IN THE SUPREME COURT OF MISSISSIPPI
NO. 2015-CA-00260-SCT
WILLIAM BURGESS, DERIVATIVELY ON
BEHALF OF BANCORPSOUTH, INC.
v.
AUBREY B. PATTERSON, HASSELL H.
FRANKLIN, JAMES VIRGIL KELLEY, TURNER
O. LASHLEE, ROBERT C. NOLAN, ALAN W.
PERRY, JAMES E. CAMPBELL, III, WILBERT G.
HOLLIMAN, JR., LARRY G. KIRK, GUY W.
MITCHELL, III, WILLIAM CAL PARTEE, JR.,
WARREN A. HOOD, JR., WILLIAM L. PRATER,
GREGG COWSERT AND BANCORPSOUTH, INC.
DATE OF JUDGMENT: 12/30/2014
TRIAL JUDGE: HON. WILLIAM R. BARNETT
TRIAL COURT ATTORNEYS: DAVID M. McMULLAN, JR.
KIP BRIAN SHUMAN
RUSTY E. GLENN
ROBERT B. WEISER
BRETT D. STECKER
JAMES M. FICARO
JEFFREY J. CIARLANTO
JOSEPH M. PROFY
JAMES PATRICK CALDWELL
COURT FROM WHICH APPEALED: LEE COUNTY CIRCUIT COURT
ATTORNEYS FOR APPELLANT: DAVID M. McMULLAN, JR.
KIP BRIAN SHUMAN
RUSTY E. GLENN
ROBERT B. WEISER
BRETT D. STECKER
JAMES M. FICARO
ATTORNEYS FOR APPELLEES: JAMES PATRICK CALDWELL
KEVIN B. SMITH
NATURE OF THE CASE: CIVIL - OTHER
DISPOSITION: AFFIRMED - 04/14/2016
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
BEFORE WALLER, C.J., KITCHENS AND COLEMAN, JJ.
KITCHENS, JUSTICE, FOR THE COURT:
¶1. William Burgess, a common stock shareholder of BancorpSouth, Inc., filed a
shareholder derivative action in the Circuit Court of Lee County after a Special Committee
comprised of BancorpSouth directors and officers rejected his presuit demand. Burgess, in
his presuit demand and in his Shareholder Derivative Complaint, made various claims
relating to alleged misrepresentations in company publications directed to shareholders
following the 2008 economic downturn. Ultimately, the Circuit Court of Lee County
dismissed the action. For the reasons stated below, we now affirm.
FACTS AND PROCEDURAL HISTORY
¶2. Burgess sent a shareholder demand pursuant to Mississippi Code Section 79-4-7.421
on June 2, 2010, requesting that “BancorpSouth’s Board of Directors . . . take actions to
remedy breaches of fiduciary duties from July 2009 to the present . . . by certain current
and/or former directors and executive officers of the Company . . . .”2 Burgess claimed that
corporate management, in the wake of the 2008 economic downturn, had “caused
1
Mississippi Code Section 79-4-7.42 provides, in pertinent part that “[n]o
shareholder may commence a derivative proceeding until . . . [a] written demand has been
made upon the corporation to take suitable action . . . .” Miss. Code Ann. § 79-4-7.42 (Rev.
2013).
2
Burgess specifically named the following BancorpSouth directors and officers in
his presuit demand: Aubrey B. Patterson, Jr., Hassell H. Franklin, William L. Prater, James
E. Campbell, III, Wilbert G. Holliman, James Virgil Kelley, Larry G. Kirk, Turner O.
Lashlee, Guy W. Mitchell, III, Robert Madison Murphy, Robert C. Nolan, William Cal
Partee, Jr., and Alan W. Perry.
2
BancorpSouth to issue a series of materially false and misleading statements regarding the
Company’s business and financial results.” More specifically, Burgess claimed that
management had “failed to disclose the extent of seriously delinquent commercial real estate
loans and construction and land loans” and had “also failed to ensure that the Company
adequately and timely recorded losses for its impaired loans, which in turn caused
BancorpSouth’s financial statements to be materially false and misleading.”
¶3. Burgess’s demand cited various press releases from 2009 and early 2010 in which
BancorpSouth had touted its vigorous financial health. But then, on February 25, 2010,
management announced a delay in the filing of BancorpSouth’s Annual Report on Form 10-
K with the Securities and Exchange Commission (SEC).
¶4. Burgess claimed that management’s “material misrepresentations and gross
mismanagement of the Company” caused BancorpSouth to sustain damages. Burgess stated
that management had “authorized, caused, or permitted BancorpSouth to issue false and
misleading financial results for fiscal year 2009” and that management had:
[A]uthorized, caused or permitted BancorpSouth to conduct its business in an
unsafe, imprudent and dangerous manner by pursuing unsound practices,
including financial disclosure, allowance for credit losses and financial
oversight, and the serious and adverse impact of these practices on
BancorpSouth’s finances and financial condition and prospects. In addition,
they permitted BancorpSouth to falsify its statements to the public to try to
conceal the true nature of its problems.
Based on his allegations of corporate management malfeasance, Burgess demanded that the
BancorpSouth Board of Directors (the Board) conduct an internal investigation into
“BancorpSouth’s violations of Mississippi and/or federal law” and “commence a civil action
3
against each member of management to recover for the benefit of the Company the amount
of damages sustained by the Company as a result of their breaches of fiduciary duties . . . .”
¶5. On June 30, 2010, the Board delegated to a Special Committee “the full authority and
responsibility for determining whether it is in the Company’s best interest to pursue any of
the claims asserted” by Burgess in his demand. The Board appointed and unanimously
approved Hassell H. Franklin, Wilbert G. Holliman, and Guy W. Mitchell, III, as qualified
directors to serve on the Special Committee. By letter dated July 2, 2010, Burgess was
notified that the Special Committee had been formed for the purpose of evaluating his
claims. On July 15, 2010, Stephen L. Thomas of the law firm of Bradley Arant Boult
Cummings, LLP, informed Burgess that his firm had been “retained as independent counsel
to aid a recently created Special Committee . . . composed of qualified, disinterested
Directors of BancorpSouth, Inc. to conduct an inquiry into the allegations” of the demand.
¶6. The Special Committee, “having conducted a good faith, adequate, and reasonable
inquiry into the allegations and claims” raised in Burgess’s demand, determined “for and on
behalf of the Board that, based upon its inquiry, the maintenance of the derivative proceeding
. . . is not in the best interests of the Company.” Thomas notified Burgess and his counsel,
in a letter dated August 27, 2010, that this determination had been made.
¶7. Aggrieved by the Special Committee’s refusal to initiate derivative proceedings,
Burgess, on August 16, 2011, filed a Shareholder Derivative Complaint in the Circuit Court
of Lee County. In addition to naming BancorpSouth, Inc., as a defendant, Burgess also
named “certain current and/or former members of its Board of Directors . . . and executive
4
officers,” including Aubrey B. Patterson, Hassell H. Franklin, James Virgil Kelley, Turner
O. Lashlee, Alan W. Perry, James E. Campbell, III, Wilbert G. Holliman, Jr., Larry G. Kirk,
Guy W. Mitchell, III, William Cal Partee, Jr., Warren A. Hood, Jr., William L. Prater, and
Gregg Cowsert.
¶8. Burgess claimed that the Special Committee improperly had rejected his demand. He
stated that the investigation was “perfunctory and inadequate,” because the Special
Committee had “performed their entire purported ‘investigation’ in little more than a month
(in the middle of summer), start to finish.” He claimed that the Special Committee members
lacked independence because they “are individuals that have developed longstanding
professional relationships with each other and with whom they have entangling financial
alliances, interests, and dependencies . . . .” Burgess continued that “the members of the
Special Committee have benefited [sic], and will continue to benefit, from the wrongdoing
alleged herein and have engaged in such conduct to preserve their positions of control and
the perquisites derived thereof, and are incapable of exercising independent judgment in
deciding whether to bring this action.” Burgess described the Special Committee
investigation as having been a “sham, mere window dressing as no true independent
investigation of the Company’s myriad financial reporting, accounting, and internal control
issues could have possibly been completed in a month’s time.”
¶9. In terms of substantive claims, Burgess first alleged that the defendants had “violated
their fiduciary duties of care, loyalty, and good faith by causing or allowing the Company to
disseminate to BancorpSouth shareholders materially misleading and inaccurate information
5
through, inter alia, BancorpSouth filings and other public statements and disclosures . . . .”
