Notz v. Everett Smith Group, Ltd.

Edward U. Notz, Plaintiff-Appellant-Cross-Respondent-Petitioner,

v. Hauske, Ltd., Thomas J. Group, Everett Segerdahl, Perry, Anders M. Jr., Randall Hartung Trostel & Sons and Albert J. Steven Defendants-Respondents-Cross- Company, Appellants-Cross Petitioners.

Supreme Court January argument Oral No. 2006AP3156. April Decided 2009 WI 904.) (Also in 764 N.W.2d reported plaintiff-appellant-cross-respondent- For the by Friebert, petitioner H. briefs Robert there were Finerty Friebert, John, O'Neill, & and St. Matthew W. by argument Matthew W S.C., Milwaukee, and oral O'Neill. defendants-respondents-cross-appellants-

For the by petitioners L. there were briefs Thomas Shri- cross Halfenger, House, ner, Jr., G. Rebecca Wickhem Michael argu- Foley Milwaukee, LLP, & and oral and Gardner by Shriner, ment Thomas L. Jr. CROOKS, J. a PATRICK This review N. appeals

published decision1 involves three court minority questions in the context of that arise against majority share the shareholder's lawsuit (1) complaint allegations in the the holder: whether by minority shareholder for a direct claim the state (2) duty; allegation fiduciary an breach of whether diligence from benefited due shareholder —paid by corporation own for for shareholder's corporation— purposes without reimbursement by minority supports for claim the shareholder direct (3) fiduciary duty; pending whether a breach judicial minority direct claim the (based conduct) oppressive survives a dissolution petitioner's merger status that eliminates cash-out as a shareholder. appeals held that 2. The court of complaint claim for failed to state direct

shareholder's fiduciary duty primary because harm breach alleged corporation, not to shareholder. was to the Ltd., 84, 312 Group, v. Notz Everett Smith App 2008 WI 2d 754 N.W.2d appeals allegation However, the court of held that one diligence expenditures potential —that for due for a acquisition company ultimately of another benefited only majority if would, true, consti shareholder2 — payment majority tute a "dividend-like" share support judicial holder and thus a direct claim. The go dissolution claim3 the circuit court had allowed to forward encountered an unforeseen barrier at the court appeals: appeal pending, while the a forced merger petitioner's eliminated the status as a share by majority holder. A motion filed shareholder brought appeals' this to the court of attention. Ulti mately, appeals the court of remanded with directions grounds to enter an order to dismiss that claim on the post-claim merger stripped petitioner that the had standing pursue that claim. minority majority 3. Both the and shareholders sought rulings involved review this court of the adverse to shareholder, them. The Edward (Notz), appealed appeals' Notz the court of decisions he first, failed to state a direct claim for breach of fiduciary duty, standing second, he had lost on the The ultimately acquired the com- pany for itself. 180.1430(2)(b) (2005-06): Wisconsin Stat. may proceeding: corporation circuit court. .. dissolve in a

(2) By shareholder, any following if is established: (b) corporation That the directors or those control of the have acted, acting illegal, oppressive are or will act in a manner or fraudulent. All subsequent references to the Wisconsin are Statutes the 2005-06 version unless otherwise indicated. major- merger.

judicial due The claim to dissolution (the Group, ity Ltd. Smith shareholder, Everett appeals' Group), cross-appealed of decision the court allegations about due on the direct claim based that the proceed. diligence costs could herein, we affirm in set forth 4. For the reasons proceed- part, part, for further and remand reverse agree appeals ings. that the claims the court of We with corporate alleged opportunity loss of a of harm —the high subsidiary growth potential of with and the sale a corporation, primarily and thus harm to the —caused direct claim of breach the dismissal of Notz's we affirm allegations. fiduciary duty to On the cross- as those appeals agree appealed issue, with the court of we also majority appropriation due of the that the shareholder's corporation diligence paid in a resulted be- to the constructive dividend expense of minor- a at the cause it received benefit appeals' ity Thus we affirm court shareholders. proceed permitting remand that claim to decision proceedings. for further to the circuit court appeals disagree with the court of 5. Where we pursue judicial standing question of Notz's to his (d) 180.1106(1) claim. Stat. dissolution Wisconsin pending straightforward requirement claim in its that a "may merger as if the did not occur."Notz's be continued merger, prior judicial claim, dissolution initiated corporation. alleged shareholder, not harm that merger operating precludes from Because the statute a right pursue pending strip a such claimant of here, as and because we action, such his direct action persuasive support position, we reverse the find for that appeals' We decision on that issue. therefore court pro- circuit court for further remand that claim the ceedings opinion. this consistent with

