Carramerica Realty Corp. v. Kaidanow

• Decision Date: 07 March 2003
• Docket Number: No. 01-7175.,No. 01-7167.,01-7167.,01-7175.
• Citation: 321 F.3d 165
• Parties: CARRAMERICA REALTY CORPORATION, et al., Appellants, v. Joseph KAIDANOW and Robert A. Arcoro, Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

321 F.3d 165

CARRAMERICA REALTY CORPORATION, et al., Appellants, v. Joseph KAIDANOW and Robert A. Arcoro, Appellees.

No. 01-7167.

No. 01-7175.

United States Court of Appeals, District of Columbia Circuit.

Argued January 16, 2003.

Decided March 7, 2003.

Appeals from the United States District Court for the District of Columbia (No. 99cv00260).

Kenneth C. Smurzynski argued the cause for appellants. With him on the briefs were Paul Martin Wolff, Eva Petko Esber, and Anthony T. Pierce.

Eric Seiler argued the cause for appellees. With him on the brief was Daniel B. Rapport.

Before: EDWARDS and SENTELLE, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge Sentelle.

SENTELLE, Circuit Judge:

This is an appeal from a summary judgment in favor of counterclaiming defendants asserting a shareholder derivative action in answer to a suit for declaratory judgment. In 1998, OmniOffices, Inc. (Omni) issued 5,535,353 non-voting common shares to its controlling shareholder, CarrAmerica Realty Corp. (CarrAmerica), at a price of $20.00 per share. In the face of challenges to the fairness of the price from its then-minority shareholders Joseph Kaidanow and Robert Arcoro, Omni and CarrAmerica filed a complaint in District Court seeking a declaration that the issuing price was fair. Kaidanow and Arcoro counterclaimed, alleging that Omni and CarrAmerica had violated fiduciary duties. The parties filed cross-motions for summary judgment. The District Court denied Omni's and CarrAmerica's motion, granted Kaidanow's and Arcoro's and declared the contested shares void. CarrAmerica and Omni appealed. On appeal, we hold that the District Court erred in holding the shares void rather than voidable and because we find both that Kaidanow's and Arcoro's claim was barred by the equitable defense of laches and that Omni's Board of Directors properly ratified the issuance of the shares, we reverse the decision below and grant summary judgment for the Appellants, Omni and CarrAmerica.

Background

CarrAmerica, a Delaware corporation, is a publicly traded real estate investment trust (REIT) that invests in commercial real estate nationwide. In 1997 CarrAmerica decided to branch into the "executive suites" business. To this end, CarrAmerica acquired Omni, an office suites corporation. CarrAmerica acquired a 95% economic interest in Omni, and in compliance with tax rules governing REITs, non-voting stock. Omni's capital included a loan from CarrAmerica. At the time of the acquisition that loan was in the amount of $36 million. The remaining economic interest in Omni and the voting shares were acquired by other entities affiliated with CarrAmerica. The total initial investment in Omni was $20 million, and the number of shares to be issued was set at 1 million, resulting in a price of $20.00 per share. Upon acquisition, Omni and the new shareholders entered into a Stockholders' Agreement granting the voting stockholders anti-dilution rights which would enable them to maintain their proportional interest by purchasing additional shares if Omni raised additional equity capital.

A majority of Omni's Board consisted of officers or directors of CarrAmerica, including Thomas Carr, the CEO of CarrAmerica as Chairman. In March 1998, Appellees Kaidanow and Arcoro sold their executive office suites business to Omni for approximately $32.5 million and warrants to purchase, collectively, 185,000 shares of Omni non-voting stock at $20 per share. The agreement gave them anti-dilution protection, entitling them to additional warrants if new Omni equity was issued for less than "fair market value" defined in the agreement as $20 per share through December 31, 1999. They were permitted to exercise their options at any time. The warrants made clear that as warrant holders they had no shareholder rights. Kaidanow was invited to join the Omni Board and became a director. At about the same time, CarrAmerica increased its loan to Omni to about $111 million at a rate of 9.5% annual interest. Additionally, each CarrAmerica affiliated shareholder invested additional capital in March and April 1998.

