Opinion
No. 4:19-cv-00374-JAJ-CFB
2020-08-03
Gregory M. SHEPARD, Plaintiff, v. EMPLOYERS MUTUAL CASUALTY COMPANY and Bruce G. Kelley, Defendants.
Stephen R. Eckley, Eckley Law PLLC, Des Moines, IA, Brad J. Brady, Matthew L. Preston, Brady, Preston, Gronlund, PC, Cedar Rapids, IA, Steven E. Sexton, Thomas K. Cauley, Jr., Pro Hac Vice, Sidley Austin LLP, Chicago, IL, for Plaintiff. John E. Lande, Mollie Pawlosky, Dickinson Mackaman Tyler & Hagen PC, Des Moines, IA, Beth Boland, Pro Hac Vice, Foley & Lardner, LLP, Boston, MA, Bryan B. House, Pro Hac Vice, Eric Pearson, Pro Hac Vice, Philip C. Babler, Pro Hac Vice, Foley & Lardner LLP, Milwaukee, WI, Joseph S. Harper, Pro Hac Vice, Foley & Lardner LLP, Madison, WI, for Defendant Employers Mutual Casualty Company. Terri L. Combs, Kwesi Atta-Krah, Faegre Drinker Biddle & Reath LLP, Des Moines, IA, Daniel Robert Kelley, Pro Hac Vice, Faegre Drinker Biddle & Reath LLP, Indianapolis, IN, for Defendant Bruce G. Kelley.
Stephen R. Eckley, Eckley Law PLLC, Des Moines, IA, Brad J. Brady, Matthew L. Preston, Brady, Preston, Gronlund, PC, Cedar Rapids, IA, Steven E. Sexton, Thomas K. Cauley, Jr., Pro Hac Vice, Sidley Austin LLP, Chicago, IL, for Plaintiff.
John E. Lande, Mollie Pawlosky, Dickinson Mackaman Tyler & Hagen PC, Des Moines, IA, Beth Boland, Pro Hac Vice, Foley & Lardner, LLP, Boston, MA, Bryan B. House, Pro Hac Vice, Eric Pearson, Pro Hac Vice, Philip C. Babler, Pro Hac Vice, Foley & Lardner LLP, Milwaukee, WI, Joseph S. Harper, Pro Hac Vice, Foley & Lardner LLP, Madison, WI, for Defendant Employers Mutual Casualty Company.
Terri L. Combs, Kwesi Atta-Krah, Faegre Drinker Biddle & Reath LLP, Des Moines, IA, Daniel Robert Kelley, Pro Hac Vice, Faegre Drinker Biddle & Reath LLP, Indianapolis, IN, for Defendant Bruce G. Kelley.
OPINION AND ORDER REGARDING DEFENDANTS’ MOTIONS TO DISMISS
JOHN A. JARVEY, Chief Judge
In this case, a minority shareholder in what was then a publicly-traded property and casualty insurance company claims breach of fiduciary duty by the majority shareholder, which was a mutual insurance company, and an individual director. This case is before the court on the majority shareholder's May 15, 2020, Motion To Dismiss [Dkt. No. 42] and the director's separate May 15, 2020, Motion To Dismiss [Dkt. No. 43]. The minority shareholder filed his Response To Defendants’ Motions To Dismiss [Dkt. No. 52] on June 12, 2020. The defendants filed separate Replies [Dkt. Nos. 72 and 73] on July 7, 2020. For the reasons set out below, the defendants’ Motions To Dismiss are both GRANTED .
I. INTRODUCTION
A. Factual Background
Because this case is before the court on motions to dismiss for failure to state a claim on which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, this statement of the factual background is drawn from the allegations in the operative pleading, taken as true. See Klein v. Credico Inc. , 922 F.3d 393, 396 (8th Cir. 2019). The operative pleading is the plaintiff's April 10, 2020, Amended Complaint For Breach Of Fiduciary Duty [Dkt. No. 38]. This statement of the factual background is only a summary of the much more extensive factual allegations in the Amended Complaint, however.
According to the Amended Complaint, plaintiff Gregory M. Shepard was a longtime shareholder of EMC Insurance Group Inc. (EMCI), a property and casualty insurance holding company that was traded on the NASDAQ at the relevant times. Shepard first acquired shares in EMCI in October of 2005. On June 24, 2019, Shepard owned 1.1 million shares of common stock in EMCI, or approximately 5% of EMCI's total outstanding stock. The majority shareholder of EMCI was defendant Employers Mutual Casualty Company (EMCC), a mutual insurance company that was founded in 1911 by defendant Bruce G. Kelley's great-grandfather. EMCI was "spun-off" of EMCC by Kelley's father in 1974. As of mid-2019, EMCC owned approximately 54% of EMCI's stock.
Shepard alleges that EMCC and Kelley structured EMCI as a shell company with no employees or operating assets of its own, which prevented EMCI from ever growing into a valuable company in its own right or acting independently from EMCC. EMCI had no employees or senior executives of its own and did not have its own brand or business relationships. EMCI also had no underwriting, claims service, or investment management capabilities of its own, and no information technology systems to quote, issue, bill, and service policies or administer its claims or investments. All EMCI's business arose from, and was managed by, EMCC. EMCI had four independent directors, but the fifth director was Kelley, who also served as EMCI's chief executive officer (CEO). Kelley was also a director and the CEO of EMCC. All of EMCI's other officers were also officers of EMCC.
On November 16, 2018, EMCI announced that it had received an offer from EMCC to acquire the outstanding shares of EMCI's minority shareholders at $30 per share. That offer was subsequently increased to $36 per share. A Special Committee, comprised of EMCI's independent directors, notified EMCC on April 22, 2019, that it would accept $36 per share. The merger agreement was then negotiated and drafted. Shepard alleges that the $36 per share that EMCC paid was not a fair price based on the fair value of EMCI on September 19, 2019, when the merger was completed, even setting aside breaches of fiduciary duty by EMCC and Kelley, which Shepard alleges depressed EMCI's share price. The Amended Complaint states, in part, as follows:
This action arises from gross breaches by EMCC and Kelley of the fiduciary duties they owed to Shepard. Shepard was one of the largest minority public shareholders of EMC Insurance Group Inc. ("EMCI"), until EMCI's controlling shareholder EMCC squeezed him out on September 19, 2019 and took EMCI private (the "Squeeze-out"). While Shepard was a shareholder of EMCI, EMCC and Kelley owed Shepard and other EMCI minority shareholders a fiduciary duty to enhance and promote the business and value of EMCI and maximize its share price. While, EMCC and Kelley also owed fiduciary duties to the insurance policyholders of EMCC, they plainly could have satisfied their fiduciary duties to both EMCC's policyholders and to EMCI's minority shareholders, but elected not to do so.
Amended Complaint, ¶ 1 (emphasis added).
