Oliveira v. Sugarman, 17, Sept. Term, 2016

CourtCourt of Special Appeals of Maryland
Citation451 Md. 208,152 A.3d 728
Docket NumberNo. 17, Sept. Term, 2016,17, Sept. Term, 2016
Parties Albert F. OLIVEIRA, et al. v. Jay SUGARMAN, et al.
Decision Date20 January 2017

451 Md. 208
152 A.3d 728

Albert F. OLIVEIRA, et al.
Jay SUGARMAN, et al.

No. 17, Sept. Term, 2016

Court of Appeals of Maryland.

January 20, 2017

Nicholas I. Porrit (Donald J. Enright, Adam M. Apton, Alexander A. Krot, III, Levi & Korsinsky LLP, Washington, DC), on brief, for petitioners.

G. Stewart Webb, Jr. (James L. Shea, Mitchell Y. Mirviss, Venable LLP, Baltimore,

152 A.3d 732

MD; Joseph S. Allerhand, Stephen A. Radin, Weil, Gotshal & Manges LLP of New York, NY), on brief; (Daniel J. Kramer, Daniel J. Leffell, Jesse S. Crew, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY; Craig A. Benson, Paul, Weiss, Rifkind, Wharton & Garrison, LLP, Washington, DC), on brief, for respondent.

Barbera, C.J., Greene, Adkins, McDonald, Watts, Hotten, Getty, JJ.

Adkins, J.

451 Md. 214

Petitioners Albert F. Oliveira and Lena M. Oliveira filed suit against current and former members of iStar's Board of Directors and senior management in the Circuit Court for Baltimore City for breach of fiduciary duty, unjust enrichment, waste of corporate assets, breach of contract, and promissory estoppel arising from the Board of Directors' modification of performance-based executive compensation awards, which were granted in the form of stock. The Circuit Court dismissed all of Petitioners' claims for failure to state a claim, and the Court of Special Appeals affirmed. We hold that the traditional business judgment rule applies to a board of directors' decision to deny a shareholder litigation demand, not the heightened standard established by Boland v. Boland , 423 Md. 296, 31 A.3d 529 (2011). Furthermore, we hold that Petitioners do not allege facts sufficient to support direct claims for breach of contract or promissory estoppel. Thus, they are derivative claims that are subject to the business judgment rule. They were correctly dismissed.


Petitioners are Albert F. Oliveira and Lena M. Oliveira, trustees for the Oliveira Family Trust, a shareholder of iStar Financial Inc. ("iStar"). iStar is a publicly traded real estate investment trust incorporated in Maryland with its principal place of business in New York. Respondents are iStar and current and former members of iStar's Board of Directors.1

451 Md. 215

The 2008 Awards and 2009 Plan

On December 19, 2008, iStar's Board of Directors ("the Board") granted over ten million performance-based restricted stock units to certain iStar executives and employees ("the 2008 Awards"). The Board intended for the awards to vest only if iStar common stock achieved any of the following average closing prices over a period of 20 consecutive days: $4.00 or more prior to December 19, 2009; $7.00 or more prior to December 19, 2010; or $10.00 or more prior to December 19, 2011. When the Board granted these awards, iStar did not have enough authorized shares of stock to pay the awards if they vested. Thus, in 2009, the Board sought shareholder approval of an issuance of additional stock units to be used for executive compensation.

On April 23, 2009, Chief Executive Officer ("CEO") Jay Sugarman sent a letter inviting iStar shareholders to the annual shareholders meeting. The letter indicated that at the meeting shareholders would be asked to "consider and vote upon a proposal to approve the iStar Financial Inc. 2009

152 A.3d 733

Long–Term Incentive Plan" ("the 2009 Plan"). The mailing also included a notice of the annual shareholders' meeting, which explained that shareholders were to "consider and vote" on the 2009 Plan at the meeting. The notice indicated that the 2009 Plan was "further described in the accompanying proxy statement." Moreover, the Board included a letter introducing the proxy statement, which urged shareholders to approve the 2009 Plan. The letter told shareholders, "[I]t is crucial that we retain and motivate our senior leaders and key employees by granting long-term, performance-based equity incentive compensation." It continued, "In particular, if the 2009 Plan is not approved, we are obligated to settle existing performance-

451 Md. 216

based awards granted on December 19, 2008 in cash, rather than common stock, if the performance and vesting conditions of those awards are achieved."

