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Maryland high court nixes company’s stock buyback plan

In a decade-old case involving contractual interpretation, Maryland’s top court has unanimously nixed a financially troubled real estate company’s Great Recession-era bid to buy back shares of its Class B stock for about a penny on each dollar invested.

The Court of Appeals ruled last week that Impac Mortgage Holdings Inc.’s plan failed to be approved by two-thirds of it Class B stockholders as the company’s charter required.

In its 7-0 decision, the high court rejected Impac’s interpretation of its own corporate document, saying its stockholder voting provision was at best ambiguous in ruling for shareholders who challenged the buyback that paid them about 29 cents for every $25 invested before the real estate boom went bust in 2008.

“It’s been a very long road,” said Daniel S. Katz, the shareholders’ attorney, of the litigation that began in 2011 and is headed back to circuit court. “It’s not over yet, but we’re getting there.”

Impac’s attorney, G. Stewart Webb Jr., did not immediately return messages Monday seeking comment on the high court’s decision. Webb is with Venable LLP in Baltimore.

Impac said the charter – which Maryland law treats as a contract between a company and its investors – required that the buyback plan for the company’s Class B and C stocks be approved by a two-thirds aggregate of the shareholders of those stocks.

But the Court of Appeals said the charter was unclear whether Class B and Class C buyouts were to be voted on independently – as the Class B stockholders argued — or collectively – as the company maintained. For example, the court said the charter was silent with regard to Class C stock, having been drafted before the company sold that class of stock.

Because of the charter’s ambiguity, the high court turned to another company document – its pre-Great Recession prospectus – to glean what Impac meant by a two-thirds vote.

The prospectus, essentially the company’s solicitation for shareholders, specifically stated that a two-thirds vote of Class B stockholders would be required to “amend, alter or repeal any of the provisions of our charter so as to materially and adversely affect the Series B preferred stock,” the court said.

That statement in the prospectus was reiterated in a 2004 resolution of Impac’s board of directors, the high court added.

“As every lawyer knows, ambiguity happens,” Judge Robert N. McDonald wrote for the Court of Appeals.

But “the prospectus summary leads to only one interpretation of the (charter’s) voting provision: Impac could not amend its charter in such a way as to materially and adversely affect certain Series B rights and preferences unless Impac had obtained the votes of two-thirds of the outstanding shares of Series B,” McDonald added. “That meaning is also confirmed by the April 2004 board resolution which … was the board’s contemporaneous expression as to its intent as to the voting rights of purchasers of the soon to be offered Series B stock.”

The first sign of trouble for Impac’s shareholders was at the outset of the Great Recession in 2008 when the company sought to stop paying dividends and end its obligation to those shareholders by buying their shares back. Impac, a publicly traded Maryland company based in Irvine, California, cited “the unprecedented turmoil in the mortgage market,” according to court documents.

The two-thirds requirement for acceptance of the buyback would be exhibited not by a vote of the shareholders per se but by the percentage of those who accepted the offer.

In the aggregate, 67.7% of all Class B and C shareholders accepted the buyback, which the company said meant its plan was adopted and stockholders who still declined to sell their shares back to the company would be left with an “illiquid investment indefinitely.”

However, only 66.2 percent – just short two-thirds — of Class B shareholders accepted the offer, which the non-accepting stockholders said meant the plan was rejected and they retained their rights as shareholders.

The shareholders filed suit in December 2011 in Baltimore City Circuit Court, where Judge W. Michel Pierson ruled in their favor. Pierson found the charter’s voting provision to be ambiguous and cited the contract law principle that ambiguous contractual terms are construed against the party that drafted the contract, in this case Impac.

The Court of Special Appeals upheld the decision for the shareholders but on a different rationale. The intermediate court found the voting provision was not ambiguous but explicitly required a two-thirds vote by Class B shareholders, prompting Impac to seek review by the high court.

The Court of Appeals found the voting provision ambiguous, as Pierson had, but said the ambiguity was clarified by the prospectus and the board’s resolution.

“Each of the three courts relied on a different ground,” said Katz, the shareholders’ attorney. “I don’t think you see that every day.”

Katz is with Tydings & Rosenberg LLP in Baltimore.

The Court of Appeals rendered its decision in Impac Mortgage Holdings Inc. v. Curtis J. Timm et al., No. 18, September Term 2020.