findlay v. Baltimore Tr. & Guarantee Co., 97 Md. 716, 723 (1903) (quoting Savage v. Bartlett, 78 Md. 561, 565 (1894)). The securities laws set the same expectation; under those laws, misleading statements of material fact in the prospectus may subject the corporation to liability.5 For purposes of those laws, “it can be assumed” that an investor has relied on the prospectus and the issuer‘s other public statements when buying or selling stock at the market price. Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 159 (2008); see also Janus Cap. Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 144 (2011) (holding
that the issuer, as the entity with authority over the content of a prospectus, had made the statements in the prospectus, whether or not the prospectus had been prepared by other entities); Basic, Inc. v. Levinson, 485 U.S. 224, 246 n.24 (1988) (“[stock] market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices“). This, of course, is a compelling reason why shareholders reasonably rely on the prospectus – the risk of liability is an assurance of reliability.
On occasion, a company may decide to buy back shares of its stock from the shareholders. One such mechanism is known as an “issuer tender offer” that requires the company to make various disclosures and follow other procedures in compliance with the securities laws. See Prifti, supra, § 9.4.
B. Construing a Contract under Maryland Law
1. The Objective Approach to Contract Interpretation
It is often said that Maryland courts take an “objective” approach to the interpretation of contracts. Under that approach, the court‘s inquiry is initially bounded by the “four corners” of the agreement. Cochran v. Norkunas, 398 Md. 1, 17 (2007). As with the interpretation of a statute, the court does not construe particular language in isolation, but considers that language in relation to the entire contract. See Dumbarton Improvement Ass‘n v. Druid Ridge Cemetery Co., 434 Md. 37, 52, 58 (2013). The court is to give effect to the plain meaning of the contract, read objectively, regardless of the parties’ subjective intent at the time of contract formation. Myers v. Kayhoe, 391 Md. 188, 198 (2006). In other words, when the contract language is plain and unambiguous, “the true test of what is meant is not what the parties to the contract intended it to mean, but what a reasonable person in thе position of the parties would have thought it meant.” Dennis v. Fire & Police Employees Ret. Sys., 390 Md. 639, 656-57 (2006) (citation and internal quotation marks omitted).
Thus, the initial step in the objective approach to contract interpretation is to determine whether the contract‘s meaning is plain and unambiguous. If that is so, the court‘s task – at least as to the interpretation of the contract – is at an end.
2. Ambiguity and Resort to Extrinsic Evidence
Ambiguity arises when a term of a contract, as viewed in the context of the entire contract and from the perspective of a reasonable person in the position of the parties, is susceptible of more than one meaning. Ocean Petroleum, Co., Inc. v. Yanek, 416 Md. 74, 87 (2010). If a contract provision is ambiguous, “the narrow bounds of the objective approach give way,” and the court may consider extrinsic evidence to ascertain the mutual intent of the parties. Credible Behavioral Health, Inc. v. Johnson, 466 Md. 380, 394 (2019); see also Dumbarton Improvement Ass‘n, 434 Md. at 54. In that effort, the court is to consider admissible evidence that illuminates the intentions of the parties at the time the contract was formed. Truck Ins. Exchange v. Marks Rentals, Inc., 288 Md. 428, 433 (1980); Sy-Lene of Washington, Inc. v. Starwood Urb. Retail II, LLC, 376 Md. 157, 167-68 (2003). When addressing an ambiguous provision in a contract, the court “will search to find mutuality” and not a “self-serving, unilateral construction” of the contract. Kelley Const. Co. v. Washington Suburban Sanitary Comm‘n, 247 Md. 241, 247 (1967).
To be admissible, extrinsic evidence of intent as to the meaning of a contract term must demonstrate “an intent made manifest, not a secret intent” at the time of contract formation. Gov‘t Emps. Ins. Co. v. Coppage, 240 Md. 17, 25-26 (1965) (citations and internal quotation marks omitted). The parties’ construction of the contract before the controversy arises can be “an important aid,” as can be the usage of the term in the parties’ trade. Pac. Indem. Co. v. Interstate Fire & Cas. Co., 302 Md. 383, 389 (1985). And, communications between the parties about a contract subsequent to the execution of that contract may be admissible “as evidence of an interpretation by both parties.” Hurt v. Penn. Thresherman & Farmers’ Mut. Cas. Ins. Co., 175 Md. 403, 407 (1938). However, retrospective, subjective, and unexpressed views about the contract are not proper extrinsic evidence: “It is the intention of the parties as expressed in their words and the paper which they sign, not their own interpretation as to what their statements and acts were supposed to mean, which is determinative.” Coppage, 240 Md. at 25.
If the extrinsic evidence presents disputed factual issues bearing upon the
3. Construing Language Against the Drafter
Courts have developed rules of interpretation, often called canons of construction, as aids to interpret contracts as a matter of law. See, e.g., Williston on Contracts (4th ed. & 2021 update), Chapters 31, 32. As we shall see later in this opinion, among those rules of interpretation is that ambiguous language in a contract that is not clarified by extrinsic evidence or interpretive aids is construed against a party to the contract when that party drafted the language in question – a canon of construction sometimes referred to by the Latin phrase contra proferentem (“against the offeror“). Id. at § 32.12; see also Black‘s Law Dictionary (9th ed. 2009) at 377.6 That canon of construction is based on elementary notions of fairness – that the drafting party was responsible for including the particular language in the contract and presumably had the greater opportunity to clarify the language in its favor, if that was the parties’ intent, or at least to protect its own interests from a lack of clarity. See Restatement (Second) of Contracts § 206, Comment a. It is also meant to discourage the drafter from including ambiguous language in order “to induce another to contract with him on the supposition that the words mean one thing while he hopes the court will adopt a construction by which they will mean another thing more to his advantage.” Owens v. Gretzel, 146 Md. 361, 370-71 (1924) (citation and internal quotation marks omitted). As is evident, that rule of contract interpretation requires a court to identify the drafter. The identity of the drafter is not always self-evident – or even a simple question of fact. And, as we shall see, identification of the drafter may itself require applicatiоn of other legal principles.
