| STATE OF SOUTH CAROLINA | ) | |
| ) | IN THE COURT OF COMMON PLEAS | |
| COUNTY OF RICHLAND | ) | |
| ) | Civil Action No.: 2008-CP-40-5294 | |
| Carolyn D. Covan and Debra K. Harris, | ) | |
| on behalf of themselves and all others | ) | |
| similarly situated, | ) | |
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) | ORDER |
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| Blue Cross and Blue Shield of South | ) | |
| Carolina, Joseph F. Sullivan, Billy L. | ) | |
| Amick, Robert V. Royall, E. Erwin | ) | |
| Maddrey II, Merl F. Code, Charles F. | ) | |
| Bolden, Jr., M. Edward Sellers, Helen E. | ) | |
| Clawson, Minor M. Shaw, John M. | ) | |
| Trask, Jr., and Harry R. Easterling, | ) | |
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This matter came before the Court on September 21, 2009 pursuant to Defendants� Motion to Dismiss Plaintiffs� Verified First Amended Class Action Complaint.� Present at the hearing were J. Preston Strom, Jr., Esquire, Mario A. Pacella, Esquire, and John P. Freeman, Esquire, representing Plaintiffs; and W. Howard Boyd, Jr., Esquire, Luanne Lambert Runge, Esquire, and Michael A. Pope, Esquire, representing Defendants, Blue Cross and Blue Shield of South Carolina (�Blue Cross�) and Blue Cross� Board of Directors (�Board�).
FACTUAL AND PROCEDURAL BACKGROUND
On July 23, 2008, Plaintiffs filed a Class Action Complaint alleging causes of action for breach of fiduciary duty and to compel the declaration of dividends.� Defendants moved to dismiss Plaintiffs� Complaint on the following grounds: (1) Plaintiffs failed to state facts sufficient to state a cause of action for breach of fiduciary duty under South Carolina�s statutory law and failed to allege any exception to South Carolina�s common law business judgment rule; (2) Plaintiffs have no right to a dividend; (3) Plaintiffs� claims are barred, in part, by lack of standing and the statute of limitations; and (4) the allegations in the Complaint alleging a derivative action failed to comply with Rule 23, SCRCP.� By Order dated March 26, 2009, the Court granted Defendants� Motion to Dismiss as to both causes of action and granted Plaintiffs� request for leave to amend the Complaint (�Order�).
On April 24, 2009, Plaintiffs filed a Verified First Amended Class Action Complaint (�Amended Complaint�) alleging direct causes of action for breach of fiduciary duty and oppressive and unfairly prejudicial conduct, and derivative causes of action for breach of fiduciary duty and to compel the declaration of dividends.� Plaintiffs, current policyholders of Blue Cross, allege that Defendants breached their fiduciary duties to Blue Cross and its policyholders and have acted in an illegal, fraudulent, oppressive and unfairly prejudicial manner by continuing to increase premiums and Blue Cross� capital surplus without declaring dividends.� Plaintiffs seek an order compelling the declaration of dividends from Blue Cross� excess surplus, an accounting and the imposition of a constructive trust over the excess surplus, and other equitable remedies as the Court may determine, pursuant to S.C. Code Ann. � 33-14-310 (1976).
Defendants now move to dismiss Plaintiffs� Amended Complaint on the grounds that: (1) Plaintiffs� sole purported cause of action is a derivative cause of action for breach of fiduciary duty for Defendants� failure to declare dividends, and Plaintiffs have failed to allege that demand would be futile as required by Rule 23(b)(1), SCRCP; (2) Plaintiffs are not entitled to seek relief under the involuntary judicial dissolution provisions of South Carolina Code Ann. �� 33-14-300 (1976), et seq.; and (3) Plaintiffs have failed to state facts sufficient to constitute a cause of action for breach of fiduciary duty or for judicial dissolution.�
STANDARD OF REVIEW
A defendant may move to dismiss a complaint based on a plaintiff�s failure to state facts sufficient to constitute a cause of action. Rule 12(b)(6), SCRCP; Spence v. Spence, 368 S.C. 106, 116, 628 S.E.2d 869, 874 (2006). A court's decision to grant a Rule 12(b)(6) motion to dismiss must be based solely upon the allegations set forth in the complaint. Spence, 368 S.C. at 116, 628 S.E.2d at 874; Clearwater Trust v. Bunting, 367 S.C. 340, 343, 626 S.E.2d 334, 335 (2006). If material outside the pleading is considered by the court, the motion becomes one for summary judgment. McDonnell v. The Consolidated School Dist. of Aiken, 315 S.C. 487, 489, 445 S.E.2d 639, 639 n.2 (1994); Gilbert v. Miller, 356 S.C. 25, 586 S.E.2d 861 (Ct. App. 2003).�
In reviewing a motion to dismiss, the court must accept as true the well-pleaded facts in the complaint. See Gressette v. S.C. Elec. & Gas Co., 370 S.C. 377, 379, 635 S.E.2d 538, 538 (2006). However, the court will not admit inferences drawn by the plaintiff from such facts, nor will it admit conclusions of law. See Fireman's Ins. Co. of Newark, New Jersey v. Cincinnati Ins. Co., 302 S.C. 234, 235, 394 S.E.2d 855, 856 (Ct. App. 1990). Essentially, the plaintiff must describe each element of the cause of action in terms of the facts of the case. This requires the plaintiff �to plead the ultimate facts which will be proved at trial, not evidence which will be used to prove those facts.� Clark v. Clark, 293 S.C. 415, 416, 361 S.E.2d 328, 328 (1987). "Ultimate facts fall somewhere between the verbosity of 'evidentiary facts' and the sparsity of 'legal conclusions.�� Watts v. Metro Security Agency, 346 S.C. 235, 240, 550 S.E.2d 869, 871 (Ct. App. 2001). Legal conclusions �describe a legal status, condition, or legal offense.� Stroud v. Riddle, 260 S.C. 99, 103, 194 S.E.2d 235, 237 (1973). Where the facts alleged give rise to competing inferences, dismissal under Rule 12(b)(6) is inappropriate; thus, �further development of the facts is [often] necessary before [a] case can be decided.� Jensen v. Conrad, 297 S.C. 323, 334, 377 S.E.2d 102, 108 (Ct. App. 1988).