B. Procedural Background
Shepard filed a "non-public version" of his original Complaint For Breach Of Fiduciary Duty, which nevertheless was not sealed, on November 20, 2019, and a separate Motion To File Complaint Publicly Or, Alternatively, To File Unredacted Complaint Under Seal, which was subsequently withdrawn. On January 24, 2020, the defendants filed a Motion To Stay Proceedings Pending Resolution Of Related State Court Actions. On February 7, 2020, Shepard filed a second Motion To File Complaint And Resistance Publicly Or, Alternatively, To File An Unredacted Complaint And Resistance Under Seal (Motion To File Publicly). After a hearing on March 4, 2020, a magistrate judge entered an Order on March 16, 2020, denying Shepard's Motion To File Publicly and also denying defendants’ Motion To Stay.
More specifically, in the March 16, 2020, Order, the magistrate judge denied a stay, because she doubted that this case was "parallel" with two other cases pending in state court, which pertained to the merger, and because there are no exceptional circumstances justifying a stay of this case. She denied leave to file the Complaint publicly and, instead, directed Shepard to file an Amended Complaint, omitting any confidential information obtained in the "Books and Records Action" in state court that is the subject of a previous Confidentiality Agreement. In so doing, the magistrate judge observed,
Using the standard for pleadings set by Fed. R. Civ. P. 8, which requires a "short and plain statement" of a claim for relief, the Court finds that Shephard has stated a claim without the redacted material. Even assuming that ... a heightened pleading standard under Fed. R. Civ. P. 9 applies, which requires Shepard to identify with particularity false or fraudulent acts, due to his allegation of Defendants’ willful and reckless breach of fiduciary duty, the Court finds that Shephard has stated a claim without the redacted material. Shephard has stated sufficient factual allegations to meet the pleading requirements for federal court under both rules.
March 16, 2020, Order [Dkt. No. 34], 12 (citing, inter alia, Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ).
In response to the defendants’ Motion For Clarification Regarding March 16, 2020 Order, the magistrate judge entered a Text Order on March 24, 2020, stating the following:
In the Order of March 16, 2020 [ECF 34], the Court ruled that Plaintiff had "stated a claim," relating to the pleading standards under Fed. Rls. Civ. P. 8 and
9. The Court was referring to the requirement for pleading simple, concise, and direct statements of the allegations, not the standard required under a responsive pleading filed [under] Fed. R. Civ. P. 12(b)(6) for raising a defense of "failure to state a claim upon which relief can be granted." By May 15, 2020, Defendants are free to file whatever responsive pleading is appropriate, after Plaintiff files his Amended Complaint as Ordered.
Text Order [Dkt. No. 36].
Shepard filed his Amended Complaint on April 10, 2020. The single count of the Amended Complaint alleges breach of fiduciary duty against EMCC and Kelley. After realleging preceding paragraphs, that count alleges the following:
98. Defendants EMCC and Kelley owed Shepard fiduciary duties of care, loyalty and good faith.
99. Defendants EMCC and Kelley breached their fiduciary duties when they, inter alia and as further described above, failed to promote the value of EMCI for the benefit of its minority shareholders, including Shepard, and acted to promote the interests of EMCC to the detriment of EMCI and its minority shareholders.
100. As a direct and proximate result of the breaches of fiduciary duty by EMCC and Kelley, Shepard has been directly damaged, which entitles him to monetary damages in an amount to be proven at trial.
101. EMCC and Kelley's breaches were willful and in reckless disregard for the rights of minority shareholders.
Amended Complaint, ¶¶ 98-101. As relief, the Amended Complaint prays for compensatory damages, punitive damages, attorney's fees and costs, and such further relief as this court deems just and proper.
The Motions To Dismiss now before the court followed on May 15, 2020.
II. LEGAL ANALYSIS
Both Motions To Dismiss now before the court seek dismissal pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Thus, the court begins its legal analysis with the standards for dismissal pursuant to that Rule.
A. Rule 12(b)(6) Standards
Rule 12(b)(6) provides for a pre-answer motion to dismiss "for failure to state a claim upon which relief can be granted." FED. R. CIV. P. 12(b)(6). As the Eighth Circuit Court of Appeals recently reiterated, the focus of a Rule 12(b)(6) motion is ordinarily on the pleading of a plausible factual basis for claims:
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.
Klein v. Credico Inc. , 922 F.3d 393, 396 (8th Cir. 2019) ; Jones v. Douglas Cty. Sheriff's Dep't , 915 F.3d 498, 499 (8th Cir. 2019).
In the face of a Rule 12(b)(6) challenge, the "short and plain statement" requirement of Rule 8(a) is no longer the measure of the sufficiency of a complaint. Rather, as the standards set out, above, indicate, to defeat a Rule 12(b)(6) motion to dismiss, a plaintiff must show that he or she has pleaded "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. To put it more pointedly,
The complaint "must allege more than ‘[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements[;]’ ... [it must] allege sufficient facts that, taken as true, ‘state a claim to relief that is plausible on its face.’ " K.T. v. Culver-Stockton Coll. , 865 F.3d 1054, 1057 (8th Cir. 2017) (first alteration in original) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ) (internal quotation marks omitted).
Waters v. Madson , 921 F.3d 725, 734 (8th Cir. 2019).
In evaluating the plausibility of the challenged pleading, the court must "accept[ ] as true all factual allegations in the light most favorable to the nonmoving party." Id. ; Jones , 915 F.3d at 499. On the other hand, courts "need not accept as true a plaintiff's conclusory allegations or legal conclusions drawn from the facts." Id. Nor is the court required to wait to see if more specific information becomes available through the discovery process that demonstrates that there is sufficient factual matter to state a claim. Where a complaint lacks sufficient factual allegations to state a claim, the district court does not abuse its discretion by refusing to allow discovery. Steinbuch v. Cutler , 518 F.3d 580, 591 (8th Cir. 2008).
Although the focus of a Rule 12(b)(6) motion is ordinarily the asserted lack of factual plausibility, Rule 12(b)(6) also permits dismissal of a claim that lacks a recognized or cognizable legal theory, even after Iqbal . See Couzens v. Donohue , 854 F.3d 508, 519 (8th Cir. 2017) (holding that the district court properly dismissed the plaintiff's claim for negligent infliction of emotional distress, because the plaintiff had not pleaded a legally recognized duty under Missouri law); Brown v. Mortgage Electronic Registration Sys., Inc. , 738 F.3d 926, 933 n.7, 934 (8th Cir. 2013) (noting the appellate court's agreement "with the district court's sound reasoning that the facts pled do not state a cognizable claim under Arkansas law" and holding that dismissal pursuant to Rule 12(b)(6) was appropriate, because Arkansas law did not impose the purported duty on which an unjust enrichment claim and a state statutory claim were based). In other words, such a complaint fails to state a claim because of legal insufficiency, rather than factual insufficiency.