II
Facts and Procedural History
A. The Corporation and its Issuance of Preferred Stock
1. Impac
Impac is a publicly traded Maryland corporation headquartered in Irvine, California. During most of the time relevant to this case – late 2003 through mid-2009 – Impac operated as a real estate investment trust (“REIT“)7 and primarily focused on originating, acquiring, securitizing, and investing in residential and commercial mortgages.
In 2004, Impac‘s board of directors resolved to raise capital by issuing and selling shares of preferred stock in public offerings. Under Impac‘s articles of incorporation, as described by Impac,8 the board had authority to classify and reclassify shares of unissued stock by setting or changing certain terms and conditions applicable to those shares, including preferences, “voting powers,” and limitations as to dividends, all as provided by
Two sets of such enabling actions, and subsequent issuances of preferred stock, are relevant here. One concerned an issue of preferred stock called 9.375% Series B Cumulative Redeemable Preferred Stock (“Series B“); the second concerned a related issue of preferred stock called 9.125% Series C Cumulative Redeemable Preferred Stock (“Series C“). As preferred stock, both series ranked ahead of Impac‘s common stock in the payment of dividends and in their claims upon corporate assets in dissolution. Both series had a liquidation preference of $25 per share. The annual dividend was to be approximately $2.34 for each share of Series B and $2.28 for each share of Series C, paid quarterly.9 The dividends were cumulative, and Impac could not pay dividends or make distributions to shareholders of its common stock or repurchase stock unless it paid the cumulative dividends owed on its preferred stock.
While the preferred stock ordinarily had no say in corporate governance and no voting rights, its shareholders had the right to elect two members of Impac‘s board of directors if Impac failed to pay dividends on the stock for six or morе quarters. In addition, pertinent to this case, Series B and Series C shareholders had certain voting rights as to any corporate action that affected the rights or preferences of those shares.
Impac issued 2,000,000 shares of Series B, by which it raised $50,000,000 in equity capital, and 4,470,600 shares of Series C, by which it raised $111,765,000 in equity capital. Series B and Series C traded on the New York Stock Exchange, under the symbols “IMH PrB” and “IMH PrC“, respectively.
The creation of each series began with a resolution of the Impac board of directors that authorized an amendment of the company charter, by means of articles supplementary, to authorize the issuance of the shares. To offer the preferred stock for sale, Impac entered into an underwriting agreement with a group of investment banks and issued a prospectus supplement with respect to each series.
3. Corporate Actions Related to Issuance, Offer, and Sale of Series B
Board Resolution as to Series B
A board resolution dated April 29, 2004, “authorize[d] the creation of a new class of capital stock classified as up to a 10% Series B Cumulative Redeemable Preferred Stock,” with the terms and conditions as stated in an exhibit attached to the resolution.10 Under the heading for “Voting
[T]he affirmative vote of holders of at least two-thirds of the outstanding shares of Series B Preferred Stock will be required to . . . (ii) amend, alter or repeal the provisions of the Amended and Restated Articles of Incorporation of the Company, as amended and supplemented, . . . so as to materially and adversely affect any right, preference, privilege or voting power of the Series B Preferred Stock or the holders thereof . . . .
As is evident, that exception did not state that Series B shareholders would vote as a class with the shareholders of other series or classes.
Articles Supplementary as to Series B
The board‘s April 29, 2004 resolution also authorized Impac‘s officers to take various actions to amend the company‘s charter and to issue and sell Series B stock. First, the officers were authorized to execute, and file with SDAT, the Articles Supplementary that made the corporate charter amendment needed to effect the creation of Series B preferred stock. That document was executed on May 25, 2004. The Articles Supplementary described the voting rights of Series B shareholders, with language additional to that in the board resolution, as italicized below:
So long as any shares of Series B Preferred Stock remain outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of the Series B Preferred Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting (voting separately as a class with all series of Parity Preferred that the Corporation may issue upon which like voting rights have been conferred and are exercisable) . . . (ii) amend, alter or repeal any of the provisions of the Charter, so as to materially and adversely affect any preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, or terms or conditions of redemption of the Series B Preferred Stock or the holders thereof; . . . .
Section 6(d)(ii) of the Series B Articles Supplementary (emphasis added) (the “Voting Provision“). The Articles Supplementary thus added to the board resolution the concept that the requisite affirmаtive vote or consent of Series B shareholders was to be “given in person or by proxy, either in writing or at a meeting (voting separately as a class with all series of Parity Preferred that the Corporation may issue upon which like voting rights have been conferred and are exercisable).”
Series B Prospectus Supplement
The April 29, 2004 board resolution also authorized Impac‘s officers and board members to prepare, and file with the
The prospectus supplement described Series B voting rights in several places. In its “brief summary” of the offering, Impac described voting rights in the event Impac failed to pay dividends with respect to the Series B shares. In addition, the prospectus summary also described the voting rights of holders of Series B shares in the event that Impac proposed to amend its charter to adversely affect the rights and preferences of those shares. Consistent with the board resolution, Impac represented in the prospectus summary that:
In addition, the affirmative votes of holders of at least two-thirds of the outstanding shares of Series B Preferred Stock will be required to . . . (b) amend, alter or repeal any of the provisions of our charter so as to materially and adversely affect the Series B Preferred Stock . . . .
The beginning of the summary advised that a “more complete description” of the terms applicable to the stock could be found in a later section of the prospectus supplement.