Second, he claimed that Defendants had “willfully ignored the obvious and pervasive
problems with BancorpSouth’s internal controls practices and procedures and failed to make
a good faith effort to correct the problems or prevent their recurrence.” Third, Burgess
claimed that Defendants had “violated and breached their fiduciary duties of care, loyalty,
reasonable inquiry, oversight, good faith and supervision,” and such breach caused
“significant damages, not only monetarily, but also to corporate image and goodwill.”
¶10. Fourth, Burgess alleged that “[w]hen informed of a material event such as the opening
of an investigation by the SEC, Defendants had a duty to disclose that information to the
public” and their failure to do so had caused monetary damages and damage to “corporate
image and goodwill.” Fifth, Burgess claimed that Defendants had been unjustly enriched by
their malfeasance. Finally, Burgess alleged that “Director Defendants, by allowing the
Officer Defendants to retain all of their incentive compensation from FY09 which was based
upon materially false and misleading financial statements, have given away corporate assets
without cause.”
¶11. Burgess sought a judgment “in favor of the Company for the amount of damages
sustained . . . as a result of the Defendants’ breaches of fiduciary duties.” He asked that
BancorpSouth be directed to “take all necessary actions to reform and improve its corporate
governance and internal procedures to comply with applicable laws and to protect the
Company and its shareholders . . . .” He requested that the court grant restitution and
“disgorgement of all profits, benefits and other compensation obtained by the Defendants”
6
and that the court grant “costs and disbursements of the action, including reasonable
attorneys’ fees, accountants’ and experts’ fees, costs, and expenses.”
¶12. On October 25, 2011, First Circuit Court District judges, Hon. Thomas J. Gardner, III,
Hon. Paul S. Funderburk, Hon. Jim S. Pounds, and Hon. James L. Roberts, Jr., recused, one
of the defendants being a practicing member of the Bar of that district. Chief Justice William
L. Waller, Jr., appointed Hon. William R. Barnett to preside over the matter as a special
judge. On December 20, 2011, a stay was entered “pending certain activities in litigation
involving related factual issues . . . pending in another forum.”3
¶13. After the stay was lifted November 19, 2012, the defendants, on November 30, 2012,
filed a motion to dismiss, in which they stated that:
Having chosen to investigate the Shareholder’s allegations, and having
assembled a Special Committee of qualified directors, having employed
counsel and a corporate law expert, and said Committee having determined in
good faith, after conducting a reasonable inquiry on which its conclusions
were based that the maintenance of the derivative proceeding was not in the
best interest of the corporation, Mississippi law compels that this derivative
proceeding “shall be dismissed by the court on motion by the corporation.”
(quoting Miss. Code Ann. § 79-4-7.44(a) (Rev. 2013)) (emphasis added by BancorpSouth).
The defendants took the position that, because the Special Committee had determined that
3
Burgess noted that on May 12, 2010, a federal class action lawsuit was instituted
against BancorpSouth officers and directors by shareholders on behalf of the company in the
United States District Court for the Middle District of Tennessee. The shareholders alleged
that the officers and directors had committed various violations of the 1934 Securities and
Exchange Act. When the defendants moved to dismiss the complaint, a magistrate judge
submitted a report and recommendation to the assigned district judge, Hon. William J.
Haynes. The report and recommendation stated that the plaintiff’s allegations had been
sufficient to support a claim for federal securities law violations. Ultimately, the parties
settled the case.
7
a derivative suit was not in the best interests of the corporation, and because of the “shall be
dismissed” language of Mississippi Code Section 79-4-7.44, the Special Committee’s
“determination is not subject to judicial challenge here.”
¶14. The defendants stated that, while Burgess bore the “burden of pleading particularized
facts that cast reasonable doubt as to the Special Committee’s independence or the
sufficiency of its inquiry,” Burgess had failed to do so. The defendants responded to
Burgess’s allegations of “disabling conflicts” by stating that Mitchell’s fees had been de
minimis and that the relationship between Mitchell and BancorpSouth had been disclosed to
shareholders. To that effect, the defendants attached a proxy statement from March 2011 in
which Mitchell was listed, with biography, as a nominee for election by shareholders to the
BancorpSouth Board of Directors. The defendants also discounted the alleged disabling
conflicts of Holliman and Franklin. The defendants mentioned a report prepared by the
Special Committee and stated that “[t]his Report is subject to the attorney-client privilege
between the Committee and its counsel, and constitutes the work-product of Bradley-Arant,”
thus the “Report has therefore not been shared with non-Committee BancorpSouth directors
or management, and certainly not Burgess or his counsel.”
¶15. Attached to the Motion to Dismiss were three affidavits. The first affidavit was from
attorney Stephen Thomas, who had been retained to assist the Special Committee to conduct
its inquiry into Burgess’s demand. Thomas stated that, prior to the Special Committee’s
statutory investigation, he had conducted “independence interviews with the Committee
members to confirm their suitability to sit on the Committee” and that, in addition, he “had
8
the Committee itself conduct an independence interview with counsel to determine the
independence of Bradley Arant Boult Cummings LLP.” Additionally, Thomas stated that the
Committee had retained the services of Mississippi College School of Law Professor Cecile
C. Edwards as an expert in the field of corporate law, who “provided the Committee with
assistance in its investigation and preparation” of its report.
¶16. Thomas reported that, except for Burgess’s demand letter of June 2, 2010, Burgess
and his counsel offered no input to aid in the Special Committee’s investigation, despite
multiple written requests that he share any documents, information, and authorities which he
or his counsel deemed helpful to the Committee’s investigation. Thomas stated also that the
Special Committee’s 25-page report constituted work product and was, therefore, subject to
the attorney-client privilege. He concluded that, “[h]aving conducted a full, fair, and
reasonable investigation, the Committee unanimously concluded that it was not in the best
interests of the Company to prosecute the claims asserted in the Demand” because, in
addition to no legal support having been found to support Burgess’s allegations, “the direct
and indirect litigation costs would outweigh the potential recoverable damages to the
Company.”
¶17. A second affidavit attached to the Motion to Dismiss was from Guy W. Mitchell, III,
one of the members of the Special Committee. Mitchell, like Thomas, explained the scope
of the Committee’s review, described what the Committee had investigated, claimed that the
Committee’s report was subject to the attorney-client privilege, and concluded that
prosecution of the claims asserted by Burgess was not in the company’s best interests.
9
¶18. The third affidavit was from Professor Edwards, who stated that she and Thomas had
aided the Special Committee in its determination of its own impartiality and independence.
According to Professor Edwards, based on the impartiality determination, the Special
Committee had determined that “its members were sufficiently independent and disinterested
to serve as ‘qualified directors’ under Mississippi law, and to evaluate the allegations in the
Demand in good faith, and to conduct an adequate and reasonable investigation of those
allegations.” Independence having been ascertained, the Special Committee, according to
Professor Edwards, then conducted its investigation into the substance of Burgess’s
allegations and concluded that it was not in the company’s best interests to prosecute.
¶19. On December 5, 2012, Burgess propounded a Request for Production of Documents
upon BancorpSouth and the Special Committee. Among thirty-seven requests for documents
relating to the Special Committee’s independence and impartiality and its investigation of
Burgess’s derivative demand, Burgess sought “[a]ll documents created by the Special
Committee in connection with the Demand” and “[a]ll documents relating to any findings,
conclusions or recommendations of the Special Committee.” The defendants responded with
a motion for a protective order, arguing that no law permitted Burgess to obtain discovery
or to supplement his complaint at the pleading stage prior to a ruling on the motion to
dismiss.
¶20. Burgess filed a memorandum in opposition to the defendants’ motion to dismiss, to
which he attached sources purporting to show what he claimed were disabling conflicts.
According to Burgess, the North Mississippi Medical Center webpage indicated that
10
Defendants Patterson, Franklin, Holliman, and Kelley served together on the board of
directors of the North Mississippi Medical Center. The web page of the Community
Development Foundation listed BancorpSouth as a “Circle Member.” An article available
on the web page of the Mississippi Economic Counsel entitled “BancorpSouth Selects James
D. Rollins III as New Chief Executive Officer” from January 4, 2013, indicated that
Patterson previously had served as Chairman of the Community Development Foundation.
