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In re National Research Corporation Shareholder Litigation

United States District Court, D. Nebraska

October 9, 2018



          John M. Gerrard United States District Judge

         This matter comes before the Court on the motion of National Research Corporation (NRC), its CEO Michael D. Hays, and members of its Board of Directors Joann M. Martin, Barbara J. Mowry, John N. Nunnelly, and Donald M Berwick, (hereinafter the Directors), to dismiss the plaintiffs' suit against them in its entirety pursuant to Fed.R.Civ.P. 12(b)(6), or in the alternative, to dismiss the plaintiffs' federal claim and stay the plaintiffs' state claims in favor of a parallel Wisconsin case docketed in Milwaukee County Circuit Court. The Court will grant their motion and dismiss the case in its entirety.


         A complaint must set forth a short and plain statement of the claim showing that the pleader is entitled to relief. Fed.R.Civ.P. 8(a)(2). This standard does not require detailed factual allegations, but it demands more than an unadorned accusation. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The complaint need not contain detailed factual allegations, but must provide more than labels and conclusions; and a formulaic recitation of the elements of a cause of action will not suffice. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). For the purposes of a motion to dismiss a court must take all of the factual allegations in the complaint as true, but is not bound to accept as true a legal conclusion couched as a factual allegation. Id. [1]

         A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Iqbal, 556 U.S. at 678. Where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but has not shown-that the pleader is entitled to relief. Id. at 679.


         Anthony Gennaro commenced this matter as a "Verified Shareholder Class Action" complaint, filed on November 15, 2017, naming NRC, Hays, and the individual board members as defendants. Filing 1. On November 30, the Court ordered Gennaro's complaint consolidated with a complaint filed by James Gerson (4:17-CV-3152, filing 1). Filing 29. On March 23, 2018, Gennaro and Gerson filed their Verified Consolidated Shareholder Class Action and Derivative Complaint, which is now the operative complaint and the object of the defendants' motions to dismiss. Filing 43.

         Hays founded NRC in 1981. Filing 43 at 8. In 1997, Hays reincorporated NRC in Wisconsin. Filing 43 at 8. Notwithstanding its reincorporation, NRC's headquarters remained in Nebraska. Filing 43 at 8. In 2013, NRC engaged in a recapitalization that resulted in two classes of stock-Class A Stock and Class B Stock-with different voting and dividend rights. Filing 43 at 9. Holders of Class B Stock received one vote per share, whereas holders of Class A Stock received 1/100th of a vote per share. Filing 43 at 9. Also, holders of Class B Stock had the right to receive six times the dividend paid on a share of Class A Stock. Filing 43 at 9.

         Hays is NRC's controlling shareholder. Filing 43 at 10. In 2017, Hays held approximately 26 percent of the outstanding shares of Class A Stock and approximately 56 percent of the outstanding shares of Class B Stock. Filing 43 at 10. Because of his stock holdings, Hays held approximately 54.1 percent of the total voting power. The Michael and Karen Hays Grandchildren's Trust was established by Hays and his wife and held approximately 28 percent of the outstanding Class A Stock and approximately 3.5 percent of the outstanding shares of Class B Stock. Combined, Hays and the Trust controlled approximately 54 percent of the Class A Stock voting power, and 59.5 percent of the Class B Stock voting power. Filing 43 at 10.

         Sometime before August 2017, Hays and the Board began formulating a plan to repurchase and retire all outstanding Class B Stock, except the Class B Stock owned by Hays. Filing 43 at 10. The complaint refers to this as the "Hays Transaction." Filing 43 at 10. The plaintiffs assert that Hays and his family were the intended beneficiaries of the Hays Transaction. Filing 43 at 11. According to the plaintiffs, when the Hays Transaction was announced, Hays held a 40.8 percent "economic stake" in NRC and controlled 54.1 percent of NRC's voting power. Filing 43 at 11-12. Had the Hays Transaction come about, Hays would have held a 51.9 percent economic interest in NRC and controlled 92.3 percent of its voting power. Filing 43 at 12.

         However, the Hays Transaction was never implemented. Filing 43 at 27. The plaintiffs credit their initial complaints and motions for preliminary injunctive relief, filed between November 15 and 17, [2] with the NRC Board's announcement on December 13 that it was terminating the proposed Hays Transaction. Filing 43 at 26-27. The plaintiffs allege, at length, all sorts of damage and harm to NRC and its minority shareholders that they say would have occurred had the Hays Transaction taken effect. Filing 43 at 10-26. In addition, the plaintiffs allege that NRC suffered damage notwithstanding the Board's abandonment of the Hays Transaction. In this regard, the plaintiffs claim that NRC "incurred over $1 million in unnecessary expenses, including over $500, 000 of Hays's personal expenses that the Board decided to reimburse." Filing 43 at 27.

         Although the Board abandoned the Hays Transaction, the Board did not abandon the concept that the Class B Shares needed to be retired. The Board developed what the plaintiffs refer to as the "Replacement Transaction" to address nearly all the criticisms the plaintiffs raised regarding the Hays Transaction. Filing 43 at 27-28. For example, in the Replacement Transaction, Hays' and his family's collective voting power will not increase. Filing 43 at 28. In addition, all Class B Stock shares, including Hays' Class B Stock holdings, would be repurchased for one share of Class A Stock and a cash payment of $19.59 per share of Class B Stock. Filing 43 at 27-28.

         The Board elected to solicit minority shareholder approval of the Replacement Transaction even though Hays and his family constituted a majority of the voting power. Filing 43 at 28. The plaintiffs allege that the proxy issued by the Board to solicit the minority shareholders' approval failed to disclose material information because it did not include NRC management's cash flow projections. Filing 43 at 28. The plaintiffs also allege that the proxy appeared to mislead shareholders regarding reimbursement of Hays' "personal expenses" by reporting that the expenses were for legal, advisory, and financial modeling fees that would have been borne directly by NRC had Hays not advanced the costs. Filing 43 at 28.


         1. Plaintiffs' Federal Claims

         The plaintiffs allege that NRC and its Directors violated Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), and Rule 14(a)-9, 17 C.F.R. § 240.14a-(9). Filing 43 at 33. Section 14(a) was "intended to promote 'the free exercise of the voting rights of stockholders' by ensuring that proxies would be solicited with 'explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.'" Mills v. Electric ...

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