The attached Schedule 14A Proxy Statement ("the 2009 Proxy Statement") further described the 2009 Plan, which authorized the issuance of an additional eight million shares of common stock. The Proxy Statement explained that "the ongoing financial crisis and its negative impact on [iStar] business and financial results" had led to a depletion of iStar shares issued in 2006. This new stock would allow iStar to settle the 2008 Awards—if they vested—with stock rather than cash, which would enable the corporation to preserve cash. The Proxy Statement also noted that approval of the 2009 Plan would "ensure, for federal tax purposes, the deductibility of compensation recognized by certain participants in the 2009 Plan which may otherwise be limited by Section 162(m) of the Internal Revenue Code." A copy of the 2009 Plan was attached to the Proxy Statement.

On April 27, 2009, Respondents filed the Proxy Statement with the United States Securities and Exchange Commission. On May 27, 2009, at the annual shareholders' meeting, the shareholders voted to approve the 2009 Plan.

In 2009, iStar did not meet its target share price for 20 consecutive days as required for the 2008 Awards to vest. In 2010, iStar achieved the target price of $7.00 for 20 consecutive days ending on December 20—eight trading days too late to vest the 2008 Awards. Following this near miss, iStar began considering modification of the 2008 Awards "to achieve a fair balance between rewarding management's exceptional performance, as reflected by the 300% rise in the market value of iStar stock, and enforcing the terms of the 2008 Awards." After several Board and Compensation Committee meetings, as well as discussion with legal, accounting, and compensation advisors, the Board modified the 2008 Awards to convert them from performance-based to service-based awards (the "2011 Modification").

451 Md. 217

Under the 2011 Modification, iStar executives received compensation in three installments—on January 1, 2012, 2013, and 2014—as long as the employee still worked for iStar on the vesting date. The 2011 Modification also reduced the amount of the 2008 Awards by 25 percent. With the 2011 Modification, the Board hoped to prevent key members of iStar management from leaving the corporation. Additionally, the Board believed that modifying the existing 2008 Awards, which had already been largely expensed, would be more cost effective than issuing new awards.

Demand and Response

On May 23, 2013, Petitioners demanded that the Board "investigate and institute claims on behalf of [iStar] ... against responsible persons" related to the 2011 Modification. Petitioners demanded that the Board rescind all shares of stock issued

152 A.3d 734

under the 2009 Plan to settle the 2008 Awards, or, alternatively, "seek any other appropriate relief on behalf of [iStar] for damages sustained ... as a result of the Board's misconduct" in modifying the 2008 Awards. Additionally, Petitioners sought to "[e]njoin [iStar] from issuing any more shares under the 2009 Plan to settle the 2008 Awards."

In June 2013, the Board appointed Barry W. Ridings, an outside, non-management director who joined the Board after the 2011 Modification, to serve as the demand response committee ("the Committee"). The Committee was tasked with investigating Petitioners' demand and making a recommendation to the Board as to the best course of action. The Committee hired outside counsel, Joseph S. Allerhand and Stephen A. Radin of Weil, Gotshal & Manges LLP, to assist with the investigation. In October 2013, following extensive document review and interviews with key iStar executives, the Committee recommended that the Board refuse Petitioners' demand. On November 11, 2013, the Board unanimously voted in accordance with that recommendation.

In a letter sent to Petitioners on November 12, 2013, the Board presented several reasons for denying their demand.

451 Md. 218

The Board noted that the Committee had concluded that the Board made a good faith, informed business judgment to modify the 2008 Awards, and that it had the authority to do so. Additionally, the Board explained that if it were to rescind the 2008 Awards, it would harm corporate morale and likely invite litigation from management executives. Lastly, the Board noted that even if it were to win the demanded litigation, the damages would not be enough to offset the cost of issuing new awards. The Board concluded that it saw "no upside—and much downside—to the action and lawsuit proposed in the [d]emand. iStar would probably lose, suffer substantial harm,...

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