The web page of the Board of Directors of the Community Development Foundation
indicated that Mitchell had served as one of its directors. Other allegedly disabling conflicts
involved BancorpSouth board members’ and Special Committee members’ being members
of and/or serving currently or previously on the boards of CREATE, Inc., the North East
Mississippi United Way, North Mississippi Health Services, the Board of Trustees of State
Institutions of Higher Learning (IHL Board), and the Tupelo Kiwanis Club.
¶21. Burgess also opposed the defendants’ request for a protective order, arguing that he
was entitled to discovery of “any and all information relating to the ‘investigation’
performed by the appointed ‘Special Committee’ of BancorpSouth’s Board of Directors.” In
response, the defendants filed a Memorandum in Rebuttal to the Opposition to Defendants’
Motion for Protective Order, to which they attached, for in camera review by the trial court,
the report of the Special Committee. With regard to the content of the report, the defendants
maintained their prior assertion of work-product and attorney-client privileges.
¶22. Special Judge Barnett granted the motion to dismiss on December 30, 2014. He held
that “the Plaintiff’s Complaint wholly fails to allege with particularity any facts (not
11
possibilities) which any reasonable person could construe that the Special Committee’s
members were somehow not qualified, that their inquiry was not reasonable and their
conclusions not made in good faith.” He rejected Burgess’s argument that discovery was
needed at the pleadings stage: “This Court finds that in derivative proceedings you must have
a legally sufficient Complaint in order to conduct discovery.”
¶23. Aggrieved, Burgess appealed the judgment to this Court. Burgess claims that his
complaint alleged with the requisite particularity facts establishing that the members of the
Special Committee were not qualified under Mississippi Code Section 79-4-1.43 (Rev.
2013). He continued that the law imposes upon the defendant officers and directors the
burden of proving that the determination that maintenance of the derivative proceeding was
not in the best interests of the corporation was made independently and in good faith,
following a reasonable inquiry under Mississippi Code Section 79-4-7.44 (Rev. 2013). He
stated that, in this case, the Special Committee had not borne its burden of demonstrating its
independence and that its investigation was performed in good faith, following a reasonable
inquiry. Furthermore, Burgess argued that reports of the Special Committee, if any, must be
produced to the plaintiff, that the circuit court erred in relying on the Special Committee’s
report, and that the circuit court erred by not allowing him further discovery.
¶24. BancorpSouth maintains that Burgess failed to allege with particularity either that the
board of directors was not qualified at the time the determination was made or that the
determination was not made in good faith, following a reasonable inquiry and, thus, did not
meet the requirements of Mississippi Code Section 79-4-7.44. Because, as BancorpSouth
12
claims, Burgess has failed to meet the threshold requirements of Section 79-4-7.44,
BancorpSouth argues that the circuit court correctly dismissed Burgess’s complaint and that
the business judgment rule protected the determination of the Special Committee that the best
interests of the corporation were not served by maintaining a derivative suit. BancorpSouth
contends that no discovery was available to Burgess at the initial pleadings stage and
maintains that the Special Committee’s report was protected by the work-product and
attorney-client privileges.
STANDARD OF REVIEW
¶25. As an initial matter, this Court never before has been called upon to review a circuit
court’s dismissal of a shareholder’s derivative complaint under Mississippi Code Section 79-
4-7.44. As an issue of first impression in this jurisdiction, this Court must assign a standard
of review by which our appellate courts are to consider this and similar future cases.
¶26. Mississippi Code Section 79-4-7.44 provides the following:
(a) A derivative proceeding shall be dismissed by the court on motion by the
corporation if one of the groups specified in subsection (b) or (f)4 has
determined in good faith, after conducting a reasonable inquiry upon which its
conclusions are based, that the maintenance of the derivative proceeding is not
in the best interests of the corporation.
(b) Unless a panel is appointed pursuant to subsection (e), the determination
in subsection (a) shall be made by:
(1) A majority vote of qualified directors present at a meeting of
the board of directors if the qualified directors constitute a
quorum; or
4
No subsection (f) exists. Ostensibly, the statute refers to subsection (e), which
permits the court to appoint a panel to make the best-interests determination, but that
subsection is not at issue in the present appeal.
13
(2) A majority vote of a committee consisting of two (2) or more
qualified directors appointed by majority vote of qualified
directors present at a meeting of the board of directors,
regardless of whether such qualified directors constitute a
quorum.
(c) If a derivative proceeding is commenced after a determination has been
made rejecting a demand by a shareholder, the complaint shall allege with
particularity facts establishing either (1) that a majority of the board of
directors did not consist of qualified directors at the time the determination
was made or (2) that the requirements of subsection (a) have not been met.
(d) If a majority of the board of directors consisted of qualified directors at the
time the determination was made, the plaintiff shall have the burden of proving
that the requirements of subsection (a) have not been met; if not, the
corporation shall have the burden of proving that the requirements of
subsection (a) have been met.
(e) Upon motion by the corporation, the court may appoint a panel of one or
more individuals to make a determination whether the maintenance of the
derivative proceeding is in the best interests of the corporation. In such case,
the plaintiff shall have the burden of proving that the requirements of
subsection (a) have not been met.
Miss. Code Ann. § 79-4-7.44 (Rev. 2013). We turn to the laws of other states whose statutory
frameworks are similar to Mississippi’s.
¶27. Connecticut’s statute is identical to Mississippi’s. See Conn. Gen. Stat. § 33-724 (Rev.
2015).5 The Appellate Court of Connecticut likewise was faced with the question of what
standard to apply to a review of the trial court’s dismissal of a shareholder’s derivative
complaint. Sojitz Am. Capital Corp. v. Kaufman, 61 A.3d 566, 571 (Conn. App. Ct. 2013).6
5
The statutes of both Mississippi and Connecticut are identical to the Model Business
Corporation Act. See Model Bus. Corp. Act § 7.44 (3d ed. 2005).
6
Among the states which have adopted the Model Business Corporation Act, we
observe that Sojitz appears to be the most recent pronouncement from an appellate court on
14
¶28. The Appellate Court considered as persuasive authority the standards of review of
Wisconsin and Florida, which, like Connecticut and Mississippi, have codified Section 7.44
of the Model Business Corporation Act:
Two such states, Wisconsin and Florida, have clearly established that a trial
court’s dismissal of a derivative action will be reviewed by an appellate court
as a mixed question of fact and law. In Einhorn v. Culea, . . . 591 N.W.2d 908
([Wis. Ct.] App. 1999) rev’d on other grounds, . . . 612 N.W.2d 78 ([Wis. Ct.
App.] 2000), the Wisconsin Court of Appeals held that “[w]hether the trial
court properly found that the [committee] was independent within the meaning
of [the statute] presents a mixed question of fact and law.” The Florida Court
of Appeals similarly concluded that a mixed standard of review is appropriate.
Batur v. Signature Properties of Northwest Fla., Inc., 903 So. 2d 985, 994-95
(Fla. [Dist. Ct.] App. 2005).
Id. at 572.
¶29. Based on persuasive authority from Wisconsin and Florida, the Appellate Court
departed “from the well settled standard of review typically applied to motions to dismiss,”
because “Section 33-724 is distinguishable from other motions to dismiss, as it sets forth a
unique, heightened pleading standard and elements that must be either proven or disproven.”
Id. (citing Conn. Gen. Stat. § 33-724). It concluded that “a departure from the usual standard
of review governing motions to dismiss is warranted” and that “a dismissal pursuant to § 33-
724 should be reviewed as a mixed question of fact and law.” Id. at 572. The Appellate Court
held that:
It is well settled that mixed questions of fact and law are subject to plenary
review by this court.“[S]o-called mixed questions of fact and law, which
require the application of a legal standard to the historical-fact determinations,
are not facts in this sense. . . . [Such questions require] plenary review by this
court unfettered by the clearly erroneous standard. . . . When legal conclusions
the question of dismissal of shareholder derivative actions.
15
of the trial court are challenged on appeal, we must decide whether [those] .
. . conclusions are legally and logically correct and find support in the facts
that appear in the record.”
Id. at 573 (quoting D’Appollonio v. Griffo-Brandao, 53 A.3d 1013 (Conn. App. Ct. 2012)).
¶30. In Einhorn, the Supreme Court of Wisconsin more specifically stated that, when
considering whether the trial court had properly reviewed the independence of a special
committee under the Wisconsin dismissal statute,7 “we will not reverse the trial court’s
findings of fact as to the independence of the [special committee] members unless they are
clearly erroneous. . . . However, we review de novo the trial court’s application of §
180.0744 to the facts as found.” Einhorn, 591 N.W.2d at 914.
