ATTORNEYS FOR APPELLANT
Michael A. Wilkins
Brian J. Paul
Indianapolis, Indiana
ATTORNEYS FOR APPELLEE
Joseph H. Yeager, Jr.
Scott D. Himsel
Indianapolis, Indiana
__________________________________________________________________
IN THE
SUPREME COURT OF INDIANA
__________________________________________________________________
DENNIS MURRAY, SR., )
)
Appellant (Plaintiff Below), ) Indiana Supreme Court
) Cause No. 29S02-0309-CV-410
v. )
) Indiana Court of Appeals
CONSECO, INC., ) Cause No. 29A02-0108-CV-552
)
Appellee (Defendant Below). )
__________________________________________________________________
APPEAL FROM THE HAMILTON SUPERIOR COURT
The Honorable William J. Hughes, Judge
Cause No. 29D03-0012-CP-898
__________________________________________________________________
ON PETITION FOR TRANSFER
__________________________________________________________________
September 15, 2003
BOEHM, Justice.
This case deals with the provisions of the Indiana Business
Corporation law governing the removal of directors. Conseco, Inc. is an
Indiana corporation organized under the Business Corporation Law.
Conseco’s articles of incorporation have no provisions regarding removal of
directors. Dennis Murray, Sr. was elected to the Board by the shareholders
as a whole, and not by a separate “voting group.” Under those
circumstances, we affirm the trial court’s ruling that the Board of
Directors was within its authority when it removed Murray as a director of
the corporation.
Factual and Procedural History
Conseco is a publicly traded corporation whose common shares were
listed on the New York Stock Exchange until they were delisted in 2002.
Conseco’s directors are elected by vote of the shareholders to staggered
three-year terms. There is only one class of common stock, and some
preferred shares also have voting rights. All common and voting preferred
shares vote together to elect directors. Conseco’s articles and bylaws
have no provision addressing the removal of directors. As a result, the
statutory provisions for removal of a director apply to this dispute.
Murray was first elected to a three-year term on Conseco’s Board of
Directors at the annual meeting of the shareholders of the corporation in
1994. He was re-elected in 1997 and again in June 2000. On December 12,
2000, Conseco’s Board of Directors voted to remove Murray as a director.
That same day Murray filed a declaratory judgment action challenging his
removal as a violation of the Indiana Business Corporation Law (BCL).
Specifically, he contended that he was elected to the Board by the
shareholders and only the shareholders could remove him. The trial court
granted summary judgment in favor of Conseco and the Court of Appeals
affirmed. Murray v. Conseco, Inc., 766 N.E.2d 38 (Ind. Ct. App. 2002).
I. Removal of a Director by Board Action
Indiana’s BCL is largely drawn from the Model Business Corporation Act
(MBCA), but includes a number of unusual provisions. Unlike the MBCA, the
Indiana version has a provision expressly addressing the authority of the
board of directors to remove a director without cause. The BCL not only
addresses this subject, but expressly authorizes removal by directors for
every Indiana corporation unless the articles of incorporation provide
otherwise. The same section of the BCL includes provisions retained from
the MBCA addressing removal of directors elected by a “voting group,”
removal of directors elected by cumulative voting, and procedures for
convening a shareholder meeting to remove a director.
This section, found at Indiana Code section 23-1-33-8, provides in its
entirety:
Removal
(a) Directors may be removed in any manner provided in the articles of
incorporation. In addition, the shareholders or directors may remove
one (1) or more directors with or without cause unless the articles of
incorporation provide otherwise.
(b) If a director is elected by a voting group of shareholders, only
the shareholders of that voting group may participate in the vote to
remove that director.
(c) If cumulative voting is authorized, a director may not be removed
if the number of votes sufficient to elect the director under
cumulative voting is voted against the director’s removal. If
cumulative voting is not authorized, a director may be removed only if
the number of votes cast to remove the director exceeds the number of
votes cast not to remove the director.
(d) A director may be removed by the shareholders, if they are
otherwise authorized to do so, only at a meeting called for the
purpose of removing the director and the meeting notice must state
that the purpose, or one (1) of the purposes, of the meeting is
removal of the director.