Since �a judgment on the pleadings is considered to be a drastic measure,� a motion to dismiss under Rule 12(b)(6) should not be granted if facts alleged and inferences reasonably deducible therefrom entitle a plaintiff to any relief under any theory of the case. Id.; Overcash v. S.C. Elec. & Gas Co., 364 S.C. 569, 572, 614 S.E.2d 619, 620 (2005); Slack v. James, 356 S.C. 479, 589 S.E.2d 772 (Ct. App. 2003). Furthermore, the court should not dismiss a complaint merely because the court doubts the plaintiff will prevail in the action. Spence, 328 S.C. at 116-17, 628 S.E.2d at 874. �
LEGAL DISCUSSION
I. Cause of Action for Breach of Fiduciary Duty for Failure to Declare Dividends
Plaintiffs allege both direct and derivative causes of action in their Amended Complaint. Plaintiffs allege direct causes of action for breach of fiduciary duty and oppressive and unfairly prejudicial conduct, and derivative causes of action for breach of fiduciary duty and to compel the declaration and payment of dividends.� Although Plaintiffs have separated their allegations into multiple claims or theories in their Amended Complaint, Plaintiffs only allege a cause of action for breach of fiduciary duty for Defendants� failure to declare dividends. While a complaint may state two causes of action in form, there is one cause of action in fact where a plaintiff alleges a single wrong and seeks a single recovery.� Glenn v. E.I. DuPont de Nemours & Co., 250 S.C. 323, 323, 157 S.E.2d 630, 630 (1967); Floyd v. C.I.T. Corp., 191 S.C. 518, 518, 5 S.E.2d 299, 301 (1939) (�A single cause of action cannot be split either as to relief demanded or grounds on which recovery is sought.�).�
The gravamen of Plaintiffs� Amended Complaint is Defendants� failure to declare dividends. The Amended Complaint alleges:
Plaintiffs do not contend that their premiums should be lower, but rather contend that the failure to pay dividends, while the company performs well in a particular year, while raising the premiums the following year, constitutes oppressive conduct by the Defendants and represents a bad faith breach of Defendants� fiduciary duties owed to Plaintiffs and its members.� Given the financial condition of the company, the Board�s failure to consider and to declare dividends constitutes a breach of fiduciary duty.� The failure to declare a dividend against the backdrop of increasing premiums and the exponential growth of Blue Cross� capital surplus is without business justification and constitutes bad faith.
(Am. Compl. � 5) (emphasis added).� The Amended Complaint further alleges:
The Plaintiffs, individually and on behalf of the class, allege that the Defendants arbitrarily and capriciously breached their fiduciary duty in failing to declare dividends from [the] excess surplus and instead raised premiums in bad faith to grow the excess surplus.
The Plaintiffs, individually and on behalf of the class members, aver that they are entitled to a judicial declaration of dividends from excess surplus, costs, and attorneys� fees.
(Am. Compl. �� 78 and 79) (emphasis added).� To support their direct and derivative causes of action, Plaintiffs allege the same wrongful conduct: (1) Defendants failed to consider whether to pay dividends (Am. Compl. �� 83-84, 91, 96-97, 130); and (2) Defendants failed to declare dividends while continuing to increase premiums and grow Defendant Blue Cross� surplus (Am. Compl. �� 83-84, 91, 96-97, 130). Plaintiffs do not assert any other conduct by Defendants to support their causes of action.�
In addition to the declaration of dividends, at the hearing Plaintiffs indicated to the Court that they also seek equitable remedies such as the replacement of the Board, creation of a new dividend policy, the refund of premiums to members who have paid escalating premiums without receiving the payment of dividends, or the reinstatement of former policyholders who were spiraled out of coverage because Defendants did not declare a dividend despite increasing premiums.� However, the requested equitable remedies are also based on Defendants� failure to declare dividends. In Baron v. Allied Artists Pictures Corp., 337 A.2d 653 (Del. Ch. 1975), the Delaware Chancery Court addressed arguments similar to those Plaintiffs assert in this action. The plaintiff in Baron asserted that the board of directors was in breach of its fiduciary duties by refusing to pay accumulated dividend arrearages.� Id. at 655.� The plaintiff stressed that he was not asking the court �to compel the payment of the dividend arrearages, but only that a new election be held because of the preferred board�s allegedly wrongful refusal to do so.�� Id. at 657.� The Baron court stated that �[d]espite the approach that plaintiff attempts to take, [it] fail[s] to see how his relief can be granted without reaching the question of whether the dividend arrearages should have been paid.�� Id.� The court concluded:
Plaintiff�s attempt to distinguish his action by asserting that he does not seek to compel the payment of the dividend arrearages, but only to return control to the common stockholders, has a hollow ring.� In either case the basic question is whether or not the board has wrongfully refused to pay dividends even if funds did exist which could have been used for such purpose.� The established test for this is whether the board engaged in fraud or grossly abused its discretion.� The mere existence of a legal source from which payment could be made, standing alone, does not prove either.�
Id. at 659.� The Court finds the present situation analogous with that in Baron and agrees with the Baron court�s analysis. Plaintiffs� claims for equitable remedies are ancillary to the ultimate issue in this case which is whether Defendants breached their fiduciary duties by failing to declare dividends. Accordingly, the Court concludes Plaintiffs� sole cause of action is one for breach of fiduciary duty for Defendants� failure to declare dividends.
II. Direct vs. Derivative Suit
In its previous Order, the Court held that, under South Carolina law, a shareholder�s suit to compel directors to declare dividends is the right of the corporation and therefore derivative.� Order at 10-12; Johnson v. Brandon Corp., 221 S.C. 160, 160, 69 S.E.2d 594, 595-96 (1952); Thompson v. Thompson, 214 S.C. 61, 61, 51 S.E.2d 169, 172 (1948); see also Rule 23(b)(1), SCRCP. Contrary to Plaintiffs� arguments, this issue has been addressed by South Carolina courts.[1]
Generally, a cause of action is either derivative or direct. �See Schuster v. Gardner, 127 Cal. App. 4th 305, 312, 25 Cal. Rptr. 3d 468, 473 (Cal. Ct. App. 2005) (�Shareholders may bring two types of actions, a direct action filed by the shareholder . . . or a derivative action . . . �The two actions are mutually exclusive: i.e., the right of action and recovery belongs either to the shareholders (direct action) or to the corporation (derivative action).�) (internal citations omitted).� Only in rare situations have courts held claims to be both derivative and direct in character. For example, courts have found claims to be both derivative and direct in �a species of [a] corporate overpayment claim� where the �public shareholders are harmed, uniquely and individually, to the same extent that the controlling shareholder is (correspondingly) benefited,� Gentile v. Rosette, 906 A.2d 91, 99-100 (Del. 2006), and in the rare scenario �where a controlling shareholder causes the corporate entity to issue more equity to the controlling shareholder at the expense of the minority stockholders,� Dubroff v. Wren Holdings, LLC, 2009 WL 1478697, at *3 (Del. Ch. 2009). The case before the Court does not fall within one of those rare situations.� Because the Court finds that Plaintiffs� sole cause of action is for breach of fiduciary duty for Defendants� failure to declare dividends, Plaintiffs may only recover from Defendants by bringing a derivative suit under Rule 23(b)(1), SCRCP.
III. Rule 23(b), SCRCP.
A. Requirements for Derivative Suits under Rule 23(b)(1), SCRCP
Pursuant to Rule 23(b)(1), SCRCP, a shareholder who initiates a derivative suit on behalf of the corporation �shall� allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority�and the reasons for his failure to obtain the action or for not making the effort.� As a precondition for bringing a derivative action under Rule 23(b)(1), the plaintiff must make a demand on the board which the board refused or allege facts sufficient to show that a demand would have been futile. See Thompson v. Thompson, 214 S.C. 61, 61, 51 S.E.2d 169, 173 (1948); Carolina First Corp. v. Whittle, 343 S.C. 176, 539 S.E.2d 402 (Ct. App. 2000). �A derivative action that does not meet the pleading requirements of Rule 23(b)(1), SCRCP, is properly dismissed pursuant to Rule 12(b)(6). Clearwater Trust v. Bunting, 367 S.C. 340, 351, 626 S.E.2d 334, 339 (2006).
