Dentists who are members of Delta Dental of Kansas (DDKS) joined with the United Dentists of Kansas (UDK) to file a petition of legal action against DDKS company officers and directors on February 8, 2021, in Kansas District Court of Sedgwick County. DDKS is structured as a 501(c)(4) non-profit company, though it also operates a for-profit insurance agency known as Surency.
In Schedule O of its 2018 tax return, DDKS disclosed that “Nancy Zogelman, Nancy Umholtz, Michael Herbert, Michael Ellis, Dean Newton, Dr. Alan Marcotte, and Mark Phillips have a business relationship with each other. They all serve as either officers or directors of Surency Life & Health Insurance Company, a related for-profit company. The officers and directors do not have stock ownership interest in the related for-profit company.”
The Players
Zogelman, an attorney and vice chair at DDKS, is specifically named as a defendant in the current legal action. She also formerly served on the board of directors at Surency.
Newton, a corporate attorney serving from 2000 to 2005 as a Kansas state legislator, worked in a leadership capacity for DDKS initially in 2005. In April 2020, he became CEO of both DDKS and Surency.
Ruth Teichman, a former member of the Kansas State Senate and former chair of its Financial Services & Insurance Committee, was also specifically named in the lawsuit. Teichman is on the DDKS Board of Directors.
Obviously, DDKS has strong historical ties between its officers and the Kansas State Legislature. Substantial influence with state government is implied by their officer’s former positions.
The members of DDKS who are bringing forth the legal action, however, allege that the company’s management unlawfully amended its bylaws.
The Plaintiffs’ Side of the Story
The plaintiffs presented a petition signed by 50 DDKS members asking for a meeting with the board of directors to discuss possible member-initiated amendments to the company’s bylaws in the fall of 2020, according to the complaint.
The request was supposed to be considered during a regular board meeting on December 11, 2020, the complaint continued. Instead, the directors voted six to four to amend the company’s articles and bylaws, rather than entertain the plaintiffs’ request, the complaint continued.
The four dentist directors whom the members elected to the board voted “no” on amending the company’s articles and bylaws. Before the meeting, the complaint said, these directors had no notice of the proposed amendments, nor were the amendments presented to DDKS’s membership for approval.
“In fact, the Board purported to make the amendments effective when filing them,” the complaint said.
“The amendments are corporate governance matters that influence the balance of power within the Company, where the greatest tension between managers and the members resides. The amendments seek to disenfranchise members by reducing their participation and voting power,” the complaint said.
“Specifically, the amended Articles eliminate the provision giving members the same voting powers as stockholders in a stock corporation. They suspend the former checks and balances inherent in the process for having the membership vote on Board-adopted amendments to the Articles. They strip the members of their exclusive and vested power to amend the Bylaws. They place an all-but-impassable gate for the membership’s consideration of member-proposed Bylaw amendments that are opposed by the Board,” it said.
Further, the amended articles “entrench the current directors by extending their terms of office from four years to six years and giving each director class carte blanche to further amend the Bylaws to change the terms of their office and tenure. They potentially disqualify the four directors who are elected by the members from voting on matters that affect their personal interests as dentists who have participating agreements with the Company,” the complaint said.
The plaintiffs allege that the amendments were drafted to insulate the defendants from DDKS members’ scrutiny by stripping members of vested voting power and reallocating power in the company in violation of the corporation’s code and the law.
“Collectively, the amendments strike a critical blow to corporate democracy,” the complaint said.
The plaintiffs also asserted that the defendants’ conduct constituted a clear abuse of control as well as a breach of fiduciary duties for which they should be held liable to the plaintiffs derivatively on behalf of the company.
In essence, the plaintiffs allege that the current directors, officers, and management at DDKS have unlawfully wrested control of the company away from the member dentists.
DDKS’s Side of the Story
A spokesperson of DDKS, however, offers a different perspective.
“We’ve worked very hard over the past two years to work with this small group of dentists, and we’re disappointed by their lawsuit,” said Sarah E. Patterson, chief innovation and marketing officer at DDKS.
“We are very dedicated to helping dentists in Kansas. The DDKS Board of Directors unanimously approved nearly $19 million in dentist programs, including more than $8 million in dentist COVID-19 relief in 2020, approved a 2021 fee increase, and supported more than 20 innovations to help dentists since 2020,” Patterson said.
