Opinion ID: 852988
Heading Depth: 3
Heading Rank: 1

Heading: Removal of Directors Elected by Voting Groups

Text: Murray contends that he was elected by a voting group and, by reason of subsection 8(b), cannot be removed except by the shareholders of that group. The Court of Appeals concluded that subsection 8(a) permitted removal of a director by a majority of the Board without regard as to how that director was elected to the Board. The Court of Appeals took the view that subsection 8(b) had no relevance to a removal by the directors. Rather, its effect was only to limit the shareholders who are eligible to vote at a shareholder meeting to remove a director who had been elected by a voting group of shareholders. Both Murray's contentions and the Court of Appeals' view find solid footing in the literal language of the statute. Each relies on a specific section of the BCL and reasons from it to a logical conclusion. We think, however, that a reading of the statute as a whole leads to the conclusion that neither view is correct. We do not agree that subsection 8(b) has no effect on any removal by the Board. Rather, for the reasons given, we conclude that subsection 8(b) prohibits the removal by the Board of one of its members who was elected by a separate voting group of shareholders. However, we do not find Murray's removal improper. Murray was elected by a vote of all voting shares of Conseco. He does not enjoy the immunity from removal conferred by subsection 8(b) and was therefore properly removed by the Board under the authority conferred by subsection 8(a). With the exception of the provision in subsection 8(a) for removal of a director by the directors, section 8 tracks the language of the MBCA. The provision in subsection 8(a) for the removal of a director by the board without cause is highly unusual, and perhaps unique to Indiana. [1] As the Court of Appeals pointed out, most jurisdictions reserve the power to remove a member of the board to the shareholders who elected the director. Indeed some courts have found an agreement that purported to permit the board of directors to remove a sitting director to be contrary to public policy. See, e.g., Dillon v. Berg, 326 F.Supp. 1214, 1225 (D.Del.1971), aff'd, 453 F.2d 876 (3d Cir.1971). However, as the Court of Appeals pointed out, public policy is a matter for the General Assembly subject only to constitutional limitations on legislative authority. On this issue the General Assembly's expression of its policy is quite clear. The language of subsection 8(a) unequivocally vests the board with the power to remove one of its members. Moreover, the commentary to the Indiana BCL expressly noted and approved this unusual and specific provision. [2] Thus the Court of Appeals was clearly correct in its conclusion that the public policy of this state on this issue has been set by the legislature, and authorizes the board of directors to remove one of its members. In the absence of any constitutional challenge, the wisdom of the policy reflected in the statute is not for us to resolve. The issue remains how to reconcile the unequivocal power of the board to remove, as provided in subsection 8(a), with the express provision in subsection 8(b) addressing removal of a director elected by a voting group of shareholders. Although Conseco has neither separate voting groups nor cumulative voting, the statutory provisions addressing removal of a director elected by one of these provisions are relevant to the construction of section 8 as it relates to this lawsuit. The Court of Appeals reconciled subsection (a) with subsection (b) by concluding that subsection (b) has no application to a removal by the directors. Rather, under this view, subsection (b) regulates only the manner of conducting the shareholder vote if a shareholder vote is the means through which removal is sought. The same would presumably be true of subsections (c) and (d). The structure of subsections 8(b), (c) and (d) lends some support to this view as a matter of statutory construction. Subsection (b) speaks of the shares eligible to vote to remove a director elected by a voting group, subsection (c) addresses the votes necessary for removal if cumulative voting is authorized, and subsection (d) specifies the means of calling the meeting for shareholders to act on a removal. Subsection (d) clearly relates only to the manner of conducting a shareholder removal of a director and seems to have no implication for how or whether the board of directors may remove one of its members. None of these three subsections by its terms directly addresses the power of either the shareholders or the directors to remove a member of the board. We think, however, that subsections (b) and (c) are not of the same character as subsection (d), and do in fact place restrictions on removal by the board. We think that subsection (b) has significance in this case even though Conseco does not have directors elected by a separate voting group. Section 8 is found in Chapter 33 of the BCL, which deals with directors. Section 4 of that chapter expressly contemplates election of directors by voting groups. [3] A voting group is one or a number of classes of stock entitled to vote separately on a matter presented to shareholders for a vote. This specifically authorizes a corporation to be structured in such a way as to guarantee specific bodies of shareholders that they will have representation on the board of directors. The utility of such an arrangement is often found in smaller corporations whose securities are not publicly traded. A typical use of directors elected by groups is to create an intentional deadlock to require consensus before the board can act in a closely held corporation. The technique may also simply guarantee a seat at the table to a minority shareholder group who holds a separate class of stock whose principal or sole difference from other classes is the right to elect one or more directors by its separate vote. See MBCA § 8.04 cmt. In either case, it is an important component of the corporate governance that the shareholders bargain for when they acquire stock in a corporation that has voting groups who vote separately for different seats on the board of directors. Subsections (b), (c) and (d) came directly from section 8.08 of the MBCA, which had no provision for board removal of a director. The current MBCA version of subsection (a) is the same as the second sentence of the Indiana version, but without the words, or the directors. Predecessor versions of the MBCA did not break these provisions down into subsections, but their substance was the same as the current version. Because the MBCA version of subsection (a) gave only shareholders the right to remove, the subsequent subsections assumed that any removal of a director required a shareholder vote unless the articles provide otherwise. Accordingly, subsections (b), (c) and (d) were written to address only the process necessary for a shareholder vote to effect a removal. But restricting the power to remove to the shareholders of the voting group that elected the director has a very important purpose if the voting group is less than all of the shares. If the directors of such a corporation can act to remove one of their members without cause, the natural deadlock created by two voting groups could be shattered at any meeting where a quorum was present. If for any reason one director is absent, one group could oust the absent member and the other directors elected by the absent member's group. In a corporation such as Conseco, where all shareholders vote as one group, a majority of the shareholders could readily reverse such a coup by removing the surviving directors. But in a close corporation the shareholdings may be intentionally deadlocked at 50-50. In that case, shareholder removal is not an available remedy to cure a coup by one group's directors who obtain a temporary majority of a quorum. Similarly, if subsection (b) were no restraint on removal by the board, a voting group designed to give the minority a seat on the board could be easily frustrated. We think such dramatic changes in the statute were not contemplated by the BCL. Rather, we conclude that the specific provision in subsection (b) designed to preserve representation on the board by a voting group is not overridden by the general authority in subsection (a) permitting directors to remove one of their members.