I. BACKGROUND company dispute, 6. The at the center of this (ATS), grew Albert Trostel & Sons evolved and from its beginning as one of the tanneries that made Milwaukee powerhouse industry in the leather in the late 1800s. story company's growth includes names anyone passing knowledge familiar to with a of Wiscon history: sin one of Albert Trostel's sons married into family, major player the Uihlein in another of then-thriving brewing Milwaukee's industries —the years, acquired beer. Over the ATS subsidiaries and production branched plastics. out into of rubber and Through a company series of transactions, control of the shifted from Trostel's descendants to Everett Smith, who by president was hired ATS in 1938 and later became company. eventually Smith formed what would be Group. come the Smith At the time this action was percent by commenced, ATS was owned 88.9 the Smith Group, percent by percent by 5.5 Notz, and 5.6 other parties proceedi Trostel descendants who are not to this ng.4 By 2003, 7. ATS's board of directors was com-

prised entirely of members who were also officers and/or Group. Group began directors of the Smith The Smith making purchase minority offers to the shares of ATS's rejected shareholders. Notz the offers.

¶ 8. At the time, same ATS turned its attention to potential growth plastics. part for As of this new strategy, subsidiary, Specialty its Trostel Elastomers (Trostel Group, SEG), acquired Inc. in June 2003 an 4 Notz, the plaintiff-petitioner, is a descendant of Albert Trostel; the defendants-cross-petitioners are three directors of ATS who were affiliated with the Smith Group, and the Smith itself, Group now controlled in part descendants of Everett Smith. con- and ATS molding company, custom injection

Iowa as well. acquisitions other templated basis of Notz's next is the 9. happened What itself presented an opportunity claims. In June 2004 Masch, & assets of Dickten acquire ATS ATS con- business. manufacturing plastics competing the ATS But in August ducted due diligence. & Masch. Dickten on acquiring board decided to pass had no which thereafter, Group, the Smith Shortly field, acquired plastics holdings other direct months, Group's the Smith & Masch. Within Dickten the assets of purchased Dickten & Masch affiliate new SEG, from ATS. Trostel subsidiary, ATS's plastics Group's acquisition In to the Smith response an action5 Notz commenced companies, of both plastics of its directors on and four against dismissed, and The initial complaint April ATS, pursuant demand letter to Notz had also sent a 180.0742, minority shareholders are stating, "the Wis. Stat. to take action with make a demand for ATS required to written serve that claims. This letter shall regard to these derivative demanded, things, that the among other purpose." The letter rescinded and by Dickten & Masch be purchase of Trostel SEG response In elected to ATS's board. independent directors be letter from the other Notz's letter and a similar 4, 2005, shareholders, indepen- ATS elected three on October special litigation ATS's board and created dent directors to allegations in the demand letters. investigate to the committee indepen- consisted of the three special litigation committee report a subsequently The committee issued dent directors. maliciousness concluding there "no intentional behavior or was minority disadvantage to the part [ATS] on the fiduciaries recommendations that are making shareholders" and certain with here. No questions we are concerned not relevant Notz; by pursued dispute pre- the derivative claim was ever claims. here centers on his direct sented 648 complaint September an amended was filed 29, 2006, alleging duty by fiduciary Group breach of the Smith and fiduciary duty by breach directors, the individual and requesting judicial pursuant dissolution Stat. 180.1430(2)(b) grounds on the that the defendants had oppressive acted in that manner was to Notz.6 hearing ¶ 11. At a on 2006, held November the County Milwaukee Court, Circuit the Honorable A. John presiding, injuries alleged Franke complaint found that the in the reasoning

were common to all shareholders, any ancillary Group benefit the Smith received from injury. the transaction not did create direct The circuit fiduciary duty. court dismissed claims breach of Notz's judicial However, it declined to the dismiss dissolution allegedly oppressive claim based conduct. granted appeals parties' 12. The court of

