The Iowa Supreme Court today issued a decision in favor of EMC Insurance Cos. in a class action suit brought by a shareholder who alleged the company’s directors abdicated their fiduciary duties by agreeing to a “flawed merger process” by accepting a low price in a deal to convert the company to private ownership.

In the opinion published this morning, the justices reversed and remanded the Iowa Business Specialty Court’s denial of EMC’s motion to dismiss the shareholder’s claims for breach of fiduciary duty regarding the directors’ handling of the corporate merger. The case is “Kendall Meade v. Peter Christie, Stephen Crane, Jonathan Fletcher and Gretchen Tegeler; and EMC Insurance Group Inc., Bruce Kelley and EMCC Casualty Co.”

On May 9, 2019, Employers Mutual Casualty Co. and EMC Insurance Group Inc. announced they had entered into a definitive merger agreement to transition the Des Moines-based property-casualty insurer from a publicly held stock company to a private company. The transaction was completed on Sept. 19, 2019.

The appeal of the Iowa Business Specialty Court’s ruling, on which the Iowa Supreme Court heard oral arguments March 23, “presents our court’s first opportunity to examine Iowa’s director shield protections and the procedural requirements that accompany them,“ according to a summary of the appeal.

Iowa first adopted its director shield statute in 1987, and on Jan. 1, 2003, replaced its original Delaware-modeled director shield provision with the Model Business Corporation Act, which further increased protections for directors.

In 2019, the independent directors of EMC recommended, and a majority of the minority shareholders agreed to, a sale price of $36 per share for the transaction to take the company private. Kendall Meade, a minority shareholder, sued the independent directors — Peter Christie, Stephen Crane, Jonathan Fletcher and Gretchen Tegeler — alleging breach of their fiduciary duties.

The corporate directors filed a motion to dismiss the shareholder’s claims, invoking statutory director protections — known as “director shield” laws — that prevent holding directors liable for many types of claims for monetary damages, according to a summary of the opinion. The Iowa Business Specialty Court rejected the directors’ arguments and denied their motion to dismiss.

“We disagree with the business court’s determination,” wrote Associate Justice Matthew McDermott, who delivered the opinion in which all justices joined. “Accepting Meade’s allegations as true, we find Meade’s allegations insufficient to establish ‘intentional infliction of harm on the corporation or the shareholders’ by the directors.”

The justices also denied Meade’s request to amend his petition following its dismissal.

The Iowa Association of Business and Industry and the Iowa Business Council had filed a friend of the court brief in support of the EMC directors’ position in the case. “The Defendants utilized every conceivable procedural protection available to protect the interests of the minority shareholders here,” the associations said in the brief.  

A decision against the directors would “reinforce the incentives of the plaintiffs’ bar to pursue unmeritorious class action litigation in public company mergers, with the principal objective being large plaintiff attorney fees,” the organizations further said.