¶31. Because of the statutory similarities in Mississippi and Connecticut, Wisconsin, and
Florida, we hold that appellate review of a dismissal of a shareholder derivative suit is a
mixed question of law and fact. This Court has held that proper review of mixed questions
of law and fact require that the trial court’s “factual findings [be] reviewed for clear error and
[that] its interpretation of the law [be] reviewed de novo.” Hewes v. Langston, 853 So. 2d
1237, 1241 (Miss. 2003) (citing United States v. Neal, 27 F.3d 1035, 1048 (5th Cir. 1994)).
With that framework established, we proceed to address the present appeal.
ANALYSIS
1. Whether Burgess’s complaint alleged with particularity facts
establishing that the members of the Special Committee were not
qualified under Mississippi Code Section 79-4-1.43.
7
Wisconsin Statutes Section 180.0744 is similar to Mississippi Code Section 79-4-
7.44. See Wis. Stat. § 180.0744 (2015).
16
¶32. Burgess claims that he has “made a showing that there is reason to doubt that
Franklin, Holliman, and Mitchell are all ‘qualified’ within the meaning of Mississippi law
to serve on the Special Committee.”
¶33. Section 79-4-7.44(c) requires that, “[i]f a derivative proceeding is commenced after
a determination has been made rejecting a demand by a shareholder,” the shareholder’s
complaint “shall allege with particularity facts establishing either (1) that a majority of the
board of directors did not consist of qualified directors at the time the determination was
made or (2) that the requirements of subsection (a) have not been met.” Miss. Code Ann. §
79-4-7.44(c) (Rev. 2013) (emphasis added).
¶34. A “‘qualified director’ is a director who, at the time action is to be taken under: (1)
Section 79-4-7.44, does not have (i) a material interest in the outcome of the proceeding, or
(ii) a material relationship with a person who has such an interest.” Miss. Code Ann. § 79-4-
1.43(a)(1) (Rev. 2013). “Material relationship” is defined as “a familial, financial,
professional, employment or other relationship that would reasonably be expected to impair
the objectivity of the director’s judgment when participating in the action to be taken . . . .”
Miss. Code Ann. § 79-4-1.43(b)(1) (Rev. 2013). Likewise, “material interest” is defined as
“an actual or potential benefit or detriment (other than one which would devolve on the
corporation or the shareholders generally) that would reasonably be expected to impair the
objectivity of the director’s judgment when participating in the action to be taken.” Miss.
Code Ann. § 79-4-1.43(b)(2) (Rev. 2013).
17
¶35. The Model Business Corporation Act, upon which Section 79-4-7.44 is based,
provides commentary:
Subsection (c), like Delaware law, assigns to the plaintiff the threshold burden
of alleging facts establishing that the majority of the directors on the board are
not qualified. If there is a majority, then the burden remains with the plaintiff
to plead and establish that the requirements of subsection (a) . . . have not been
met. If there is not a majority of qualified directors on the board, then the
burden is on the corporation to prove that the issues delineated in subsection
(a) have been satisfied; that is, the corporation must prove both the eligibility
of the decision makers to act on the matter and the propriety of their inquiry
and determination.
Model Bus. Corp. Act § 7.44 cmt. 2 (3d ed. 2005). Thus, the burden remains with the
plaintiff to make the threshold showing that the majority of the directors on the board are not
qualified. See Sojitz, 61 A.3d at 575 (“The court’s determination as to whether the directors
are qualified is, therefore, the threshold issue, and its resolution is essential to analyzing
every other aspect of the statute.”)
¶36. Under the Connecticut statute, identical to that of Mississippi, a plaintiff “must not
only plead that the directors are not qualified due to a material interest or material
relationship, but must also plead these allegations with factual particularity.” Sojitz, 61 A.3d
at 574 (citing Conn. Gen Stat. §§ 33-605, 33-724(c)) (emphasis added). “This is a standard
more demanding than mere notice pleading.” Sojitz, 61 A.3d at 574. One case from the
Supreme Court of Delaware dismissed, without prejudice, a complaint which it described as
a “pastiche of prolix invective.” Brehm v. Eisner, 746 A.2d 244, 249 (2000); see Sojitz, 61
A. 3d at 574 n.13. The Brehm court reasoned that “[p]leadings in derivative suits” must
“comply with stringent requirements of factual particularity that differ substantially from the
18
permissive notice pleadings.” Brehm, 746 A.2d at 254. “What the pleader must set forth are
particularized factual statements that are essential to the claim.” Id. “A prolix complaint
larded with conclusory language, like the Complaint here, does not comply with these
fundamental pleading mandates.” Id.
¶37. In Sojitz, the plaintiff’s derivative suit was dismissed after the board rejected his
demand and, on appeal, the plaintiff argued that the court had erred in “concluding that a
majority of qualified directors determined in good faith, after conducting a reasonable
inquiry, that maintaining the plaintiff’s derivative proceeding was not in the best interests of
the corporation.” Id. at 569. The defendant, a board member of Keystone Equipment Finance
Corporation, had, in the course of business, “provided certifications to various financial
lending institutions on which Keystone depended to meet its financing needs.” Id. at 568.
The plaintiff alleged that “these certifications falsely attested that the Keystone board of
directors met, adopted resolutions and empowered Keystone’s officers to enter into lending
agreements on behalf of Keystone,” which, the plaintiff claimed, exposed the corporation to
potential fraud liability. Id.
¶38. But the Appellate Court of Connecticut affirmed the trial court’s determination that
the defendant directors were qualified directors under the statute, finding that the plaintiff
had pled only conclusory allegations of director partiality. Id. at 575. The court observed that,
on appeal, the shareholder had claimed that the directors had material interests in that they
had escaped potential liability and were able to continue in their employment with the
corporation by rejecting the shareholder’s demand. Id. at 576. Furthermore, on appeal, the
19
plaintiff claimed a material relationship because of familial relations among corporate
directors. Id. The court held that, in the complaint, “the plaintiff alleged only that the
directors knew or disregarded the defendant’s misdeeds and therefore were not ‘in a position
to dispassionately determine whether the instant litigation is in the best interests of
Keystone.’” Id. That said, the court affirmed the trial court’s determination that the directors
had been qualified under the Connecticut dismissal statute. Id.
¶39. Conversely in Einhorn, the Supreme Court of Wisconsin considered the proper
inquiry and standard for determining whether a member of a special committee is
independent under Wisconsin Statutes Section 180.0744. Einhorn, 612 N.W.2d at 81.The
Wisconsin court concluded:
that in deciding whether members of the special litigation committee are
independent, the circuit court should determine whether, considering the
totality of the circumstances, a reasonable person in the position of the member
of the special litigation committee can base his or her decision on the merits
of the issue rather than on extraneous considerations or influences. In other
words, the test is whether a member of the committee has a relationship with
an individual defendant or the corporation that would reasonably be expected
to affect the member’s judgment with respect to the litigation at issue.
Id. at 81. In that case, Culea, Einhorn, and Einhorn’s business partner, Mertz, acquired
Northern Labs. The board of directors consisted of Culea, Culea’s wife, Einhorn, Mertz, and
the company’s vice president of finance, Bonk; Culea, Mertz, and Bonk comprised a
“compensation committee.” Id. at 82. When the compensation committee unanimously
approved a $300,000 retroactive bonus to Culea, Einhorn filed a direct action against Culea,
which he later amended to state a derivative action, alleging that Culea “had willfully
breached his fiduciary duty to Einhorn by participating in and causing the corporation to
20
award a self-dealing retroactive bonus to Culea of $300,000.” Id. The board created a special
committee, which consisted of board member Chewning, Culea’s neighbor; CFO Bonk;
board member Chua, Culea’s wife’s friend; and Beagle, Einhorn’s business partner. Id. The
special committee concluded that it was not in the best interests of the corporation to pursue
Einhorn’s derivative action. Id. at 83. The circuit court, having determined that the members
of the committee were independent, that they had acted in good faith, and that their
determination had been made based on a reasonable inquiry, dismissed the derivative action.
Id. The Wisconsin Court of Appeals affirmed. Id.
