January 23, 2017
On January 20, 2017, Weil secured a major victory for iStar Financial – and all Maryland corporations – in an important corporate law decision issued by the Maryland Court of Appeals (the state’s highest court), affirming the January 28, 2016 decision of the Maryland Court of Special Appeals. Both decisions are likely to become leading corporate law and REIT decisions in Maryland, and underscore the important protections afforded to boards and corporations by the business judgment rule and related corporate governance doctrines.
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, in January 2016, the Court of Special Appeals affirmed the dismissal, and in January 2017, the Court of Appeals – Maryland’s highest court – again affirmed.
The Maryland Court of Appeals’ 38-page January 20, 2017 decision makes clear that under the rules governing shareholder derivative litigation in Maryland, the business judgment rule protects board decisions to refuse demands where a majority of the board is disinterested and independent – a previously unsettled point in Maryland law, the home of many real estate investment trusts (REITs).
The intermediate appellate court’s 31-page January 28, 2016 decision also held that (1) the iStar board committee and the full board were composed of disinterested and independent directors, (2) the modification of the awards was not a violation of the stock incentive plan, (3) 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, (4) statements by a board in a letter refusing a shareholder’s demand should be presumed to be true, and (5) shareholders are not entitled to discovery on these subjects unless and until they plead facts overcoming the business judgment rule. These holdings also established new law on previously unclear and untested areas of Maryland law. The Court of Appeals’ January 20, 2017 decision leaves intact these intermediate appellate court rulings on these issues of first impression at any appellate level in Maryland.