Data Key Partners v. Permira Advisors LLC
837 N.W.2d 624
Wis. Ct. App.2013Background
- Renaissance Learning, Inc., a publicly traded Wisconsin corporation, was controlled by founders Terrance and Judith Paul, who held a majority of shares and sat on the board.
- Data Key Partners was a minority shareholder and sued after Renaissance was sold to Permira Advisors, LLC, alleging directors and majority shareholders (the Pauls) breached fiduciary duties and Permira aided and abetted.
- Competing offers from Plato (higher per-share offers) were allegedly rejected while Permira’s deal gave differing per-share payments to the Pauls and minority shareholders and included side benefits to the Pauls and arrangements involving Goldman Sachs.
- Data Key pleaded claims for (1) directors’ breach of fiduciary duty (including abdication and conflicts), (2) breach by the Pauls as majority shareholders (self-dealing/undue influence), (3) directors’ failure to disclose material information in the proxy, and (4) Permira aiding and abetting.
- The circuit court dismissed the complaint on a motion to dismiss; the appellate court reviewed de novo, assuming complaint allegations true for pleading-stage review.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the business judgment rule may be applied on a motion to dismiss | Business judgment rule is an evidentiary presumption inappropriate at pleading stage; Data Key need not plead facts to overcome it | Rule is an immunity/legal presumption; complaints that fail to plead facts overcoming it can be dismissed | Court held the rule should not be applied at motion to dismiss in a notice-pleading jurisdiction and reversed dismissal that rested on it |
| Whether directors breached fiduciary duties (abdication/conflicts/willful misconduct) | Allegations support inferences of abdication to the Pauls, personal benefits to directors, and willful misconduct | Directors acted within business judgment, reasonably rejected Plato given closing risk and termination fee exposure | Court concluded dismissal was error; complaint sufficiently alleged breaches to survive motion to dismiss (business judgment rule inappropriate at this stage) |
| Whether the Pauls, as majority shareholders, breached fiduciary duties by using control to harm minority | Pauls used majority power and personal arrangements (timing, licenses, indemnities, Goldman Sachs tie) to cash out at minority’s expense | Pauls had right to sell and vote shares; receiving less for their shares undermines claim of self-dealing | Court held complaint plausibly alleged undue influence/self-dealing by the Pauls and reversed dismissal as to this claim |
| Whether failure to disclose and aiding-and-abetting claims survive pleading | Omitted proxy disclosures were material and prevented informed vote; Permira knowingly incentivized breaches | Disclosure omissions were immaterial or could not have caused harm because Pauls could control outcome; Permira negotiated at arm's length and lacked intent to aid breaches | Court affirmed dismissal of the failure-to-disclose claim for lack of alleged causal harm; affirmed dismissal of aiding-and-abetting claim as insufficiently developed by plaintiff |
Key Cases Cited
- Northridge Co. v. W.R. Grace & Co., 162 Wis. 2d 918 (Wis. 1991) (pleading-stage standard: accept complaint allegations as true for 12(b)(6) review)
- Reget v. Paige, 242 Wis. 2d 278 (Ct. App. 2001) (describes business judgment rule as evidentiary presumption considered at summary judgment)
- Mendel v. Carroll, 651 A.2d 297 (Del. Ch. 1994) (discusses limits on deploying corporate power against majority stockholders in context of dilutive remedies)
- In re Synthes, Inc. Shareholder Litigation, 50 A.3d 1022 (Del. Ch. 2012) (pleading-stage dismissal of merger challenge relied on business judgment rule and some discovery)
- Berner Cheese Corp. v. Krug, 312 Wis. 2d 251 (Wis. 2008) (elements of breach of fiduciary duty include causation of damage)
- Edwardson v. American Family Mut. Ins. Co., 223 Wis. 2d 754 (Ct. App. 1998) (elements for aiding and abetting require intent/conscious desire to assist wrongful act)
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (U.S. 1976) (standard for materiality in disclosure context)