Meade v. Christie

• Decision Date: 27 May 2022
• Docket Number: 21-0098
• Citation: 974 N.W.2d 770
• Parties: Kendall J. MEADE, Individually and on behalf of all others similarly situated, Appellee, v. Peter S. CHRISTIE, Stephen A. Crane, Jonathan R. Fletcher, and Gretchen H. Tegeler, Appellants, and EMC Insurance Group, Inc., Bruce G. Kelley, and EMCC Casualty Company, Defendants.
• Court: Iowa Supreme Court

974 N.W.2d 770

Kendall J. MEADE, Individually and on behalf of all others similarly situated, Appellee,

v. Peter S. CHRISTIE, Stephen A. Crane, Jonathan R. Fletcher, and Gretchen H. Tegeler, Appellants,andEMC Insurance Group, Inc., Bruce G. Kelley, and EMCC Casualty Company, Defendants.

No. 21-0098

Supreme Court of Iowa.

Submitted March 23, 2022

Filed May 27, 2022

Michael W. Thrall (argued), Mark C. Dickinson, Lynn C. Herndon, and Angel A. West (until withdrawal) of Nyemaster Goode, P.C., Des Moines, for appellants.

Juan Monteverde (argued) of Monteverde & Associates PC, New York, New York, and Gary Dickey of Dickey, Campbell, & Sahag Law Firm, PLC, Des Moines, for appellee.

William C. Brown of Brown, Winick, Graves, Gross and Baskerville, P.L.C., Des Moines, for amici curiae Iowa Association of Business and Industry and the Iowa Business Council.

McDermott, J., delivered the opinion of the court in which all justices joined.

McDERMOTT, Justice.

This appeal involves a shareholder's challenge to a corporate merger involving the purchase of a publicly traded company's shares in what's known as a "going private transaction." The shareholder alleges that the corporation's directors abdicated their fiduciary duties by agreeing to a flawed merger process with the acquirer that resulted in too low a price for the minority shareholders’ stock. The corporate directors filed a motion to dismiss the shareholder's claims, invoking statutory director protections—known as "director shield" laws—that prevent holding directors liable for many types of claims for money damages. The Iowa Business Specialty Court rejected the directors’ arguments and denied their motion to dismiss. The directors filed an application for interlocutory review, which we granted. This case presents our court's first opportunity to examine Iowa's director shield protections and the procedural requirements that accompany them.

I.

A.

Because this case involves an appeal from the denial of a motion to dismiss, we accept the facts as alleged in the petition as true. McGill v. Fish , 790 N.W.2d 113, 116 (Iowa 2010).

Employers Mutual Casualty Company (EMCC) was founded in 1911 in Des Moines as a mutual insurance company. A "mutual" company is owned by its policyholders; a "stock" company, in contrast, is owned by stockholders.

EMCC formed EMC Insurance Group, Inc. (EMCI) in 1974 as a special type of subsidiary called a "downstream subsidiary" that would serve as EMCC's holding company. Under this structure, EMCC, the old insurance company, became a subsidiary of EMCI, the new company. When EMCI became a publicly traded company in 1982, this structure—EMCI serving as a holding company for EMCC—enabled EMCC to access public capital markets as a source of funding for its business while maintaining its status as a policyholder-owned mutual insurance company. All the while, EMCC owned a majority of the shares in EMCI, which meant that EMCC controlled its own holding company. EMCI employed no staff, leased no facilities, and owned no information technology, but instead relied completely on "EMCC's employees, facilities, and information technology to conduct its business."

Bruce Kelley was EMCC's president and CEO and served on its board of directors throughout the events of this case. Kelley was also EMCI's president and CEO. EMCI's shareholders elected its board of directors. Kelley served on EMCI's board of directors (at times relevant to this lawsuit) with four other members: Peter S. Christie, Stephen A. Crane, Jonathan R. Fletcher, and Gretchen H. Tegeler.

In October 2018, EMCC decided to attempt to purchase the publicly traded stock of EMCI that it didn't own, commonly referred to as a "going private transaction." EMCC soon retained investment bank Boenning & Scattergood, Inc., to provide financial analysis and to assist EMCC's board in the going private transaction. On November 15, EMCC sent a nonbinding proposal letter to EMCI's board offering to purchase the EMCI stock that EMCC didn't already own for $30 per share. The next day, EMCC filed the proposal letter with the Securities and Exchange Commission (SEC) and issued a press release announcing the offer.

