What changed in this filing

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Item 1. Legal Proceedings

2020-11-04 compared with 2020-08-05 · 86 added, 5 removed, 3 unchanged (97% of the section changed)

LEGAL PROCEEDINGS

Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2019 (the “Form 10-K”) includes a discussion of our legal proceedings.

There have been no material changes from the legal proceedings described in our Form 10-K, except that the existing lawsuit against Randall Riley, Citizens American Life, LLC, Citizens American Life, Inc., the Los Raudales defendants, Michael P.

There are no material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our or their property is the subject, except as set forth below.

Additionally, from time to time, we may be subject to legal and regulatory actions relating to our business.

We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending any claims.

If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition.

Trade Secret Suit filed by the Company against Former Executives, CALI and First Trinity.

As previously disclosed, on November 7, 2018, Citizens, CICA Ltd.

and CICA filed a lawsuit in the District Court of Travis County, Texas (the “District Court”) against (i) Randall Riley (“Riley”), a former Citizens executive and son of Citizens’ founder Harold E.

Riley, (ii) Citizens American Life, LLC and Citizens American Life, Inc.

(collectively, “CALI”), copycat companies formed by Riley and (iii) Alexis Enrique Delgado, Carlos Nalsen Landa, Enrique Pinzon Ruiz, Johan Emilio Mikuski Silva and Esperanza Peralta de Delgado (collectively, the “Los Raudales Defendants,” and together with Riley and CALI, collectively the “Defendants”), former independent consultants of Citizens, for unfair competition, misappropriation of Citizens’ trade secrets, tortious interference with Citizens’ existing contracts with its independent consultants and, with respect to the Los Raudales Defendants, breach of their independent consultant contracts with Citizens.

The lawsuit sought (i) a declaration that Citizens had grounds to terminate the Los Raudales Defendants for cause under their independent consultant contracts with Citizens and that the Los Raudales Defendants are not entitled to future commissions under such contracts, (ii) injunctive relief, (iii) damages and (iv) attorneys’ fees and costs.

Among other things, the suit alleges that Riley formed CALI and misappropriated trade secrets during the time he was employed by Citizens, in violation of his contractual and other duties to Citizens, and that the Los Raudales defendants breached their independent consultant contracts with Citizens by inducing or attempting to induce other independent consultants to terminate or reduce service to Citizens and disclosing confidential information.

On January 25, 2019, the Defendants filed a motion to dismiss certain claims alleged in the suit, and on April 11, 2019, the District Court denied the Defendants’ motion in its entirety.

On May 29, 2019, Citizens, CICA Ltd.

and CICA filed a motion for a preliminary injunction to bar the Defendants from continuing to engage in unfair competition and misappropriation of Citizens’ trade secrets and tortious interference with Citizens’ existing contracts with its independent consultants.

A hearing for the preliminary injunction was held on August 12, 2019.

On August 13, 2019, the District Court denied the application for a temporary injunction, and on August 31, 2020, the Third Court of Appeals in Austin, Texas affirmed the District Court’s decision.

On September 10, 2019, Citizens, CICA Ltd.

and CICA filed an amended complaint and added additional defendants to the lawsuit, including (i) Michael P.

Buchweitz, Jonathan M.

Pollio, Jeffrey J.

Wood, Steven A.

Rekedal, First Trinity Financial Corporation, Trinity American, Inc.

Zahn is expected to proceed to trial in the second quarter of 2021.

Wood and Steven A.

Rekedal, former Citizens executives and employees and, in the case of Steven A.

Rekedal, a former Citizens independent consultant, (ii) First Trinity Financial Corporation, and Trinity American, Inc.

(collectively, “First Trinity”) and International Marketing Group S.A., LLC, entities that have founded a business on the exploitation of Citizens’ trade secrets and goodwill, and (iii) Gregg E.

Zahn, a First Trinity executive.

The amended complaint asserted additional claims for breach of contract, conspiracy and unjust enrichment.

The lawsuit is currently in discovery and is expected to proceed to trial in the second quarter of 2021.

Colorado Suit filed by the Foundation against the Company and the Board.

On September 2, 2020, the Company and its eight directors, Christopher W.

Davis, Jr., Gerald W.

Shields, Frank A.

Keating II, Terry S.

Dean Gage, Robert B.

and Constance K.

Weaver, were named as defendants in a lawsuit (the “Colorado Suit”) filed by the Harold E.

Riley Foundation, the sole holder of the Class B common stock of the Company, in the District Court of Arapahoe County of Colorado (the “Colorado Court”).

The Foundation’s complaint requested:

(i) a declaration by the Colorado Court that the Action by Written

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CITIZENS, INC.

Consent of the Foundation (the “Written Consent”) to add director nominees to the Company’s board of directors ("Board"), which was delivered on August 13, 2020, is valid and enforceable;

(ii) a declaration by the Colorado Court that the actions of the Board taken after the receipt of the Written Consent, including expanding the size of the Board and amending the Third Amended and Restated Bylaws of the Company, are void and unenforceable;

and (iii) immediate injunctive relief against the Board from taking certain action that is outside the ordinary course of business.

Additionally, the Foundation’s complaint requested:

(i) the Company and the Board to indemnify the Foundation and its director nominees for any expenses incurred related to lawsuit;

(ii) the existing Board members to reimburse the Company for any (A) Board fees received on or since August 13, 2020 and (B) reimbursements received for acquiring legal representation relating to the litigation;

and (iii) the Colorado Court award the Foundation all fees and expenses incurred in pursuit of the litigation, including attorney fees.