petitions appeal the circuit court's order. While the appeal pending, merger was ATS initiated a cash-out 180.1101(2)(c) 180.1103(3). §§ under Wis. Stat. and De spite opposition,7 merger approved Notz's and May became above, effective 2007.8 As noted 6 The complaint oppressive amended describes the conduct as "includ[ing], among things, other a concerted effort and the Individual to oppress Defendants Plaintiff and force him sell his shares in ATS to the Smith Group for less than a fair value freeze Plaintiff out of the plastics business in retaliation refusing for to sell his at shares less fair than value." The other shareholders received cash for their perfected shares. Notz rights his dissenter's to have a court determine the fair currently value of his shares. case That pending separate proceeding as the United States District See, Court infra, Eastern District of Wisconsin. 37 n.26. are procedural peculiarities There some in this case in the record contains no documentation related holding appeals that circuit court's affirmed the court of duty appropriately fiduciary a claim was the breach of grounds direct, on that derivative, than claim the rather important "strippl’ingl its & Sons of most Albert Trostel divertLing] Trostel's to the Smith assets corporate opportunity buy . Masch . . to Dickten and injury [was] "all of sharehold- because an Trostel" Group, equally[.]"Notz v.Everett Smith were affected ers App 2d Ltd., 636, 754 N.W.2d WI having portion claim, however, 235. It carved out spent diligence. money for due Given the with do acquisition Group's Masch, & of Dickten ultimate ultimately expenditures diligence ben- ATS's for due ap- only majority shareholder, the court of that efited peals reasoned, and thus constituted constructive divi- judicial claim, As Id., dend. 18. dissolution court, had the circuit the court of which survived in intervening appeals the cash-out event, found that an standing pursue merger, stripped petitioner of had longer judicial claim because he was no dissolution appeals Id., Therefore, the court of shareholder. for lack of remanded with an order to dismiss claim standing. Id. cross-petition petition

¶ and a for review A granted review. followed, and this court already it merger complete because the record was before appeals accepted briefing The court of on the happened. clearly merger's judicial effect on dissolution claim and Notz's presented ruling standing based its on materials those briefs; supplement permit parties it did not record. in their briefs here parties The result was cited appeals considered the court of that were never materials rely as well on the part made of the record. We therefore appeals. materials submitted the court of

II. STANDARD OF REVIEW Whether complaint by ¶ minority share- holder has alleged facts that will direct support claims for breach of fiduciary duty presents of questions law reviewed de novo. See Borne v. Gonstead Advanced Inc., 2003 Techniques, 135, WI App 10, 266 2dWis. ¶ 253, 667 N.W.2d 709. 15. At the motion to dismiss the court stage,9

must all accept facts as true alleged and construe "all reasonable inferences that may be drawn from those facts in favor of a claim." stating Peterson v. Volkswagen Am., Inc., 76, 2004 WI App 2, 272 Wis. 2d 679 N.W.2d 840. A claim will be dismissed if "it only appears

9 recognize We that material related merger to the presented to the appeals court of in connection with motions made pursuant to that court and 4, 2007, order, to an October stated, which

Although permit supplementation the court will appel- not of the record, recognizes late addressing the court the mootness may require issue appellate consideration of materials not in the record, likely produced since the appeal materials were after the Consequently, parties was filed. the court will allow the to refer in appendices their briefs and to materials submitted in the motion practice before this court that relate to the mootness issue. We note that under the unusual presented circumstances here this material does not constitute "matters outside of the 802.06(2)(h) pleadings" under Wis. Stat. (stating that where presented court, such matters are the motion is treated as summary one for judgment). The appeals court of appeared to part treat this material as pleadings. Under these circumstances, we see no reason to treat this as an action for summary judgment. any granted

quite set be under that no relief can certain prove support plaintiffs might their facts the allegations." Id. undisputed application statute Menasha, WI 88, v. de DOR

facts is reviewed novo. ¶ 44, 2d N.W.2d95. 311 Wis. DUTY FIDUCIARY CLAIMS

III. THE BREACH OF plastics companies Acquisitions of A. fiduciary duty ¶ are of breach claims 17. Notz's primarily on the series transactions which based Group plastics companies.10 acquired two the Smith Group, allegations ATS's are that the Smith as The rejected opportunity had shareholder, ATS buy Group Masch; the subse to quently Dickten & Smith

bought and itself; Dickten & Masch the Smith Group, capacity majority shareholder, in its as orches plastics group, Trostel trated the sale of ATS's valuable acquisition. SEG, to its own new allegations question The those 18. is whether fiduciary duty support breach to a direct claims for parties suggest minority different shareholder. analysis. Group guides for The Smith cases as our argues Schantz, 222, Rose v. 56 Wis. 2d 201 N.W.2d (1972), finding requires these are a derivative states, The amended complaint fiduciary duty its to the Plaintiff

