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Weil Achieves Major Corporate Law Decision Establishing Rules for Shareholder Litigation in Maryland

On January 28, 2016, Weil secured a major victory for iStar Financial – and all Maryland corporations – in an important corporate law decision issued by the Court of Special Appeals of Maryland. 

Shareholders of iStar challenged iStar’s modification of stock incentive awards and demanded that iStar’s board of directors commence a litigation asserting the shareholders’ claim that the modification of the awards was not permitted by the governing plan.  Weil was retained to represent a committee of iStar’s board, which investigated the claim and ultimately recommended that the board refuse the demand.  iStar’s full board then refused the demand, and the shareholders commenced a shareholder derivative action in Maryland state court challenging the board’s refusal of the demand and the modification of the stock incentive awards.  In October 2014, the trial court dismissed the plaintiffs’ complaint.

The Court of Special Appeals has now affirmed the dismissal.  The appellate court’s 31-page decision holds that under the rules governing shareholder derivative litigation in Maryland, (1) the business judgment rule protects board decisions to refuse demands, (2) the iStar board committee and the full board were comprised of disinterested and independent directors, (3) the modification of the awards was not a violation of the stock incentive plan, (4) even if the modification were a violation of the plan, the committee and the full board could still have determined that pursuit of the lawsuit would not serve the best interests of iStar, (5) statements by a board in a letter refusing a shareholder’s demand should be presumed to be true, and (6) shareholders are not entitled to discovery on these subjects unless and until they plead facts overcoming the business judgment rule. 

Several of these rulings were on previously unclear and untested areas of Maryland law, the home of many real estate investment trusts (REITs).  The decision is likely to become a leading corporate law and REIT decision in Maryland and underscores the important protections afforded to boards and corporations by the business judgment rule.

Weil Securities Litigation partner Stephen Radin argued the appeal.  The Weil team included Securities Litigation practice co-head Joseph Allerhand and associates Evert Christensen and Matthew Connors.

Legalese