Opinion ID: 2633044
Heading Depth: 1
Heading Rank: 7

Heading: Competing Health Care Facility

Text: The Physicians also take issue with the district court's ruling that KMC was a competing health care facility as contemplated in the redemption provision of CHW's bylaws. Section 1.5(e) defined a competing health care facility as any medical hospital or facility specializing in cardiac, cardiothoracic, or vascular care. The Physicians argue KMC did not meet the definition because KMC was not yet constructed or a functioning hospital at the time their stock was redeemed in October 2004 (Dr. Idbeis) and January 2005 (the remaining Physicians). They contend that KMC was incapable of competing with KHH and CHW at that time. Further, they argue the district court erred in finding that the Directors' actions must be judged under the business judgment rule. In making this argument, the Physicians assert: (a) there was no room for judgment in the Directors' determination of whether the bylaw restriction was violated and (b) the business judgment rule does not apply to the Directors' interpretation or application of the corporate bylaws. The resolution of these arguments will involve the interpretation of CHW's bylaws and the examination of legal issues that the district court addressed in its summary judgment ruling. Thus, as with the prior issues, we will examine these questions under the de novo standard of review. See McGinley v. Bank of America, N.A., 279 Kan. 426, 431, 109 P.3d 1146 (2005); State ex rel. Stovall v. Reliance Ins. Co., 278 Kan. 777, 788, 107 P.3d 1219 (2005). Business Judgment Rule This court has previously defined the business judgment rule as follows: `The presumption that in making business decisions not involving direct self-interest or self-dealing, corporate directors act on an informed basis, in good faith, and in the honest belief that their actions are in the corporation's best interest. The rule shields directors and officers from liability for unprofitable or harmful corporate transactions if the transactions were made in good faith, with due care, and within the directors' or officers' authority.' Black's Law Dictionary 192 (7th ed.1999). Burcham v. Unison Bancorp, Inc., 276 Kan. 393, 417, 77 P.3d 130, 147 (2003) (quoting Unrau v. Kidron Bethel Retirement Services, Inc., 271 Kan. 743, 759, 27 P.3d 1 [2001]). Also, [t]he burden is on the party challenging the decision to establish facts rebutting the presumption. Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244, 253-54 (Del.2000). Obviously, a key to the application of the rule is that a business judgment must be at issue, and the Physicians argue that the decision whether KMC was a competing health care facility was not a business judgment decision. This argument ignores that the decision was tied directly to the board's determination of whether to redeem the Physicians' shares of CHW stock. In other words, the CHW's board of directors was deciding whether there was a violation of the bylaws and whether to take action. An argument similar to the Physicians' was rejected by the Court of Appeals in Gray v. Manhattan Med. Center, Inc., 28 Kan.App.2d 572, 18 P.3d 291 (2001). Gray, a shareholder, believed that certain conduct by two other shareholders violated their lease with the corporation and also violated the bylaws. Because the bylaws were violated, Gray argued the directors must act and enforce the provisions. Contrary to this view, the board determined there had not been a violation of the bylaws. The Court of Appeals held that [t]he business judgment rule gives a corporation's directors the authority to interpret and apply the bylaws and the lease in the corporation's best interest. 28 Kan.App.2d at 579, 18 P.3d 291. The Gray court further noted: [T]here was a dispute regarding the interpretation of the lease and bylaws. . . . The fact that [the directors] chose a course of action Gray disagrees with does not affect the applicability or reduce the protection of the business judgment rule. 28 Kan.App.2d at 579, 18 P.3d 291. Similarly, in this case, as highlighted by the Physicians' own argument that KMC was not a competing health care facility, a judgment had to be made as to whether section 1.5(e) was violated. The bylaw vested the CHW's board of directors with discretion to make the determination, stating: The Board of Directors shall issue such interpretations as are necessary to carry out the intent of this restriction. Further, the decision related to business considerations. As the Corporations point out, the language of the redemption provision made it clear that the act of investment was intended to trigger the provision. In addition, the intent of the redemption provision was to prohibit ownership of a competing health care facility, not a limitation of any-one's group practice or facilities integrated within the practice. The focus of the provision was a proactive one. In adopting the provision, the directors and the shareholders recognized that divulging business plans and proprietary information was damaging to the business interests of the corporation. Given that conflicts start before completion of the building that houses a hospital, it would be unreasonable to conclude that CHW's bylaws did not operate until that point. Even during the planning stages, KMC was a competitor for shareholder investment, physician participation, and referral contacts and relations. Moreover, CHW's directors interpreted the redemption provision consistent with past interpretations. It is uncontroverted that the bylaw restriction had its genesis in response to a proposed hospital on Wichita's west side, and the directors and shareholders viewed that proposal as presenting a competitor. The decision made by CHW's board of directors was a business judgment decision. Are the Requirements of the Business Judgment Rule Satisfied? The Physicians argue that, even if the business judgment rule gave CHW's board of directors the authority to interpret the bylaws, the directors cannot be protected by the business judgment rule defense because the requirements of the rule have not been met. The business judgment rule presumes a corporate board's decision was made by disinterested directors who acted on an informed basis, in good faith, and in the honest belief the decision was in the corporation's best interest. Gray, 28 Kan.App.2d at 577, 18 P.3d 291. The Physicians attack the application of the rule, pointing to each of these criteria. First, they argue that CHW's directors were not personally financially disinterested in their decision to redeem the Physicians' shares of CHW stock. A director is interested where the director has a financial or pecuniary interest in a transaction other than that which devolves to the corporation or to all of the shareholders generally. 