¶40. The Supreme Court of Wisconsin reversed, holding that the circuit court had not made
sufficient findings of fact in determining the independence of the special committee. Id. at
81. The Court reviewed “the relations of the members of the special litigation committee to
the corporation and the defendant Culea.” Id. at 91. Bonk, Einhorn’s friend, had received a
$25,000 bonus at the same meeting at which Culea’s bonus, the subject of Einhorn’s
derivative action, was challenged. Id. at 92. Outside counsel questioned his independence,
and the court held that “[w]hether Bonk was independent should be determined on the basis
of his employment status, his financial interest in the outcome and his personal relation with
Culea.” Id. Beagle, characterized as Einhorn’s “right-hand man” and his “good friend and
close business partner,” openly admitted he was not independent. Id. Finally, “[t]he circuit
court did not make findings of fact specifying the relationships of Chewning and Chua to
Culea other than describing Chewning as a ‘neighbor’ and Chua as a ‘social friend’ of Mrs.
Culea.” Id. The Court held that, while “mere acquaintanceship and social interaction are not
21
per se bars to finding a member independent,” relationships “with an individual defendant
and the corporation are, however, factors the circuit court must consider in the totality of the
circumstances.” Id. at 93.
¶41. In the present case, Burgess’s complaint stated that the following constituted disabling
conflicts:
[D]efendant Patterson currently serves on and has served on the board of
directors of Furniture Brands International since 2004. Defendant Holliman,
a member of the Special Committee, served as the CEO of Furniture Brands
International from 1996-2008. Thus, defendants Patterson and Holliman have
been business associates for at least seven years, serving on the boards of the
companies the other served as CEO.
Similarly, defendant Mitchell also has a disabling financial interest with
BancorpSouth and its senior officers and directors. According to the
LexisNexus [sic] website lawyers.com, defendant Mitchell’s law firm, of
which he is President, counts BancorpSouth among its clients. . . . This
relationship was not disclosed in BancorpSouth’s public filings, nor to Plaintiff
upon his inquiry into the Special Committee’s membership. Thus, it was to
Mitchell’s financial benefit to maintain BancorpSouth as a client of his law
firm and as a result, he could not have acted disinterestedly or independently
when considering the Demand to sue his own clients.
The final Special Committee director, defendant Franklin (who also serves as
BancorpSouth’s Lead Director) has served on the Board since 1974. It is
simply unreasonable to expect an individual who has worked with some of his
fellow Board members (including defendant Patterson) for almost forty years
to independently and disinterestedly consider a Demand to sue such
longstanding friends and colleagues.
¶42. With regard to the alleged Patterson-Holliman connection, Mississippi Code Section
79-4-1.43(c)(2) specifically states that the following circumstance is, without more, not
automatically foreclosed: “Service as a director of another corporation of which a director
who is not a qualified director with respect to the matter . . . is or was also a director . . . .”
22
Miss. Code Ann. 79-4-1.43(c)(2). Without more, this claim fails. It is, as in Brehm and
Sojitz, a mere conclusory allegation that is insufficient under the heightened pleading
standard to sustain a derivative suit.
¶43. BancorpSouth did, in fact, disclose “the relationship between Mr. Mitchell’s law firm,
Mitchell McNutt & Sams, P.A., and the amount BancorpSouth paid to said law firm for the
year of his Special Committee service,” which totaled $350 for 2010, according to a March
2011 proxy statement. A proxy statement from March 2010 reported to shareholders that
Mitchell’s law firm had received $4,655 in 2009. Under the New York Stock Exchange
standards, a portion of which the defendants attached as an exhibit to the Motion to Dismiss,
a director is considered not independent if “[t]he director has received . . . during any twelve-
month period within the last three years, more than $120,000 in direct compensation from
the listed company, other than director and committee fees and pension or other forms of
compensation for prior service . . . .” The mere allegation, without more, that Mitchell
himself must have benefitted financially from the Special Committee’s decision not to pursue
derivative claims is unavailing, given the relatively insignificant fees paid to Mitchell’s law
firm by the corporation over a two-year period. During that two years, Mitchell’s law firm
had garnered a mere $5,005 from BancorpSouth.
¶44. Finally, Burgess’s claim that Franklin had served on the board since 1974 and
therefore must have developed longstanding, close personal friendships and connections as
a result, fails. Mere allegations that directors “move in the same business or social circles,
or a characterization that they are close friends, is not enough to negate independence . . . .”
23
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051-52
(Del. 2004). “That is not to say that personal friendship is always irrelevant to the
independence calculus. But, for pre-suit demand purposes, friendship must be accompanied
by substantially more in the nature of serious allegations that would lead to a reasonable
doubt as to a director’s independence.” Id. at 1052. The mere fact that Franklin has friends
and colleagues at the company is insufficient to call into question his independence as a
member of the Special Committee.
¶45. Burgess cites a case from the Supreme Court of Delaware in which that court held that
a special committee “has the burden of establishing its own independence by a yardstick that
must be ‘like Caesar’s wife’—‘above reproach.’” Stewart, 845 A.2d at 1055 (quoting Lewis
v. Fuqua, 502 A.2d 962, 967 (Del. Ch. 2003)). In Stewart, the Supreme Court of Delaware
continued that, “unlike the presuit demand context,8 the [special committee] analysis
contemplates not only a shift in the burden of persuasion but also the availability of discovery
into various issues, including independence.” Stewart, 845 A.2d at 1055.
¶46. The court stated that:
We need not decide whether the substantive standard of independence in a
[special committee] case differs from that in a presuit demand case. As a
practical matter, the procedural distinction relating to the diametrically-
opposed burdens and the availability of discovery into independence may be
outcome-determinative on the issue of independence.
8
As Burgess recognizes, Mississippi Code Section 79-4-7.42 requires a presuit
demand. Miss. Code Ann. § 79-4-7.42 (Rev. 2013) (“No shareholder may commence a
derivative proceeding until: (1) A written demand has been made upon the corporation to
take suitable action . . . .”).
24
Id. at 1055. But the context of Stewart was that of a presuit demand having been excused:9
The [special committee] procedure is a method sometimes employed where
presuit demand has already been excused and the [special committee] is vested
with the full power of the board to conduct an extensive investigation into the
merits of the corporate claim with a view toward determining whether—in the
[special committee’s] business judgment—the corporate claim should be
pursued.
Id. In Mississippi, a shareholder’s filing of a derivative suit is predicated upon the board’s
having declined to accede to the shareholder’s demand that the board do so. Miss. Code Ann.
§ 79-4-7.42 (Rev. 2013). Therefore, the contexts are different under Mississippi and
Delaware law and Stewart, which involved a question of whether the plaintiff had
sufficiently demonstrated demand futility10 to excuse presuit demand. Id.; see Rales v.
Blasband, 634 A.2d 927, 934 (Del. 1993) (“[A] court must determine whether or not the
particularized factual allegations of a derivative stockholder complaint create a reasonable
doubt that, as of the time the complaint is filed, the board of directors could have properly
exercised its independent and disinterested business judgment in responding to a demand.
9
Presuit demand can be excused under Delaware law: “If the Court determines that
the pleaded facts create a reasonable doubt that a majority of the board could have acted
independently in responding to the demand, the presumption is rebutted for pleading
purposes and demand will be excused as futile.” Stewart, 845 A.2d at 1049 (citing Rales v.
Blasband, 634 A.2d 927, 934 (Del. 1993)). In Stewart, the court affirmed the chancellor’s
finding that the plaintiff had failed to allege “sufficient facts to support the conclusion that
demand was futile . . . .” Stewart, 845 A.2d at 1046.
10
This Court specifically has rejected demand futility: “The fact is, Mississippi’s
written demand statute does not contain an exception for futility, and unless and until the
Legislature decides to include one, it does not exist. Speetjens v. Malaco Inc., 929 So. 2d
303, 309 (Miss. 2006).
25
If the derivative plaintiff satisfies this burden, then demand will be excused as futile.”)
(emphasis added).
¶47. In the demand-excusal context, in which the plaintiff must demonstrate that a demand
upon the board will be futile, the burden shifts to the special committee to “establish its own
independence by a yardstick that must be ‘like Caesar’s wife’—‘above reproach.’” Id.
(quoting Lewis, 502 A.2d at 967). Conversely, presuit demand unequivocally is required
under Mississippi law; and so the threshold showing that the special committee was not
qualified pursuant to Sections 79-4-7.44(c) and 79-4-1.43 rests with the plaintiff, as in
Connecticut. Sojitz, 61 A.3d at 574 (Plaintiff “must not only plead that the directors are not
qualified due to a material interest or material relationship, but must also plead these
allegations with factual particularity.”)