Defendant Smith breached by engaging self-dealing in two transactions that were related Plaintiff, by provide failing Plaintiff with intended to harm prior proposed when transactions at a time Plaintiff notice transactions, by objected sought stop could have orchestrating ATS to the constructive dividends from by acting Group, and the intent to harm the Plaintiff. with argues principles claims; Notz that the articulated in II), Jorgensen (Jorgensen Works, v. Water Inc. 2001 WI App 135, 614, 246 Wis. 2d 630 N.W.2d and Luther v. (1903), Co., compel C.J. Luther 118 Wis. 94 N.W.69 finding that these are direct claims. Rose, 19. In stockholders sued for an fiduciary injunction for breach of the duties owed to by Rose, them the directors. 56 Wis. 2d at 223-24. The summary circuit court denied motion defendants' judgment but was reversed this court. at 224, Id. though We held that each shareholder has an individual right fairly by to be treated directors, board of when injury primarily corpora- from such actions is to the by minority tion, be there can no claim direct sharehold- Id. ers. at 228-29. acknowledged duty case, In that we important parameters.

individual but shareholders set fiduciary duty It is true the of a director owed individual as well stockholders as to the corporation. may Directors in this state not use their position of trust Thus, further their private interests. where right some individual impaired stockholder is being by the improper director, acts of the stockholder can bring a direct suit on his own behalf it is because his right individual being that violated. (citations omitted). right

Id. However, a of action that belongs corporation pursued to the be cannot as a direct claim an individual stockholder. Id. at 229. As we injury corporation noted, even where the results in shareholder,11 harm a it won't transform an action from a derivative ato direct one:

11We use the terms and "shareholder" "stockholder" inter- changeably. injury corporation to a primary such and direct

That the of the may subsequent impact have on value clear, enough but that not stockholders' shares is direct, derivative, rather than right bring create a is the corporation the injury Where the action. second- any injury and to stockholders primary injury, brought that can be ary, it is the derivative action alone rule, and, if it were general the maintained. That is and abandoned, reason left for the there would be no to be wrongs concept of actions for the redress derivative corporation. to a omitted). (citations

Id. at 229-30 Jorgensen principles ¶ 21. asserts that the Notz Jorgensen apply In II the court of II Luther here. and stopped appeals shareholder-directors found that where minority making some shareholders distributions to continuing pay distributions, such themselves while fiduciary their shareholder-directors had breached duty, injury primarily personal to and the caused Jorgensen II, 246 Wis. 2d the shareholders. two ¶¶ Luther, In court found that 18-19. this fiduciary duty had breached their shareholder-directors ally they to an orchestrated the sale of new shares when gain company. Luther, 118 Wis. in order to control of Rose, it more at would have us read 123. As for Notz alleged narrowly, holding only as that where the harm by minority is the diminution of value corporation, there thus, harm to shares, can no direct claim. be alleges self-dealing part on Notz

majority shareholder, he relies but cases which proposition do for the a shareholder- not stand prima self-dealing transforms an action director's rily corporation primarily injures into one that injures Read, is clear from Read v. a shareholder. It (Ct. 1996), App. 558, Wis. 2d 556 N.W.2d 768 that a self-dealing may injury shareholder's result in primarily corporation. that is to the Read, In that case, minority alleged controlling shareholder, had that the misappropriated corporate stockholders had engaged assets and self-dealing "through their with transactions corporations they other in which were but stockholders disagreed appeals he was not." Id. at 562. The court of any injury directly to him as the "Here, shareholder: as case, in the Rose Read's com- plaint alleges resulting that, true, conduct if means that primary injury corporation, to the not individual bringing stockholder Id. suit." at 570. agree

¶ 23. We with the Smith that breach fiduciary duty opportunity claims, of on based the lost purchase company subsidiary one and the sale of a great growth potential, governed by with are Rose. Our analysis under Rose centers a determination of primary injury corporation whether is to the or to precisely the shareholder. Rose does not define when an "primarily] injury corporation." Rose, ... Jorgensen does, Wis. 2d at 229. II however, define opposite, injury "primarily... an an individual shareholder," as which one "affects shareholder's rights upon in a manner distinct from the effect other Jorgensen II, shareholders." 2dWis. 16. We agree appeals allegations with the court that the here essentially Group "stripped [ATS] are that the important engaged its most assets" and in various acts self-dealing, allegations injury and that are those primarily Notz, to ATS. 312 Wis. 2d 17. As appeals "[A]ll [of noted, court of of the shareholders by ATS] equally" opportu- were affected loss nity acquire Dickten & Masch and the sale of plastics Id. To hold otherwise SEG, the division.

