ATTORNEYS FOR APPELLANT
Michael A. Wilkins
Brian J. Paul
ATTORNEYS FOR APPELLEE
Joseph H. Yeager, Jr.
Scott D. Himsel
(a) Directors may be removed in any manner provided in the articles of
incorporation. In addition, the shareholders or directors may remove one (1) or
more directors with or without cause unless the articles of incorporation provide otherwise.
(b) If a director is elected by a voting group of shareholders, only
the shareholders of that voting group may participate in the vote to remove
(c) If cumulative voting is authorized, a director may not be removed if
the number of votes sufficient to elect the director under cumulative voting is
voted against the directors removal. If cumulative voting is not authorized, a
director may be removed only if the number of votes cast to remove
the director exceeds the number of votes cast not to remove the director.
(d) A director may be removed by the shareholders, if they are otherwise
authorized to do so, only at a meeting called for the purpose of
removing the director and the meeting notice must state that the purpose, or
one (1) of the purposes, of the meeting is removal of the director.
A. Removal of Directors Elected by Voting Groups
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 Murrays 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 Murrays 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. See footnote 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), affd, 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 Assemblys 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. See footnote 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 shareholders 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. See footnote 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 members 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 groups 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.
B. Removal of Directors Elected Generally by the Shareholders
Murray was most recently elected to the Conseco Board of Directors at the annual meeting of shareholders held in June 2000. Like most directors of publicly held companies, Murray was elected along with the rest of managements slate by a vote of over ninety percent of the shareholders eligible to vote for directors. In Consecos case, those shareholders were the holders of common stock listed on the New York Stock Exchange and also holders of preferred stock. All voting shares voted as one, except that each preferred share carried voting weight different from the one vote accorded each common share. Although there are no directors elected by any subset of Consecos outstanding securities, Murray contends that the holders of the common and preferred stock collectively form a voting group that elected him. Because of our conclusion in Part I.A. that voting group representatives are protected from removal without cause by the directors, Murray argues that the shareholders are the only body that can remove him.
In support of his position Murray cites the last sentence of the statutory definition of voting group, which says that all shares entitled . . . to vote generally on the matter are for that purpose a single voting group. I.C. § 23-1-20-28. From this, Murray reasons that the shareholders as a body are a voting group who elected him, and, by reason of subsection 8(b), only the shareholders are authorized to remove him. There is a logic to Murrays position. This definition of voting group comes from section 1.40(26) of the MBCA. The Commentary to that section of the MBCA explains, as one would expect, that shares entitled to vote generally means shares that have a vote on a matter without any right to be counted separately. Thus all of Consecos voting shares are in this category and constitute a single voting group for various purposes under the Act.
Despite the statutory definition of voting group in both the MBCA and in the Indiana BCL, we think this definition does not make Consecos directors elected by a voting group as the term is used in subsection 8(b). We concluded in Part I.A. that subsection 8(b) operates as a limitation on the ability of the board to remove one of its members who was elected by a voting group. However, we think elected by a voting group, in subsection 8(b) refers to groups that elect separate directors, and does not apply to directors elected by a voting group consisting of all voting shares voting generally.
First, subsection 8(b) is meaningless unless there are separate groups who elect separate directors. It makes no sense to speak of participation only by the shareholders in the group if there is only one group to consider. Second, the reason to find subsection 8(a) to prohibit removal of a director elected by a separate group of shareholders has no application to a director elected by all shareholders. We reach the conclusion that subsection 8(b) has the effect of precluding removal by the board, not by strict reading of the language of the subsection, but by attempting to fit subsection 8(a) into the logic of this comprehensive and detailed statute. Although the reading given subsection 8(b) by the Court of Appeals to Indianas version is certainly consistent with the literal language of that section, it would frustrate the elevated status that section 4 clearly gives to board representation for less than majority shareholdings who are entitled to elect directors as a separate voting group. For that reason, we concluded that subsection 8(b), carried over from the MBCA that assumed only shareholders could accomplish a removal, implies a prohibition on board removal of a director elected by a voting group. That rationale has no application to a director elected by all of the shareholders.
Third, Murrays contention relies on the statutory definition of voting group to include a block of all shareholders if all are entitled to vote. Indianas BCL is based on the MBCA, but layers onto that structure a number of unique provisions, of which the boards power to remove a director is one. We think there is an obvious purpose to treating all the shareholders as a voting group, as that term is used in the MBCA and in other parts of the Indiana BCL. This definitional provision is necessary to make many provisions in the statute work properly in the case of a corporation that does not vote by class. For example, under Indiana Code section 23-1-30-1 voting lists at shareholder meetings are to be arranged within each voting group by class, and section 23-1-38-3 requires that an amendment to the articles be approved by a majority of any voting group whose dissenters rights are affected. These provisions, and several others, obviously are intended to apply not only to a separate voting group that has special voting rights, but also to the shareholders as a whole in the much more common situation where, as in Consecos case, all shareholders vote together.
In sum, although we do not agree that subsection (b) permits removal by the directors if the director was elected by a separate voting group, we nevertheless agree with the Court of Appeals conclusion that the Board had the power to remove Murray. Concern for preserving the rights of a voting group has no application to Conseco. There is no separate group that elected Murray, and the implied protection subsection 8(b) gives to separate groups does not apply to him. Although we are mindful of the maxim that the language of the statute is the first and often the last resort in interpreting legislation, it is also important to bear in mind how statutory provisions interact. See Milk Control Bd. v. Pursifull, 219 Ind. 396, 402, 38 N.E.2d 246, 249 (1941) (In the interpretation of a part of a statute we must consider the act as a whole and its general purpose.). In a complex and interrelated statute such as the BCL it is not unusual to find situations where a definition designed to accomplish one purpose has unintended consequences if applied literally across the board. We find an implied limitation on removal despite its absence from the literal language of section 8 to accommodate the needs of section 4. That concern goes only as far as the purpose of section 4 takes it. Limiting the boards power to remove directors elected by separate voting groups preserves the rights given under section 4 to minorities and fifty percent shareholder blocks to representation on the board. But that does not require immunizing all directors of all corporations in the face of the clear directive that the board has the power to remove one of its members. In both cases, we construe the specific provision (board power to remove and specific endorsement of voting group representation) to prevail over the general statutory definition. As a result the Board had authority under the statute to remove a member elected by the shareholders generally, as Murray was.
DICKSON, SULLIVAN, and RUCKER, JJ., concur.
SHEPARD, C.J., not participating.
Election of directors by classes of shares. If the articles of incorporation
authorize dividing the shares into classes, the articles may also authorize the election
of all or a specified number of directors by the holders of one
(1) or more authorized classes of shares. Each class (or classes) of
shares entitled to elect one (1) or more directors is a separate voting
group for purposes of the election of directors.
Voting group is defined by Indiana Code section 23-1-20-28 as:
One (1) or more classes or series that under the articles of incorporation or this article are entitled to vote and be counted together collectively on a matter at a meeting of shareholders. All shares entitled by the articles of incorporation or this article to vote generally on the matter are for that purpose a single voting group.