On February 10, 2021, DDKS released a statement noting that it is a 501(c)(4) corporation organized under federal and state law to benefit the people of Kansas and help the public. The company also said that it takes its responsibility to help state residents very seriously and focus on improving oral health through affordable and quality dental care, reduced healthcare costs, and exceptional service.
“As a result, DDKS is a trusted and experienced dental carrier, achieving a 98% satisfaction rate among Kansans and a 99% satisfaction rate among Kansas employers,” DDKS said.
“Despite successful work on behalf of Kansans, a very small group of dentists affiliated with United Dentists of Kansas believes that as few as six dentists (0.4% of DDKS dentists; 0.002% of the Kansas population) govern DDKS through bylaws changes, interfere with DDKS operations, and change how insurance is managed for Kansans with no Board of Directors oversight,” DDKS continued.
“This argument is directly contrary to DDKS’s enabling legislation, the Kansas Corporate Code, standard corporate governance principles, and decades of case law supporting the long-standing principle that the Board of Directors has the sole authority to manage DDKS’s business and affairs,” DDKS said.
“Under Kansas law, bylaws are meant for procedural matters like dentist quorum and notice. Bylaws do not give anyone authority to govern a company or interfere with business operations. Even stockholders of public companies—people who have actually purchased stock and own a company—cannot bring forth proposals that interfere with a company’s ordinary business operations, which these dentists are attempting to do,” DDKS said.
“Additionally, this small group of dentists has attempted to leverage these provisions to repeatedly propose illegal and harmful amendments over a two-year period that target only DDKS and no other insurance carrier in Kansas,” the company said.
“DDKS has tried to work with this very small group of dentists for almost two years. DDKS has repeatedly shared with them the harm these proposals would cause DDKS, Kansans, and Kansas employers. They have made no substantive changes to the harmful proposals. DDKS would lose tax status if our organization operated to further the interests of dentists at the expense of Kansans, which these illegal dentist proposals attempt to do,” according to the company.
“In response to the repeated unlawful amendments, the Board of Directors added common corporate governance provisions to the DDKS Articles of Incorporation to ensure any proposals, including those from dentists, are in the best interests of the public, Kansas businesses, and consumers. Additionally, they must deliver on DDKS’s mission,” the company said.
“No one, including dentists, has a right to propose harmful and illegal amendments or offer proposals that harm DDKS, Kansans, or Kansas employers. This small group of dentists’ lawsuit is frivolous and baseless. We will vigorously defend DDKS and continue to work hard to create value for all Kansans, Kansas employers, and our dentist partners,” DDKS said.
The UDK Joins the Fray
The UDK has a perspective definitively in line with the DDKS members who filed this lawsuit. Two of its directors are listed as plaintiffs with this case. On its website, the organization offered opinions and a request for donations after the legal action was filed against DDKS and its directors and certain officers.
According to the UDK, in December 2020, the DDKS Board of Directors voted to amend the company’s Articles of Incorporation to essentially strip dentists of the ability to make any bylaw amendments that DDKS management didn’t like.
“Furthermore, they voted to award entrenched positions to the six non-dentist members of the board. This was in response to our proposed bylaw amendments in 2019 and 2020,” the UDK said.
“After several months of Delta’s legal maneuvering to prevent these proposals, we requested a sit-down meeting with the Board of Directors to discuss their objections and to allow the voices of their dentist ‘partners’ to be heard,” the UDK continued.
“We received no response from them for several weeks until we were made aware of this drastic machination that was snuck in behind our backs and behind the backs of the four elected dentist board members,” the UDK said.
In response, the UDK said, it has sued the directors and DDKS as a nominal defendant to set aside their amendments to the articles and bylaws and restore control to the membership, not for monetary damages.
“We have concluded that we have solid legal standing to contest that Delta’s actions are illegal and invalid, and we have filed a lawsuit against Delta Dental of Kansas and their Board of Directors to put this issue in front of the courts,” the UDK said.
“Doing so could be a huge win for our profession, as it will enable us to proceed with our much needed bylaw amendments once and for all,” the UDK continued.
Further, the UDK noted that the legal battle will cost tens of thousands of dollars and that it will need a tremendous amount of financial support to cover its expenses.