Trostel Rose, no "there be that would mean, as we said would concept the for of actions for the derivative reason left wrongs corporation." Rose, 2d at 56 Wis. to a redress of court involves, as the circuit The here 230. situation company part majority's power of a noted, sell "the percent . entity in . . interest it a hundred to an that has may give to a price."12 [a]t rise a transaction a fair Such primarily injury that is claim for derivative only corporation; avail Rose, that the claim under is able. diligence expenses

B. due ap of above, however, 24. court As noted fully peals claim did the door on Notz's direct not close complaint duty. fiduciary Notz's amended breach of Group alleged ATS's the Smith benefited from that expenses payment diligence never- due acquisition it & when of Dickten Masch consummated subsequently acquired In Dickten & Masch for itself. majority shareholder, the Smith words, as other ATS up pick Group tab for to let ATS made the decision expense diligence, accrued the due the benefits which only Group, share not ATS's the Smith made the decision holders, when Smith here that a applicable It clear from the case law appropriate derivative on the claim the extent action Group's concerning it is allegations based on approach and Dickten & Masch. The purchase of Trostel SEG create possibil- would advocated the concurrence/dissent ity there shareholders in common of direct actions wherever are subsidiary and the parent corporation selling between a concurrence/dissent, an purchasing corporation. See Such impose unnecessary costs and approach unworkable would uncertainty corporate on routine transactions.

acquire Dickten & Masch on its own. The court of appeals allegation supporting viewed this as a direct fiduciary duty expense claim of breach of because the payment[]."13 was, in the words, court's a "dividend-like Notz, 2d It reasoned that this payment description Jorgensen fit the II, which held injury due to the act shareholder-directors that differently gives affects from others rise to a direct claim. Id. parties

¶ 25. On this claim at least, the have ground. argue found common Both that the court of appeals improperly distinguished Notz's constructive fiduciary duty dividend from the rest of his claims. Notz strenuously objects analysis to that would treat the due diligence expense differently claims than concern those ing majority squandering corporate shareholder's opportunities corporate and the sale assets itself.14 Group, part, objects strenuously The Smith for its applicability Jorgensen the argues II to the facts here and got right

that the circuit court it wrote, when it complaint alleges injuries "[T]he that were common to generally the shareholders and the fact that some may way shareholders have in benefited that balanced injury out for them does not create a direct injury.. Group says . ." The Smith Notz has failed

13The court of appeals also payment referred to the as a Notz, constructive 636, dividend. 312 Wis. 2d 18. In this ¶ we opinion, use the terms payment" "dividend-like and "con- structive dividend" interchangeably. Examples of a constructive dividend compensation, bargain include "excessive purchases of corporate property, and shareholder use of corporate property." (8th 2004). Black's Law Dictionary 513 ed. perceived by "The distinction Appeals Court ... lacks a coherent underpinning. Candidly, a policy consistent should apply in either case." separate injury from that suffered an that he

articulate allegedly ATS shareholders. all other suffered injury "primarily just an ... noted, 26. As an one "affects which shareholder" individual rights effect distinct from the in a manner shareholder's Jorgensen upon II, 2dWis. other shareholders." ¶ 16. allegation is Here, that as Group got the direct and imme

shareholder, the Smith expenditure diligence15 as due benefit of the diate acquired corporation that Dickten in the shareholders minority not, did as shareholder, Notz & Masch. As a offsetting pay appeals noted, receive an the court of line, as Notz, 2d 18. The bottom ment. 312 Wis. any complaint,16 alleged is that there was never in the any benefit intention for the expenditure way diligence because from this due rejected[,] the [to the stock was purchase] if the offer [Notz] to freeze out of the Group planned Smith by transferring plastics the entire business plastics steps. two from ATS to the division First, acquire than would Group the Smith rather ATS Second, Group Smith would & Masch. the Dickten SEG operations the Dickten with the Trostel combine 15 buyer's or diligence prospective as "[a] Due defined investigation analysis target company, piece a a broker's and of property, newly security." Dictionary Law of or a issued Black's (8th 2004). 488 ed.