With these standards in mind, the court turns to consideration of the defendants’ Motions To Dismiss. The court finds that there are two principal questions, both questions of legal sufficiency, that are dispositive of whether Shepard's Amended Complaint states a claim upon which relief can be granted. One of those questions is whether Shepard's claim is a "derivative" claim, for which he has not met procedural prerequisites. The other question is whether Shepard's claim, premised on the fiduciary duty of a majority shareholder or director to a minority shareholder to maximize the value of the corporation, is legally cognizable. There is, however, a preliminary matter that the court must address before considering either of those questions. That preliminary matter is Shepard's contention that the court has already found that his pleadings state a claim on which relief can be granted.
B. A Preliminary Matter
In his Resistance To Defendant's Motions To Dismiss, Shepard argues that the defendants conceded, and that this court has already found, that his Complaint states a claim for breach of fiduciary duty against EMCC and Kelley under Rules 8 and 9. He also argues that the court found that his Complaint alleges that Kelly committed a willful and reckless breach of fiduciary duty. In response to the defendants’ contentions that the complaint's allegations of breach of fiduciary duty are vague and impermissibly lump EMCC and Kelley together, Shepard argues, "[B]ased on defendants’ representations to the Court, this Court already found that Shepard's allegations were sufficient to state a claim under Rules 8 and 9." Pl.’s Br. at 14. In its Reply, EMCC asserts that Shepard wrongly claims that EMCC "conceded," and that the magistrate judge "already found," that he stated a claim for breach of fiduciary duty.
The court agrees with EMCC that the magistrate judge did not already hold that Shepard's Amended Complaint states a claim upon which relief can be granted under Rule 12(b)(6). First, the part of the magistrate judge's March 16, 2020, Order, quoted above, on page 4, addressed whether the original Complaint satisfied the "short and plain statement" requirement of Rule 8 and the "heightened" pleading requirement of Rule 9 of the Federal Rules of Civil Procedure. The Order states, "Shephard has stated sufficient factual allegations to meet the pleading requirements for federal court under both rules. " (Emphasis added). The part of the Iqbal decision cited in the Order in support of this statement is the statement that "[a]s the Court held in [ Bell Atlantic Corp. v.] Twombly , 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 [ (2007) ], the pleading standard Rule 8 announces does not require ‘detailed factual allegations,’ but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly , 550 U.S. at 555, 127 S.Ct. 1955 ). Likewise, the portions of other decisions cited in the Order in support of its statement that Shepard had met the pleading requirements of Rules 8 and 9, Streambend Properties II, LLC v. Ivy Tower Minneapolis, LLC , 781 F.3d 1003, 1013 (8th Cir. 2015) and Great Plains Trust Co. v. Union Pac. R. R. Co. , 492 F.3d 986, 995 (8th Cir. 2007), addressed what the Order had described as the "factual allegations" required by Rule 9(b), that is, the who, what, where, when, and how of an alleged fraud.
Second, there was no assessment in the magistrate judge's March 16, 2020, Order of whether the original Complaint was sufficient to overcome a Rule 12(b)(6) challenge. Nowhere does that Order assess whether the original Complaint would "survive a motion to dismiss" or whether it "contain[ed] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Iqbal , 556 U.S. at 679, 129 S.Ct. at 1941 (quoting Twombly , 550 U.S. at 570, 127 S.Ct. 1955 ); see also Klein , 922 F.3d at 396. The Order also never addressed the requirement, which persists even after Iqbal and Twombly , that a claim must be dismissed pursuant to Rule 12(b)(6) if the claim lacks a recognized or cognizable legal theory. See Couzens , 854 F.3d at 519 ; Brown , 738 F.3d at 933 n.7, 934.
If there were any doubt that the court has not already decided that Shepard's original Complaint or his Amended Complaint states a claim upon which relief can be granted under Rule 12(b)(6), that doubt should have been dispelled by the magistrate judge's subsequent Text Order on March 24, 2020, also quoted, above, on page 4. That Text Order made clear that the court had not addressed Rule 12(b)(6) requirements, and it set a deadline for the defendants to file whatever responsive pleading they considered appropriate, after Shepard filed his Amended Complaint as directed in the March 16, 2020, Order.
In short, no issue now before the court was decided in the magistrate judge's Orders filed on March 16, 2020, and March 24, 2020.
C. Is The Claim Derivative?
One of EMCC's arguments for dismissal is that Shepard's breach of fiduciary duty claim is derivative in nature and that Shepard failed to satisfy the prerequisites for a shareholder derivative suit. Kelly makes similar arguments as his first ground for dismissal of Shepard's Amended Complaint. Shepard argues that his breach of fiduciary duty claim is one he can assert directly, not a derivative claim.
1. Arguments of the parties
The defendants point out that Iowa courts have recognized that breach of fiduciary duty with regard to a corporation is generally a derivative claim. They argue that Shepard's claim does not fall within an exception to the general rule that an individual shareholder cannot assert a derivative claim in a direct action, because Shepard was not owed any "special duty" by the defendants. The defendants argue that Iowa law imposes duties running only to the corporation, not to the shareholders. They also argue that EMCC's alleged breach of fiduciary duty in failing to "promote" EMCI's value reflects an alleged duty to EMCI as a corporation and only indirectly to EMCI's shareholders. Moreover, they point out that the injury Shepard alleges is not an injury in his individual capacity, because EMCC's alleged refusal to promote EMCI's value, by definition, alleges harm inflicted on EMCI and only indirectly on all EMCI shareholders, including EMCC as the majority shareholder. They argue that Shepard's claim is a classic derivative claim of mismanagement that depressed the value of stock in EMCI. They point out that Shepard has not satisfied the requirement for a derivative suit under IOWA CODE § 490.74221 and Rule 23.1 of the Federal Rules of Civil Procedure that Shepard make a prior demand on EMCI to assert such a claim and that Shepard now lacks standing to do so, because he is no longer a shareholder of EMCI.
Shepard responds that he was owed a "special duty," allowing him to assert a direct claim, because EMCC and Kelley owed him directly a fiduciary duty as a minority shareholder. He contends that he can also assert a direct claim, because he has suffered injury at the hands of Kelley and EMCC separate and distinct from any injury EMCC suffered, as the majority shareholder, where EMCC benefitted from its breaches of fiduciary duty. He argues that the defendants’ assertion that he has not met the prerequisites for a derivative claim is simply an attempt to avoid all liability for their gross breaches of fiduciary duty.