¶48. Thus, the plaintiff is required to allege with particularity facts establishing that the
members of the Special Committee were not qualified under Mississippi Code Sections 79-4-
7.44 and 79-4-1.43. Here, Burgess has not made this threshold showing. Dismissal, therefore,
was appropriate and is affirmed.
2. Whether the plaintiff or the defendant bears the burden under
Section 79-4-7.44 of proving or rebutting the good faith of the
Special Committee and the reasonableness of its inquiry and
whether that burden was met in this case.
¶49. Section 79-4-7.44(c) provides that, if a derivative proceeding is commenced by a
shareholder despite the board’s having rejected the shareholder’s demand, the plaintiff’s
complaint “shall allege with particularity facts establishing either (1) that a majority of the
board of directors did not consist of qualified directors at the time the determination was
26
made or (2) that the requirements of subsection (a) have not been met.” Miss. Code Ann. §
79-4-7.44(c) (Rev. 2013) (emphasis added). Subsection (a) provides that:
A derivative proceeding shall be dismissed by the court on motion by the
corporation if one of the groups specified in subsection (b) or (f)11 has
determined in good faith, after conducting a reasonable inquiry upon which its
conclusions are based, that the maintenance of the derivative proceeding is not
in the best interests of the corporation.
Miss. Code Ann. § 79-4-7.44(a) (emphasis added). Subsection (d) states that:
If a majority of the board of directors consisted of qualified directors at the
time the determination was made, the plaintiff shall have the burden of proving
that the requirements of subsection (a) have not been met; if not, the
corporation shall have the burden of proving that the requirements of
subsection (a) have been met.
Miss. Code Ann. § 79-4-7.44(d) (Rev. 2013); see Sojitz, 61 A.2d at 575 (citing Conn. Gen.
Stat. § 33-724(d)).
¶50. The comment to the Model Business Corporation Act is instructive: “Subsection (c)
. . . assigns to the plaintiff the threshold burden of alleging facts establishing that the majority
of the directors on the board are not qualified. If there is a majority, then the burden remains
with the plaintiff to plead and establish that the requirements of subsection (a) . . . have not
been met.” Model Bus. Corp. Act § 7.44 cmt. 2 (3d ed. 2005). “The burden of proof will shift
to the corporation, however, where a majority of the board members are not qualified and the
11
These sections establish the possible groups charged with making the determination
in Subsection (a). Applicable to the present case is Section 79-4-7.44(b)(2), which allows
the good faith/reasonable inquiry determination to be made by “[a] majority vote of a
committee consisting of (2) or more qualified directors appointed by majority vote of
qualified directors present at a meeting of the board of directors, regardless of whether such
qualified directors constitute a quorum.” Miss. Code Ann. § 79-4-7.44(b)(2) (Rev. 2013)
(emphasis added).
27
determination is made by a committee under subsection (b)(2).” Id. If the board is not
qualified, the burden remains with the corporation to demonstrate that the “issues delineated
in subsection (a) have been satisfied; that is, the corporation must prove both the eligibility
of the decision makers to act on the matter and the propriety of their inquiry and
determination.” Id.
¶51. Having determined that the plaintiff failed to allege with particularity facts
establishing that the members of the Special Committee were not qualified under Mississippi
Code Sections 79-4-7.44 and 79-4-1.43, we hold that the plaintiff bears the burden, pursuant
to Section 79-4-7.44(d), of establishing, pursuant to Section 79-4-7.44(a), that the Special
Committee’s determination was not made in good faith after it conducted a reasonable
inquiry upon which its conclusions were based. If the plaintiff fails to demonstrate lack of
good faith after a reasonable inquiry upon which the Special Committee’s conclusions were
based, then “[a] derivative proceeding shall be dismissed by the court on motion by the
corporation . . . .” Miss. Code Ann. § 79-4-7.44(a) (emphasis added).
¶52. In Sojitz, the Appellate Court of Connecticut concluded that the Connecticut statute
governing dismissal “operates as a statutory embodiment of the business judgment rule,
which restricts our review of a corporate manager’s decision.” Sojitz, 61 A.3d at 578. The
court considered the policy implications of deferring to corporate judgment: “‘a corporation
should be free to determine in its own business judgment whether litigation is in its best
interest, free from unnecessary interference.’” Id. at 579 (quoting Frank v. LoVetere, 363
F. Supp. 2d 327, 335 (D. Conn. 2005)). The Connecticut statute, like Section 79-4-7.44(a),
28
required the Special Committee “to render a determination made in good faith after
conducting a reasonable inquiry.” Sojitz, 61 A.3d at 579.
¶53. According to the Appellate Court of Connecticut, “[b]ecause the inquiry varies
according to the board’s knowledge and the issues raised, the board must determine the scope
of its inquiry.” Id. The court continued:
In this case, the record indicates that the board engaged counsel for assistance
in evaluating the nature of the plaintiff’s lawsuit after concluding that the
issues raised by the plaintiff’s allegations involved corporate management and
lending relationships and were thus within the purview, knowledge and
experience of the board. Each of the board members received a draft of the
attorney’s report prior to its adoption at the March 15, 2011 meeting.
Furthermore, the board members who voted to adopt the report averred in their
affidavits that they were aware of the facts and circumstances pertaining to the
plaintiff’s demands when they rendered their decision. Indeed, the report
provides a list of the relevant documents and considerations that the board
reviewed before reaching its conclusion.
Id. “[T]he board need not take any specific measures in the course of its inquiry, but instead
must engage only in a reasonable inquiry, which varies according to the board’s knowledge
and the issues at hand.” Id. at 580. Because it declined “to examine the propriety of the
board’s considerations,” the Appellate Court of Connecticut affirmed dismissal. Id. at 580-
81.
¶54. Likewise, the Court of Appeals of New York affirmed the trial court’s dismissal of
a shareholders’ derivative action on the basis of the business judgment rule. Auerbach v.
Bennett, 393 N.E.2d 994, 1004 (N.Y. 1979). The court held that the business judgment rule
“is grounded in the prudent recognition that courts are ill equipped and infrequently called
on to evaluate what are and must be essentially business judgments.” Id. at 1000. The court
29
noted that, “[w]hile the court may properly inquire as to the adequacy of the committee’s
investigative procedures and methodologies, it may not under the guise of consideration of
such factors trespass in the domain of business judgment.” Id. at 1002.
¶55. The court found that, “[o]n the submissions made by defendants in support of their
motions, we do not find either insufficiency or infirmity as to the procedures and
methodologies chosen and pursued by the special litigation committee. That committee
promptly engaged eminent special counsel to guide its deliberations and to advise it.” Id. at
1003.
The committee reviewed the prior work of the audit committee, testing its
completeness, accuracy and thoroughness by interviewing representatives of
Wilmer, Cutler & Pickering [special counsel], reviewing transcripts of the
testimony of 10 corporate officers and employees before the Securities and
Exchange Commission, and studying documents collected by and work papers
of the [special counsel]. Individual interviews were conducted with the
directors found to have participated in any way in the questioned payments,
and with representatives of Arthur Andersen & Co. [outside auditors]
Questionnaires were sent to and answered by each of the corporation’s
nonmanagement directors.
Id. “At the conclusion of its investigation the special litigation committee sought and
obtained pertinent legal advice from its special counsel.” Id. As such, the court found nothing
“that requires a trial of any material issue of fact concerning the sufficiency or
appropriateness of the procedures chosen by this special litigation committee” which might
have raised “a triable issue of fact as to the good-faith pursuit of its examination by that
committee.” Id.
¶56. In the present case, Bancorp South retained outside counsel, Attorney Stephen
Thomas of the law firm Bradley Arant Boult Cummings LLP, to assist the Special Committee
30
in conducting its inquiry into Burgess’s demand. Prior to the Special Committee’s statutory
investigation, Thomas conducted “independence interviews with the Committee members
to confirm their suitability to sit on the Committee” and, in addition, he “had the Committee
itself conduct an independence interview with counsel to determine the independence of
Bradley Arant Boult Cummings LLP.” Thomas stated, in an affidavit attached to
BancorpSouth’s Motion to Dismiss that the “Special Committee, its counsel, and, often
Professor Edwards, personally interviewed all 13 of the named directors and officers in the
Demand letter.” According to Thomas, the scope of the investigation was as follows:
A. The allegations and claims set forth in the shareholder demand letter.
B. The standard of care for directors and officers under Mississippi law.
C. The oversight by the Board of Directors.
D. The delay in filing 2009 Form 10-K and the announcement of a
“material weakness.”