A. Removal of Directors Elected by “Voting Groups”
Murray contends that he was elected by a “voting group” and, by reason
of subsection 8(b), cannot be removed except by the shareholders of that
group. The Court of Appeals concluded that subsection 8(a) permitted
removal of a director by a majority of the Board “without regard as to how
that director was elected to the Board.” The Court of Appeals took the
view that subsection 8(b) had no relevance to a removal by the directors.
Rather, its effect was only to limit the shareholders who are eligible to
vote at a shareholder meeting to remove a director who had been elected by
a voting group of shareholders.
Both Murray’s contentions and the Court of Appeals’ view find solid
footing in the literal language of the statute. Each relies on a specific
section of the BCL and reasons from it to a logical conclusion. We think,
however, that a reading of the statute as a whole leads to the conclusion
that neither view is correct. We do not agree that subsection 8(b) has no
effect on any removal by the Board. Rather, for the reasons given, we
conclude that subsection 8(b) prohibits the removal by the Board of one of
its members who was elected by a separate “voting group” of shareholders.
However, we do not find Murray’s removal improper. Murray was elected by a
vote of all voting shares of Conseco. He does not enjoy the immunity from
removal conferred by subsection 8(b) and was therefore properly removed by
the Board under the authority conferred by subsection 8(a).
With the exception of the provision in subsection 8(a) for removal of
a director by the “directors,” section 8 tracks the language of the MBCA.
The provision in subsection 8(a) for the removal of a director by the board
without cause is highly unusual, and perhaps unique to Indiana.[1] As the
Court of Appeals pointed out, most jurisdictions reserve the power to
remove a member of the board to the shareholders who elected the director.
Indeed some courts have found an agreement that purported to permit the
board of directors to remove a sitting director to be contrary to public
policy. See, e.g., Dillon v. Berg, 326 F.Supp 1214, 1225 (D. Del. 1971),
aff’d, 453 F.2d 876 (3d Cir. 1971). However, as the Court of Appeals
pointed out, public policy is a matter for the General Assembly subject
only to constitutional limitations on legislative authority. On this issue
the General Assembly’s expression of its policy is quite clear. The
language of subsection 8(a) unequivocally vests the board with the power to
remove one of its members. Moreover, the commentary to the Indiana BCL
expressly noted and approved this unusual and specific provision.[2] Thus
the Court of Appeals was clearly correct in its conclusion that the public
policy of this state on this issue has been set by the legislature, and
authorizes the board of directors to remove one of its members. In the
absence of any constitutional challenge, the wisdom of the policy reflected
in the statute is not for us to resolve.
The issue remains how to reconcile the unequivocal power of the board
to remove, as provided in subsection 8(a), with the express provision in
subsection 8(b) addressing removal of a director elected by a “voting
group” of shareholders. Although Conseco has neither separate voting
groups nor cumulative voting, the statutory provisions addressing removal
of a director elected by one of these provisions are relevant to the
construction of section 8 as it relates to this lawsuit. The Court of
Appeals reconciled subsection (a) with subsection (b) by concluding that
subsection (b) has no application to a removal by the directors. Rather,
under this view, subsection (b) regulates only the manner of conducting the
shareholder vote if a shareholder vote is the means through which removal
is sought. The same would presumably be true of subsections (c) and (d).
The structure of subsections 8(b), (c) and (d) lends some support to this
view as a matter of statutory construction. Subsection (b) speaks of the
shares eligible to vote to remove a director elected by a “voting group,”
subsection (c) addresses the votes necessary for removal if cumulative
voting is authorized, and subsection (d) specifies the means of calling the
meeting for shareholders to act on a removal. Subsection (d) clearly
relates only to the manner of conducting a shareholder removal of a
director and seems to have no implication for how or whether the board of
directors may remove one of its members. None of these three subsections
by its terms directly addresses the power of either the shareholders or the
directors to remove a member of the board. We think, however, that
subsections (b) and (c) are not of the same character as subsection (d),
and do in fact place restrictions on removal by the board.
We think that subsection (b) has significance in this case even
though Conseco does not have shareholders elected by a separate “voting
group.” Section 8 is found in Chapter 33 of the BCL, which deals with
“directors.” Section 4 of that chapter expressly contemplates election of
directors by “voting groups.”[3] A “voting group” is one or a number of
classes of stock entitled to vote separately on a matter presented to
shareholders for a vote. This specifically authorizes a corporation to be
structured in such a way as to guarantee specific bodies of shareholders
that they will have representation on the board of directors. The utility
of such an arrangement is often found in smaller corporations whose
securities are not publicly traded. A typical use of directors elected by
groups is to create an intentional deadlock to require consensus before the
board can act in a closely held corporation. The technique may also simply
guarantee a seat at the table to a minority shareholder group who holds a
separate class of stock whose principal or sole difference from other
classes is the right to elect one or more directors by its separate vote.