In its Reply, EMCC contends that Shepard's expansion of the exception would eviscerate the general rule that fiduciary duty claims are derivative. EMCC asserts that the general rule prevents a multiplicity of suits by the various stockholders and assures that the corporation will be bound by the result of the litigation. EMCC argues that Shepard's reliance on a "fiduciary duty" as a "special duty" is wrong, because a "special duty" cannot arise by virtue of his status as a stockholder but must instead arise from rights extrinsic from the corporation. EMCC argues that Shepard also has not demonstrated any injury to him that is separate and distinct from the injury to EMCI, where his claim is that the breach of fiduciary duty was failure to enhance EMCI's value. As to Shepard's argument that EMCC benefitted from its breach of fiduciary duty, EMCC argues that Shepard's argument would mean that virtually every minority shareholder suit against a majority shareholder would be direct, because most such suits allege that the majority shareholder sought to benefit from its conduct.
In his Reply, Kelley concedes that, as a director, he owed a fiduciary duty to all EMCI shareholders, but he did not owe a "special duty" to Shepard. Kelley also argues that the question for determining whether Shepard's pre-merger claim is derivative or direct is not whether EMCC benefitted in its capacity as the buyer of EMCI in the merger, it is whether the alleged harm in operating EMCI pre-merger was suffered directly by EMCI, and indirectly by all EMCI shareholders, including Shepard, Kelley, and EMCC. Here, Kelley argues, if EMCI's value pre-merger was not "maximized," any harm would have been suffered by EMCI and flowed through to all EMCI shareholders. Kelly points out that Shepard does not dispute that if the claim he is attempting to bring belongs to EMCI, he lacks standing because he is no longer an EMCI shareholder and cannot satisfy the prerequisites to bring a derivative claim.
2. Discussion
a. The rule and the exception
As the Iowa Supreme Court explained, nearly four decades ago, and has since reiterated,
As a matter of general corporate law, shareholders have no claim for injuries to their corporations by third parties unless within the context of a derivative action. State v. Bechtel , 244 Iowa 785, 810–11, 56 N.W.2d 173, 187 (1953 [1952]) ; Grimes v. Bramer [Brammer] , 214 Iowa 405, 407, 239 N.W. 550, 550 (1931) ; 13 Fletcher Cyclopedia of Corporations § 5910 (1980).
There is, however, a well-recognized exception to the general rule: a shareholder has an individual cause of action if the harm to the corporation also damaged the shareholder in his capacity as an individual rather than as a shareholder. See Annot. 167 A.L.R. 279 (1947)....
... [T]he test is best stated in the disjunctive: in order to bring an individual cause of action for direct injuries a shareholder must show that the third-party owed him a special duty or that he suffered an injury separate and distinct from that suffered by the other shareholders.
Cunningham v. Kartridg Pak Co. , 332 N.W.2d 881, 883 (Iowa 1983) (emphasis in the original); accord Rieff v. Evans , 630 N.W.2d 278, 293–94 (Iowa 2001) ; Ezzone v. Riccardi , 525 N.W.2d 388, 394–95 (Iowa 1994) ; Engstrand v. West Des Moines State Bank , 516 N.W.2d 797, 799 (Iowa 1994). The court will consider in turn the two alternatives of the test to determine whether the harm Shepard alleges the corporation suffered, failure to enhance its value, also damaged him in his capacity as an individual rather than as a shareholder.
b. "Special duty"
As to the first alternative of the test, the Iowa Supreme Court has explained that the "special duty" must be one "outside the duties to the corporation." Rieff , 630 N.W.2d at 294. Where "plaintiff's only rights arise by virtue of the fact that he was a stockholder," the plaintiff "has failed to establish that he possessed rights extrinsic from the corporation." Cunningham , 332 N.W.2d at 884. On the other hand, " ‘when there exists a special duty to the shareholder ..., breach of that duty individually harms the shareholder and suit may be brought in that capacity.’ " Rieff , 630 N.W.2d at 294 (quoting Ezzone , 525 N.W.2d at 395, in turn citing Cunningham , 332 N.W.2d at 883 ).
In Cunningham , Cunningham sued Kartridg Pak Co., the maker of a meat processing machine called the Yieldmaster, for damages sustained by Iowa Meat Fabricators Corp. (IMF), the corporation in which he was a shareholder, after IMF leased a Yieldmaster from Kartridg Pak. Id. at 882. The court considered whether organization of IMF to produce a pork product by use of the Yieldmaster created a special duty from Kartridg Pak to Cunningham, and concluded, as a matter of law, that it did not. Id. at 884.
In Cunningham , the Iowa Supreme Court identified a few cases in which a "special duty" to the shareholder had been found:
In Eden v. Miller , 37 F.2d 8 (2d Cir.1930), plaintiffs formed a corporation for freight hauling in consideration for defendant's promise to provide the corporation with capital and to secure business for it. Defendant breached the oral contract and plaintiffs were allowed to recover in their individual capacity. In ... Eden the corporation was not a party to the breached contract.
A special duty arising out of a contract was also present in Sedco International, S.A. v. Cory , 522 F.Supp. 254 (S.D.Ia.1981). The court recognized that the estate of the shareholder, Roy Carver, had an individual cause of action "when the wrong is both to the stockholder as an individual and to the corporation." Id. at 314. In that case the wrong to the individual, Carver, was plaintiff's alleged fraudulent inducement of Carver to make substantial loans of operating capital to the corporation of which Carver was a stockholder and with which plaintiff was doing business.
As a final example, we consider Bushmann [Buschmann] v. Professional Men's Assoc. , 405 F.2d 659 (7th Cir.1969), in which the stockholder, who was also a guarantor, was allowed to sue in his individual capacity because of a contract between plaintiff, defendant and a lending bank. The contract contained an implied promise by the defendant that defendant would not mismanage the corporation for which the stockholder was guarantor to the bank which was a party to the contract.
Cunningham , 332 N.W.2d at 884.
In Cunningham , the court distinguished Eden on the ground that the corporation was not a party to the contract at issue, while in Cunningham , the corporation, IMF, was a party to the lease from Kartridge Pak, but Cunningham was not; i.e. , in Cunningham's case, the contractual duty ran to the corporation, not to the individual shareholder. Id. The court distinguished Sedco International on the ground that the wrong in that case had been to Carver, as an individual, in the form of fraudulent inducement of Carver to make loans to the corporation with which the inducer was doing business; i.e. , there was a duty to Carver as an individual not to induce him to make the loans by fraudulent misrepresentations. Id. Finally, the court distinguished Buschmann on the ground that there was an implied promise, i.e. , a duty, of the defendant to Carver not to mismanage the corporation for which Carver was a guarantor to the bank, which was also a party to the contract. Id. Thus, in each of these cases, unlike in Cunningham , the duty ran directly to the shareholder as an individual , and the shareholder consequently suffered an individual injury distinct from any injury to the corporation or any other shareholder.