16 stage, 15, As at at the motion dismiss ¶ noted above alleged "all accept all facts as true and construe the court must may that be' drawn from those facts reasonable inferences Am., Inc., stating Volkswagen v. a claim." Peterson favor 2, 676, 76, 2d N.W.2d 840. 2004 WI 272 Wis. 679 App ¶ operations synergy savings to achieve the identified in diligence investigation due acquiring the ATS plastics division. After rejected [Notz] the Smith Group's purchase shares, offers to his Defendants pro- plan ceeded with their to freeze any out from [Notz] plastics interest in the ATS business. appeals noted,

As court of it was beneficiary expenditure." was "the Notz, of that payments 636, 2d Such 18. dividend-like were rights not made to Notz, reason, and for that Notz's as were affected "in a manner distinct from upon Jorgensen effect II, other shareholders." part Here, 2dWis. 16. cash that was corporation's pay assets which could been have used to diligence dividends was instead diverted to due fund company majority shareholder later ac- quired. type inequitable It is this treatment that was Jorgensen issue in at II because the defendants had "stopped paying [plaintiffs] pro rata distribution [the corporation's] they from cash flow while continued pay regular they distributions, themselves treated differently, [plaintiffs] inequitably, compared and when with the treatment accorded all other shareholders." Jorgensen II, 246 Wis. 2d

¶ 28. This is different from claim, first Notz's majority acquisition which based on the shareholder's acquisi- of Dickten & and Masch Trostel SEG. Those effectively expansion tions, which ended ATS' into the plastics parallel complained business, Rose, the acts of in part plan deplete acts that were of "a scheme or corporation thereby rendering of its cash reserves, it incapable continuing [the enabling in business, defendant] successfully engage competing in busi- Rose, ness." 56 Wis. 2d at regard plastics shareholder's with decisions to ATS's 659 thing: alleged precisely same to do interest are continuing incapable business that ATS render competing engage in a business. enable itself and to purchase of related to the claim reason, For that Rose because Masch is controlled Dickten & corporation. injury primarily The claim as to the factually expenses diligence more similar to the due alleged Jorgensen unequal distributions the claim of gov- properly explained therefore above, and is II, as analysis. by that erned CLAIM DISSOLUTION THE JUDICIAL

IV appeals an ¶ remanded with The court of 29. judicial after a dissolution claim order to dismiss merger the case instituted while was forced cash-out appeal. pending Notz, 2d 312 Wis. was longer merger, Following no share Notz holder in ATS.17 180.1106(1)18 argues Stat. 30. Notz pending

explicitly preserves after a civil claims all (d) pro- merger. corporate "a civil. . . states Subsection 17 judicial dissolution Group sought to have The Smith decision, appeals court of moot; in its as claim dismissed Notz, standing instead. as one of question characterized the Wis. 2d merger or share § 180.1106. Effect Wisconsin Stat. exchange.

(1) merger following takes effect: All of the occur when (d) administrative, investigatory proceeding civil, criminal, or A entity party any pending by against that is a or business occur, merger or the merger may if did not be continued as proceeding entity may surviving in the be substituted business entity ceased. whose existence the business ceeding pending against any entity . .. business that is party merger may merger the as if be continued 180.1106(l)(d). § did not occur ... Wis. Stat. This qualified any way, statute not limited or Notz argues, expressly preserves standing and it plaintiffs pending against merged corpora- with claims liability merged tions, and ensures that follows the entities. argues

¶ Group merger 31. The Smith that the preserve statute cannot a claim that Notz lacks stand- ing pursue. agreed appeals

¶ 32. The court of with the Smith Group; it held that statute "does not address who is previously entitled to maintain a action; commenced it merely says Notz, that those actions survive." 312 636, Wis. 2d

¶ 33. As we have noted other cases where we § provision construed 180.1106, Wis. Stat. this is based Corporation § on Model Business 11.07, Act "Effect of Merger Exchange."19 generally or Share See Model Bus. 1998/99) § Corp. (Supp. (listing fifty Act Ann. 11.07 all having adopted states as this rule under the Model Act). Corporation dealing Business While cases with aspect provision one or another of or this its variations pointed any abound, the Smith has not case precisely point provision on where this has been found