See MBCA § 8.04 cmt. In either case, it is an important component of the
corporate governance that the shareholders bargain for when they acquire
stock in a corporation that has “voting groups” who vote separately for
different seats on the board of directors.
Subsections (b), (c) and (d) came directly from section 8.08 of the
MBCA, which had no provision for board removal of a director. The current
MBCA version of subsection (a) is the same as the second sentence of the
Indiana version, but without the words, “or the directors.” Predecessor
versions of the MBCA did not break these provisions down into subsections,
but their substance was the same as the current version. Because the MBCA
version of subsection (a) gave only shareholders the right to remove, the
subsequent subsections assumed that any removal of a director required a
shareholder vote unless the articles provide otherwise. Accordingly,
subsections (b), (c) and (d) were written to address only the process
necessary for a shareholder vote to effect a removal. But restricting the
power to remove to the shareholders of the “voting group” that elected the
director has a very important purpose if the “voting group” is less than
all of the shares. If the directors of such a corporation can act to
remove one of their members without cause, the natural deadlock created by
two voting groups could be shattered at any meeting where a quorum was
present. If for any reason one director is absent, one group could oust
the absent member and the other directors elected by the absent member’s
group. In a corporation such as Conseco, where all shareholders vote as
one group, a majority of the shareholders could readily reverse such a coup
by removing the surviving directors. But in a close corporation the
shareholdings may be intentionally deadlocked at 50-50. In that case,
shareholder removal is not an available remedy to cure a coup by one
group’s directors who obtain a temporary majority of a quorum. Similarly,
if subsection (b) were no restraint on removal by the board, a “voting
group” designed to give the minority a seat on the board could be easily
frustrated. We think such dramatic changes in the statute were not
contemplated by the BCL. Rather, we conclude that the specific provision
in subsection (b) designed to preserve representation on the board by a
“voting group” is not overridden by the general authority in subsection (a)
permitting directors to remove one of their members.
B. Removal of Directors Elected “Generally” by the Shareholders
Murray was most recently elected to the Conseco Board of Directors at
the annual meeting of shareholders held in June 2000. Like most directors
of publicly held companies, Murray was elected along with the rest of
management’s slate by a vote of over ninety percent of the shareholders
eligible to vote for directors. In Conseco’s case, those shareholders were
the holders of common stock listed on the New York Stock Exchange and also
holders of preferred stock. All voting shares voted as one, except that
each preferred share carried voting weight different from the one vote
accorded each common share. Although there are no directors elected by any
subset of Conseco’s outstanding securities, Murray contends that the
holders of the common and preferred stock collectively form a “voting
group” that elected him. Because of our conclusion in Part I.A. that
“voting group” representatives are protected from removal without cause by
the directors, Murray argues that the shareholders are the only body that
can remove him.
In support of his position Murray cites the last sentence of the
statutory definition of “voting group,” which says that “all shares
entitled . . . to vote generally on the matter are for that purpose a
single voting group.” I.C. § 23-1-20-28. From this, Murray reasons that
the shareholders as a body are a voting group who elected him, and, by
reason of subsection 8(b), only the shareholders are authorized to remove
him. There is a logic to Murray’s position. This definition of “voting
group” comes from section 1.40(26) of the MBCA. The Commentary to that
section of the MBCA explains, as one would expect, that shares entitled to
vote “generally” means shares that have a vote on a matter without any
right to be counted separately. Thus all of Conseco’s voting shares are in
this category and constitute a single “voting group” for various purposes
under the Act.
Despite the statutory definition of “voting group” in both the MBCA
and in the Indiana BCL, we think this definition does not make Conseco’s
directors “elected by a voting group” as the term is used in subsection
8(b). We concluded in Part I.A. that subsection 8(b) operates as a
limitation on the ability of the board to remove one of its members who was
elected by a “voting group.” However, we think “elected by a voting
group,” in subsection 8(b) refers to groups that elect separate directors,
and does not apply to directors elected by a “voting group” consisting of
all voting shares voting “generally.”
