Robert SHENKER, et al. v. Bernice POLAGE, et al.
No. 2620, Sept. Term, 2014.
Court of Special Appeals of Maryland.
Feb. 1, 2016.
130 A.3d 1171
NAZARIAN, J.
David A.P. Brower (Brian C. Kerr, Brower, Piven, New York, NY. Charles J. Piven, Yelena Trepetin, Brower Piven, Stevenson, MD. Lee D. Rudy, Michael C. Wagner, J. Daniel Albert, Justin O. Reliford, Kessler, Topaz, Metzler & Check, LLP, Radnor, PA.) Adam S. Hobson (William Savitt, Andrew J.H. Cheung, Wachtell, Lipton, Rosen & Katz, New York, NY. G. Stewart Webb, Jr., Maria E. Rodriguez, Venable, LLP, Baltimore, MD. Scott H. Marder, Laurie B. Goon, Duane Morris, LLP, Baltimore, MD. Rebecca M. Lamberth, Duane Morris LLP, Atlanta, GA), all on the briefs, for Appellee.
Panel: WRIGHT, NAZARIAN, HOTTEN,* JJ.
NAZARIAN, J.
This appeal arises from the Circuit Court for Baltimore City‘s approval of a class action settlement of claims against*
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.
In 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 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 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.
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
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. 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
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
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
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
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, 2014 to the extent such Director Defendants, former officers or outside advisors 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
December 23, 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
Unlike most settlements of civil actions, class action settlements must be approved by the court. See
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:
- The court must direct notice in a reasonable manner to all class members who would be bound by the proposal.
- 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.
- The parties seeking approval must file a statement identifying any agreement made in connection with the proposal.
- 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.
- 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
The federal courts evaluate proposed class action settlements in two steps: first, by evaluating the procedural fairness of the settlement process, and second, by evaluating
A. The Circuit Court Sufficiently Articulated Its Reasoning.
Mr. Shenker argues that the court did not make adequate factual findings or articulate any standard for determining that the settlement was reasonable. He characterizes the court‘s approval of the settlement as conclusory, and contends that the court “failed to carefully assess the facts and law as required.” It‘s true that the court did not state, in so many words, which particular standard it used to evaluate the amended settlement and release language, nor did the court undertake the step-by-step analysis for settlement approval that we explain below and that appears in the federal cases analyzing
Although a trial court may not give a settlement boilerplate approval, it need not “turn the settlement hearing into a trial or a rehearsal of the trial, nor need it reach any dispositive conclusions on the admittedly unsettled legal issues in the case.” Flinn, 528 F.2d at 1172-73 (footnotes, internal citations, and quotations omitted).
So long as the record before it is adequate to reach an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated and form an educated estimate of the complexity, expense, and likely duration of such litigation, and all other factors relevant to a
Id. at 1173 (footnote and internal citations omitted). As a procedural matter, this settlement complied both with
The court‘s written decision approving the settlement is not lengthy, and only a portion of the court‘s memorandum analyzes the substantive merits of the settlement. For that reason, our appellate task would be easier if the court had, either from the bench or in its written order, undertaken a full-blown, step-by-step
Mr. Shenker argues that the circuit court failed to take proper account of Mr. Nemer‘s testimony on the extent of CREI‘s due diligence (or the lack thereof). But in the course of the fairness hearing, the circuit court demonstrated that it had carefully reviewed and considered all of the evidence, including Mr. Nemer‘s deposition and the “reverse due diligence” undertaken by outside advisors in association with the merger. Moreover, this complaint is really more a complaint about the relative weight the court afforded that piece of evidence, and that point of view, over any other. As we explain next, the circuit court‘s conclusions as to the settlement‘s substantive fairness and adequacy are supported by the record.
B. The Circuit Court Did Not Abuse Its Discretion By Approving The Settlement.
Mr. Shenker argues next that the amended settlement releasing CREI officers from future liability is unfair and inadequate because it releases valuable claims shareholders have against those officers under
1. Fairness
Mr. Shenker argues that the settlement, and more specifically the release, was unfair to class members because it was rushed after ARCP announced the accounting irregularities. He claims that post-settlement discovery was too limited and
In approving a settlement, the court must ascertain that it was reached “as a result of good faith bargaining at arm‘s length.” Id. at 159. To determine if the proposed terms are fair, the court should consider factors tending to show “the presence or absence of collusion among the parties.” In re Mid-Atl. Toyota, 564 F. Supp. at 1383 (quoting Montgomery Cty., 83 F.R.D. at 315). That is, “the posture of the case at the time settlement is proposed, the extent of discovery that has been conducted, [and] the circumstances surrounding the negotiations and the experience of counsel.” Id. at 1383-84 (quoting Montgomery Cty., 83 F.R.D. at 315); see also Carson v. American Brands, Inc., 654 F.2d 300, 301 (4th Cir. 1981) (en banc) (per curiam); Flinn, 528 F.2d at 1173 (articulating the fairness factors as “the extent of discovery that has been taken place, the stage of the proceedings, the want of collusion in the settlement, and the experience of counsel who may have represented the plaintiffs in the negotiation“).