3A Fletcher § 1040 (rev. ed.2002); see also McCall v. Scott, 239 F.3d 808, 817 (6th Cir.2001) (A director is considered interested when, for example, he will receive a personal financial benefit from a transaction that is not equally shared by the stockholders, or when a corporate decision will have a `materially detrimental impact' on a director but not the corporation or its stockholders.). The Delaware Chancery Court has described interest as `mean[ing] that directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally.' [Citation omitted.] Orman v. Cullman, 794 A.2d 5, 23 (Del.Ch.2002). The Physicians argue the directors' ownership interests increased because the Physicians owned 40.17 percent of the equity in CHW before the redemption of their stock. As the district court pointed out, however, the directors did not stand to receive a personal financial benefit from the stock redemption that was not shared equally by all the remaining shareholders. If there is any benefit from the redemption, it is merely the result of the fact that fewer shares are outstanding. And this is a benefit that all remaining shareholders participate in equally in accordance with their respective ownership. As the district court found, there were no interested directors under these circumstances. Next, the Physicians argue the directors did not act in good faith. Citing Delaware cash-out merger cases, the Physicians argue the standard should be whether they received fair value for their share of the corporation's equity. See, e.g., Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110 (Del.1994). What this ignores is that the Physicians, as well as the other shareholders, agreed upon a method for determining a fair valuation for the shares if the circumstance ever arose where a shareholder violated the restrictive provisions. There is no evidence the CHW directors manipulated the valuation method. Additionally, as already discussed, there was a good faith basis to conclude KMC was a competitor. As a result, we conclude the Physicians have not met the burden of coming forward with evidence in response to the motions for summary judgment to show a lack of good faith. Finally, regarding the due care criteria of the business judgment rule, the Physicians make an argument in their reply brief that the CHW directors failed to exercise due care in making the redemption valuation. They complain that Dr. Duick, the cofounder of KHH, called a meeting and prepared a report, but the board meeting was held without formal notice. The bylaws of CHW, however, expressly provided that notice of a special meeting of the directors only needed to be given to directors and that the required notice could be waived. Each of the directors in this case waived formal notice by unanimous consent. See K.S.A. 17-6519 (waiver of notice). The Physicians further argue that the lack of due care is illustrated by the fact the CHW directors were not given copies of KMC's offering memorandum before the meeting so they could make their own judgments instead of relying on Dr. Duick's. The sole case cited by the Physicians is Smith v. Van Gorkom, 488 A.2d 858 (Del.1985), superseded by statute as stated in Emerald Partners v. Berlin, 787 A.2d 85 (Del.2001). In Van Gorkom, the chairman of the board, unbeknownst to the other directors, devised a plan to sell the company and picked a sale price based on how long he felt it would take an acquirer to pay back borrowed funds. Neither the chairman nor the board obtained a valuation of the company. After he found a buyer, he called a board meeting to approve a merger, despite the fact that the board had never before considered a sale of the company. Van Gorkom, 488 A.2d at 866-67. In contrast, in this case, Dr. Duick presented to the other CHW directors the offering memorandum of KMC and Dr. Duick's comparative analysis of KMC and KHH. It was uncontroverted that Dr. Duick sought additional information from Dr. Idbeis (the manager of KMC) about KMC and that Dr. Idbeis refused to respond to that request. Also, by the time the directors considered the other Physicians' interest in KMC, several months had elapsed. In addition, the Physicians fail to cite any authority requiring each director to conduct an independent investigation to separately uncover the facts that are reported to the directors. Nor do they identify any additional information that should have been reasonably gathered by the directors in advance of making its decision. The district court found it irrelevant that the other directors did not duplicate Dr. Duick's effort. The Physicians offer no arguments or authority contrary to these findings, and we are not persuaded otherwise. The district court correctly concluded that the Physicians failed to come forth with material evidence to rebut the presumptions that the CHW directors were not interested and that it acted with due care. Under the uncontroverted facts, the directors, in applying the bylaw provision restricting ownership, made a business judgment in good faith, with due care, and within the directors' authority.