First, subsection 8(b) is meaningless unless there are separate groups
who elect separate directors. It makes no sense to speak of participation
only by the shareholders in the group if there is only one group to
consider. Second, the reason to find subsection 8(a) to prohibit removal
of a director elected by a separate group of shareholders has no
application to a director elected by all shareholders. We reach the
conclusion that subsection 8(b) has the effect of precluding removal by the
board, not by strict reading of the language of the subsection, but by
attempting to fit subsection 8(a) into the logic of this comprehensive and
detailed statute. Although the reading given subsection 8(b) by the Court
of Appeals to Indiana’s version is certainly consistent with the literal
language of that section, it would frustrate the elevated status that
section 4 clearly gives to board representation for less than majority
shareholdings who are entitled to elect directors as a separate voting
group. For that reason, we concluded that subsection 8(b), carried over
from the MBCA that assumed only shareholders could accomplish a removal,
implies a prohibition on board removal of a director elected by a “voting
group.” That rationale has no application to a director elected by all of
the shareholders.
Third, Murray’s contention relies on the statutory definition of
“voting group” to include a block of all shareholders if all are entitled
to vote. Indiana’s BCL is based on the MBCA, but layers onto that
structure a number of unique provisions, of which the board’s power to
remove a director is one. We think there is an obvious purpose to treating
all the shareholders as a “voting group,” as that term is used in the MBCA
and in other parts of the Indiana BCL. This definitional provision is
necessary to make many provisions in the statute work properly in the case
of a corporation that does not vote by class. For example, under Indiana
Code section 23-1-30-1 voting lists at shareholder meetings are to be
arranged “within each voting group by class,” and section 23-1-38-3
requires that an amendment to the articles be approved by a majority of any
voting group whose dissenters’ rights are affected. These provisions, and
several others, obviously are intended to apply not only to a separate
“voting group” that has special voting rights, but also to the shareholders
as a whole in the much more common situation where, as in Conseco’s case,
all shareholders vote together.
In sum, although we do not agree that subsection (b) permits removal
by the directors if the director was elected by a separate “voting group,”
we nevertheless agree with the Court of Appeals’ conclusion that the Board
had the power to remove Murray. Concern for preserving the rights of a
“voting group” has no application to Conseco. There is no separate group
that elected Murray, and the implied protection subsection 8(b) gives to
separate groups does not apply to him. Although we are mindful of the
maxim that the language of the statute is the first and often the last
resort in interpreting legislation, it is also important to bear in mind
how statutory provisions interact. See Milk Control Bd. v. Pursifull, 219
Ind. 396, 402, 38 N.E.2d 246, 249 (1941) (“In the interpretation of a part
of a statute we must consider the act as a whole and its general
purpose.”). In a complex and interrelated statute such as the BCL it is
not unusual to find situations where a definition designed to accomplish
one purpose has unintended consequences if applied literally across the
board. We find an implied limitation on removal despite its absence from
the literal language of section 8 to accommodate the needs of section 4.
That concern goes only as far as the purpose of section 4 takes it.
Limiting the board’s power to remove directors elected by separate “voting
groups” preserves the rights given under section 4 to minorities and fifty
percent shareholder blocks to representation on the board. But that does
not require immunizing all directors of all corporations in the face of the
clear directive that the board has the power to remove one of its members.
In both cases, we construe the specific provision (board power to remove
and specific endorsement of voting group representation) to prevail over
the general statutory definition. As a result the Board had authority
under the statute to remove a member elected by the shareholders generally,
as Murray was.
II. Murray’s Claim for Damages
Murray argues that the Board’s action in removing him was grounded in
“improper motives.” The Court of Appeals concluded that the Board was
authorized to remove one of its members, and therefore there was no issue
as to its motivation. We agree that under most circumstances shareholders
are entitled to vote their shares as they see fit in their self interest.
A publicly traded corporation presents no issue of the duties of officers,
directors or shareholders in a close corporation as discussed in Barth v.