That later section, labeled “Description of the Series B Preferred Stock,” was prefaced by a disclaimer that the “following summary of the terms and provisions of the Series B Preferred Stock does not purport to be complete and is qualified in its entirety by reference to the pertinent sections of our charter and the articles supplementary creating the Series B Preferred Stock . . . .” Under a heading entitled “Further Issuances,” the prospectus supplement stated that, without the consent of the Series B shareholders, Impac could issue additional shares of Series B stock with the same ranking “and other terms” as the Series B preferred stock except for the issue price and date. With regard to such further issuances, Impac stated that any additional shares of Series B preferred stock would, “together with” the shares described in the initial offering, “constitute a single class of preferred stock under our charter and will vote together on limited matters under the charter,” as described in the section on voting rights. Then, in the voting rights section of the prospectus supplement, Impac used the same phrasing that it had used in the Articles Supplementary, with only stylistic changes.11
Underwriting Agreement with Bear Stearns
To carry out the issuance and sale of the Series B preferred stock that the board had authorized, the April 29, 2004 board resolution also authorized Impac‘s officers to contract with a group of underwriters headed by Bear Stearns & Co., Inc. (collectively, “Bear Stearns“) to underwrite an initial public offering of those shares. That,
4. Corporate Actions Related to Issuance, Offer, and Sale of Series C
Reclassification of Remaining Series B Shares as Series C Shares
Impac did not issue all of the authorized shares of Series B during 2004. Instead, the board decided later that year to “reclassify” the 5,500,000 unissued Series B shares as
a new Series C preferred stock with a lower dividend rate.13 Impac created the new Series C in order to take advantage of a coupon rate of interest lower than what it was paying on the Series B shares that it had previously issued.
On November 18, 2004, Impac filed with SDAT Articles Supplementary that created Series C Cumulative Redeemable Preferred Stock. That same day, Impac published a prospectus supplement for the initial offering of a portion of the newly-authorized Series C stock.
Articles Supplementary as to Series C
The Articles Supplementary for Series C recited that Impac‘s board of directors had, by board resolution, “reclassified and designated” the remaining authorized but unissued shares of Series B as shares of “9.125 Series C Cumulative Redeemable Preferred Stock.” (emphasis added). It provided that Series C preferred stock would, “with respect to the payment of distributions and the distribution of assets upon liquidation, dissolution, or winding up of the Corporation, rank . . . on a parity with [Series B] stock . . . .” With respect to voting rights in the event of Impac‘s failure to pay dividends, the Articles Supplementary specified that, upon Impaс‘s failure to pay dividends on any shares of the two series for six quarters, the holders of Series C stock, “voting separately as a class with any other classes or all other series of our preferred stock, including the 9.375% Series B . . . Stock” were entitled to elect two directors to the board. By contrast, the voting provision applicable to proposed charter amendments that would adversely affect the rights and preferences of Series C shares did not similarly specify the participation of Series B in the vote. That provision was worded just as the Voting Provision in the Series B Articles Supplementary had been worded but for the references to the new Series C rather than Series B.14
A prospectus supplement, also dated November 18, 2004, offered 4,000,000 shares15 of Series C for sale to the public. The prospectus supplement for Series C offering was similar to that for the Series B offering. The voting rights description in the summary was exactly the same as that in the Series B prospectus supplement summary (but for the references to Series C):
[T]he affirmative votes of holders of at least two-thirds of the outstanding shares of Series C Preferred Stock will be required to . . . (b) amend, alter or repeal any of the provisions of our charter so as to materially and adversely affect the Series C Preferred Stock . . . .
The summary also explained that “Series C Preferred Stock will rank senior to our common stock and on parity with our Series B Preferred Stock with respect to the payment of distributions and amounts upon liquidation, dissolution or winding up.”
In a later description of the Series C stock in the prospectus supplement, Impac again cautioned a prospective shareholder that the information in the prospectus supplement “was qualified in its entirety by reference to the pertinent sections of our charter and the articles supplementary creating the Series C Preferred Stock . . . .” And, as in the Series B prospectus supplement, Impac stated thаt it could issue more Series C shares without the shareholders’ consent and that “such additional shares of Series C Preferred Stock will, together with the shares offered hereby, constitute a single class of preferred stock under our charter and will vote together on limited matters under the charter,” as provided in the section on voting rights. Likewise, the pertinent voting rights language was exactly the same as that in the voting rights section of the Series B prospectus supplement, but for the references to Series C.
B. The Great Recession and Impac‘s Tender Offer for its Preferred Stock
1. Impact of the Great Recession
Four years passed, apparently without incident pertinent to the issues in this case. Then, in 2008, during the Great Recession, Impac stopped paying dividends to the Series B and Series C shareholders.16 At the close of the first quarter of 2009, Impac estimated that the total stockholder equity in the company had plummeted from $1 billion to $9 million. To reduce Impac‘s obligations to shareholders, Impac‘s board ended the company‘s election to operate as a REIT under the tax laws; as a result, it would no longer have to distribute 90% of its profits to its shareholders.17 Further, in a form filed with the SEC, Impac stated that it had “no present intentions” to pay dividends to the Series B and Series C shareholders.18 Impac then
2. Impac‘s Tender Offer for its Series B and Series C Preferred Stock
On May 29, 2009, Impac offered to purchase the Series B shares for $0.29297 per share and Series C shares for $0.28516 per share - approximately one percent of the price at which they had been offered to the public five years earlier.19 In a transmittal letter accompanying the offering circular for the proposed buy-back of those shares, Impac cited “the unprecedented turmoil in the mortgage market,” and a goal of reducing costs to “align” them with cash flows. Impaс also stated: “We believe the elimination of the Preferred Stock and the related dividends through the Offer to Purchase and Consent Solicitation will give us the enhanced balance sheet flexibility to operate and grow our business.”
To carry out the tender offer, Impac had to amend its charter with respect to its preferred stock. Thus, the tender offer was linked to a consent solicitation to amend the respective articles supplementary that had established the rights and preferences of Series B and Series C shares in the corporation‘s charter. The amendments would eliminate most of the rights and preferences of each series of the preferred stock. Impac told the shareholders that the completion of the offer to purchase would require “consent from at least 66 2/3 % of the outstanding shares of the Preferred Stock, voting together as a single class.” Shareholders who tendered their shares were deemed to consent to the amendments to the pertinent articles supplementary that were needed to eliminate the preferences given to their shares in the distribution of dividends and other matters. Shareholders who declined the offer would be bound by the amendments if the amendments passed. The offering circular advised that shareholders who did not tender their shares would be left with an “illiquid investment indefinitely.”
Impac‘s solicitation of the Series B and Series C shareholders for their consent to the charter amendments and tender of shares expired a month later, after one brief extension, on June 29, 2009.
