998 F.3d 330
8th Cir.2021Background:
- EMCI (EMC Insurance Group, Inc.) was a publicly traded company controlled by Employers Mutual, which owned ~54% of shares; Bruce Kelley was CEO/director of both entities.
- Shepard, a minority EMCI shareholder, alleged Employers Mutual structured EMCI as a shell (no employees; officers also served Employers Mutual) and used agreements/policies that depressed EMCI’s value and share price.
- On November 15, 2018, Employers Mutual initiated a squeeze-out merger; a special committee negotiated an increased offer of $36/share and the merger was approved by a majority-of-the-minority vote.
- Shepard sued Employers Mutual and Kelley for breach of fiduciary duty based on conduct "in the years leading up to the squeeze-out," alleging depressed stock value; he did not allege a breach during the squeeze-out itself.
- The district court dismissed under Fed. R. Civ. P. 12(b)(6), concluding the claim was derivative and Shepard failed to plead compliance with state demand requirements; alternatively it held Iowa law does not recognize fiduciary duties to maximize share value or duties by a majority/director to minority shareholders.
- The Eighth Circuit affirmed.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Shepard's breach claim is direct or derivative | Shepard: his injury (depressed share price) is an individual harm separate from the corporation | Employers Mutual/Kelley: alleged harm is to EMCI and thus derivative | Held: claim is derivative |
| Whether defendants owed a "special duty" to Shepard | Shepard: special duties exist here (akin to contractual/statutory duties) because defendants favored majority and depressed price | Defs: no contractual or statutory special duty pleaded; injury arises solely from shareholder status | Held: no special duty pleaded; special-duty exceptions inapplicable |
| Whether Shepard’s injury was separate and distinct from other shareholders' injuries | Shepard: minority shareholders were uniquely harmed because Employers Mutual benefited from low price in the squeeze-out | Defs: diminution in share value is a generalized injury to all shareholders and to the corporation first | Held: loss in share value is not a separate and distinct injury; injury is shared and derivative |
| Whether Shepard met demand/delay pleading requirements for a derivative suit | Shepard: argued on appeal for leave to amend (late footnote) | Defs: Shepard failed to plead demand or excuse under Iowa law and Fed. R. Civ. P. 23.1 | Held: Shepard failed to plead particularized demand efforts or statutory 90-day requirements; dismissal appropriate (request to amend waived on appeal) |
Key Cases Cited
- Cunningham v. Kartridg Pak Co., 332 N.W.2d 881 (Iowa 1983) (shareholder injuries to the corporation are generally derivative; special-duty and separate-and-distinct exceptions explained)
- Rieff v. Evans, 630 N.W.2d 278 (Iowa 2001) (statutory demutualization created a special duty to policyholders allowing direct suit)
- Ezzone v. Riccardi, 525 N.W.2d 388 (Iowa 1994) (special duties to shareholders may support direct claims in certain contexts)
- Gentile v. Rossette, 906 A.2d 91 (Del. 2006) (corporate overpayment/dilution to majority can create a direct claim for minority shareholders)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading must be facially plausible)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (complaint must plead factual content allowing a reasonable inference of liability)
- Cottrell v. Duke, 737 F.3d 1238 (8th Cir. 2013) (Rule 23.1 pleading requires particularized allegations about demand and demand futility)