UPDATES & ANALYSIS

Corporate Shareholders Suing Directors Face Heightened Pleading Requirement, Iowa Supreme Court Holds

by Matt McGuire | June 1, 2022

In 2019, the publicly traded stock of EMC Insurance Group, Inc. (“EMCI”) was acquired in a “going private transaction.” Certain shareholders sued members of EMCI’s board of directors for breaching fiduciary duties owed to public shareholders. Those individual directors moved to dismiss the plaintiffs’ claims, and the district court denied the motion to dismiss. On Friday, May 27, 2022, a unanimous Iowa Supreme Court reversed the district court’s denial of the motion to dismiss in Meade v. Christie, finding that the plaintiffs failed to meet the heightened pleading standards applicable to claims against corporate directors.

The typical civil case in Iowa is governed by what is referred to as the “notice pleading” standard. A plaintiff files a petition that sets forth the claim(s) for relief and the factual basis for the claims. A defendant may file a motion to dismiss any and all claims for relief for failure to state a claim upon which any legal relief may be granted. This motion, which is filed before discovery is taken into the parties’ claims and defenses, challenges the legal sufficiency of the claims under the facts as pled. The court must assume all facts alleged in the petition to be true and may only dismiss a claim if the petition shows no right to recover under any set of facts consistent with the allegations in the petition. This is a standard that is very lenient to plaintiffs, and motions to dismiss are rarely granted in Iowa court.

In Meade, the Iowa Supreme Court examined whether a heightened pleading standard exists for claims against corporate directors for breach of fiduciary duties. At issue was a provision of the Iowa Business Corporation Act, Iowa Code section 490.831, which stated that a director “shall not be liable” for a breach of fiduciary duty unless the party asserting liability establishes, among other criteria, that no defense “interposed by the director” based on various specified bases precludes liability. The directors here argued, on a motion to dismiss, that because the plaintiffs’ petition did not allege facts that would defeat the listed statutory defenses, the petition failed to allege that the “director’s shield” provision of the Iowa Code did not bar the plaintiffs’ claims.

The plaintiffs argued that their petition did not need to address potential defenses because the defendant directors had not formally asserted any defenses in an answer to the petition—they had only filed a motion to dismiss. The district court accepted this argument, but the Iowa Supreme Court disagreed. The Iowa Supreme Court interpreted the term “interposed” to include the assertion of any legal defenses in a pre-answer motion to dismiss, which is what happened in this case. Here, specifically, the defendant directors pointed to a provision within EMCI’s articles of incorporation shielding directors from liability from actions taken (or not taken) in their capacity as directors. Such “directors’ shield” provision qualified as one of the enumerated defenses in Iowa Code 490.831, which the plaintiffs must establish do not apply to be successful on their claims.

The Court determined the plaintiffs needed to have alleged sufficient facts in their petition to support a reasonable inference that the director’s shield defense would not apply. The district court ruled against the defendants on this point, applying the “notice pleading” standard to find that the plaintiffs had alleged that an exception to application of the director’s shield provision for “intentional infliction of harm on the corporation or its shareholders” could apply. The plaintiffs pointed to certain alleged misconduct on the part of the directors, which the petition characterized as “conscious disregard for their duties.”

This is not enough, the Iowa Supreme Court held. Mere failure to perform duties or “incompetent performance” is not the same as intentional infliction of harm on the corporation or its shareholders, the Court reasoned. And even if these allegations were consistent with a finding that the directors intended to inflict harm on the corporation or its shareholders, they do not support a reasonable inference of specific intent to harm. Thus, the Iowa Supreme Court acknowledged that a heightened pleading requirement exists “in the specific context of claims against corporate directors,” which was not met in this case.

(Disclosure: Nyemaster Goode attorneys Mark Dickinson, Michael Thrall and Lynn Herndon represented the individual directors in this case.)

Tags: Iowa Supreme Court 2021-2022