E. The impact of the announcement of late filing and the material
weakness determination.
F. The allegations of breach of fiduciary duty and unjust enrichment.
G. An inquiry whether a fact-finder would find that Management (as
defined in the Demand) breached their fiduciary duties by acting
without good faith and due care, and specifically by acting in a grossly
negligent manner.
H. Consideration of whether Management would be protected from money
damages by exculpatory provision.
I. Consideration that Management would likely deny the allegations.
J. Damages consideration.
K. Cost of litigation.
L. Consequences related to the Company’s insurance coverage.
¶57. Professor Edwards was retained by Special Committee to advise it regarding
investigation of the derivative demand. According to Professor Edwards, in an affidavit
attached to BancorpSouth’s Motion to Dismiss, she and Thomas had aided the Special
Committee in its determination of its own impartiality and independence:
31
Each member of the Special Committee affirmed to the Special Committee,
Affiant, and B[radley] A[rant] B[oult] C[ummings] that he would make an
independent and impartial determination as to what actions, if any, should be
undertaken in the best interests of the Company; and that he had not been
subjected to any undue or improper influence with respect to that
determination.
Professor Edwards stated that, based on the impartiality determination, the Special
Committee had determined that “its members were sufficiently independent and disinterested
to serve as ‘qualified directors’ under Mississippi law, and to evaluate the allegations in the
Demand in good faith, and to conduct an adequate and reasonable investigation of those
allegations.”
¶58. The Special Committee, according to Professor Edwards, then conducted its
investigation into the substance of Burgess’s allegations and concluded that it was not in the
company’s best interests to prosecute. She stated, as had Thomas and Mitchell, that the
Committee had considered the following in reaching its decision:
(1) the likelihood that a fact-finder would find that Management breached its
fiduciary duties, and was unjustly enriched, by failing to adequately oversee
the Company’s internal control over financial reporting with respect to its
allowance for credit losses, and by issuing false and misleading 2009 financial
results; (2) whether liability would be contested and affirmative defenses likely
would be asserted, which would lead to greater uncertainty for a recovery and
increased litigation expenses; (3) whether the directors would assert as a
defense an exculpation clause in the Company’s Articles of Incorporation
against money damages; (4) the existence of cognizable and recoverable
damages; and (5) to the extent cognizable damages exist, the cost and
distraction of litigation, including the Company’s indemnity obligations.
¶59. Burgess makes only vague claims regarding whether the Special Committee had
“determined in good faith, after conducting a reasonable inquiry upon which its conclusions
are based, that the maintenance of the derivative proceeding is not in the best interests of the
32
corporation.” Miss. Code Ann. § 79-4-7.44(a). He professes to be “unaware what documents
were reviewed by the Special Committee or its counsel in reaching the conclusion that a
derivative proceeding was not in the best interest of BancorpSouth.” He says that, “while one
of Defendants’ supporting affidavits lists some of the individuals interviewed by the Special
Committee, the list is vague and hardly complete and does not speak to whether any potential
interviewee declined an interview request.” Burgess couches his arguments in terms of his
claim, discussed infra, that he was entitled to discovery, particularly of the Special
Committee’s report, which BancorpSouth maintains is subject to the work-product and
attorney-client privileges. Burgess also claims that, “in order for a [Special Committee] to
adequately conduct a good faith and reasonable investigation into the allegations raised in
the Demand, the [Special Committee] was required to engage truly independent counsel.”
¶60. The Delaware cases cited by Burgess are inapposite. He cites Zapata v. Maldonado,
430 A.2d 779 (Del. 1981), and Aronson v. Lewis, 473 A.2d 805 (Del. 1984), to argue that,
in order to secure dismissal of a derivative action, “the [Special Committee] has the burden
of proving that: (i) the [Special Committee Members are independent; (ii) the [Special
Committee] acted in good faith; (iii) the [Special Committee] had reasonable bases for its
conclusions.” But, in Delaware, where the Special Committee bears the “burden of proving
independence, good faith and a reasonable investigation,” the court “should inquire into the
independence and good faith of the committee and the bases supporting its conclusions.”
Zapata, 430 A.2d at 788; see Aronson, 473 A.2d at 813.
33
¶61. Comment 2 to Section 7.44 of the Model Business Corporation Act recognizes this
distinction:
Finally, section 7.44 does not authorize the court to review the reasonableness
of the determination to reject a demand or seek dismissal. This contrasts with
the approach in some states that permit a court, at least in some circumstances,
to review the merits of the determination (see Zapata Corp. v. Maldonado,
430 A.2d 779, 789 (Del. 1981) and is similar to the approach taken in other
states (see Auerbach v. Bennett, 393 N.E.2d 994, 1002-03 (N.Y. 1979)).
Model Bus. Corp. Act § 7.44 cmt. 2 (3d ed. 2005). Aside from the differences in Delaware
law and Mississippi law regarding which party bears the burden of proof, the Delaware cases
are unavailing in that they contemplate inquiry by the court into the “good faith of the
committee and the bases supporting its conclusions.” Zapata, 430 A.2d at 788; see Aronson,
473 A.2d at 813.
¶62. But, as in Connecticut, the Special Committee “need not take any specific measures
in the course of its inquiry, but instead must engage only in a reasonable inquiry, which
varies according to the board’s knowledge and the issues at hand.” Sojitz, 61 A.3d at 580
(emphasis in original). This Court, like the Appellate Court of Connecticut, should decline
“to examine the propriety of the board’s considerations.” Id. at 580-81. Likewise, as in
Auerbach, nothing raised by Burgess “requires a trial of any material issue of fact concerning
the sufficiency or appropriateness of the procedures chosen by this special litigation
committee” which might have raised “a triable issue of fact as to the good-faith pursuit of
its examination by that committee.” Auerbach, 393 N.E.2d at 1003.
¶63. The burden remained with Burgess, in keeping with Section 79-4-7.44, to show that
the Special Committee’s decision not to maintain the derivative proceedings was not made
34
in good faith after conducting a reasonable inquiry to support its conclusions. Because
Burgess failed to meet his burden, dismissal was appropriate and the Circuit Court of Lee
County was not in error for granting dismissal to BancorpSouth.
3. Whether Burgess is entitled to discovery relating to the
reasonableness of the Special Committee’s determination that
pursuit of the derivative claims was not in the best interests of the
corporation, specifically whether Burgess is entitled to the Special
Committee’s report.
¶64. Burgess argues that he was entitled to the report prepared by the Special Committee
in its review of his presuit demand and that “limited discovery into the independence of the
Special Committee and the good faith of its investigation” was available to him. Burgess also
claimed that BancorpSouth’s submission of the report to the circuit court, in camera, as an
attachment to its Memorandum in Rebuttal to the [Plaintiff’s] Opposition to Defendants’
Motion for Protective Order, amounted to an ex parte communication with the circuit court
which influenced its decision to grant dismissal.
¶65. Among more than thirty-seven requests for documents relating to the Special
Committee’s independence and impartiality and its investigation of Burgess’s derivative
demand, Burgess had sought, via a Request for Production of Documents, “[a]ll documents
created by the Special Committee in connection with the Demand” and “[a]ll documents
relating to any findings, conclusions or recommendations of the Special Committee.”
Defendants responded with a Motion for a Protective Order, arguing, first, that no law
permitted Burgess to obtain discovery and to supplement his complaint at the pleading stage
35
prior to a ruling on the motion to dismiss. With regard to the content of the report, the
defendants maintained their prior assertion of work-product and attorney-client privileges.
¶66. On appeal, BancorpSouth maintains that it submitted the Special Committee’s report
to aid the circuit court’s consideration of its Motion for a Protective Order, which the circuit
court ruled moot in the dismissal order. Further, BancorpSouth maintains that the Special
Committee’s report was subject to work-product and attorney-client privileges.