In contrast, in Cunningham , the court recognized that the lease was not with Cunningham. Therefore, the court concluded that Cunningham did not show direct injuries, but only injuries alleged to be the consequence of being a shareholder of IMF. In those circumstances, the court concluded that the cause of action rightfully belonged to the corporation. Id. Another example of a contractual "special duty" giving rise to an individual claim was in Ezzone , where a contract provided a special duty to an individual shareholder, such that interference with that contract was specifically directed at that shareholder, not the corporation. 525 N.W.2d at 395. In Rieff , which appears to be the only example of a non-contractual "special duty" considered by the Iowa Supreme Court, the court found that, where a statute imposed on a mutual corporation "an affirmative responsibility to disclose its intentions [to demutualize] and seek approval from policyholders, as well as compensate them upon conversion, this creates a special duty not ordinarily cognizable between a mutual corporation and its policyholders." 630 N.W.2d at 294.
Here, Shepard argues that the "special duty" owed him was the fiduciary duty of a majority shareholder to minority shareholders and that the breach of that duty was the defendants’ failure to enhance the value of a publicly-traded corporation. Even assuming there is such a fiduciary duty under Iowa law, the defendants are correct that "a breach of fiduciary duty is generally recognized as a derivative claim." Rieff , 630 N.W.2d at 295 (citing Weltzin v. Nail , 618 N.W.2d 293, 299 (Iowa 2000), and Cunningham , 332 N.W.2d at 883 ); accord Spears v. Com Link, Inc. , 837 N.W.2d 680, 2013 WL 3457171, *10 (Iowa Ct. App. 2013). More importantly, again assuming that there is such a fiduciary duty under Iowa law, such a duty, as a matter of law, is not one "outside the duties to the corporation," Rieff , 630 N.W.2d at 294, or "a right[ ] extrinsic from the corporation," Cunningham , 332 N.W.2d at 884. Rather, it is a duty that "arise[s] by virtue of the fact that [the plaintiff, here, Shepard] was a stockholder." Id. To put it another way, the duty is not one that runs to Shepard as an individual , but one that runs to Shepard only because he is a shareholder. Id. This is unlike the situations in Eden, Sedco International , and Buschmann , as described in Cunningham, id. , or the situation in Ezzone. See 525 N.W.2d at 395. Also, as in Cunningham , Shepard's alleged injury, failure to enhance the value of his shares, did not arise from a "special duty" to him as an individual, because it is "the consequence of being a shareholder of [EMCI] and the cause of action rightfully belongs to [EMCI]." 332 N.W.2d at 884.
Finally, the fiduciary duty of a majority shareholder to minority shareholders that Shepard contends is imposed by case law might seem analogous to the "special duty" to policy holders imposed by statute on a mutual corporation intending to and effecting a demutualization, as discussed in Rieff , 630 N.W.2d at 294. However, the court is not convinced. The purported fiduciary duty on which Shepard relies is not a "special" duty, but a "general" duty, because it applies outside of a specific circumstance, such as a demutualization. Here, Shepard has represented that his claim is not related to the merger, or "squeeze-out" as he calls it, but to failure to enhance the value of EMCI in the years prior to the merger. To put it another way, the purported duty here is one "ordinarily cognizable" between a majority shareholder and minority shareholders, unlike the statutory duties at issue in Rieff. Compare 630 N.W.2d at 294. Moreover, it is a duty that "arise[s] by virtue of the fact that [the plaintiff, here, Shepard] was a stockholder." Cunningham , 332 N.W.2d at 884.
Under the "special duty" test, Shepard's claim is derivative, not a claim he can assert directly.
c. Distinct injury
Shepard also argues that he is entitled to assert an individual action under the second alternative test, which examines whether "he suffered an injury separate and distinct from that suffered by the other shareholders." Cunningham , 332 N.W.2d at 883. The Iowa Supreme Court applied this test by looking at whether the shareholder's "injuries were unique in comparison to those of the other shareholders, if any." Id. at 884. The court observed that the fact that a loss fell heaviest on those who had invested the most did not demonstrate that a majority shareholder had suffered an injury separate and distinct from that of any other shareholders. Id. Furthermore, "a mere economic loss to the value of a shareholder's stock is not a ‘separate and distinct’ interest allowing [a direct suit] because it is a loss suffered by all shareholders, albeit to differing extents." Taylor v. Hogan , 834 N.W.2d 82, 2013 WL 1749777, at *6 (Iowa Ct. App. 2013) (citing Cunningham , 332 N.W.2d at 884 ). Also, an injury to the corporation itself that is then shared only indirectly by shareholders or only "flow[s] through the corporation" to the shareholders is not a separate and distinct injury to any shareholder. See Redeker v. Litt , 699 N.W.2d 684, 2005 WL 1224697, at *4-*5 (Iowa Ct. App. 2005).
Shepard argues that he has suffered injury at the hands of Kelley and EMCC separate and distinct from any injury EMCC suffered, as the majority shareholder, where EMCC benefitted from its breaches of fiduciary duty. This argument fails as a matter of law. Instead, Shepard suffered only an indirect injury that "flowed through" EMCI, where he alleges that the defendants’ breach of fiduciary duty failed to enhance EMCI's value. See id. All shareholders suffered the same indirect injury from the failure to enhance the value of EMCI. Cunningham , 332 N.W.2d at 883. This is true, even if EMCC reaped some other business benefit from its conduct toward EMCI that was not shared by Shepard or other minority shareholders. This is a case in which "a mere economic loss to the value of a shareholder's stock is not a ‘separate and distinct’ interest allowing [a direct suit] because it is a loss suffered by all shareholders, albeit to differing extents." Taylor , 834 N.W.2d 82, 2013 WL 1749777, at *6.
Under the "separate and distinct injury" test, Shepard's claim is derivative, not a claim he can assert directly.
d. Prerequisites to a derivative action
Because the court has determined that Shepard's claim is derivative, the court must consider the prerequisites for a shareholder to assert a derivative claim. As the Eighth Circuit Court of Appeals has explained,
Rule 23.1(b)(3) [of the Federal Rules of Civil Procedure] says that shareholders seeking to enforce a corporation's rights through a derivative action must "state with particularity" "any effort" they took "to obtain the desired action from the [corporation's] directors" and "the reasons for not obtaining the action or not making the effort." On its face, that language does not make seeking action from the board a prerequisite to bringing a derivative suit, though it does "clearly contemplate[ ]" that such a requirement might apply. See Kamen v. Kemper Fin. Servs., Inc. , 500 U.S. 90, 96, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991). We have therefore recognized Rule 23.1 as " ‘a rule of pleading’ that ‘requires that the complaint ... allege the facts that will enable a federal court to decide whether’ " derivative plaintiffs complied with such a demand requirement imposed by another source. Gomes [v. Am. Century Cos.] , 710 F.3d [811,] 815 [ (8th Cir. 2013) ] (quoting Halebian v. Berv , 590 F.3d 195, 211 (2d Cir. 2009), abrogated on other grounds by
Espinoza ex rel. JPMorgan Chase & Co. v. Dimon , 797 F.3d 229 (2d Cir. 2015) ).