“A favorable ruling in this case will be a huge win for dentists and our patients. A ruling in favor of Delta will give Delta even more unchecked control over their contracted providers and policy holders,” the UDK said. “Your support in this endeavor is absolutely vital.”
Immediately after DDKS issued its statement on the legal action, the UDK released a statement via email to DDKS member dentists.
“Hopefully, you were able to see through their claims and you realize that nothing we have stated has been false or misleading. Not in the least,” the UDK said in its email.
“We chuckled when they referred to the United Dentists of Kansas as a ‘small group of dentists.’ If it’s only a small group of dentists who oppose the board’s new amendments to Delta’s articles and bylaws, then why is the board so afraid to submit our new bylaw amendments to a vote by the member dentists?” the UDK said.
The UDK informed DDKS members that in late October 2020, it sent a letter to each member of the DDKS Board of Directors asking for a meeting with the board. This letter included the bylaw amendments that the UDK wanted to discuss with the board so that its members could hear the board’s concerns and make possible modifications before submitting them to the membership for a vote. Also, the letter included a petition showing that 50 member dentists supported the suggested amendments. However, the UDK said, it received no response to its request for a meeting.
During its regular meeting on December 11, 2020, the email said, the board voted to amend the Articles of Incorporation and Bylaws to grant the board the authority to strip the members of vested voting powers if the board does not approve of a particular proposal. The board also included a provision that would effectively entrench the six non-dentist directors, the email continued, noting that the four elected dentist board members voted in opposition to the amendments.
“DDKS’s assertion that we wanted to give six members the power to amend the bylaws is not true,” the email said.
According to the UDK’s proposal, Articles II, III, V, and XIII of the bylaws would be able to be amended or repealed by a majority vote of the members, provided that any amendment or repeal of any provision of the bylaws that would alter the minimum percentage of dentists entitled to be elected to the Board of Directors or to membership shall be approved by an affirmative vote of a majority of both the members and the Board of Directors, voting separately.
Also, the email noted that the board’s December 11 amendments stripped from the articles, which were adopted by the DDKS’s members in 2000, the provision granting the member dentists the same voting powers as stockholders in a public company. Such power includes the ability to approve or reject amendments to the articles proposed by the board.
The December 11 amendments additionally stripped the provision that grants members the sole power to amend the bylaws from the 2000 articles. Instead, the articles now require members to share that power with the board while giving the board the sole power to decide which member-initiated amendments will be presented to the membership for a vote.
“Certainly, the directors should express their views to the members about any proposed amendments to the bylaws so the members can case informed votes,” the email said. “But the board should not be allowed to decide what the membership considers. This is not how it was intended to work.”
Instead of a meeting with the board, the email said, the UDK got amendments.
“The board’s December 11 actions strike a serious blow to corporate democracy. Our lawsuit asks the district court in Wichita to set those actions aside. It is a blatant abuse of power and tips the scales even further in Delta’s favor. We cannot and will not allow that to happen,” the email said before ending with a request for donations to cover legal expenses.
Conclusion
Issues related to law should not be adjudicated in the media. Both sides ideally should forcefully argue their case in the course of judicial due process. All interested parties, including the general public, should have full access to arguments made on all sides as generated for the public record.
This case is specific to Kansas state law. Its outcomes may or may not be applicable to similar cases in other states or pending cases in federal courts.
Also, the implications of this case should reasonably be examined in the context of how Delta Dental operates nationally as well as how other insurance companies operate in other states. There may be concerns about how insurance carriers operate as nonprofit 501(c) organizations. There may be issues with apparently well-connected elites and their potential influence inside government. The examination of voting rights for the members of nonprofit entities, in juxtaposition with company officers and directors, is valid for discussion as well.
As Thomas Jefferson once said, “An educated citizenry is a vital requisite for our survival as a free people.”
Dr. Davis practices general dentistry in Santa Fe, NM. He assists as an expert witness in dental fraud and malpractice legal cases. He currently chairs the Santa Fe District Dental Society Peer-Review Committee and serves as a state dental association member to its house of delegates. He extensively writes and lectures on related matters. He may be reached at mwdavisdds@comcast.net or smilesofsantafe.com.
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