On May 7, 1998, the Omni Board, including director Kaidanow, approved a resolution, hereinafter the "Conversion Resolution," authorizing the amendment of the CarrAmerica loan into a convertible loan, at a conversion price of not less than $20 per share. The Conversion Resolution states:

WHEREAS, the Corporation has borrowed approximately $111 million from CarrAmerica Realty Corporation pursuant to a Loan Agreement and related documents dated as of March 31, 1998 (the "CarrAmerica Loan"); and

WHEREAS, the Board of Directors has determined that it is advisable and in the best interests of the Corporation to negotiate with CarrAmerica regarding the possible conversion of the CarrAmerica Loan to a loan in which CarrAmerica may convert some or all of such a loan into equity of the Corporation;

NOW, THEREFORE, IT IS RESOLVED, that the conversion of the CarrAmerica Loan into a loan, some or all of which may be converted into equity of the Corporation, hereby is approved; provided, that the equity value used for conversion purposes shall not be less than $20 per share; and

RESOLVED FURTHER, that the officers of the Corporation, or any of them, be and hereby are authorized, in the name and on behalf of the Corporation, to negotiate, execute and deliver any and all documents as they deem necessary or advisable in order to facilitate the conversion of the CarrAmerica loan into a convertible loan, and to do or cause to be done any and all such further acts and things as they may deem necessary or advisable in order to effectuate these resolutions.

(Emphasis added.)

In August 1998, Kaidanow and Arcoro exercised their warrants and each tendered $1.5 million to Omni for 75,000 shares of non-voting stock, in order to improve their legal position for challenging corporate conduct. Thus, Kaidanow and Arcoro became minority shareholders of Omni for the first time on September 1, 1998. At this point they expressed to the Board their position that the conversion price of $20 was unfair. The Omni Board met again on September 15, 1998. Kaidanow did not attend. However, he asked Thomas Carr to raise concerns about the conversion price at the meeting. Carr mentioned at the meeting that Kaidanow and Arcoro had become minority shareholders and their rights as such should be considered when undertaking corporate action.

On September 30, CarrAmerica and Omni executed an amendment to the Loan Agreement making the $111 million CarrAmerica loan convertible, in whole or in part, into Omni stock at a price of $20 per share. CarrAmerica immediately exercised its rights and converted the loan into 5,535,353 Omni shares. There was no negotiation over the conversion price. On November 5, 1998, the Board met again, this time with Kaidanow in attendance. During the meeting, Kaidanow stated that he and Arcoro had personal claims against the Board and made an offer to allow the Board to purchase their interests for between $12.5 and $25 million. This offer was not accepted by the Omni Board.

The next Omni Board meeting took place on December 17, 1998. Kaidanow was again not present, and the Board passed a resolution authorizing 291,334 additional shares of common stock, in compliance with the anti-dilution provisions of the Stockholders' Agreement with the original Omni shareholders. This resolution, the "December Resolution," states:

WHEREAS, on September 30, 1998, the Corporation issued 5,535,353 shares of non-voting common stock to CarrAmerica Realty Corporation at a purchase price of $20.00 per share;

WHEREAS, under the terms of a Stockholders' Agreement dated as of August 21, 1997 by and among the Corporation, Security Capital Holdings S.A., Security Capital U.S. Realty, The Oliver Carr Company, Strategic Omni Investors LLC and CarrAmerica Realty Corporation, as amended (the "Stockholders' Agreement"), if the Corporation raises equity capital, it is required to provide each of the voting stockholders the right to contribute a proportionate share of such capital at the same purchase price per share so as to maintain their percentage economic interest in the Corporation;

WHEREAS, the Board of Directors desires to authorize and approve the issuance of up to 291,334 additional shares of voting common stock at a purchase price of $20.00 per share, in accordance with the terms of the Stockholders' Agreement (the "Stock Issuance"); and ...

NOW THEREFORE BE IT RESOLVED, that the Board of Directors hereby authorizes and approves the Stock Issuance; and ...

RESOLVED FURTHER, that the officers of the Corporation, or any one or more of them, hereby are authorized, in the name of and on behalf of the Corporation, to execute and deliver such documents and instruments as they, or any one or more of them, determine to be such instruments as they determine to be necessary or advisable in connection with the Stock Issuance or the satisfaction of the Corporation's obligations under the Stockholders' Agreement (such determination to be conclusively, but not exclusively, evidenced by the execution and delivery thereof by any such officer); and

RESOLVED FURTHER, that all actions heretofore taken by the officers of the Corporation with respect to the Stock Issuance hereby are ratified, confirmed and approved.

On February 4, 1999, Omni filed the present action in District Court seeking a declaration that the $20 conversion price was fair and that CarrAmerica was the owner of 6,850,000 shares of Omni non-voting stock. That same day, Kaidanow resigned from the Omni Board. On March 1, 1999, Kaidanow and Arcoro counterclaimed against Omni, CarrAmerica and all directors other than Kaidanow, alleging breach of fiduciary duties based on the claim that the conversion price was unfair. On November 4, 1999, CarrAmerica, Omni and the remaining directors moved for summary...