¶67. In Grimes v. DSC Communications Corporation, the Court of Chancery of Delaware
for New Castle County considered an action filed by Grimes, “pursuant to 8 Del C. § 22012
seeking the inspection of certain books and records of the defendant, DSC Communications
Corp. (“DSC”), a Delaware corporation.” Grimes v. DSC Commc’n Corp., 724 A.2d 561,
563 (Del. Ch. 1998) (Grimes II). A prior derivative action filed by Grimes had been
dismissed because the complaint failed “to include particularized allegations which would
raise reasonable doubt that the Board’s decision to reject the demand was the product of a
valid business judgment.” Grimes v. Donald, 673 A.2d 1207, 1220 (Del. 1996) (Grimes I),
overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
¶68. In Grimes II, in considering Grimes’s sought inspection of DSC’s books and records,
the Court of Chancery held that “[i]t is well settled law in Delaware that a plaintiff who files
a derivative suit is not entitled to discovery in that action in order to assist him or her in
12
This code section allows “any stockholder, in person or by attorney or other agent,”
to, “upon written demand under oath stating the purpose thereof, have the right during the
usual hours for business to inspect for any proper purpose, and to make copies and extracts
from: (1) [t]he corporation’s stock ledger, a list of its stockholders, and its other books and
records . . . .” Del. Code Ann. tit. 8, § 220(b) (2015).
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meeting the particularized pleading requirements . . . .” Grimes II, 724 A.2d at 565. The
court continued: “In reaffirming this strict rule in Grimes [I], the Supreme Court noted that
derivative plaintiffs have other avenues available by which to obtain information bearing on
the subject of their claims outside the civil discovery context.” Id. (citing Grimes I, 673 A.2d
at 1216 n.11). “Surprisingly, little use has been made of section 220 as an information-
gathering tool in the derivative context.” Grimes I, 673 A.2d at 1216 n.11. Grimes I, of note,
dealt with the context of a shareholder’s failure to meet the pleading requirements in the
context of demand futility: “[I]f the stockholder cannot plead such assertions . . . , after using
the ‘tools in hand’[Section 220] to obtain the necessary information before filing a derivative
action, then the stockholder must make a pre-suit demand on the board.” Grimes I, 673 A.2d
at 1216.
¶69. Ultimately, in response to the DSC’s argument that sought documents—including a
report prepared by the special committee containing analysis and advice and
recommendations regarding Grimes’s demands—were subject to the attorney-client privilege,
the Court of Chancery ruled that Grimes had demonstrated good cause for production of the
documents under Section 220: “Of particular import is the fact that the documents sought are
unavailable from any other source while at the same time their production is integral to the
plaintiff’s ability to assess whether the board wrongfully refused his demand—the stated
purpose of his Section 220 demand.” Grimes II, 724 A.2d at 569. Likewise, the Court of
Chancery ruled that Grimes had “demonstrated a ‘substantial need’ for the information which
the defendant asserts is protected by the work product doctrine.” Id. at 570.
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¶70. Here, it is the sufficiency of the complaint, not a request for documents,13 with which
this Court is now concerned. In the present case, as in Grimes I, the question is whether
Burgess’s complaint included “particularized allegations which would raise a reasonable
doubt that the Board’s decision to reject the demand was the product of a valid business
judgment.” Grimes I, 673 A.2d at 1220.
¶71. In considering whether the plaintiff in Auerbach was entitled to discovery, the Court
of Appeals of New York held that the plaintiff had failed to “identify any particulars as to
which he desires discovery relating to the disinterestedness of the members of the special
litigation committee or to the procedures followed by that committee.” Auerbach, 393
N.E.2d at 1004. Decrying the plaintiff’s claims that “something might be caught on a fishing
expedition,” that court ruled that:
The disclosure proposed and described by [plaintiff] . . . would go only to
particulars as to the results of the committee’s investigation and work, the
factors bearing on its substantive decision not to prosecute the derivative
actions and the factual aspects of the underlying first-tier activities of
defendants all matters falling within the ambit of the business judgment
doctrine and thus excluded from judicial scrutiny.
Id. at 1004.
13
Mississippi, like Delaware, has a statute which allows a shareholder “to inspect and
copy, during regular business hours at a reasonable location specified by the corporation, any
of the following records if the corporation if the shareholder meets the requirements of
subsection (c) and gives the corporation a signed written notice of his demand at least five
(5) business days before the date on which he wishes to inspect and copy: (1) [e]xcerpts
from minutes of any meeting of the board of directors . . . ; (2) [a]ccounting records of the
corporation; and (3) [t]he record of shareholders.” Miss. Code Ann. § 79-4-16.02(b) (Rev.
2013). BancorpSouth notes that “Burgess has not brought that type of action but rather
instituted solely a derivative action.”
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¶72. Burgess cites recent changes to the Mississippi Uniform Limited Partnership Act. This
statute provides that “[i]f a limited partnership is named as or made a party in a derivative
proceeding the partnership may appoint a special litigation committee to investigate the
claims asserted in the proceeding and determine whether pursuing the action is in the best
interests of the partnership.” Miss. Code Ann. § 79-14-905(a) (Supp. 2015). The statute
specifies that “a special litigation committee shall file with the court a statement of its
determination and its report supporting its determination and shall serve each party with a
copy of the determination and report.” Miss. Code Ann. § 79-14-905(e) (Supp. 2015).
¶73. But legislative alteration of one statute does not require that another statute, in an
entirely separate and distinct act, be ascribed some new and different meaning. Of course,
“[i]t is a well-settled rule of statutory construction that ‘when two statutes pertain to the same
subject, they must be read together in light of legislative intent.’” Tunica Cty. v. Hampton
Co. Nat’l Sur., LLC, 27 So. 3d 1128, 1133 (Miss. 2009) (quoting Lenoir v. Madison Cty.,
641 So. 2d 1124, 1129 (Miss. 1994)) (emphasis added). Here, the two statutes do not pertain
to the same subject: one governs special litigation committees in derivative proceedings
relating to limited partnerships; the other governs dismissal of derivative proceedings in
which a corporate Special Committee has determined in good faith after having conducted
a reasonable inquiry that maintenance of the derivative proceeding is not in the best interests
of the corporation.
¶74. Burgess may be entitled to the Special Committee’s report under Section 79-4-
16.02(a), the statute governing rights of shareholders to inspect corporate records. But no
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such demand currently is before the Court. Instead, Burgess claims that he is entitled, at the
pleadings stage of his derivative lawsuit after his demand was rejected, to the report prepared
by the Special Committee in its review of his presuit demand. But, as in Grimes II, “a
plaintiff who files a derivative suit is not entitled to discovery in that action in order to assist
him or her in meeting the particularized pleading requirements . . . .” Grimes II, 724 A.2d
at 565. Simply because “something might be caught on a fishing expedition” is not a
sufficient reason to allow Burgess to augment his pleadings with discovery. Auerbach, 393
N.E.2d at 1004. The trial court’s ruling that, “in derivative proceedings you must have a
legally sufficient Complaint in order to conduct discovery,” was not erroneous.
¶75. Finally, Burgess argues that the in camera submission of the Special Committee’s
report amounted to ex parte communication with the Special Judge. Burgess had filed a
Request for Production of Documents, which was opposed by the responsive Motion for
Protective Order filed by BancorpSouth. The Special Judge ruled that his grant of dismissal
to BancorpSouth rendered its Motion for Protective Order moot. But BancorpSouth asserted
work-product and attorney-client privilege, and this Court has held that it is the circuit court’s
responsibility “to conduct a careful and detailed in camera review of all documents over
which privilege is asserted.” Powell v. McLain, 105 So. 3d 308, 315 (Miss. 2012). The in
camera submission of a document over which a privilege is asserted for consideration by the
circuit court was appropriate and did not amount to an ex parte communication.
40
CONCLUSION
¶76. Because Burgess has not alleged with particularity facts establishing that members of
the Special Committee were not qualified under Mississippi Code Sections 79-4-7.44 and 79-
4-1.43, dismissal was appropriate. Pursuant to Section 79-4-7.44, the burden remained with
Burgess to show that the Special Committee’s decision to reject the shareholder’s demand
was not made in good faith after the committee had conducted a reasonable inquiry to
support its conclusions. Burgess failed to demonstrate that the Special Committee’s decision
was not made in good faith after it had conducted a reasonable inquiry. The Circuit Court of
Lee County, therefore, was not in error for granting dismissal to BancorpSouth. Finally, the
Special Judge correctly ruled that obtaining discovery in derivative proceedings is predicated
on the sufficiency of the complaint.
¶77. AFFIRMED.
WALLER, C.J., DICKINSON, P.J., KING AND COLEMAN, JJ., CONCUR.
RANDOLPH, P.J., LAMAR, MAXWELL AND BEAM, JJ., NOT PARTICIPATING.
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