Cottrell on behalf of Wal-Mart Stores, Inc. v. Duke , 829 F.3d 983, 989 (8th Cir. 2016) (emphasis added). Thus, the court must look to state law to see if it imposes a substantive demand requirement. Id. ; see also Cottrell v. Duke , 737 F.3d 1238, 1247 (8th Cir. 2013) ("When a shareholder sues derivatively, the shareholder must satisfy the pleading requirements of Federal Rule of Civil Procedure 23.1, which incorporate a threshold issue of substantive state law, the sufficiency of demand or excuse." (citing, inter alia, Kamen v. Kemper Fin. Servs., Inc. , 500 U.S. 90, 95–97, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991) ).
Iowa law imposes such a substantive demand requirement:
To initiate a shareholder derivative action, a shareholder must petition to enforce the corporation's rights. See Iowa R. Civ. P. 1.279. The shareholder must support the petition with an affidavit setting forth "their efforts to have the directors ... or other shareholders bring the action or enforce the right, or a sufficient reason for not making such effort." Id. Ordinarily, a shareholder cannot initiate a derivative action unless the shareholder has first made a written demand upon the corporation and ninety days have expired from the date the demand was made. See Iowa Code § 490.742 (2011).
Spears v. Com Link, Inc. , 837 N.W.2d 680 (Iowa Ct. App. 2013).
Shepard does not argue that he has met these requirements, nor does he argue that it would have been futile for him to have tried to meet these requirements. Rather, he argues that the defendants are miscasting his claim as a derivative one to evade liability. The court concluded, above, however, that Shepard has failed both tests for a direct action by a shareholder, so his claim falls within the general rule that "shareholders have no claim for injuries to their corporations by third parties unless within the context of a derivative action." Cunningham , 332 N.W.2d at 883. Thus, Shepard's claim was subject to, but Shepard has not satisfied, the pleading requirements and substantive prerequisites for a derivative claim under Rule 23.1 of the Federal Rules of Civil Procedure, Rule 1.279 of the Iowa Rules of Civil Procedure, and IOWA CODE § 490.742.
Because Shepard's claim is a derivative claim for which he failed to satisfy the prerequisites, his breach of fiduciary duty claim is not legally cognizable under Iowa law. Therefore, the defendants’ Motions To Dismiss are granted. See Couzens , 854 F.3d at 519 (concluding that a claim must be dismissed pursuant to Rule 12(b)(6) if the claim lacks a recognized or cognizable legal theory); Brown , 738 F.3d at 933 n.7, 934 (same).
D. Is The Fiduciary Duty Claim Cognizable?
Although the conclusion, above, is fully dispositive of the defendants’ Motions To Dismiss, the court will consider, in the alternative, whether Shepard's claim is based on a cognizable fiduciary duty, if it is not derivative.
1. Arguments of the parties
The defendants argue that the Iowa Business Corporation Act imposes duties on officers and directors, not majority shareholders. They argue, further, that Iowa courts have never found a fiduciary duty of a majority shareholder to a minority shareholder in the circumstances present here, that is, with regard to a publicly-traded corporation, where EMCI was a publicly-traded corporation at the times relevant to Shepard's claim. The defendants point out that Iowa courts have found such a fiduciary duty of majority shareholders to minority shareholders only in the context of a closely-held corporation. They contend that this difference makes sense, because unlike shareholders in a publicly-traded corporation, shareholders of closely-held corporations typically have no market for their shares, leaving them at risk of opportunistic behavior by the majority. Furthermore, they argue that no Iowa law imposes on a majority shareholder a duty to "maximize shareholder value," even if such a duty might be imposed upon directors in the context of a merger in some jurisdictions. The defendants contend that Iowa is not such a jurisdiction, however, because the Iowa "constituency" statute makes clear that the corporation, not shareholders, is the object of a director's duties, and that directors may consider the interests of other stakeholders, such as employees, suppliers, and customers, in addition to the interests of shareholders.
Kelley adds that Shepard has not pleaded that the Director Shield Defense is unavailable to Kelley and that the Amended Complaint's allegations improperly "lump" EMCC and Kelley together, thus failing to state a claim against Kelley.
Shepard contends that Iowa law squarely contradicts the defendants’ arguments that they do not owe fiduciary duties to him as a minority shareholder of EMCI. Shepard argues that the Iowa Supreme Court consistently recognized that majority shareholders owe a fiduciary duty to minority shareholders. Shepard asserts that no Iowa court has ever held that majority shareholders of a publicly-traded company do not owe minority shareholders a fiduciary duty and that Iowa courts have never limited the fiduciary duties of majority shareholders to closely-held companies. Moreover, he contends, the defendants’ public SEC filings and EMCI's Proxy expressly state that EMCC owed a fiduciary duty to EMCI's minority shareholders. Shepard argues, next, that the rationale for the rule the defendants assert is suspect, because controlling shareholders of publicly-traded corporations may act just as opportunistically to claim a disproportionate share of corporate financial benefits as majority shareholders of closely-held corporations and that the shares of publicly-traded corporations may be just as illiquid as the shares of closely-held corporations. Shepard also argues that directors, such as Kelley, owe a fiduciary duty to a company's shareholders and, in particular, to minority shareholders.
In reply, EMCC argues that Shepard does not cite a single Iowa case holding that the majority shareholder of a publicly-traded company has a fiduciary duty to each minority shareholder, because there is no such case. Rather, EMCC argues, Iowa cases recognize a distinction between duties in the publicly-traded corporation context versus the closely-held corporation context. EMCC argues that Shepard's theory relies on the law in other jurisdictions, not the law in Iowa. EMCC contends that Shepard has also misquoted EMCI's SEC filing and EMCI's Proxy to suggest that EMCC has a fiduciary duty to EMCI's minority shareholders. In his reply, Kelley adds that the Iowa "constituency" statute shows that, because Iowa directors do not have a duty to accept a takeover offer even if the offer would maximize shareholder value, they plainly have no such duty outside the merger context.
2. Discussion
a. Fiduciary duty of a majority shareholder
The court concludes that Shepard relies on a fiduciary duty of a majority shareholder to a minority shareholder that is not recognized or cognizable under Iowa law. See Couzens , 854 F.3d at 519 (concluding that a claim must be dismissed pursuant to Rule 12(b)(6) if the claim lacks a recognized or cognizable legal theory); Brown , 738 F.3d at 933 n.7, 934 (same). There are at least three reasons for this conclusion.