Defendants assert that Plaintiffs have failed to comply with Rule 23(b)(1) because (1) Plaintiffs never made a demand on Defendants and (2) Plaintiffs did not allege demand futility with particularity.� Here, Plaintiffs allege that a demand would have been futile.� See Am. Compl. �� 99-106, 120-27.� In support of their claim that demand should be excused because it would have been futile, Plaintiffs allege: (1) Defendants have been aware of Plaintiffs� complaints since Plaintiffs filed the original Complaint and Defendants have still failed to declare a dividend (Am. Compl. �� 100-02; 121-22); (2) Blue Cross� Directors are not disinterested because the inside, interested director (Defendant Sellers) controls their decisions (Am. Compl. �� 103-06; 124-27); and (3) demand would have been futile because the Directors are not disinterested due to their financial interest in the surplus, which Plaintiffs argued in their Memorandum in Opposition to Defendants� Memorandum in Support of their Motion to Dismiss.�
�At the outset, the Court notes that the �protective principles underlying the pleading requirements of Rule 23(b)(1) have long been recognized as important gatekeepers in South Carolina corporate jurisprudence.� Whittle, 343 S.C. at 185, 539 S.E.2d at 407 (2000).� Our Court of Appeals further underscored the purpose of the pleading requirements of Rule 23(b)(1) by stating the following:
This doctrine, thus abundantly supported by authority, is also well founded in reason� [T]o allow a single stockholder, or one or more of them, to force a corporation or its managing agents into a litigation, which the majority of the body or its officers may think unwise or unnecessary, would place it in the power of a single stockholder who may be dissatisfied with the management of the business of the corporation to involve the corporation in expensive litigation, which might be destructive to the interests of such corporation and would permit a single discontented stockholder to force the majority, who have the right to control, to adopt his views of policy, or incur the expense and hazards of a lawsuit. The business of a corporation must, necessarily, be committed to the management of its officers or agents� and as it would be unreasonable to expect that their views of the proper policy to be adopted in such management can always command the approval of every individual stockholder, it is very manifest that if one or more of the dissatisfied stockholders should be permitted to precipitate the corporation into litigation, whenever the policy of the managing board does not meet with their approval, it would be impossible to conduct the affairs of a corporation with any success.
Id. at 176, n. 6, 539 S.E.2d at 408, n. 6 (quoting Latimer v. Richmond & D.R. Co., 39 S.C. 44, 51-2, 17 S.E.2d 258, 260-1 (1893)); see also Thompson v. Thompson, 214 S.C. 61, 51 S.E.2d 169 (1948); Stahn v. Cawtawba Mills, 53 S.C. 519, 31 S.E.2d 498 (1898). �The demand requirement of Rule 23 balances a shareholder�s right to assert a derivative claim against a board�s duty to decide whether to invest the resources of the corporation in pursuit of the shareholder�s claim of corporate wrong.� Id. at 187, 539 S.E.2d at 408 (citing Blasband v. Rales, 971 F.2d 1034 (3d Cir. 1992) (applying Delaware corporate law)); see also Spiegal v. Buntrock, 571 A.2d 767, 775-6 (Del. 1990).
South Carolina courts have upheld Rule 23 demand requirements. �At a minimum, a demand must identify the alleged wrongdoers, describe the factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief.� Whittle, 343 S.C. at 189, 539 S.E.2d at 409. However, �[d]emand may be excused� if the complaint pleads particularized facts sufficient to create a reasonable doubt that the challenged transaction was the product of a valid exercise of business judgment.� Id. at 195, 539 S.E.2d at 413; see also Rales v. Blasband, 634 A.2d 927, 932-937 (Del. 1993); Aronson v. Lewis, 473 A.2d 805, 812-818 (Del. 1984); White v. Panic, 783 A.2d 543, 551 (Del. 2001); Wesenberg v. Zimmerman and Federated Department Stores, Inc., 2002 WL 1398539 at *3 (D. Minn. 2002) (After the plaintiff pleads particularized facts alleging demand futility, then �[a] demand is considered futile and may be excused�if the particularized facts� create a reasonable doubt that: (1) the directors are disinterested and independent; or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.�); Allison ex rel. General Motors Corp. v. General Motors Corp., 604 F. Supp. 1106, 1112 (D. Del. 1985) (�[T]he shareholder must either make a demand or plead with particularity the exceptional circumstances that demonstrate why a demand would be futile, i.e., why the Board of Directors should not be allowed to decide whether to institute litigation.�). When the plaintiff-shareholder does not make a demand on the directors, then he or she has the �burden of alleging particularized facts to support the assertion that demand would have been futile.�� Id. at 193-94, 539 S.E.2d at 411 (quoting Lewis v. Curtis, 671 F.2d 779, 784 (3d Cir. 1982); Cramer v. Gen. Tel. & Elec. Corp., 582 F.2d 259, 275 (3d Cir. 1978)).� �Particularized allegations� are more than notice pleading, and must include the specific facts that support the conclusions the plaintiff wishes to draw from those facts. Id. at 188, 539 S.E.2d at 409. �See also In re Tyson Foods, Inc., 919 A.2d 563, 581 (Del. Ch. 2007) (Rule 23 �requires that a plaintiff who asserts that demand would be futile must �comply with stringent requirements of factual particularity that differ substantially from the permissive notice pleadings�� (quoting Zimmerman ex. rel. Priceline.com, Inc. v. Braddock, 2002 WL 31926608, at *7 (Del. Ch. Dec. 20, 2002)). In other words, �[v]ague or conclusory allegations do not suffice to upset the presumption of a director�s capacity to consider demand.� Id.
Plaintiffs concede that they never made a demand on the Board. However, Plaintiffs argue that the Court should excuse the demand requirement because �[i]n evaluating the �excuse� allegations in a derivative suit, �Courts have generally been lenient in excusing demand.�� Grant v. Gosnell, 266 S.C. 372, 376, 223 S.E.2d 413, 415 (1976) (quoting DeHaas v. Empire Petroleum Co,, 435 F.2d 1223 (10th Cir. 1970)). In Carolina First Corp. v. Whittle, 343 S.C. 176, 539 S.E.2d 402 (Ct. App. 2000), the court directly addressed the discrepancy created by this language contained in the Grant and DeHaas opinions[2] as follows:
We first address Shareholders� argument that South Carolina follows a �lenient standard� in excusing the demand requirement. Shareholders base this premise upon language contained in Grant v. Gosnell, in which our supreme court recognized that �[i]n evaluating the �excuse� allegations in a derivative suit, �[c]ourts have generally been lenient in excusing demand.� We concluded Shareholders have misconstrued this statement. As stated in Kaufman v. Kansas Gas and Elec. Co.,
[t]his standard does not mean a court will be lenient in finding there are sufficient facts pled to establish futility. Rather, it means that if the court finds sufficient facts are pled, then it will be lenient in excusing demand- a matter within its discretion.
343 S.C. at 192, 539 S.E.2d 402 at 411 (2000) (emphasis added) (internal citations omitted). Therefore, Plaintiffs� reliance on a lenient standard for excusing demand is misplaced, and Plaintiffs must allege demand futility with particularity before the Court will excuse demand.