Barth, 659 N.E.2d 559 (Ind. 1995). Accordingly, if Conseco’s shareholders
had chosen to exercise their rights to remove Murray for any reason or for
no reason at all, or for a reason grounded solely in their own perceived
interests, Murray would have no claim. Removal by directors is another
story, however. By adding directors to the entities authorized to remove a
board member, the Indiana statute did not exempt the directors from the
standards applicable to directors in any action they take. Directors are
obligated to act in the interest of the corporation. Ind. Code § 23-1-35-
1. If it is in the interest of the corporation as a whole to remove
Murray, then Murray has no claim against the corporation or its Board for
the implementation of that action, unless it constitutes a breach of
contract. There is no implied contract not to remove him as director
simply by reasons of his election. Moreover, as the Court of Appeals
noted, Indiana’s BCL is extremely deferential to directors’ judgment as to
what is in the corporation’s interest. It erects a number of barriers to
successful challenges to directors’ actions, including notably a strong
endorsement of the business judgment rule and a standard of good faith for
director conduct. Id.
The directors are not defendants in this case and their liability is
not an issue. However, an action taken by them in good faith after
reasonable investigation is “conclusively presumed to be valid.” I.C. § 23-
1-35-1(g). If “valid,” the removal is by definition not wrongful and forms
no basis for a claim in the absence of a breach of contract. The standard
of good faith and reasonable investigation remains, however, before this
principle is invoked.
Murray claims that even if the Board has the power to remove him
without cause, this case must nevertheless be remanded for trial of his
damages claim. He cites several items he describes as damages, all of
which may have cost him loss, or at least lost expectations. These include
“termination of non-vested options” and “deferred compensation,” as well as
several other lost forms of director compensation. It is unclear whether
he claims these items as contract breach or some sort of wrongful action by
the corporation. Neither theory is viable on the facts before us. To the
extent Murray claims a contract, he cites no written agreement between him
and Conseco, and none is pleaded as required by Trial Rule 9.2(A). There
is no implied contract that Murray will not be removed by the Board if it
concludes that that action is appropriate. To the contrary, the Indiana
BCL contemplates that the possibility of removal and the terms of every
director’s employment are subject to its provisions unless some relevant
document provides otherwise. In short, Murray’s removal may have caused
him loss, but he fails to allege compensable damages.
Finally, on appeal Murray seems to rely on a contract theory to
recover his claimed damages. In the trial court his claim was solely that
the removal was wrongful because it was contrary to statute and because it
was beyond the power of the Board. He pleaded no other theory and alleged
no “improper motive.” Specifically, he made no claim that the directors
were not acting in good faith or acted without reasonable investigation.
Accordingly, he has presented no claims that the Board acted other than in
exercise of its judgment as to the corporation’s interests. Accordingly,
summary judgment was properly granted by the trial court on all issues
raised by Murray’s complaint.
Conclusion
The judgment of the trial court is affirmed.
DICKSON, SULLIVAN, and RUCKER, JJ., concur.
SHEPARD, C.J., not participating.
-----------------------
[1] See MBCA Ann. § 8.08, at 8-72 , discussing provisions in other states
whose corporate laws are based on the MBCA. The commentary is not complete
as to Indiana. It describes the Indiana statute as permitting removal “in
any manner proved by the articles of incorporation.” That language appears
in the first sentence of subsection (a), but the commentary ignores the
reference to removal by directors in the second sentence of subsection (a).
[2] See Commentary to Ind. Code § 23-1-33-8. Indiana Code section 23-1-17-
5 states that the official comments may be consulted by courts to determine
the policies of the BCL, and this Court routinely relies on those comments
in disputes concerning BCL provisions. See, e.g., G & N Aircraft, Inc. v.
Boehm, 743 N.E.2d 227, 243 (Ind. 2001); Galligan v. Galligan, 741 N.E.2d
1217, 1223 (Ind. 2001).
[3] I.C. § 23-1-33-4 provides:
Election of directors by classes of shares. – If the articles of
incorporation authorize dividing the shares into classes, the articles
may also authorize the election of all or a specified number of
directors by the holders of one (1) or more authorized classes of
shares. Each class (or classes) of shares entitled to elect one (1)
or more directors is a separate voting group for purposes of the
election of directors.
“Voting group” is defined by Indiana Code section 23-1-20-28 as:
One (1) or more classes or series that under the articles of
incorporation or this article are entitled to vote and be counted
together collectively on a matter at a meeting of shareholders. All
shares entitled by the articles of incorporation or this article to
vote generally on the matter are for that purpose a single voting
group.