There is no allegation here that the settlement is the product of collusion. Rather, Mr. Shenker complains that the settlement was reached too soon after ARCP‘s announcement, without enough discovery to allow a full evaluation of the potential culpability of CREI insiders under the federal Securities Acts. Beyond a general complaint that more depositions weren‘t taken and new searches for documents or email weren‘t made, though, nothing in the record indicates that the information available to the court, most importantly Mr. Nemer‘s testimony, was inadequate to assess the merits of the potential claims against CREI‘s officers. To the contrary, the record allowed the objectors to argue about the evidence that wasn‘t there, i.e., the absence of evidence of more extensive
2. Adequacy
Under the amended settlement, the class members relinquished the right to bring suit against CREI officers for any false statements made on the Joint Proxy, in exchange for the ability to bring claims against ARCP‘s officers (claims that were released in the original settlement), a $14 million cash payment, and the relinquishment by Messrs. Cole and Nemer of $50 million in personal payments. In evaluating the adequacy of a proposed settlement, the trial court should “weigh the likelihood of the plaintiffs recovery on the merits against the amount offered in settlement.” In re Mid-Atl. Toyota, 564 F. Supp. at 1384 (quoting Montgomery Cty., 83 F.R.D. at 315Id. (quoting In re Montgomery Cty., 83 F.R.D. at 316).
As for “the relative strength of the plaintiffs’ case on the merits,” In re Mid-Atl. Toyota, 564 F. Supp. at 1384, the record before the circuit court revealed a theoretical, but highly uncertain, claim against CREI‘s officers under
More to the point, though, and even assuming that the class could readily prove liability against the CREI directors under
We don‘t purport to resolve these disputed securities law questions definitively. It is enough for our purposes that the record and competing legal arguments before the circuit court raised serious uncertainties about the likelihood of success on the merits of any claims the objectors might have had against the released CREI parties, or the marginal value of those claims in light of the claims that survived the release. And as such, the circuit court did not abuse its discretion in finding that the settlement consideration—most notably, the reinstatement of the class‘s claims against ARCP and its directors and officers—was adequate under the circumstances.
Finally, Mr. Shenker seems to argue, based on a repackaging of the claims discussed above, that the amended settlement violated the due process rights of the absent class members, whom he argues were not adequately represented by the plaintiff class members’ counsel. He relies on Matsushita Elec. Indus. Co., Ltd. v. Epstein, for the proposition that “a court may permit the release of a claim based on the identical factual predicate as that underlying the claims in the settled class action, even though the claim was not presented and might not have been presentable in the class action.” 516 U.S. 367, 376-77 (1996) (citation and quotation omitted). He argues that Matsushita should have prevented the circuit court from releasing the potential Securities Act claims against CREI officers and directors because the facts underlying those claims did not arise from the same operative facts as those asserted in the current action.
Putting aside the defendants’ arguments that Mr. Shenker failed to preserve this issue in the circuit court, the argument fails for the same reasons as his other arguments. Moreover, Mr. Shenker‘s reliance on Justice Ginsburg‘s concurrence in Matsushita is misplaced. While there may be a due process problem if the class representatives are willing to “release federal securities claims within the exclusive jurisdiction of the federal courts for a meager return to the class members,” id. at 388, that is not what happened here. Beyond the terms of the original settlement, the amended settlement gave class members the ability to bring Securities Act claims against ARCP officers and directors, who otherwise would have been released, and it was entirely reasonable on this record for the circuit court to conclude that this trade-off was fair, especially considering the uncertainty of any federal claims against CREI officers.
The dispositive question in a due process challenge to a class action settlement is whether class counsel adequately
JUDGMENT OF THE CIRCUIT COURT FOR BALTIMORE CITY AFFIRMED. COSTS TO BE PAID BY APPELLANT.
Notes
- Is the Settlement unfair and inadequate where it releases defendants and their agents and affiliates from liability of valuable unrelated federal claims that arose after a preliminary settlement, based on limited discovery, and without adequate consideration?
- Did the Circuit Court fail to conduct a careful assessment of the facts and a thorough analysis of applicable law by concluding the Release is “reasonable” without making factual findings, articulating any standard for determining reasonableness or considering the merits or value of released claims?
- Does the Settlement violate Due Process because it released individual defendants from liability for federal claims that are not based on the same factual predicate as the Settlement‘s underlying state claims and did so for meager consideration?