B. Demand Futility
i. Defendants� Response to the Filing of the Lawsuit
Plaintiffs allege that demand should be excused because Defendants have been aware of Plaintiffs� concerns since they filed their original complaint in 2008 and have not reacted by declaring a dividend in response to the lawsuit. (Am. Compl. �� 100-02). Courts have consistently held that the board�s action or failure to act when responding to the plaintiff�s initiation of litigation should not be considered when determining demand futility. See Kamen v. Kemper Financial Services 500 U.S. 90, 102, n. 6 (1991) (�All states require that a shareholder make a precomplaint demand on the directors.�) (emphasis added); Kaster v. Modification Systems, Inc., 731 F.2d 1014, 1020 n.4 (2d Cir. 1984) (�[T]he directors� failure to act during the pendency of the instant suit� does not �necessarily indicat[e] their hostility to intra-corporate remedies. Business reasons or legal strategy might caution directors not to take remedial action after a suit is brought.�); West Hill Farms, Inc. v. RCO AG Credit Line, Inc., 2008 WL 5341350 at *13 (Cal. Ct. App. 2008) (�[F]utility is to be determined on the basis of circumstances existing before the shareholder files the derivative suit, since that is the time the demand would have been made.�) (emphasis added); Wesenberg, 2002 WL 1398539, at *5 (D. Minn. 2002) (finding plaintiffs� failure to plead futility was �not altered by [their] feeble contention that Defendants� opposition to this action demonstrate[d] that demand would have been futile�). When dismissing the plaintiff�s argument that defendant�s filing of a motion to dismiss �established board hostility and the futility of demand,� the Delaware Supreme Court held that �futility is gauged by the circumstances existing at the commencement of a derivative suit,� not after the plaintiff has initiated the lawsuit. Aronson, 473 A.2d at 810.
The requirement of making a demand prior to serving the complaint goes to the very purpose of Rule 23(b)�s gatekeeping role: �The purposes of requiring a precomplaint demand is to protect the directors� prerogative to take over the litigation or oppose it. Kamen, 500 U.S. at 101 (1991) (emphasis added); see also Speigal v. Bentrock, 571 A.2d 767, 773 (Del. 1990); Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 530 (1984).� As stated above, most courts that have considered the issue have limited review to the board�s conduct prior to the commencement of the lawsuit. Therefore, the Court finds that this allegation is insufficient to support Plaintiffs� claim that demand should be excused.
ii. Board Disinterestedness
Plaintiffs allege in their Amended Complaint that the Directors are not disinterested. However, they fail to allege misconduct specific to any Director other than Director Sellers. Defendants argue that general allegations that the directors are not disinterested are insufficient to excuse demand. The Court agrees.
In Whittle, the plaintiff attempted to demonstrate demand futility by alleging the board was not disinterested.� In rejecting the plaintiffs� argument, the Whittle court held that �more than mere participation in the original decision� is required to allege futility. �343 S.C. 176, 193, 539 S.E.2d 402, 411-2 (Ct. App. 2000) (citing Kaufman v. Kansas Gas and Elec. Co., 634 F. Supp. 1573, 1579 (D. Kan. 1986)). The court indicated that determining disinterestedness depends on whether the directors engaged in self-dealing or otherwise benefitted personally from their decision at the expense of the corporation. Id. at 193-4, 539 S.E.2d at 411-12 (citing Lewis ex rel Nat�l Semiconductor Corp. v. Sporck, 612 F. Supp. 1316, 1322 (N.D. Cal. 1985) (�raising a presumption of bias �depends on whether or not the act benefitted the directors personally at the expense of the corporation��) (quoting In re Kauffman Mut. Fund Actions, 479 F.2d. 257, 265 (1st Cir. 1973)); Vanderbilt v. Geo-Energy Ltd., 590 F. Supp. 999, 1002 (E.D. Pa. 1984); Weiss v. Temporary Inv. Fund, Inc., 516 F. Supp. 665, 672 (D. Del. 1981), aff�d, 692 F.2d 928 (3d. Cir. 1982), vacated on other grounds by 465 U.S. 1001, 104 S. Ct. 989, 79 L. Ed.2d 224 (1984) (interested director is one who engaged in self-dealing or �otherwise stood to obtain any personal advantage�); Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984) (�Directorial interest exists whenever divided loyalties are present, or a director either has received, or is entitled to receive, a personal financial benefit from the challenged transactions which is not equally shared by the stockholders.�); Dockside Ass�n v. Detyens, 294 S.C. 86, 87, 362 S.E.2d 874, 875 (1987); Stahn v. Catawba Mills, 53 S.C. 519, 519, 31 S.E.2d 498, 498-499 (1898) (stating that �refusal need not be alleged, if it be shown that the directors or managing board are themselves the wrong-doers in some alleged breach of trust or fraudulent misappropriation of the corporate property, and have control of a majority of the stock, so as to control corporate action�). �The Whittle court noted that the plaintiff made no allegations that the members of the board other than Director Whittle and another member had any improper motive or participated in any self-dealing or fraud. Id. at 194, 539 S.E.2d at 412. Thus, the court dismissed the complaint, concluding that the �vast majority of the directors received nothing of value�no improper bonus, and were not otherwise involved in self-dealing or fraud,� and were disinterested.� Id.
Here, the Amended Complaint does not contain particularized allegations specific to any Director that he or she received or may receive a personal benefit from the failure to issue dividends, or has engaged in self-dealing or fraud. Because the Amended Complaint contains no allegations that any Director had an improper motive or participated in self-dealing or fraud, the Court must accept as true that the Directors received no personal benefit, as the Court did in Whittle. Additionally, there are no allegations of misconduct specific to any Director, other than CEO Sellers. Therefore, based on the reasoning in Whittle, the Court finds that Plaintiffs� Amended Complaint does not sufficiently allege particularized facts to excuse demand on this basis.
iii. Controlling Director
Plaintiffs allege that the one inside Director, Chairman and CEO Sellers, controls the ten outside Directors. Plaintiffs support this claim by alleging in their Amended Complaint that in a four-year period, the Board voted unanimously in 84 out of 85 substantive votes and �most� of those votes supported proposals made by Sellers. (Am. Compl. �� 66, 105).� Courts have routinely rejected conclusory allegations of board control similar to the claims made by Plaintiffs in their Amended Complaint. For example, the Delaware Supreme Court has held that �[t]here must be coupled with the allegation of control such facts as would demonstrate that through personal or other relationships the directors are beholden to the controlling person.� Aronson, 473 A.2d at 815 (emphasis added); see also Whittle, 343 S.C. 176, 195, 539 S.E.2d 402, 412; Orman v. Cullman, 794 A.2d 5 (Del. Ch. 2002); Ash v. McCall, 2000 WL 1370341, at *7 & n.12 (Del. Ch. Sept. 15, 2000) (�conclusory allegations of domination and control are insufficient to excuse pre-suit demand.�); Caviness v. Evans, 229 F.R.D. 354, 361 (D. Mass. 2005) (A �bald assertion that [the CEO] controlled the Board does not particularize how the directors are �beholden� to [the CEO] or so under [his] influence that their discretion would be sterilized.� (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993)); Grobow v. Perot, 526 A.2d 914, 924 (Del. Ch. 1987), aff�d 539 A.2d 180 (Del. 1988), overruled in part on other grounds, Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) (dismissing complaint for failure to plead demand futility where plaintiffs did not allege �particularized supporting facts� to �show specifically how GM�s �outside� directors, who comprise[d] the majority of the Board and who, therefore, were presumptively independent, were dominated and controlled by the �inside� directors.�).�
To establish that Director Sellers controlled the Board, the Court would have to rely on speculations based solely on the Board�s voting patterns. Courts in other jurisdictions have held allegations of lack of independence based upon voting patterns insufficient to excuse demand upon the board, if not accompanied by allegations as to how the directors� alleged acquiescence benefited them. See Mills v. Esmark, Inc., 544 F. Supp. 1275 (N.D. Ill. 1982); In re Tyson Foods, Inc., 919 A.2d 563 (Del. Ch. 2007). In their Amended Complaint, Plaintiffs do not allege specific facts that Chairman and CEO Sellers himself is self-interested in decisions relating to the declaration and payment of dividends or that his conduct has been improper; nor do Plaintiffs allege facts specific as to any of the other directors. Moreover, the Amended Complaint does not allege that any of the Board�s votes harmed the corporation. For these reasons, the Court finds Plaintiffs� allegation that Sellers controlled the Board insufficient to excuse demand.