3. Shareholder Response to Tender Offer
When the tender offer expired, Impac determined that the Series B and Series C shareholders had collectively tendered - and, in its view, thereby consented to the charter amendments as to both series - “an aggregate of approximately 67.7% . . . of the Preferred Stock.” Impac made a filing with the SEC and issued a press release to that effect. It also filed with SDAT the amendments to the articles supplementary for both series that eliminated most of the rights and preferences of those series of preferred stock in accordance with the terms of the tender offer. Impac repurchased the tendered shares. Approximately 676,000 shares of Series B and 1,416,000 shares of Series C remained in the hands of shareholders. One of those
Mr. Timm disagreed with Impac‘s approach to counting the responses to the tender offer - essentially the departing shareholders’ votes on the proposed charter amendments altering the rights and preferences of the two series of preferred stock. According to Mr. Timm, Impac had improperly counted the votes of the two series collectively in concluding that the two-thirds threshold for the charter amendments had been satisfied. If the votes of the Series B shares and of the Series C shares had been counted separately, the two-thirds threshold had not been satisfied with respect to Series B. Holders of only 66.2% of the Series B shares - just under two-thirds of those shares - had accepted Impac‘s solicitation to tender their shares and consent to the charter amendments.20 Mr. Timm also believed that the tender offer and consent solicitation were defective in other respects.
Mr. Timm contacted Impac, expressed his concerns, and asked Impac to repurchase his shares for the $25 per share liquidation price set forth in the original articles supplementary for each series. Impac declined to do so. Litigation ensued.
C. Litigation Related to the Series B Vote Tabulation
During nearly a decade of litigation, this case has generated various issues arising from claims against numerous defendants. We need not recite that history in all of its detail. At this juncture, Impac is the only remaining defendant, and the issues before us relate solely to the Voting Provision of the Series B Articles Supplementary that authorized the issuance of the Series B preferred stock and specified the rights and preferences of holders of those shares. The key question is whether the Voting Provision required Impac to obtain the approval of holders of two-thirds of the shares of Series B, counted separately from the approval of holders of Series C shares, in order to amend the Series B Articles Supplementary. Accordingly, we focus on the proceedings in this case relevant to that question.
1. Mr. Timm Files a Complaint
On December 7, 2011, Mr. Timm filed a complaint in the Circuit Court for Baltimore City, on his own behalf and as a class action on behalf of the Series B and Series C shareholders who had not tendered their shares. He named as defendants Impac and various Impac officers and board members. The complaint alleged, among other things, that Impac‘s amendment of the Series B Articles Supplementary following the May 2009 tender offer was invalid because Impac had not obtained the requisite two-thirds approval from the Series B shareholders, tallied separately from the votes of Series C shareholders.
The complaint included several counts alleging breach of the articles supplementary for both series, as well as a count alleging breach of fiduciary duty and of the obligation of good faith and fair dealing with respect to the articles supplementary.
In his complaint, Mr. Timm asked that the action be certified as a class action with himself as class representative. His requests for relief included reinstatement of the original articles supplementary as to both series of preferred stock, a declaration of the rights of shareholders of both series under the respective articles supplementary,
2. The Circuit Court Finds the Voting Provision to be Ambiguous
Impac and the individual defendants moved to dismiss the complaint. Treating the motion as one for summary judgment, the Circuit Court granted judgment in favor of the individual defendants. As to Impac, the court granted the motion in part (including the claims related to the vote of Series C shares), but denied the motion as it related to Mr. Timm‘s claim that Impac was required to obtain two-thirds approval of the Series B shareholders in order to amend the Series B Articles Supplementary.21 Timm v. Impac Mortgage Holdings, Inc., 2013 WL 605867 (Md. Cir. Ct. Jan. 28, 2013).
In its memorandum opinion, the Circuit Court noted that the language of the Voting Provision of the Series B Articles Supplementary could be interpreted in two ways as to how Impac was to count the responses of Series B and Series C shareholders to the tender offer and consent solicitation. On the one hand, the court noted, the Voting Provision prohibited an amendment adverse to the rights and preferences of Series B shares “without the affirmative vote or consent of the holders of at least two-thirds of the shares of the Series B Preferred Stock outstanding at the time,” thereby suggesting that only Series B shareholders could approve amendments to Series B Articles Supplementary. On the other hand, the Voting Provision specified that Series B shareholders were to vote on amendments “separately as a class with all series of Parity Preferred that the Corporation may issue upon which like voting rights have been conferred and are exercisable” - thereby suggesting instead that Impac could treat the two series as one “class” and amend the articles supplementary of both series if two-thirds of the shareholders in that “class” approved the amendments. Concluding that the Voting Provision in the Series B Articles Supplementary was ambiguous and that “its meaning cannot be fixed as a matter of law without consideration of extrinsic evidence to determine the parties’ intent,” the Circuit Court denied Impac‘s motion to dismiss as it related to the Voting Provision. Id. at *6-10.22
A few months later, in June 2013, Camac, also a Series B and Series C shareholder,23 filed a motion to intervene in the action. The Circuit Court granted that motion in March 2014 and Camac filed a “Class Action Complaint in Intervention” in the existing action. Camac‘s complaint was virtually identical to Mr. Timm‘s complaint, naming the same defendants and causes of action and asserting class representative status on behalf of Series B and Series C shareholders who had not tendered their shares.24
4. Summary Judgment Motions and Submissions of Extrinsic Evidence
After a period of discovery, Impac moved, and Mr. Timm and Camac jointly cross-moved, for summary judgment on the grounds that there was no genuine dispute of material fact and that their respective interpretations of the Voting Provision entitled them to judgment as a matter of law.
In support of their respective positions, the parties submitted extrinsic evidence in the form of documents, affidavits, and deposition testimony. Both sides also relied on various grammatical rules, cited statements made by Impac at the time of the tender offer, and pointed out similarities or distinctions between the Voting Provision and voting provisions in offerings of preferred stock by other companies.
