United States District Court, D. Nebraska
In re NATIONAL RESEARCH CORPORATION Shareholder Litigation.
MEMORANDUM AND ORDER
M. Gerrard United States District Judge
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.
STANDARD OF REVIEW
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. 
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.
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.
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
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.
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.
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,  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.
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.
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.
Plaintiffs' Federal Claims
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