iv. Directors� Financial Interest in the Surplus
Although not specifically alleged in the Amended Complaint, Plaintiffs argued in their opposition memorandum and at the hearing that the directors are not disinterested because they have a financial interest in the surplus.� As stated previously, conclusory allegations are not sufficient to excuse demand. In its Order, the Court noted that Plaintiffs allegations that �Defendants utilized the surplus of Blue Cross as personal funds to pay inflated salaries, bonuses, and to purchase and maintain a corporate jet which is used for purposes other than for the benefit of the corporation� and that the aircraft is expensive and costly to maintain did not constitute ultimate facts on which the Court could rely in considering Defendants� motion to dismiss the Complaint. Order at 7-8. Likewise, these allegations are not grounds for excusing demand here. Therefore, because Plaintiffs did not include particularized allegations in their Amended Complaint to support the claim that the Directors have a financial interest in the surplus, the Court finds that demand is not excused on this basis.�
IV. S.C. Code Ann. �� 33-14-300 et seq.
Plaintiffs seek alternative or cumulative remedies under S.C. Code Ann. �� 33-14-300 (1976) et seq. in addition to bringing an action under S.C. Code Ann. �� 33-8-300 (1976) et seq. for breach of fiduciary duty for Defendants� failure to declare dividends. S.C. Code Ann. � 33-14-300 (2) describes the circumstances by which a court may dissolve a corporation when a shareholder initiates the lawsuit.[3] After sufficiently establishing one or more of the grounds for judicial dissolution enumerated in � 33-14-300, a court may grant remedies pursuant to S.C. Code Ann. � 33-14-310. Specifically relevant to the present case, �� 33-14-310(d) lists remedies in actions sought by shareholders.[4] Moreover, �33-14-310(e) states that �[t]he relief authorized in subsection (d) may be granted as an alternative to a decree of dissolution or may be granted whenever the circumstances of the case are such that the relief, but not dissolution, is appropriate.�
A. South Carolina Insurance Statutes & Equitable Relief under �� 33-14-300 and 33-14-310
At the hearing on this motion, Plaintiffs acknowledged that they could not seek and do not seek dissolution or demutualization of Blue Cross. Rather, Plaintiffs request the Court to grant other equitable remedies under � 33-14-310. Defendants argue that because Plaintiffs cannot seek involuntary judicial dissolution of Blue Cross, they may not assert a claim under South Carolina Code Ann. �� 33-14-300 et seq. Particularly, they argue that the Court may grant equitable remedies under � 33-14-310(d) only if a plaintiff first pleads a cause of action under � 33-14-300 and demonstrates a ground for dissolution. Plaintiffs contend that South Carolina insurance statutes do not foreclose the Court�s ability to grant equitable remedies, and therefore, the Court should grant them equitable relief pursuant to � 33-14-310(d).
The Court agrees that South Carolina law does not permit courts to dissolve or demutualize an insurance company involuntarily.� See S.C. Code Ann. �� 38-27-60 and 38-27-390; S.C. Code Ann. �� 38-19-815 and 38-19-825. South Carolina insurance statutes place jurisdiction over the dissolution or demutualization of an insurance company within the province of the South Carolina Department of Insurance. South Carolina Code Ann. � 38-27-60(b) states that a court does not have jurisdiction to hear a claim for dissolution of an insurer, and � 38-27-390 provides the appropriate procedures for demutualization of a mutual insurance company.� However, these statutes conflict with section 38-19-30(A) providing that the Business Corporations Act applies to mutual insurance companies.� The Court need not resolve the conflict between �� 38-27-60(b) and 38-27-390 with � 38-19-30(A) because Plaintiffs have conceded that they seek only equitable remedies under the corporate dissolution statutes.� Neither � 38-27-60(b) nor � 38-27-390 prohibits the application of �� 33-14-300 and 33-14-310 with regard to equitable remedies other than judicial dissolution.�
Defendants argue that in order to invoke the equitable remedies of Section 33-14-310, Plaintiffs must first establish that they are entitled to judicial dissolution.� In Hite v. Thomas Howard Company of Florence, Inc., 305 S.C. 358, 409 S.E.2d 340 (1991), rev�d on other grounds, Huntley v. Young, 319 S.C. 559, 462 S.E.2d 860 (1995), the South Carolina Supreme Court addressed this very issue. In Hite, the defendant argued that the plaintiff could not pursue equitable remedies pursuant to S.C. Code Ann. � 33-14-310(d)(4) because he did not seek dissolution of the corporation.� The Hite court construed the language of S.C. Code Ann. � 33-14-310(e) broadly to allow the plaintiff to pursue alternative equitable relief and to avoid the drastic remedy of dissolution. Id. at 364, 409 S.E.2d at 343-44. The court stated the following:
We construe the broad language of � 33-14-310(e) to allow a shareholder to seek the statutory relief enumerated in subsection (d). The purpose of allowing alternative equitable relief is to avoid the drastic remedy of dissolution. Where, as [in the Hite case], a shareholder alleges a legitimate ground for dissolution enumerated in � 33-14-300, he need not demand dissolution but may seek the alternative relief available under � 33-14-310(d).
Id.; see also Greenwood Supply Co., 295 B.R. 787, 796 (D.S.C. Bankr. 2002) (stating that even if the minority shareholder chooses not to seek the �drastic remedy of dissolving the corporation but only wishes to compel the purchase of their shares at a fair value by the majority shareholders,� they must still invoke S.C. Code Ann. � 33-14-300 and demonstrate a ground for dissolving the corporation.�). South Carolina insurance law precludes courts from dissolving a mutual insurance company, and Plaintiffs have conceded the drastic remedy of dissolution is inappropriate here. However, South Carolina insurance law does not foreclose Plaintiffs� claim for equitable relief under S.C. Code Ann. � 33-14-310 so long as Plaintiffs have established a ground for relief pursuant to S.C. Code Ann. � 33-14-300.