Impac‘s Position
Impac‘s motion (and opposition to the cross-motion) rested on the propositions that (1) the Articles Supplementary were akin to a contract, (2) Impac, as seller of the stock, and Bear Stearns, as the initial purchaser of the stock, were “counterparties” to that contract, and (3) Bear Stearns - Impac‘s “counterparty” - had provided the language of the Voting Provision. Therefore, Impac argued, the Circuit Court should either construe the Voting Provision so as to effectuate Impac‘s and Bear Stearns’ mutual understanding of the provision or, alternatively, deem Bear Stearns to be the drafter and construe the provision against the shareholders as successors to Bear Stearns.25
To support those propositions, Impac submitted affidavits and deposition testimony of a number of witnesses, including Impac officers, a member of its board, and attorneys who had represented Impac and Bear Stearns in connection with the issuance and underwriting of the Series B stock. Those attorneys testified to their understanding of the meaning of the Voting Provision when they negotiated and drafted the terms of the offering and to their understanding that the Series B offering was to be modeled on offerings that Bear Stearns had underwritten for other entities. Impac also provided a chart compiled by one of its attorneys that categorized the Voting Provision, as well as voting provisions that appeared in preferred stock offerings of other REITs. Another attorney, who had not been involved in the drafting but concentrated his practice in corporate finance transactions, opined that the voting provisions in the articles supplementary for the two series “contained language commonly used and understood” to
The Plaintiffs’ Position
In support of their joint cross-motion for summary judgment and opposition to Impac‘s motion, Mr. Timm and Camac asserted that the Voting Provision unambiguously conditioned the amendment of the Series B Articles Supplementary on the approval of holders of two-thirds of the Series B shares, counted separately from the vote of Series C shares, and that the shareholders were not bound by the underwriters’ interpretation of that provision. They argued that (1) as a matter of law, the parties to the contract containing the Voting Provision were Impac and the shаreholders, not Impac and the underwriters; (2) under Delaware precedent, the inquiry should focus on the reasonable expectations of the shareholders; and (3) the court should follow the Delaware precedent. They also introduced the deposition testimony of some of Impac‘s witnesses. In particular, they submitted the deposition testimony of Impac‘s counsel, who said that she did not recall any negotiations with Bear Stearns’ counsel about the Voting Provision when the Series B Articles Supplementary were drafted. Mr. Timm and Camac also cited the 2004 board resolutions and the summary in the Series B prospectus supplement as indicia of the intended meaning of the Voting Provision.
5. The Circuit Court Rules in Favor of the Plaintiffs
In a thorough memorandum opinion dated December 29, 2017, the Circuit Court again concluded that the Voting Provision was ambiguous as to whether the Series B Articles Supplementary could be amended without approval of owners of two-thirds of Series B shares counted separately from Series C shares. Timm v. Impac Mortgage Holdings, Inc., 2017 Md. Cir. Ct. LEXIS 12 (Dec. 29, 2017). Accordingly, the court considered the extrinsic evidence offered by the parties.
At the outset of its opinion, the Circuit Court observed that “[n]either party contends that there is any genuine dispute about the facts that are material to the resolution of the parties’ contentions.” Id. at *3. With respect to the affidavits and deposition testimony provided by Impac, the court noted that, beyond “broad and conclusory pronouncements,” those submissions provided “little or no additional information or documentation about the source and drafting” of the Voting Provision. Id. at *23. There was “no contemporaneous documentation concerning the drafting” of the Series B Articles Supplementary. Id. at *24. The court accepted “at face value” the statements of the Impac personnel that they believed that the Voting Provision did not confer separate voting rights on Series B shareholders. Id. at *25. However, the court concluded that “a retrospective statement about what was intended, unsupported by any contemporaneous evidence” had little probative value in the interpretation of the Voting Provision because it would substitute “an unexpressed meaning for the language itself.” Id. The court noted that the declarations of the drafters of the Articles Supplementary appeared to express their current opinion about the operation of the Voting Provision and did “not suggest any actual consideration of the issue at the time the
The only evidence relating to the origin of the Voting Provision was that it appeared to be based on similar language from a public offering of another company. The court observed that, even if so, that fact did not give rise to an inference that collective voting was intended. There was no evidence concerning the process by which the provision was drafted for the other company - or why it was thought to provide for collective voting in that context.27 Id. at *24-25.
The court considered the charts of voting language used by other issuers that had been compiled and categorized by one of Impac‘s attorneys and analyzed by the attorney Impac had retained for the litigation as an expert on securities offerings. Id. at *32-42. According to the attorney who had compiled them, the charts distinguished language that provided for collective voting from language that provided for separate voting. The court observed that no factual basis was provided for the categorizations made in the charts. The court concluded that the charts established only that some issuers had used language that the court found to be ambiguous, that some issuers had used different language that unambiguously provided for separate voting, and that some issuers had used different language that unambiguously provided for collective voting. In particular, the court found that the contrast between the language of some of the examples in the charts that clearly provided for collective voting and the language of the Series B Voting Provision was “striking.” Id. at *40, 41. The court concluded that a prospective investor could reasonably understand those examples in the charts to provide for collective voting and that “Impac could have easily followed the examples of other Maryland REITs” to provide for collective voting. Id. at *41. The court noted that there was no indication that any of the provisions had been applied in the context of an actual vote. In the end, the court concluded that the charts did not support Impac‘s arguments, but rather undermined them.
The court then rejected Impac‘s grammatical arguments and its assertion that the manner in which it conducted the tender offer should be used to clarify the ambiguity of the Voting Provision. Id. at *42-45.
With respect to the extrinsic evidence relied upon by the plaintiffs, the court noted that both the April 2004 board resolution authorizing the issuance of Series B and the prospectus summary for Series B appeared to describe separate, rather than collective, voting by Series B shareholders.28 Id. at *45-55. However, the court found the plaintiffs’ arguments based on Impac‘s press releases for the tender offer and on a rule of grammatical construction less helpful. Id. at *55-57.
The court concluded that the extrinsic evidence did not resolve the ambiguity as to whether the Voting Provision required collective or separate voting and that it would therefore construe the Voting Provision against the drafter. Id. at *57-58.