After EMCI's board received the proposal letter and EMCC made the offer public, EMCI established a "Special Committee" consisting of its four directors other than Kelley. In December 2018, the Special Committee retained Willkie Farr & Gallagher, LLP, for legal representation. The Special Committee also retained investment bank Sandler O'Neill & Partners, L.P., to act as its financial advisor. In January 2019, the Special Committee instructed Sandler O'Neill to perform a due diligence investigation of EMCI, including requesting business and financial information, and to schedule management meetings to discuss EMCI's business and future.

Meanwhile, EMCC had received an unsolicited proposal from a group of investors proposing a joint venture transaction involving EMCI. EMCC's board of directors unanimously rejected the proposal without notifying EMCI's board. EMCI's Special Committee received notice of the proposal on January 24, about a month after EMCC received it.

The next day, EMCI received notice of a proposal from one of its shareholders, Gregory Shepard, requesting that he be made a candidate for its board of directors and a member of the Special Committee. A few days later, Shepard filed a Schedule 13D (a form required when a person or group acquires more than 5% of a voting class of a company's stock) with the SEC, stating that he owned 5.09% of EMCI's common stock and that he believed EMCI's "common stock was significantly undervalued." On February 25, the Special Committee decided not to invite Shepard to be a board member of EMCI.

Meanwhile, on January 31, EMCC publicly announced that it would not "consider any alternative merger or transaction involving a third party" that would involve EMCC merging with or into a third party.

On February 22, the Special Committee met with Willkie Farr and Sandler O'Neill and discussed an alternative proposal (prepared by Sandler O'Neill) that would replace certain insurance pooling agreements between EMCI and EMCC. The alternative proposal was presented to EMCC's board in early March. EMCC's senior executives met with the deputy commissioner-supervisor of the Iowa Insurance Division, who informed the executives that the alternative proposal was unlikely to receive regulatory approval. EMCC's board rejected the alternative proposal and kept the $30-per-share proposal on the table.

On March 20, the Special Committee responded to EMCC with a counteroffer of $40 per share of EMCI stock based on financial projections by Sandler O'Neill. On March 25, Shepard sent another letter to the Special Committee raising his concerns about its independence, Kelley's and EMCC's control, and the "gross inadequacy of EMCC's offer," and stating his belief that the fair price was $50 per share.

The Special Committee and EMCC exchanged counteroffers until, on April 20, the Special Committee accepted EMCC's offer to buy out the minority shareholders at $36 per share. The final merger agreement included a "no shop" provision, which prohibited EMCI from soliciting bids from other potential purchasers. On September 18, EMCI held a special meeting of shareholders to vote on the transaction. A majority of the minority shareholders—that is, a majority of the non-EMCC shareholders—voted to approve the merger at $36 per share. The shareholders were paid cash for their shares the next day and had their shares canceled.

B.

Kendall Meade, the plaintiff in this case, owned shares of EMCI at the time of EMCC's buyout. Meade filed a class action lawsuit on behalf of himself and the other former owners of common stock of EMCI.

The petition alleges three causes of action. Meade's first cause of action, against EMCI's individual directors (Christie, Crane, Fletcher, Tegeler, and Kelley), alleges that the directors breached "fiduciary duties of care, loyalty, good faith, and candor owed to the public shareholders of EMCI." His second cause of action, against EMCC, alleges that EMCC breached fiduciary duties it owed to the minority shareholders of EMCI. And Meade's third cause of action, against EMCI, alleges that EMCI aided and abetted the other defendants’ breaches of fiduciary duties.

EMCC, EMCI, and Kelley filed separate motions to dismiss. The four other individual directors (Christie, Crane, Fletcher, and Tegeler) filed a joint motion to dismiss. Each defendant argued that Meade's claims were derivative rather than direct and that, because Meade had failed to comply with the Iowa Code's requirements for bringing derivative claims, Meade's claims must be dismissed. Meade resisted. The business court held that Meade's claims were direct rather than derivative because the alleged wrongful actions injured the shareholders rather than EMCI, and the shareholders had suffered separate and distinct injuries from EMCI.

The four individual directors further argued that Meade failed to plead around the statutory defenses available to the directors under these circumstances. The business court rejected this argument, reasoning that Iowa is a notice pleading state and that Meade's allegations satisfied the pleading standard set forth in the statute in any event, and denied the motion.

The business court granted Kelley's, EMCC's, and EMCI's motions to dismiss. Those issues are not before us on this appeal. The only defendants not dismissed by the business court were the EMCI directors other than Kelley: Christie, Crane, Fletcher, and Tegeler. These four defendants (whom for simplicity we will refer to simply as "the directors" in this opinion even though Kelley isn't included among them) filed an application for interlocutory appeal. A week later, the directors filed an answer denying liability. We granted the application and stayed further proceedings in the case.

II.

The directors in this appeal raise two issues: (1) that...