B. Application of S.C. Code Ann. � 33-14-300 to Public Corporations
Defendants contend that S.C. Code Ann. �� 33-14-300 and 33-14-310 only apply to closely held corporations, while Plaintiffs argue that the dissolution statutes apply to all corporations. The plain language of the statutes do not limit private causes of action for dissolution or other equitable relief for oppression or unfairly prejudicial behavior of a corporation or its board of directors to closely held corporations.� Importantly, these statutes do not appear in Chapter 18 of Title 33, the chapter applying solely to close corporations.� �Moreover, South Carolina�s �Statutory Close Corporations Supplement� of Chapter 18 of Title 33 sets forth its own remedies for oppression and unfairly prejudicial conduct in the governance and administration of a closely held corporation.[5]�The South Carolina Reporters� Comments to S.C. Code Ann. � 33-18-400 indicates that this section applies only to statutory close corporations formed under the �Statutory Close Corporations Supplement.�� However, it further states that �Sections 33-21-150 and 33-21-155 of the 1981 South Carolina Business Corporations Act apply to all corporations.�� S.C. Code Ann. �� 33-14-300 and 33-14-310 succeeded �� 33-21-150 and 33-21-155.� The Comments to �� 33-14-300 and 33-14-310 provide that �[a]lthough rare, involuntary dissolution suits against publicly-held corporations have been brought.��
The plain language of these statutes indicates that judicial dissolution may apply to corporations other than close corporations.� See S.C. Code Ann. � 33-14-300 (�The circuit courts may dissolve a corporation�); S.C. Code Ann. � 33-14-310(d) (�In any action filed by a shareholder to dissolve the corporation on the grounds enumerated in Section 33-14-300, the court may make such order or grant such relief, other than dissolution . . .�)� Additionally, the South Carolina Reporters� Comments provide that a closely held corporation also �may have such dissolution provisions under the Statutory Close Corporations Supplement,� implying that equitable remedies pursuant to S.C. Code Ann. � 33-14-310 may apply to all corporations, not just close corporations. Therefore, the Court finds that the equitable remedies are available under � 33-14-310 against all corporations under South Carolina law.
C. Shareholder Oppression Pursuant to S.C. Code Ann. � 33-14-310(d)
Based on the foregoing, the Court will now address Plaintiffs� grounds for claiming equitable relief. S.C. Code Ann. � 33-14-300(2)(ii) states grounds for dissolution or other remedies under S.C. Code Ann. � 33-14-310(d) where �the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, fraudulent, or unfairly prejudicial to either the corporation or to any shareholder.� Plaintiffs argue that they are entitled to equitable relief based on this ground.
Despite the Court�s finding that S.C. Code �� 33-14-300, et seq. apply to all corporations, shareholder oppression claims have traditionally arisen in the courts of South Carolina in the context of closely held corporations and in rare circumstances where a minority shareholder of a large corporation is being oppressed by the holder of the majority of the shares in the company. �See Comments to S.C. Code Ann. �� 33-14-300 and 33-14-310 (�[a]lthough rare, involuntary dissolution suits against publicly-held corporations have been brought.�).
In support of their claims, Plaintiffs rely on the leading case in South Carolina defining shareholder oppression, Kiriakides v. Atlas Food Systems & Services, Inc., 343 S.C. 587, 603, 541 S.E.2d 257, 266 (2001). Kiriakides involved a closely held family corporation in which the minority shareholders were in essence frozen out of the operations of the corporation after the majority shareholder employed fraudulent tactics to control the family-run corporation at the expense of his shareholder siblings. Rather than dissolve the corporation, the supreme court upheld equitable remedies based on the minority shareholders claims pursuant to 33-14-310(d). The Kiriakides court discussed at length the requirements for shareholder oppression, including the development of the current oppression statutes stemming from the increasing abuse of minority shareholders in closely held family corporations. See Kiriakides, 343 S.C. at 597 n. 17, 541 S.E.2d at 263 n. 17. The court noted that the legislature has left the definitions of �oppressive� and �unfairly prejudicial� for the courts to resolve. Id. at 599, 541 S.E.2d at 264. Therefore, the Kiriakides court instructed the lower courts to apply a �case-by-case analysis, supplemented by various factors which may be indicative of oppressive behavior� when analyzing a claim under S.C. Code Ann. � 33-14-300.� Id. at 602, 541 S.E.2d at 266.� Moreover, the court stated that �the terms �oppressive� and �unfairly prejudicial� are elastic terms whose meaning varies with the circumstances presented in a particular case.� Id. at 602, 541 S.E.2d at 266. Based on this language, Plaintiffs argue that the Court should apply the factors enumerated in Kiriakides to the present dispute. The Court disagrees.
Not only did Kiriakides involve a closely held corporation, but the court emphasized that the case-by-case approach �is well-suited to the diversified, fact-specific disputes among shareholders of closely held corporations.� Id. at 602-3, 541 S.E.2d at 266 (emphasis added). Defendant Blue Cross is a large, publicly-regulated mutual insurer with thousands of policy-holders. The Kiriakides court further distinguished the facts of that case from those cases involving public corporations as follows:
In the close corporation, a shareholder faces a potential danger the shareholder of a public corporation generally avoids- the possibility of harm to the fair value of the shareholder�s investment. At its extreme, this harm manifests itself as the classic freeze out where the minority shareholder faces a trapped investment and an indefinite exclusion from participation in business returns. The position of the close corporation shareholder, therefore, is uniquely precarious.
Id. at 604, 541 S.E.2d at 267. Other prevalent �freeze out� tactics �include the termination of a minority shareholder�s employment, the refusal to declare dividends, the removal of a minority shareholder from a position of management, and the siphoning off of corporate earnings through high compensation to the majority shareholder,� which the court noted majority shareholders often combine to oppress the minority shareholders. Id. at 605, 343 S.E.2d at 267. In situations where majority shareholders withhold dividends, they usually employ tactics to force the minority shareholder to sell his or her shares of the corporation for less than their fair value.[6] Id. at 605, 541 S.E.2d at 267. The mere fact that the Board has not declared a dividend in recent years, without more, does not constitute a minority shareholder freeze out situation as envisioned by the court in Kiriakides. Therefore, the Court finds that Plaintiffs have not stated grounds for relief under � 33-14-300 such that they are entitled to remedies under � 33-14-310. See Davis v. Hamm, 300 S.C. 284, 387 S.E.2d 676 (1989); Hite.
D. Pleading Shareholder Oppression
Moreover, Plaintiffs have not alleged sufficient ultimate facts to establish that the Defendants �have acted, are acting, and will act in a manner that is illegal, fraudulent, oppressive, and/or unfairly prejudicial to Plaintiffs and class members . . . .� (Am. Compl. � 91). Plaintiffs� allegations based solely upon Defendants� failure to declare a dividend, without more, are not sufficient to state a cause of action for oppression under S.C. Code Ann. �� 33-14-300 et seq. �See Whitehorn v. Whitehorn Farms, Inc., 346 Mont. 394, 399, 195 P.3d 836, 842 (2008); Baker v. Commercial Bodybuilders, Inc., 264 Or. 614, 630, 507 P.2d 387, 394 (1973). Because the directors� decisions regarding Blue Cross could serve a rational business purpose, their failure to declare a dividend in the present case is not �explicable only on the theory of an oppressive or fraudulent abuse of discretion.�� Gabelli & Co. v. Liggett Group, Inc., 479 A.2d 676, 280 (Del. 1984) (finding that �courts act to compel the declaration of a dividend only upon a demonstration �that the withholding of it is explicable only on the theory of an oppressive or fraudulent abuse of discretion�� (emphasis added) (internal citation omitted)). The mere allegation that the directors decided not to declare a dividend or failed to address the issue, without proof of a sinister motive such as fraud, expectation of personal gain, or bad faith does not constitute ultimate facts sufficient to state a claim for breach of fiduciary duty or oppression.� See e.g. Winters v. First Union Corp., 2001 WL 34000144, at *3-5 (N.C. Super. Ct. July 12, 2001) (dismissing plaintiff�s claim pursuant to a 12(b)(6) motion).