The court then addressed the question of who should be considered the drafter of the Voting Provision. Id. at *58-68. It rejected Impac‘s argument that Bear Stearns should be deemed both a party to the Series B Articles Supplementary and the drafter, that the shareholders stood in the shoes of Bear Stearns, and that the Voting Provision should therefore be construed against shareholders like Mr. Timm and Camac. The court noted that the characterization of the underwriter as the counterparty to Impac with respect to thе Voting Provision “did not fit the facts,” and that the “counterparties to the contract embodied in the Articles Supplementary were the holders of the preferred shares whose rights were fixed by the Articles.” Id. at *62. The court then referred to Delaware precedent to the effect that an issuer of public securities is in the best position to avoid ambiguities and that, when a contract that confers rights on investors in public securities is ambiguous, the contract is to be interpreted to give effect to the investors’ reasonable expectations. Finally, the court construed the Voting Provision against Impac and ruled in favor of the plaintiffs’ interpretation. Id. at *68.
After further proceedings, on July 16, 2018, the Circuit Court issued a follow-up memorandum opinion and a separate judgment order incorporating its various rulings. Pertinent to this appeal, that order declared that the 2009 amendment to the Series B Articles Supplementary was invalid because it lacked the requisite approval from owners of two-thirds of the Series B shares and that the 2004 version of the Series B Articles Supplementary remained in effect. The order included a declaration that Impac was required, under the Series B Articles Supplementary, to pay dividends to Series B shareholders for certain quarters. In addition, in light of the fact that there was no dispute that Impac had not paid dividends to the Series B shareholders for more than six quarters, and that the 2004 Series B Articles Supplementary required Impac to hold an election and seat two directors elected by the preferred stock shareholders, the order included injunctive relief directing Impac to comply with that provision.
Finally, in its order, the court certified these rulings as final under
6. The Appeal
Impac appealed.30 Mr. Timm cross-appealed concerning claims on which the Circuit Court had entered judgment in Impac‘s favor in 2013; Camac did not cross-appeal.
The Court of Special Appeals affirmed the Circuit Court‘s judgment. Impac Mortgage Holdings, Inc. v. Timm, 245 Md. App. 84, 103 (2020). However, it arrived there by a different route than the Circuit Court.31
The intermediate appellate court concluded that the Voting Provision was unambiguous and required a two-thirds vote of each series, tallied separately - which would compel the award of summary judgment in favor of Mr. Timm and Camac on that issue. Specifically, the Court of Special Appeals concluded that the clause providing that “the Corporation shall not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of the Series B Preferred Stock outstanding at the time” could only be interpreted to mean one thing: “that Impac
Because it had concluded that the language of the Voting Provision was unambiguous, the intermediate appellatе court did not address the extrinsic evidence submitted by the parties and analyzed by the Circuit Court. Nor did it need to evaluate Impac‘s argument that ambiguity in the language of the Voting Provision should be construed against the plaintiffs on the theory that Bear Stearns was the drafter and that the plaintiffs stood in the shoes of Bear Stearns.
Impac filed a petition for a writ of certiorari, which we granted.
III
Discussion
To decide this appeal, we must address the following issues:
- Is the Voting Provision ambiguous or unambiguous as to whether the responses of Series B shareholders were to be counted separately or collectively with the responses of the Series C shareholders to determine whether the two-thirds threshold was satisfied?
- If the Voting Provision is ambiguous, does the extrinsic evidence submitted by the parties resolve the ambiguity as a matter of law, or does it raise material factual issues that must be resolved by a jury?
(3) If the Voting Provision is ambiguous, and the extrinsic evidence neither resolves the ambiguity nor presents jury questions that, when answered, would resolve the ambiguity, how should the language be construed against the drafter?
A. Standard of Review
When a circuit court grants summary judgment, it has concluded that, based on the undisputed material facts, the prevailing party is entitled to judgment as a matter of law.
The interpretation of a contract, including the determination of whether a contract is ambiguous, is a question of law. Spacesaver Systems, Inc. v. Adam, 440 Md. 1, 7 (2014). If a party asserts that there are material facts in dispute that preclude an award of summary judgment, the party must support such аn assertion with an affidavit that “shall set forth such facts as would be admissible in evidence.”
B. Whether the Voting Provision is Ambiguous
As outlined at the outset of this opinion, the first step in construing contract language under the “objective” approach to contract interpretation is to review that language within the “four corners” of the contract and assess whether a contract provision is ambiguous.32
The Voting Provision of the Series B Articles Supplementary reads as follows:
So long as any shares of Series B Preferred Stock remain outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of the Series B Preferred Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting (voting separately as a class with all series of Parity Preferred that the Corporation may issue upon which like voting rights have been conferred and are exercisable) . . . (ii) amend, alter or repeal any provisions of the Charter, so as to materially and adversely affect any preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, or terms or conditions of redemption of the Series B Preferred Stock or the holders thereof; . . .
Most of this language sets the stage for when the Voting Provision comes into play and is not in dispute in this case. In short, this provision applies if (1) there are shares of Series B outstanding and (2) Impac plans to “amend, alter or repeal any provisions” of its charter in a way that would “materially and adversely” affect the rights and preferences of Series B stock or its shareholders. There is also no dispute that Impac‘s 2009 tender offer and consent solicitation fit that description – there were Series B shares outstanding and the rights and preferences of those shares would be materially and adversely affected by the amendments to its Articles Supplementary proposed by the tender offer.
That takes us to the language where the meaning is in dispute – the part of the Voting Provision that says what must be done to approve a material adverse action concerning the rights and preferences of Series B shares. There must be an:
affirmative vote or consent of the holders of at least two-thirds of the shares of the Series B Preferred Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting (voting separately as a class with all series of Parity Preferred that the Corporation may issue upon which like voting rights have been conferred and are exercisable)
The dispute relates to the relationship between the first half of this passage that sets forth the requisite vote and the second
In the Circuit Court, Impac initially argued that the Voting Provision clearly required that the votes of Series B and Series C shares be tallied collectively. See 2013 WL 605687 at *5. Bеfore us, Impac concedes that the language of the Voting Provision is “inartful” and asserts that it is therefore ambiguous. In any event, that ambiguity is not resolved elsewhere in the Series B Articles Supplementary. Impac argues that other provisions in the Series B Articles Supplementary providing for a vote by Series B shareholders on three matters appear to provide that Series B shareholders will vote collectively with Series C shareholders – an argument with which the plaintiffs agree to some degree.34 Those other provisions are not at issue in this case, but we agree with the
Impac also argues that, because Series B and Series C are both referred to as a “parity preferred” stock, they must vote together to maintain “parity.” That is too much weight for one word to bear. It is evident from the Articles Supplementary that the provision that defines what shares are in “parity” concerns the priority of those shares as to dividends and other distributions relative to other types of stock that the company issues; it says nothing about voting rights or whether two series of preferred shares that are in parity as to dividends and distributions vote separately or together when there is a proposal to change the rights and preferences as to one or both series.35 Moreover, the charts of preferred stock issued by other companies that were submitted by Impac in the Circuit Court included examples of preferred stock that ranked “in parity” with other series of preferred stock, but that did not vote collectively with those other series.
