Earlier today the Kentucky
Supreme Court issued its long-awaited decision in the case now styled Baptist Physicians Lexington, Inc. v. The
New Lexington Clinic, P.S.C., which case had previously been styled The New Lexington Clinic, P.S.C. v. Cooper.
Therein, the Kentucky Supreme Court provided useful guidance with
respect to when the statutory formula for a director’s fiduciary duties, as
well as the limits upon culpability, set forth in KRS § 271B.8-300 are and are
not applicable. Baptist Physicians Lexington, Inc. v. The New Lexington Clinic, P.S.C.,
2012-SC-000242-DG, 2013 WL 6700209 (Ky. Dec.
19, 2013). This opinion, which is
designated for publication, was a unanimous decision of the Supreme Court. The author of the opinion was Justice
Abramson.
Drs. Cooper, McKinney and
Winkley, each a shareholder in and director of The New Lexington Clinic, P.S.C.
(the “NLC”), were recruited to join a competing healthcare provider. After agreeing to join the new venture,
however, they did not immediately tender their resignations, but remained for a
significant period of time directors able to access the financial information
of NLC, and it is asserted, provide that information to their new
employer. Also, after having agreed to
leave NLC, but before giving notice of doing so, some or all of the physicians
solicited other employees of NLC to ultimately depart with them. After those departures, NLC brought suit
against the physicians alleging breach of fiduciary duties, but without making
any reference to KRS § 271B.8-300.
Rather, they relied upon common law fiduciary duties owed a corporation,
duties previously accepted to be part of Kentucky law under the Aero Drapery and Steelvest decisions. The
trial court granted summary judgment, primarily (at least for these purposes)
on the basis that the complaint failed to cite and therefore state a claim
under KRS § 271B.8-300. That decision
was affirmed by the Court of Appeals.
The Supreme Court granted
discretionary review and heard oral arguments on March 14 of this year. As I here summarized on March 19, on behalf
of the Defendants, it was argued that:
·
KRS § 271B.8-300 sets
forth the only fiduciary duties of a director of a Kentucky business
corporation and also specifics the threshold of culpability for asserting
damages against a director for breach thereof; and
·
There is no causal
linkage between any violation that may have occurred and the damages now
claimed by the Plaintiff.
In
contrast, the Plaintiffs argued that:
·
Under the modern Rules
of Civil Procedure, it is not necessary to cite the statutory basis of the
claim;
·
Even if KRS §
271B.8-300 is the exclusive statement of a director’s fiduciary duty and the
limits on a monetary claim for breach of those duties, the limits do not apply
when the violation of duty does not take place in the course of discharging the
duties of a director.
Essentially,
the Supreme Court has here agreed with the arguments of The New Lexington
Clinic stating:
Contrary to the lower courts’
conclusions, KRS 271B.8-300 does not abrogate common law fiduciary duty claims
against directors in Kentucky but essentially codifies a standard of conduct
and a standard of liability for directors that is derived from business
judgment rule principles. As it
explicitly states, the statute applies to “any action taken as a director” and
“any failure to take any action as a director.”
Preparing for and participating in a competing venture does not
constitute the internal corporate governance conduct addressed in KRS
271B.8-300 and consequently the statute does not apply. Slip op. at 2.
With respect to the standards
applicable to a corporate director in the discharge of their obligations on
behalf of the corporation, the Court held, inter
alia, that the statutory formula is the exclusive standard, writing:
[KRS 271B.8-300] codifies both the
standard of conduct applicable to a director and the circumstances in which the
director can be held liable for monetary damages or subjected injunctive
relief. Significantly, subsection (5)
limits a corporate director’s liability but it does so only in the context of “any action taken as a director or any
failure to take any action as a director.”
In short, when acting in his or her directorial capacity, a director
must comply with the statutory standard of conduct. If he fails to do so, injunctive relief is
available and if the conduct at issue is willful, misconduct or reflects wanton
or reckless disregard for the corporation and its shareholders, then monetary
damages may also be recovered.
Looking at the other side of
the coin, the Court wrote:
But just as clearly, [271B.8-300(5)]
does not purport to address circumstances where a director is acting, not in
his capacity as a director, but in his own individual interest with respect to
a matter beyond the conduct of the corporation’s business, even if that
extra-corporate matter may have some impact on the corporation. If a director is acting on his own accord in
anticipation of competing with the corporation which he still serves, that
conduct implicates the director’s common law fiduciary duties, not KRS
271B.8-300.
I do have one small quibble with
this decision based upon a small apparent conflict with the Supreme Court’s
decision in Ballard v. 1400 Willow
(Nov. 21, 2013). Specifically, the
decision rendered in Baptist Physicians
Lexington provides:
Kentucky Courts have long recognized
that corporate directors owe fiduciary duties to the corporation and its
shareholders, duties emanating from common law.
Slip op. at 7, 2013 WL 6700209, *4.
In support thereof, there was
cited the decision rendered in Urban J.
Alexander Co. v. Trinkle, 224 S.W.2d 923, 926 (1949). My concern is that the statement that
corporate directors owe fiduciary duties to the “shareholders” may create an
undesirable conflict with the decision rendered in Ballard v. 1400 Willow wherein the Kentucky Supreme Court
interpreted the provision of the Nonprofit Corporation Act that is identical to
KRS § 271B.8-300(1) to the effect that the director’s fiduciary duties are owed
to the corporate entity and not to the individual shareholders. Ballard
v. 1400 Willow, slip op. at 20, 21.
That said, accepting that the statement in Baptist Physicians Lexington as to who is the beneficiary of the board’s
fiduciary duty is dicta, while it is Ballard
v. 1400 Willow a core component of the case as holding, the apparent
conflict may be avoided. That being the
case, there is preserved the distinction between the two decisions, namely Ballard v. 1400 Willow addressing to
whom the director’s fiduciary duties are owed while Baptist Physicians Lexington addresses when the statutory
definition of the fiduciary duties owed and the application of the limitations
on culpability for breach thereof are applicable.
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