19 note "We that this statute based on the Model Business Corporation Merger Act 11.07 'Effect Exchange.' or Share We previously have commentary utilized the official to substan tially similar Corporation Model Business Act statutes in form our discussion of the legislative intent of Wisconsin Corporations Business statutes." Farm Credit Serv. Cent. N. 51, Wysocki, n.2, 305, Wis. v. WI 20 2001 243 Wis. 2d 627 Culea, (citing 29, N.W.2d 444 WI Einhorn v. 78). Wis. 2d 612 N.W.2d argues Group says way it It must. work allowing merger provision be read as should standing, strip from a status, and thus to plaintiff predates non-derivative claim with a merger. begin by observing that a claim for

¶ 34. We oppressive conduct, judicial as based dissolution 12B Meade not derivative claim. See William here, is Cyclopedia the Law Private Fletcher, Fletcher of of 2000) ("An (rev. § Corporations action for ed. 5820.10 distinguished oppressive been conduct has relief from the com action, since in the former a derivative from type seeking ordinarily plaining of some gener the relief, while in the latter action individual corporation ally as of the as well relief on behalf shareholders.") similarly Direct claims of situated other upheld, merger predating have been a shareholder filing brought by who after when a shareholder even the that this status, on basis claim lost shareholder the example, preserves deter after such claims. For statute "state[d] plaintiffs mining of the claims that some personal, opposed action," derivative, causes of as Supreme of the effect Court addressed Connecticut merger statute, on claims under Connecticut's such the Model Business like was based on which Wisconsin's Corporation Act:20 prohibit [corporation's] merger does the fact of the

Nor proceeding capacity individual plaintiff from in an 20 Control, Dept. Liquor Inc. v. 567 Importers, All Brand of 1989) (Conn. (discussing Statutes 1163 General A.2d consolidation," 33-369, merger stating, § "[t]he or and "Effect or merger on the effect of consolidation Connecticut statute (1969) Act Corporation Business ABA-ALI Model based .."). .76 33-369(e) against provisions s. [defendants]. clearly the General Statutes state post-merger, that the surviving corporation responsible shall be for the li- abilities, liability including shareholders, to dissenting of each of the merging corporations, any and that claim existing at merger the time of one against of the corporations may prosecuted be merger as if the had not taken place. way, merger Put another does not destroy existing obligations liabilities and of the corporations; individual to hold otherwise would depart from the clear mandate of the statute allow for perpetration fraud upon corporation of a creditors or who, plaintiff, others like the possess outstanding against merged claims corporation. (Conn. 1979). Indus.,

Yanow v. Teal A.2d That court went on to derivative claims distinguish by- that a noting only derivative claim "could be pursued by who one was a stockholder . . . both the time at of the alleged delict and at of the corporate the time filing Id. at have suit." 323. We not located case any where a merger was permitted strip shareholder of standing he at indisputably held the commencement claim.21

21For cases on the holding that turn of shareholder status commenced, an Corp. when action is Crippin Printing see v. (Ind. 1982) Abel, 1002, 441 N.E.2d 1004 App. (concluding Ct. agreement that an obligating employment a shareholder whose terminated deprive plaintiff is to sell stocks does not "of standing prior to . . bring suit. to the sale or actual transfer stock"); Artigas Corp., 327, his Renewal 22 Realty v. Arts A.D.3d (N.Y. 2005) App. (affirming Div. of petitions 328 dismissal for petitioner dissolution in "because sold his interests these cor Enter., ... porations bringing petitions"); his Martin Inc. before (N.Y. 1988) Janover, 587, v. 140 App. (finding A.D.2d 587 Div. petitioner standing "fpjrior was without because to com mencement of the proceeding, petitioner dissolution ... was

663 allow in favor of authority finding 35. Far from or non-derivative direct defeat a pending a merger ing that supports case law claim, significant we have found to which Delaware, jurisdiction a inference. the opposite corporate look for "guidance courts often Wisconsin general exception relevant a law,"22 recognizes for any as a standing a loss of rule that a derivative fatal a reason, merger, including to that law, exceptions Delaware claim.23 Under "perpetrated merger include when rule well-settled standing bring shareholders of merely deprive Indus., Inc., v. W. Pac. Kramer action[.]" derivative (Del. In re First 1998); see also 348, A.2d 354 546 A.2d 729 Litig., Consol. S'holder Bancorp Interstate 1998). (Del. 851, Ch. 867 option under an corporation in her interest

