Impac Mortg. Holdings, Inc. v. Timm

• Decision Date: 15 July 2021
• Docket Number: No. 18, Sept. Term, 2020,18, Sept. Term, 2020
• Citation: 255 A.3d 89,474 Md. 495
• Parties: IMPAC MORTGAGE HOLDINGS, INC. v. Curtis J. TIMM, et al.
• Court: Court of Special Appeals of Maryland

474 Md. 495

255 A.3d 89

IMPAC MORTGAGE HOLDINGS, INC.

v.Curtis J. TIMM, et al.

No. 18, Sept. Term, 2020

Court of Appeals of Maryland.

July 15, 2021

Argued by G. Stewart Webb, Jr. (Mitchell Y. Mirviss, Venable LLP of Baltimore, MD; Pamela S. Palmer, Troutman Pepper Hamilton Sanders LLP of Los Angeles, CA) on brief, for Petitioner.

Argued by Daniel S. Katz (John B. Isbister and Timothy R. VanCisin, Tydings & Rosenberg LLP of Baltimore, MD; Curtis J. Timm pro se of Sarasota, FL) on briefs, for Respondents.

Argued before: Barbera, C.J., McDonald, Watts, Hotten, Getty, Booth and Biran, JJ.

McDonald, J.

As every lawyer knows, ambiguity happens. Ambiguity can happen in a contract provision for any number of reasons – the parties did not anticipate all of the circumstances to which the provision might apply; the parties believed that clarifying the provision would be an obstacle to an agreement on seemingly more important terms and left any clarification of the provision to the future in the unlikely event the provision ever had to be applied; or the drafter of the contract simply copied a similar provision from a prior contract that had never been tested or interpreted. This case concerns the interpretation of an ambiguous provision in the charter of a corporation – an instrument that is regarded, under Maryland law, as a contract between the corporation and its shareholders.

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 shares of both series, tallied together, approved the measure; however, owners of less than two-thirds of Series B did so, if the votes of shareholders of the two series were tallied separately.

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 the 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.

ILegal 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 typically 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 event of dissolution, of corporate assets.¹

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"), §§ 2-102, 2-104. A corporation's charter specifies the types and quantity of stock the company may issue and defines the rights and priorities of the shareholders of the various types of stock. CA §§ 2-104, 2-105. Specifically, if a corporation divides its stock into classes, its charter must include "a description of each class including any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption." CA § 2-104.

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. CA § 2-105. Under Maryland law, such amendments can be done pursuant to a resolution of the corporation's board of directors, without shareholder approval, when the charter has granted that power to the board. CA §§ 2-105(a)(13), 2-208.² The instrument that effectuates the board's resolution is called an "articles supplementary."³ Id . Despite that unwieldy name, "articles supplementary" in this context are simply an amendment of the corporate charter. It must be signed and acknowledged by a corporate officer or agent, as witnessed or attested to by a corporate officer or agent, and filed with the State Department of Assessments and Taxation ("SDAT"). CA § 1-301.

A corporate charter is considered to be a contract between the corporation and its shareholders. Oliveira v. Sugarman , 451 Md. 208, 235-36, 152 A.3d 728 (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, 971 A.2d 309 (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 ultimate shareholders.⁴ See William M. Prifti, Securities: Public & Private Offerings (2d ed. & Oct. 2020 update), § 5.1.

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 strict and scrupulous accuracy."

Findlay v. Baltimore Tr. & Guarantee Co ., 97 Md. 716, 723, 55 A. 379 (1903) (quoting Savage v. Bartlett , 78 Md. 561, 565, 28 A. 414 (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...