E. Direct vs. Derivative Causes of Action for Shareholder Oppression
Because the Court finds that Plaintiffs have not stated grounds sufficient to bring a claim pursuant to �33-14-300(ii) or met the pleading requirements, the Court need not address at length Defendants� argument that Plaintiffs cannot satisfy the requirement for a direct action.
The Court notes that �[a] shareholder may maintain an individual action only if his loss is separate and distinct from that of the corporation.�� Hite, 305 S.C. at 361, 409 S.E.2d at 342.� Plaintiffs have not alleged that their loss is separate and distinct from the injury allegedly sustained by all policyholders as a result of the failure to declare dividends.� Rather, they allege that as a result of Defendants� breach of fiduciary duty, �Plaintiffs and Class Members have been harmed by paying higher premiums without receiving dividends� and that as a result of Defendants� acts or omissions, �Plaintiffs and Class Members have been actually, specially, incidentally, and consequentially damaged.�� (Am. Compl. �� 85, 92).� Plaintiffs make no distinctions among policyholders and class members in the Amended Complaint.[7]� They purport to represent all policyholders and allege all are similarly situated. Therefore, the Court finds that Plaintiffs failed to allege a separate and distinct loss from that of all policyholders which would be necessary for them to maintain a direct cause of action against Defendants. Thus, their claims are derivative. As discussed herein, Plaintiffs did not follow the required procedure set forth in Rule 23(b), SCRCP.
V. S.C. Code Ann. �� 33-8-300, et seq.
Plaintiffs� remaining cause of action against Defendants is an action for breach of fiduciary duty to compel the declaration of dividends pursuant to S.C. Code Ann. �� 33-8-300 (1976) et seq.[8] When dismissing Plaintiffs� original Complaint, the Court found that Plaintiffs did not alleged particularized facts sufficient to constitute a cause of action for breach of fiduciary duty under South Carolina law. The Court makes the same finding with respect to Plaintiffs� Amended Complaint.
To state a claim for breach of fiduciary duty, Plaintiffs must allege ultimate facts sufficient to support each of the following elements: (1) that there exists a fiduciary relationship between Defendants and Plaintiffs; (2) that Defendants breached a fiduciary duty owed to Plaintiffs; and (3) that Plaintiffs suffered damages as a result of Defendants� breach of their fiduciary duties. See Clearwater Trust v. Bunting, 367 S.C. 340, 626 S.E.2d 334 (2006).
The Court previously held that a fiduciary relationship existed between Defendants and Plaintiffs.� Order at 5.� However, the Court found that accepting as true all well-pleaded factual allegations, Plaintiffs �failed to satisfy the minimum pleading requirements because they did not allege ultimate facts upon which to support their claim that Defendants� actions were wrongful or based upon fraud, oppression, illegality, or similar lack of good faith.�� Order at 8.� Further, the Court found that �Plaintiffs state[d] their allegations in a conclusory way seeking the Court to draw their inferences of bad faith and conclusions of law from the mere facts that (1) Defendant Blue Cross has a large surplus, (2) Defendants continue to increase premiums (although not to an excessive amount), and (3) Defendants have not declared a dividend for the past several years � a dividend to which Plaintiffs have no right until declared by Defendant Directors.�� Id.� Moreover, the Court concluded that �Plaintiffs� allegations that the amount of capital retained by Defendants is excessive and as to the purposes for which the amount of capital retained might be used in the future are conclusory and speculative allegations not based on ultimate facts.�� Id. The Court is not required to regard as true conclusory or speculative allegations when deciding whether to dismiss a claim pursuant to Rule 12(b)(6). See Winters v. First Union Corp., 2001 WL 34000144 at *3 (N.C. Super. Ct. July 12, 2001).
Defendants again seek to dismiss Plaintiffs� cause of action for breach of fiduciary duty, contending Plaintiffs do not allege additional ultimate facts to establish that Defendants have breached their fiduciary duties to Blue Cross� policyholders by failing to distribute a portion of Blue Cross� capital surplus and that this failure to declare a dividend is based upon corrupt motive or bad faith, fraud, self-dealing, oppression, illegality, or other unconscionable conduct or incompetence. The Court agrees. Despite the Court�s previous Order, the Amended Complaint contains many of the same conclusory and speculative allegations which the Court found insufficient in dismissing the original Complaint.� In addition to re-asserting the factual allegations they included in the Complaint, Plaintiffs allege several new facts to support their claim that Defendants acted in bad faith and in violation of their fiduciary duties.� These facts can be summarized as follows: (1) Blue Cross� Directors have never considered whether to declare a dividend (Am. Compl. �� 4, 32, 60, 64, 84, 91, 97, 116, 118, 123); (2) Blue Cross� directors discussed demutualization at a board meeting on August 23, 2005 (Am. Compl. � 60); (3) Blue Cross issued a mission statement on May 16, 2006 (Am. Compl. �� 61, 62); and (4) if Blue Cross� Directors made a decision not to pay dividends, it was not made with all relevant information (Am. Compl. � 65). Plaintiffs also allege new facts relating to the surplus amounts in 2008 and the amount of premiums in comparison to amounts needed to pay claims. In support of their claims, Plaintiffs provided a summary comparing Blue Plans in a number of statistical measures.
These new allegations are not sufficient to state a cause of action for breach of fiduciary duty.� Plaintiffs do not allege any ultimate facts that would establish that the Board violated its fiduciary obligations towards the policyholders, except for the general conclusion that the Board should have declared a dividend from the excessive surplus. See Am. Compl. � 65. In its previous Order, the Court held this general allegation to be insufficient. Order at 8; See Winters, at *3; Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) (pleadings must meet �stringent requirements of factual particularity� to overcome business judgment rule).� Plaintiffs make no allegation as to what specifically the Board did not consider in making decisions regarding the financial condition of Blue Cross, what information it should have but did not when making this decision, or ultimate facts to support the allegation that the Board did not have all relevant information in making the decision.�
Plaintiffs rely on the Court�s previous conclusion that �Defendants are obligated to consider from time to time whether dividends should be declared and must exercise their authority in compliance with the required standard of care.� Order at 10 (emphasis added). However this reliance is misguided. In its previous Order, the Court also stated the following: �Thus, finding that the failure to declare dividends could possibly support a cause of action for breach of fiduciary duty, the Court reviews Plaintiffs� allegations to determine whether they have alleged a sufficient factual basis to support such breach.� Order at 6 (emphasis added). Therefore, a plaintiff must do more than merely state that the directors have failed to consider declaring a dividend.� See Churella v. Pioneer State Mut. Ins. Co., 258 Mich. App. 260, 671 N.W.2d 125 (2003).�
In Churella v. Pioneer State Mut. Ins. Co., 258 Mich. App. 260, 671 N.W.2d 125 (2003), the plaintiffs brought a claim alleging breach of fiduciary duty because the board of directors of a mutual insurer had failed to consider issuing a dividend. As in Churella, Plaintiffs here �claim that the directors are not protected by the business judgment rule because they failed to exercise their discretion when they failed to consider whether to distribute the excess surplus.� Id. at 271, 671 N.W.2d at 131.