The Board believes the dispute between the parties is essentially whether the Foundation can unilaterally appoint members to the Board without regard to the process mandated in the Corporate Governance Guidelines of the Company, namely that the Board’s Nominating and Corporate Governance Committee (the "Committee") is responsible for identifying, recruiting, interviewing, vetting and recommending potential director candidates and evaluating their qualifications, independence, potential conflicts of interest and other important considerations.

The Foundation must first engage the Committee and provide the Committee with a chance to assess the candidates’ qualifications in accordance with the criteria adopted by the Committee.

On September 28, 2020, the Colorado Court entered a mutually agreed Status Quo Stipulation (the “Stipulation”).

Pursuant to the Stipulation, the Board and its committees agreed not to direct or, to their knowledge after reasonable investigation, permit anyone on their or the Company’s behalf to take any significant action that is outside the ordinary course of business without the consent of the Foundation (each, a “Material Action”) until the Colorado Court makes a determination on the merits or otherwise rules on the Foundation’s motion for a preliminary injunction, if filed, whichever comes first (the “Expiration Date”).

Material Actions are outlined in the Stipulation and include, among other things:

(i) creating or disbanding any committee of the Board or changing the composition of any such committee;

(ii) forming any subsidiary or entering into any partnership or joint venture;

(iii) issuing any equity securities of the Company or any of its subsidiaries, other than as required pursuant to the Company’s Stock Investment Plan and pursuant to the vesting, settlement or exercise of equity-linked awards outstanding as of September 2, 2020;

(iv) acquiring, encumbering, pledging, disposing of or otherwise transferring any assets, properties or rights of the Company or its controlled affiliates with a value in excess of ten percent of total assets in each case or twenty percent of assets in the aggregate (excluding any assets of the Company’s insurance subsidiaries backing reserves);

(v) entering into any agreements involving a material change in the business operations of the Company;

(vi) granting, providing or accelerating compensation payments or arrangements to any current or former employee, director, officer or other service provider, subject to certain exceptions;

(vii) incurring, assuming, guaranteeing or otherwise becoming responsible for any debt in excess of ten percent of total liabilities (excluding contingent liabilities owed to any policyholders of insurance subsidiaries of the Company);

(viii) authorizing, declaring or issuing any dividends or “poison pill” rights to the Company’s stockholders, officers, or directors;

(ix) amending, modifying or repealing Board committee charters or the Company’s core governing documents;

and (x) entering into any transactions involving a change of control of the Company.

In addition, the Stipulation provides that until the Expiration Date, the Board shall consist of the following existing directors:

Christopher W.

Davis, Jr., Gerald W.

Shields, Frank A.

Keating II, Terry S.

Dean Gage, Robert B.

and Constance K.

The above summary of the Stipulation is qualified by reference in its entirety to the Stipulation, which is filed as E xhibit 10.2 to this Quarterly Report on Form 10-Q.

On September 29, 2020, the Company and the defendant directors of the Board filed a motion to dismiss the Colorado Suit for lack of personal jurisdiction, or, alternatively, for improper venue, because all of the individual directors live and work outside of Colorado and none of the alleged actions incurred in the state of Colorado.

The Company also moved to dismiss the Colorado Suit because the complaint failed to allege facts sufficient to support a cause of action against the Company.

On October 31, 2020, the Colorado Court denied our motion to dismiss and gave us 21 days to answer the Foundation’s complaint.

We are in the process of preparing an answer to the Foundation’s complaint.

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CITIZENS, INC.

Additionally, on October 1, 2020, the Foundation filed a motion for a preliminary injunction and request for a hearing.

On October 21, 2020, we filed a motion to oppose the Foundation's request for a preliminary injunction.

The Colorado Suit is in the early stage and the outcome is difficult to predict.

The Board, however, believes that its defenses are meritorious and that it is acting in the best interests of all shareholders, as its fiduciary duties require.

Texas Suit filed by the Foundation’s Beneficiaries against the Foundation.

On September 8, 2020, Baylor University and Southwestern Baptist Theological Seminary, the two sole charitable beneficiaries of the Foundation (the “Foundation Beneficiaries”), filed a lawsuit in the 67th District Court of Tarrant County, Texas (the “Texas Court”) against the Foundation and its Chief Executive Officer/President, Mike Hughes (the “Texas Suit”).

Neither the Company nor the Board is a party to the Texas Suit.

The Foundation Beneficiaries claimed, among other things, that the Foundation’s board of trustees improperly sought to alter the Foundation’s bylaws in an effort to remove the Foundation Beneficiaries from any input or influence over the Foundation’s direction, and attempted to change the Foundation from a public charity to a private entity.

Further, the Foundation Beneficiaries claimed that the bylaws amendments made in June 2018, as well as all actions taken by the Foundation’s board of trustees since, were improper and void, including the nomination of individuals to serve on the Company’s Board and the filing of the Colorado Suit.

The Foundation Beneficiaries specifically seek (i) an order from the Texas Court reforming the Foundation to represent their interests and (ii) an order from the Texas Court declaring that the June 2018 bylaws amendments, as well as all actions taken by the Foundation’s board of trustees since, are void and of no effect.

In essence, if the allegations of the Foundation Beneficiaries are determined to be meritorious, the current trustees of the Foundation are acting without authority both in nominating individuals to serve on the Board and in filing the Colorado Suit.

This outcome could have a material effect on the Colorado Suit.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Legal Proceedings