Nor is the ambiguity resolved by rules of grammar, because neither party‘s preferred reading of the Voting Provision gives effect to every word without rendering a portion of the language superfluous or meaningless, contrary to a basic rule of contract interpretation. Towson University v. Conte, 384 Md. 68, 81 (2004) (“[C]ourts do not interpret contracts in a manner that would render provisions superfluous or as having no effect.“). If, as the Plaintiffs contend, the provision was intended to specify separate voting by Series B shareholders alone, the parenthetical phrase would appear to be superfluous.36 If, as Impac contends, the provision was intended to specify collective voting by Series B and later-issued Parity Preferred shares, such as Series C, the reference in the first clause to an affirmative vote of Series B shares may be meaningless.37
B. Whether the Extrinsic Evidence Resolves the Ambiguity as a Matter of Law
Because the Voting Provision is ambiguous, we may consider relevant admissible extrinsic evidence that illuminates the mutual intent of the parties. To assess the extrinsic evidence, as well as to apply the other principles of contract construction in the context of a corporate charter, we must first identify the parties to the contract containing the provision in question – in this case, the charter and its amendment by the Articles Supplementary.
1. The Significance of Bear Stearns’ Status as Underwriter
In the Circuit Court, Impac rested its motion for summary judgment on arguments that Bear Stearns, as underwriter of the offering of Series B shares, was a “counterparty” to Impac as to the Articles Supplementary, that Bear Stearns drafted that charter amendment, and that the facts were undisputed as to what Impac and Bear Stearns mutually intended, leaving only questions of law as to the ramifications of those assertions of fact. In this Court, Impac asserts that whether Bear Stearns acted as a counterparty or in some other capacity as to the Articles Supplementary raises an issue of disputed fact that must be decided by a jury. To address that assertion, we must identify the material facts and determine whether they are genuinely in dispute.
Two documents in the record are material to Impac‘s assertions regarding Bear Stearns’ relationship as to Impac vis-à-vis the Articles Supplementary. The first is the underwriting agreement between Impac and Bear Stearns; the second is the Articles Supplementary.
The underwriting agreement is the only contract to which Bear Stearns is a named party. As recounted in Part II.A.3 of this opinion, the underwriting agreement provided that Bear Stearns would offer Impac‘s preferred stock to the public as soon as advisable after the stock was issued. Thus, as the Circuit Court put it, the “entire purpose of the underwriting arrangement was for Bear Stearns to resell the stock to others who would be the holders of the stock,” not for Bear Stearns to hold the stock on its own account, as a shareholder.38
Further, the underwriting agreement does not permit an inference that Bear Stearns and Impac had a contractual relationship that was not expressed there but
The underwriting agreement is thus both material and informative on the question of whether Bear Stearns was a “counterparty” as to the Articles Supplementary. There is no dispute as to its terms.
The Series B Articles Supplementary are also material to Impac‘s assertion that the underwriters were parties to the amendment of Impac‘s charter, and there is no dispute as to the language of that document, either. In executing the Articles Supplementary for filing with SDAT, Impac‘s president “acknowledge[d]” it “to be the corporate act of the Corporation,” not of any other entity, and the Articles Supplementary do not mention Bear Stearns or any other entity as a party to that document. The fact that the underwriting agreement referred to the Articles Supplementary might make the charter amendment part of the underwriting contract, but it does not make the underwriting agreement part of Impac‘s charter.40
Neither document contains any ambiguity on the underwriters’ role that would make material (or even admissible) the testimony of Impac‘s and Bear Stearns’ attorneys who stated that they participated, and worked together, in negotiating or drafting the documents related to the Series B offering; to the contrary, the merger clause in the underwriting agreement expressly makes such negotiations irrelevant.
As indicated above, a corporation‘s charter is, in essence, a contract between that corporation and its shareholders. Here, the Circuit Court correctly held as a matter of law that Bear Stearns, while an “advisor” to Impac in the formulation of the offering documents, was not a party to the Series B Articles Supplementary and that the shareholders to whom those Articles granted voting rights were Impac‘s “counterparties” as to that provision.
2. The Extrinsic Evidence Material to How a Person in the Shoes of an Impac Shareholder Would Understand the Voting Rights Provision
The summary judgment record before the Circuit Court did not contain much evidence that illuminates the parties’ intentions at the time of the contract. Indeed, that approach is made somewhat artificial by the fact that the Series B shares were not sold under any contract that the shareholders had negotiated with Impac – the issuer – at the time of the public offering. In such securities cases, the Delaware Supreme Court has explained,41
Some courts have diverged slightly from the approach taken in Delaware and would accord more weight to the unexpressed views of the drafters of an instrument like the Series B Articles Supplementary.43 That approach, however, risks turning contract language in this context into a magical incantation whose significance is opaque to all but the initiated. And, in the case at hand, it would contradict the warning in the Series B prospectus supplement that an investor “should rely only on the information contained in” the prospectus and prospectus supplement. See Part II.A.3 of this opinion. That language tells a hypothetical investor, who happens to run into the drafting attorneys on the street and happens to learn their otherwise unexpressed views on the meaning of corporate charter language, to disregard what they say and to rely only on the prospectus itself.