In the present case, Plaintiffs have not alleged facts which would establish that Defendants� engaged in fraudulent conduct in addition to their general allegation that Defendants� have not considered whether to declare a dividend. On this point, the Court finds the following language from Churella persuasive:
It is a well-recognized principle of law that the directors of a corporation, and they alone, have the power to declare a dividend� and determine its amount. Courts of equity will not interfere in the management of the directors unless it is clearly made to appear that they are guilty of fraud or misappropriation of the corporate funds, or refuse to declare a dividend when the corporation has a surplus of net profits which it can, without detriment to its business, divide among its stockholders, and when a refusal to do so would amount to such an abuse of discretion as would constitute a fraud, or breach of that good faith which they are bound to exercise towards the stockholders.
Id. at 270-71, 671 N.W.2d at 131 (quoting In re Butterfield Estate, 418 Mich. 241, 254-255, 341 N.W.2d 453 (1983)). When dismissing Plaintiffs� complaint, the Churella court held that:
[B]ecause plaintiffs did not explain how the directors� failure to consider a distribution constitutes fraud or bad faith dealings, and because plaintiffs have not cited any cases indicating that a failure to declare a dividend, without more, constitutes an abuse of business discretion, we conclude that plaintiffs have not sufficiently pleaded facts that would overcome the business judgment rule.� Conclusory statements, unsupported by factual allegations, are insufficient to state a cause of action.
Id. at 272, 671 N.W.2d at 132 (emphasis added).� As in Churella, here Plaintiffs have failed to allege any facts to establish the alleged failure to consider whether to declare a dividend was due to fraud, self-dealing, or other wrongful conduct on behalf of Defendants. Moreover the Court notes, as it did in its previous Order, that �Plaintiffs do not allege a right or entitlement to a dividend pursuant to Defendant Blue Cross� bylaws, charters, or Plaintiffs� individual contacts with Defendant Blue Cross,� Order at 6; nor do Plaintiffs allege a statutory right to a dividend. Absent such a requirement, the mere allegation that Defendants failed to consider declaring a dividend, without more, is insufficient to establish breach of fiduciary duty sufficient to overcome the business judgment rule.
Therefore, accepting as true all well-pleaded factual allegations in the Amended Complaint and not accepting inferences drawn by Plaintiffs from those facts or conclusions of law, the Court finds that Plaintiffs have failed to allege ultimate facts to support their claim that Defendants� actions breached their fiduciary duties to the policyholders or to Blue Cross under S.C. Code Ann. � 33-8-300.�
CONCLUSION
As set forth herein, IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that Defendants� Motion to Dismiss Plaintiffs� Verified First Amended Class Action Complaint IS GRANTED and Plaintiffs� Verified First Amended Class Action Complaint is DISMISSED with PREJUDICE as to all causes of action.
IT IS SO ORDERED.
__________________________________ |
Dated at Columbia, S.C.,
this 8th day of January, 2010.
[1] This rule has not been challenged and continues to remain good law in South Carolina.� Jurisdictions other than South Carolina also continue to hold that an action to compel the declaration of dividends is derivative.� U.S. v. Byrum, 408 U.S. 125, 141-42 (1972) (applying Ohio law); Abbott v. McNeff, 171 F. Supp. 2d 935, 941-42 (D. Minn. 2001) (applying Minnesota law); In re Goerler, 227 A.D.2d 479 (N.Y. App. Div. 1996) (applying New York law); Cleaver v. Cleaver, 935 S.W.2d 491, 495-96 (Tex. App. 1996) (applying Texas law); Bernhard v. Buttner, 1995 WL 656772, at * 4-5 (Conn. Super. Ct. Oct. 30, 1995) (applying New York law); Boykin v. First Ala. Bank of Birmingham, 384 So. 2d 10, 12 (Ala. 1980) (applying Alabama law).�
[2] Additionally, the Court notes that unlike the factual situation in the present case, the Grant and DeHaas cases involved corporations in which the controlling directors also owned or controlled a majority of the corporation�s stock.
[3] A court may dissolve a corporation if the shareholder establishes that (i) the directors are deadlocked causing �irreparable harm� to the corporation; (ii) the directors are acting in an �illegal, fraudulent, oppressive, or unfairly prejudicial� manner towards the shareholders or the corporation; (iii) the shareholders are deadlocked and have not elected directors within two annual shareholder meetings; (iv) waste; (v) the corporation has �abandoned its business� but has failed to dissolve or wind up; or (vi) the corporation�s period of existence as stated in the article has expired.
[4] A court may: (1) cancel or alter provisions of the corporation�s articles of incorporation or bylaws; (2) terminate, change or enjoin acts or resolutions of the corporation; (3) instruct the corporation, shareholders, directors, officers, or other parties to the action to do an act or refrain from acting; or (4) order the corporation or other shareholders to purchase the complaining shareholders shares at their fair value.
[5] Specifically, S.C. Code Ann. � 33-18-400 permits a shareholder of a statutory close corporation to petition a circuit court for an accounting, payment of dividends, removal from office of an officer or director, dissolution, or purchase of shares for value if �the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, fraudulent, or unfairly prejudicial to the petitioner, whether in his capacity as a shareholder, director, or officer of the corporation.�� S.C. Code Ann. � 33-18-400.
[6] �Holders of insurance policies and shareholders have different expectations when taking ownership interests. Holders of insurance policies expect that they will receive insurance coverage, whereas the expectations of shareholders are investment-related. See Churella v. Pioneer State Mut. Ins. Co., 258 Mich. App. 260, 271, 671 N.W.2d 125, 131 (2003). Therefore, the refusal to declare dividends as a freeze-out tactic in the context of a closely held corporation is not analogous to the failure of the board of a mutual insurance company to declare a dividend without additional allegations of abuse by the directors.
[7] Plaintiffs characterize their Amended Complaint as a class action under Rule 23 of the South Carolina Rules of Civil Procedure with the putative class defined as follows: �All current members and policyholders of Blue Cross health plans.� (Am. Compl. � 67).
[8] S.C. Code Ann. � 33-8-300(a) provides in pertinent part: �A director shall discharge his duties as a director, including his duties as a member of a committee:(1) in good faith; (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner he reasonably believes to be in the best interests of the corporation and its shareholders.� Furthermore, S.C. Code Ann. � 33-8-300(b) states that �[i]n discharging his duties a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:(1) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented; (2) legal counsel, public accountants, or other persons as to matters the director reasonably believes are within the person's professional or expert competence; or (3) a committee of the board of directors of which he is not a member if the director reasonably believes the committee merits confidence.