First, contrary to Shepard's contentions, EMCC did not take on a fiduciary duty to minority shareholders in its filing with the SEC or in EMCI's Proxy. Shepard asserts that the EMCI 2019 Proxy Statement states, "EMCC [has] ... fiduciary duties to both EMCC's policyholders and to the public shareholders," and that EMCI's 2018 Form 10-K states, "[EMCC] ... ha[s] a fiduciary duty to both the stockholders of [EMCI] and to the policyholders of [EMCC]." As EMCC points out, however, EMCI's 2018 Form 10-K filing actually says, "The Company's executive officers hold the same positions with both Employers Mutual and the Company, and therefore also have a fiduciary duty to both the stockholders of the Company and to the policyholders of Employers Mutual. " 2018 Form 10-K at 42 (emphasis added). Thus, the fiduciary duty referred to is the fiduciary duty of EMCI's directors , not EMCC as a majority shareholder. EMCC also points out that the EMCI Proxy actually says,
The court notes that neither document was attached to the Amended Complaint, but the court will assume that it may consider both on a Rule 12(b)(6) motion to dismiss as documents that are public record and as documents encompassed by the pleadings.
... EMCC's Board of Directors believed that such potential strategic alternatives would be challenging to implement given the Company's and EMCC's structure and fiduciary duties to both EMCC's policyholders and to the public shareholders and none of the potential alternatives would likely alter the dynamics and financial metrics enough to significantly increase the Company's total returns to shareholders.
Proxy at 68, 72. Thus, EMCC argues that the Proxy states that EMCC's and EMCI's duties were, respectively , to EMCC's policyholders and EMCI's public shareholders. While perhaps inartful, this statement does not plausibly suggest that EMCC acknowledged a fiduciary duty as a majority shareholder to Shepard or any minority shareholder.
Second, the Iowa Supreme Court has recognized principles "protecting the interests of minority shareholders in closely held corporations. " Baur v. Baur Farms, Inc. , 832 N.W.2d 663, 673 (Iowa 2013) (emphasis added). Thus, "[m]anagement-controlling directors and majority shareholders of such corporations ," that is, closely-held corporations, "have long owed a fiduciary duty to the company and its shareholders." Id. at 673-74 (citing Cookies Food Prods., Inc. v. Lakes Warehouse Distrib., Inc. , 430 N.W.2d 447, 451 (Iowa 1988) ). As the Iowa Supreme Court explained,
This fiduciary duty encompasses a duty of care and a duty of loyalty to the corporation. [ Cookies , 430 N.W.2d at 451.] The fiduciary duty also mandates that controlling directors and majority shareholders conduct themselves in a manner that is not oppressive to minority shareholders.
Baur v. Baur Farms, Inc. , 832 N.W.2d 663, 674 (Iowa 2013). Oppression of minority shareholders is a ground for dissolution of the corporation, see id. 674 (citing IOWA CODE § 490.1430(2)(b) ), but Shepard does not seek dissolution of the corporation. Rather, he seeks damages for breach of fiduciary duty during the operation of the corporation. In cases cited by Shepard and other decisions, Iowa courts have recognized a fiduciary duty from a majority shareholder to a minority shareholder under Iowa law only in the context of a closely-held corporation, as the Iowa Supreme Court did in Baur. See Davis-Eisenhart Mktg. Co. v. Baysden , 539 N.W.2d 140, 143 (Iowa 1995) (stating, in the context of a closely-held corporation, "Of course, a majority shareholder may not favor himself to the detriment of the minority. If such wrongdoing occurs, the shareholders may seek recovery for breach of fiduciary duty." (citations omitted)); Cookies Food Prod., Inc., by Rowedder v. Lakes Warehouse Distrib., Inc. , 430 N.W.2d 447, 451 (Iowa 1988) (stating, in the context of a closely-held corporation, that an officer and director who was also a majority shareholder owed a fiduciary duty to the company and its shareholders); Linge v. Ralston Purina Co. , 293 N.W.2d 191, 194 (Iowa 1980) (holding, in the context of a closely-held corporation, "that majority shareholders do owe a fiduciary duty to minority shareholders"); accord Spears v. Com Link, Inc. , 837 N.W.2d 680 (Iowa Ct. App. 2013) (stating, in the context of a closely-held corporation, "Generally, a majority shareholder also owes a fiduciary duty to the corporation and shareholders."); Redeker v. Litt , 699 N.W.2d 684 (Iowa Ct. App. 2005) (noting that shareholders in a closely-held corporation "have very direct obligations to one another"); see also Horras v. Am. Capital Strategies, Ltd. , No. 4:11-CV-00553-JEG, 2012 WL 12895646, at *2 (S.D. Iowa June 25, 2012) (Gritzner, Dist. J.) ("In the context of closely-held corporations, Iowa law recognizes the principle that ‘majority shareholders do owe a fiduciary duty to minority shareholders.’ " (quoting Linge , 293 N.W.2d at 193, 194 ), aff'd , 729 F.3d 798 (8th Cir. 2013)). No Iowa court has ever recognized such a fiduciary duty of a majority shareholder to minority shareholders of a publicly-traded corporation , like EMCI, however. See Horras , 2012 WL 12895646, at *2 ("Horras has not provided, and the Court has not found, any Iowa authority that shows majority shareholders of all corporations owe a fiduciary duty to minority shareholders.").
Third, a distinction between closely-held and publicly-traded corporations in this respect is appropriate. The defendants argue that the rationale for recognizing a fiduciary duty from a majority shareholder to minority shareholders in a closely-held corporation is the following:
[O]pportunistic behavior in public corporations may be constrained by the market; by definition, close corporations lack a market, and therefore lack this monitor. Finally, the impact of ordinary business decisions is felt more directly and disproportionately in a close corporation than in a public corporation. Routine events in a corporation, such as not declaring dividends and not employing a shareholder, may, in a close corporation, be involuntary, disguised wealth transfers to the controlling shareholder as the financially-starved minority shareholders may feel pressure to sell their stock for a low value. Such financial deprivation is particularly untenable given that close-corporate shareholders often have invested a disproportionately high percentage of their wealth in their corporation.
Mary Seigel, Fiduciary Duty Myths in Close Corporate Law , 29 DEL. J. CORP. L. 377, 383-84 (2004). The Iowa Supreme Court recognized this situation with closely-held corporations in Baur , 832 N.W.2d at 676, albeit in the context of minority shareholder oppression.
