Thursday, March 3, 2016

Shenker v. Polage (Ct. of Special Appeals)

Filed February 1, 2016
Opinion By: Judge Nazarian

The amended class action settlement reviewed by the trial court was procedurally and substantively fair, interpreting Md. Rule 2-231(h) consistently with the interpretation by federal courts of Federal Rule of Civil Procedure 23(e), which requires that a reviewing court approve class action settlements that it finds are "fair, adequate and reasonable."

Cole Real Estate Investments, Inc. ("CREI") (previously known as Cole Credit Property Trust III ("CCPT III") is a non-traded real estate investment trust that owns real estate throughout the United States.  American Realty Capital Properties, Inc. ("ARCP") is a publicly-traded company that acquires and owns single-
tenant freestanding commercial real estate, principally subject to medium-term net leases.

ARCP had initially made an offer to acquire CCPT III in 2013.  However, CCPT III's board elected instead to acquire a subsidiary and create CREI.  This acquisition triggered a shareholders derivative and class action lawsuit, along with a federal securities claim filed in federal district court.  The acquisition closed in April, 2013, and the pending lawsuits were dismissed following settlement of the shareholders' claims.

ARCP again approached CREI about a merger which culminated in an announcement on October 23, 2013 that the entities intended to complete an $11.2 billion merger.  Shortly thereafter, another series of lawsuits were filed by certain shareholders challenging the legality of the merger.  Negotiations were opened with the shareholders, and an agreement was reached that permitted the plaintiffs to take additional discovery, while permitting the merger to be approved.  This settlement agreement was presented to the circuit court and preliminarily approved by it on August 25, 2014.

However, in October, ARCP unexpectedly announced certain irregularities concerning its financial statements back to 2013.  This resulted in a dramatic drop in ARCP's share price and an SEC investigation and several federal lawsuits by the shareholders, essentially alleging that ARCP engaged in fraud to induce the merger with CREI.  "The complaint asserts that the defendant-directors’ wrongful conduct inflated ARCP securities prices and resulted in the subsequent decline in value of those securities when the fraud was revealed."

The parties engaged in further settlement negotiations and reached an amended settlement that carved out ARCP's officers and directors from release from all claims associated with the merger.  This amended settlement was then presented to the trial court for approval.  Following a full day trial, the trial court found that the amended settlement was fair, adequate, and reasonable.  Five shareholders, including Mr. Shenker objected.  This appeal followed.

Class action settlements in Maryland must be approved by the trial court under Md. Rule 2-231(h).  This rule is interpreted in parallel with Federal Rule 23(e), which requires that class action settlements be both procedurally and substantively fair.  On appeal, a reviewing court applies an abuse of discretion standard to a trial court's decision concerning a class action settlement.

As to procedural fairness, Federal Rule 23 provides several steps that must be taken concerning notice of the proposed settlement.  The Court found that, in accord with the applicable federal and state procedural rule, "[n]otice of the proposed settlement was sent to all class members; the parties filed and the court reviewed briefs in support of and against the revised settlement; and the court heard objections from opposing class members, both in writing and at a hearing (without subject or temporal limitation) designed to address the settlement’s reasonableness, fairness, and adequacy." 

In addition, the appellate court's role is "to determine whether the circuit court was well-informed to determine the fairness and adequacy of the settlement, and that it reached a well-reasoned decision."  A review of the trial court memorandum and record supported the conclusion that the trial judge had carefully reviewed the evidence and deposition testimony, along with the pleadings and filings of the parties concerning the merger, before approving the amended settlement.

As to substantive fairness, the trial court is to evaluate the merits of the amended settlement to determine if the settlement is fair and adequate.  A "fair" settlement is one that is not the product of collusion among the parties, which includes factors such as the posture of the case at the time of settlement, the extent of discovery that has been conducted, and the circumstances of the negotiations and the experience of counsel.  The Court found that the trial judge had sufficient information to evaluate the claims of the parties and that the settlement was not the result of collusion among the parties.  The Court held here that further discovery or time would not have yielded more evidence of the absence of evidence of more due diligence to detect the irregular financial statements prior to the merger.

An "adequate" settlement is one where the trial court has weighed the likelihood of the plaintiff's recovery on the merits against the amount offered in settlement.  The trial court is to consider these factors: “‘(1) the relative strength of the plaintiffs’ case on the merits, (2) the existence of any difficulties of proof or strong defenses the plaintiffs are likely to encounter if the case goes to trial, (3) the anticipated duration and expense of additional litigation, (4) the solvency of the defendants and the likelihood of recovery on a litigated judgment, and (5) the degree of opposition to the settlement.’” (quoting In re Montgomery Cty., 83 F.R.D. at 316).  The Court found that the plaintiff's securities claims were speculative, and the damages that might be obtained from them remote, and concluded that the trial court did not abuse its discretion in determining that the settlement was adequate, particularly as ARCP's directors and officers were not released from liability related to the false financial statements under the amended settlement.

The Court also dismissed appellant's due process argument on essentially the same grounds stated above.  The Court affirmed the trial court's approval of the amended settlement. 

The opinion is available in pdf.

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