Although Elon Musk’s offer to acquire Twitter is still garnering headlines, another “going private” development also merits attention: Meade v. Christie, an Iowa Supreme Court decision dismissing shareholder class action claims against directors who approved a going private merger. The Meade dismissal was based on a director liability shield patterned on the Model Business Corporation Act (“MBCA”) template. As interpreted and applied in Meade, the MBCA shield is more protective than the comparable Delaware provision. Equally important, Meade answers procedural questions that aren’t fully resolved by the MBCA shield text, illustrating key pleading requirements for corporate litigants when director shield defenses apply.
The MBCA Director Liability Shield
The Iowa director shield statute at issue in Meade, sometimes also called a “director raincoat,” is patterned on MBCA Section 2.02(b)(4), which authorizes corporations to include in their articles of incorporation:
[a] provision eliminating or limiting the liability of a director to the corporation or its shareholders for money damages for any action taken, or any failure to take action, as a director, except liability for any of the following: (i) the amount of a financial benefit received by a director to which the director is not entitled; (ii) an intentional infliction of harm on the corporation or the shareholders; (iii); a violation of section 8.32 [a provision limiting distributions to shareholders when the corporation would become insolvent as a result]; or (iv) an intentional violation of criminal law.
These or similar shield laws, in effect in nearly every state, are designed to allow corporate directors to take business risks without worrying about negligence lawsuits. Directors are poor risk-bearers, the argument goes; their role is to manage the corporation, not to insure against losses.
Exceptions from Excupation, Including "Intentional Infliction of Harm"
Although raincoat provisions protect directors from damage claims for ordinary “due care” violations, listed exculpation exceptions in shield laws prevent corporations from sheltering directors from damage exposure for more serious misconduct. And the Iowa director liability shield, like its MBCA counterpart in effect in at least 20 states, forbids exculpation for claims based on “intentional infliction of harm on the corporation or the shareholders.” A key holding in Meade is that this exception does not encompass claims against directors for “conscious disregard” or “intentional dereliction” of duty, an issue no appellate court in Iowa—and no reported opinion from any state that has adopted the MBCA director liability shield—had previously considered.
“Concious Disregard" and "Intentional Dereliction of Duty" Distinguished
To put the interpretative issue in context, Delaware’s shield law forbids exculpation of directors for “acts or omissions not in good faith or which involve intentional misconduct.” In 2006, the Delaware Supreme Court, construing the “not in good faith” portion of this exclusion in In re Walt Disney Co. Derivative Litigation, stated that non-exculpable acts include both “conduct motivated by an actual intent to do harm” (subjective bad faith) as well as lesser forms of bad faith, like a director’s “conscious disregard for … responsibilities” or “intentional dereliction of duty.”
The distinctions drawn in Disney proved critical to the Iowa Supreme Court’s interpretation of the “intentional infliction of harm” shield exclusion in Meade. Reversing the trial court ruling that the Iowa shield law excluded claims for “conscious disregard” or “intentional dereliction” of duty, the Iowa Supreme Court noted: “In contrast to Delaware’s statute, Iowa’s director shield statute includes no exception enabling liability for ‘acts not in good faith.’” And as the court recognized, it is the “not in good faith” exclusion that forms the statutory predicate for the “conscious disregard” and “intentional dereliction of duty” shield exceptions Disney and other Delaware decisions have recognized.
The Meade court also found support in the MBCA’s Official Comments discussing the “intentional infliction of harm” standard, which the court quoted:
The use of the word ‘intentional,’ rather than a less precise term such as ‘knowing,’ is meant to refer to the specific intent to perform, or fail to perform, the acts with actual knowledge that the director’s action, or failure to act, will cause harm … .
Applying this standard to the alleged director misconduct in Meade, the Iowa Supreme Court concluded that the allegations in Meade’s petition were “insufficient”:
The bulk of the allegations … recite failures to perform duties or incompetent performance, none of which suffices. … The statute, in short, requires a plaintiff to show a director’s specific intent to harm the corporation or its shareholders, as opposed to recklessness or dereliction in performing (or failing to perform) their duties.