Murray v. Conseco, Inc.

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.