Here, too, an inquiry into the parties’ mutual intent would serve no purpose; Series B shareholders had no part in the adoption of the charter amendment by which Impac authorized the issuance of their stock. We will apply the Matheson approach which, under these circumstances, both approximates Maryland‘s objective approach to interpreting a contract and comports with the general principle, both under the securities laws and Maryland‘s common law, that an investor may reasonably rely on the issuer‘s prospectus and other publicly-disseminated materials about the offering. As the Delaware Supreme Court has pointed out, it is, in some sense, a “specialized application” of the rule of contract interpretation that, in the face of unresolvable ambiguity, construes the contract against the drafter. Commerzbank Capital Funding, 65 A.3d at 552.
The inquiry then becomes (1) what evidence is material to the reasonable expectations of a purchaser of these publicly-issued securities, and (2) is there such evidence in this record that both is undisputed and entitles Mr. Timm and Camac to judgment as a matter of law? As for
The record in this appeal contains only one document – the Series B prospectus supplement – that addresses the meaning of the Voting Provision and that was publicly available to investors at the time of the Series B public offering of stock. There, under the caption “Prospectus Summary,” Impac described the voting rights of the Series B shareholders without any reference tо the votes of the shareholders of any other series:
[T]he affirmative vote of holders of at least two-thirds of the outstanding shares of Series B Preferred Stock will be required to . . . (b) amend, alter or repeal any provisions of our charter so as to materially and adversely affect the Series B Preferred Stock . . . .
Although the prospectus summary also refers potential purchasers to a later section of the document for a “more complete description” of shareholders’ voting rights, that later description differed only slightly from the Voting Provision and contained the same ambiguity as the Articles Supplementary. The prospectus summary quoted above is thus the only material extrinsic fact that bears on what a reasonable investor would understand the Voting Provision to mean.
The prospectus summary leads to only one interpretation of the Voting Provision: Impac could not amend its charter in such a way as to materially and adversely affect certain Series B rights and preferences unless Impac had obtained the votes of two-thirds of the outstanding shares of Series B. That meaning is also confirmed by the April 2004 board resolution which, as the Circuit Court noted, was the board‘s contemporaneous expression as to its intent as to the voting rights of purchasers of the soon-to-be-offered Series B stock. That resolution did not provide that the votes of any shareholders other than those of Series B stock could be included in the tally of votes on charter amendments affecting Series B preferences. Instead, it provided:
[T]he affirmative vote of holders of at least two-thirds of the outstanding shares of Series B Preferred Stock will be required to . . . (ii) amend, alter or repeal any provisions of the Amended and Restated Articles of Incorporation of the Company, as amended and supplemented . . . so as to materially and adversely affect any right, privilege or voting power of the Series B Preferred Stock or the holders thereof . . . .
These two documents establish that the Impac board‘s expressed understanding of the Voting Provision at the time the company
We also agree with the Circuit Court that the extrinsic evidence that it discounted – the opinion of a securities attorney on the meaning of the Voting Provision, the recollections of the Impac and Bear Stearns attorneys about their subjective, unexpressed intentions when they were working on the public offering, the charts prepared for this litigation that compare the Voting Provision to voting provisions applicable to shareholders of preferred stock of other entities, Impac‘s conduct of the election in 2009 as indicative of its interpretation – was not material to determining the reasonable expectations of a purchaser of the Series B shares.
Finally, even if we were to conclude that the relevant admissible extrinsic evidence did not resolve the ambiguity in the Voting Provision and resorted to construing the provision against the drafter, we would reach the same result. For the reasons explained earlier, Impac – not the shareholders – would be considered to be the author of the Voting Provision and, so, were we to apply that rule of interpretation, we would construe the provision against Impac.
IV
Conclusion
For the reasons set forth above, we hold that:
- The Voting Provision in the original Series B Articles Supplementary is ambiguous.
- The extrinsic evidence relating to the Voting Provision that is relevant and admissible as to the understanding of that language by a reasonable shareholder resolves thаt ambiguity as a matter of law in favor of separate voting by Series B shareholders in the 2009 tender offer and consent solicitation.
- Even if one were to conclude that the Voting Provision remained ambiguous after consideration of extrinsic evidence, the relevant language would be construed against the drafter – i.e., Impac – with the same ultimate result.
Accordingly, given that fewer than two-thirds of the Series B shareholders consented to the proposed 2009 amendments to the Series B Articles Supplementary, those amendments were not validly adopted. The Circuit Court‘s awards of declaratory and injunctive relief were appropriate.
JUDGMENT OF THE COURT OF SPECIAL APPEALS AFFIRMED. COSTS TO BE PAID BY THE PETITIONER.
Notes
It was certainly appropriate for the intermediate appellate court to assess whether it properly had jurisdiction of the appeal, and we agree that appellate jurisdiction exists pursuant to
Those provisions are § 6(b) and § 6(d)(i) and (iii) of Article First of the Articles Supplementary. (Similar provisions appear in the Series C Articles Supplementary).
Everyone – that is, the parties and lower courts – appears to agree, or at least no one disagrees, that § 6(b), which provides for the preferred stock to elect two members of the board of directors under certain circumstances, provides for collective voting by Series B and Series C shareholders. But, as the Circuit Court observed, that provision has different and clearer language as compared to § 6(d)(ii), the Voting Provision at issue in this case. 2013 WL 605867 at *8.
The two other provisions provide for a vote by Series B shareholders if Impac proposes to establish a series or class of stock ranking ahead of Series B with respect to distributions (§ 6(d)(i)) or if Impac proposes a binding share exchange or reclassification affecting Series B rights and preferences (§ 6(d)(iii)). Both involve the same voting language that is at issue in this case. Impac asserts that these two circumstances necessarily call for collective voting by Series B and Series C shareholders. Early in the litigation, Mr. Timm appeared to concede that point. In its 2013 opinion, the Circuit Court acknowledged Mr. Timm‘s concession, but concluded that neither provision would require collective voting on a share exchange or merger affecting only one series. Id. Camac has never conceded that the two provisions necessarily require collective voting. In any event, Impac now argues only that its interpretation of the other prongs of § 6(d) is a “reasonable” one, not that it is unambiguously compelled by the language.