Shepard argues this rationale does not bear scrutiny, because the same commentator observes that "controlling shareholders in public companies may attempt to appropriate a disproportionate share of corporate financial benefits or otherwise act opportunistically," citing Siegel, Fiduciary Duty Myths , 29 Del. J. Corp. L. at 383. EMCC points out that the quotation Shepard takes from Siegel is incomplete, because the full sentence reads, "While controlling shareholders in public companies may attempt to appropriate a disproportionate share of corporate financial benefits or otherwise act opportunistically, the issues surrounding such predatory behavior are compounded in a close corporation. " Id. (emphasis added). Shepard also argues another commentator pointed out that publicly-traded corporations can be as illiquid, or even more illiquid, than closely-held corporations, if the corporations are under-performing, citing Erik P.M. Vermeulen, High-Tech Cos. and the Decision to ‘Go Public,’ 4 PENN. STATE J. L. INT'L AFF. 421, 431 (2015). Here, Shepard has not pleaded that he had no market for his shares of EMCI, while it was publicly-traded, however, so this supposed similarity between a publicly-held corporation like EMCI and a closely-held one is irrelevant. Shepard also points out that other commentators have observed that "there is no reason to believe that shareholders of either closely or publicly held corporations will be more or less ‘exploited’ " by controlling shareholders, citing Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs , 38 STAN L. REV. 271, 271-73 (1986). As EMCC notes, and the Iowa Supreme Court has pointed out, however, Easterbrook and Fischel also observed, in a treatise, that "the lack of an active market in shares" prohibits close-corporation shareholders from creating "homemade dividends" by selling stock. 832 N.W.2d at 676 (quoting Easterbrook & Daniel R. Fischel, THE ECONOMIC STRUCTURE OF CORPORATE LAW 230–31 (1991)). Thus, Shepard falls well short of debunking the rationale for restricting breach of fiduciary duty claims by minority shareholders against majority shareholders to closely-held corporations, because shareholders in closely-held corporations lack a market for their shares.
In short, Shepard's claim against EMCC for breach of a fiduciary duty of a majority shareholder of a publicly-traded corporation to a minority shareholder is not recognized or legally cognizable under Iowa law. Therefore, EMCC's Motion To Dismiss is granted. See Couzens , 854 F.3d at 519 (concluding that a claim must be dismissed pursuant to Rule 12(b)(6) if the claim lacks a recognized or cognizable legal theory); Brown , 738 F.3d at 933 n.7, 934 (same).
b. Fiduciary duty of a director
The court turns, finally, to Shepard's contention that a director, such as Kelley, had a fiduciary duty to him, as a minority shareholder. This claim also is not legally cognizable.
First, Shepard cites cases and statutes stating that directors owe fiduciary duties to their corporation's shareholders. Specifically, he argues that IOWA CODE § 490.831(1) and § 490.842 refer to liability of directors and officers to shareholders, respectively. These statutes do not, however, establish any duty the breach of which may result in liability. Shepard also contends that the Iowa Supreme Court's decisions in Linge and Cookies recognize the fiduciary duty of directors and officers to the corporation and its shareholders. In Linge , the Iowa Supreme Court observed, "[O]ur cases have recognized the fiduciary duty of officers and directors in dealing with the corporation and its shareholders." 293 N.W.2d at 193. Similarly, in Cookies , the court observed, "Herrig, as an officer and director of Cookies, owes a fiduciary duty to the company and its shareholders." 430 N.W.2d at 451. Neither case, however, held that an officer or director owed minority shareholders a duty apart from the general duty owed to all shareholders and the corporation.
Second, as Kelley argues, directors of Iowa corporations are required to act (a) in "good faith"; (b) "[i]n a manner the director reasonably believes to be in the best interests of the corporation"; and (c) "with the care that a person in a like position would reasonably believe appropriate under similar circumstances." IOWA CODE §§ 490.830(1)(a)-(b), (2). Assuming that this statute imposes a fiduciary duty on directors to a minority shareholder, neither the statute nor any Iowa decision cited by any party imposes on a director a fiduciary duty to promote the value of EMCI shares.
Furthermore, the Iowa "constituency" statute provides as follows:
1. A director, in determining what is in the best interest of the corporation when considering a tender offer or proposal of acquisition, merger, consolidation, or similar proposal, may consider any or all of the following community interest factors, in addition to consideration of the effects of any action on shareholders:
a. The effects of the action on the corporation's employees, suppliers, creditors, and customers.
b. The effects of the action on the communities in which the corporation operates.
c. The long-term as well as short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.
2. If on the basis of the community interest factors described in subsection 1, the board of directors determines that a proposal or offer to acquire or merge the corporation is not in the best interests of the corporation, it may reject the proposal or offer. If the board of directors determines to reject any such proposal or offer, the board of directors has no obligation to facilitate, to remove any barriers to, or to refrain from impeding, the proposal or offer. Consideration of any or all of the community interest factors is not a violation of the business judgment rule or of any duty of the director to the shareholders, or a group of shareholders, even if the director reasonably determines that a community interest factor or factors outweigh the financial or other benefits to the corporation or a shareholder or group of shareholders.
IOWA CODE § 490.1108A. Thus, as this court has explained, "Iowa law places the interest of corporate shareholders and other corporate constituencies on equal footing, allowing directors to reject an offer under a community interest analysis, even if the offer would maximize shareholder value." Kentucky State Dist. Council of Carpenters Pension Tr. Fund v. Myers , No. 4:10-CV-00332, 2010 WL 11483954, at *5 (S.D. Iowa Sept. 9, 2010). Shepard is correct that this statute applies "in determining what is in the best interest of the corporation when considering a tender offer or proposal of acquisition, merger, consolidation, or similar proposal," but his present claims do not relate to the merger, only to the pre-merger period. As Kelley points out, however, if Iowa directors do not have a duty to accept a takeover offer even if the offer would maximize shareholder value, then Iowa directors could not possibly have such a duty outside the merger context.
Because Shepard has not cited any Iowa statute or Iowa decision recognizing the fiduciary duty of a director on which he relies—that is, a fiduciary duty of directors to minority shareholders to maximize value of the corporation—Kelley's Motion To Dismiss is granted. See Couzens , 854 F.3d at 519 (concluding that a claim must be dismissed pursuant to Rule 12(b)(6) if the claim lacks a recognized or cognizable legal theory); Brown , 738 F.3d at 933 n.7, 934 (same).
III. CONCLUSION
The court concludes, first, that Shepard's claim of breach of fiduciary duty against EMCC and Kelley is derivative and that Shepard has failed to meet the procedural and substantive prerequisites to assert a derivative claim himself. In the alternative, assuming that Shepard's claim is not derivative, the court concludes that Shepard has failed to identify a recognized or cognizable fiduciary duty under Iowa law. Where Shepard's claims are legally insufficient, they must be dismissed pursuant to Rule 12(b)(6).
Upon the foregoing,
IT IS ORDERED that
1. defendant EMCC's May 15, 2020, Motion To Dismiss [Dkt. No. 42] is GRANTED ; and
2. defendant Kelley's May 15, 2020, Motion To Dismiss [Dkt. No. 43] is GRANTED.
Shepard's Amended Complaint [Dkt. No. 38] is dismissed in its entirety. The clerk shall enter judgment in favor of the defendants.