divested of added). ...") (emphasis of stock repurchase agreement 22 Inc., 28, 81, Sharp Packaging Sys., 2002 WI Lane v. C.J., (Abrahamson, dissenting) 68, N.W.2d 788 251 Wis. 2d 640 Sys., 2000 WI 46, Health Care HMO-W Inc. v. SSM (citing (following N.W.2d 250 29-31, Wis. 2d 611 234 ¶¶ discount application of rejecting Delaware law in rights proceeding); in dissenters' determining "fair value" Cos., 384, 397, 588 N.W.2d 67 v. Am. Tool 222 Wis. 2d Jacobson (Ct. 1998) fiduciary law to define (looking to Delaware App. Inc., Form, Accuform, v. 158 Inc. Advance Concrete .duties); 1990) (Ct. (citing 334, 344, App. N.W.2d 271 2d inspect request corpo cases to determine whether Delaware v. "proper purpose"); Schweiner was for a rate documents Co., 344, 351, 2d Accident & Indem. 120 Wis. Hartford (Ct. 1984) law for effect of (citing Delaware App. N.W.2d 767 corporation)). statutory merger merger on liabilities Cyclopedia Fletcher Fletcher, 13 William Meade 2004) ("Where (rev. Corporations Law Private § 5972.40 ed. cannot merger, a former shareholder has been a cash-out there would no plaintiff proceeding a derivative because maintain recovery."). any subsequent corporate have interest longer has pursued Notz never in derivative claim action, and, as above, this noted his judicial dissolution claim is not a derivative claim.24 Delaware's narrow to loss of exception standing as a instruc tive: it illustrates the courts' recognition that mergers can be used to of fraudulently attempt plaintiffs strip opportunity, based the lack of or on standing mootness, filed pursue previously claims.25 regard Notz's amended in complaint to his direct disso- claim from lution seeks the circuit court at the following least remedies: 180.1430(2), pursuant Stats., § ordering

D. For an order Wis. ATS; of the dissolution appointment pursuant 180.1432, For E. of a receiver Stats., dispose (including equitable of of the assets ATS its SEG) through interest in public Dickten & Masch and Trostel parties; sale to one or more third damages compensation injuries F. For an award of as suffered by oppressive conduct, Plaintiff as result of Defendants' in an trial; amount to be determined at punitive damages For an of G. award in an be amount to deter- trial; mined at action; H. For the and costs disbursements of this and may equitable just I. For such other relief as be and under the circumstances. 25This alleges is indeed what Notz occurred this in stance, and persuasive there was information submitted to the appeals support court of this contention. In a document titled Special "Information Statement for Meeting Sharehold 17, 2007," ers To Be On May Held under subheading "Primary Merger," subheading Reasons For The is a entitled Against "Protection Judicial Dissolution." The text describes the pending litigation says, between Notz ATS and "[O]ur board directors completion believes the merger will serve the of our company best interests and our sharehold making ers shareholder's dissolution claim is remarkably the statute 37. The language civil, "A the of terms: is cast in broadest

clear and administrative, criminal, investigatory proceeding or is a entity party that any or business pending by against as the did not merger be continued may the merger if be substi occur, entity may business surviving or the the whose entity in business proceeding tuted the 180.1106(l)(d) (emphasis Stat. existence ceased." Wis. added). in the to the facts In the text of statute applying the civil case, to note that instant it is important the the time was at pending instituted Notz proceeding be more could written hardly of the The statute merger. "as if the merger such a claim: preserve explicitly occur, If did not would merger did not occur." the Notz shareholder, and the claim have been forced out as a not that the Therefore, continue. we are satisfied would The circuit claim continue.26 judicial may dissolution and, any result, eliminating risk that the moot as be dissolution claim will successful." shareholder's separate, made to a somewhat parties have reference Court, District the that was filed in United States related action In Wisconsin, merger. ATS District of after the Eastern action, That action pursuing appraisal an his shares. Notz case; parties the nor the filed after instant neither denying in judge are identical. As district noted issues stay proceedings, "[T]his motion to the federal action Notz's any has on only impact with the misconduct concerned court which arises proceeding value of shares whereas state duty only can oppression claims from breach of and shareholder Notz, indirectly."Albert Trostel & Sons v. appraisal address 2008). (E.D. 969, 983 In Notz's dissolution Supp. F. 2d both claim, pending appraisal in the federal oppression, based on action, fair of the shares Notz the determination value may that, regardless expect be issues. We held ATS one first, proceeding parties concludes will undoubt- of which any edly bring potential concerns about to the courts' attention judicial court should consider the dissolution claim oppression light allegations based on set forth complaint. in Notz's amended Under the circumstances, standing. Notz has not lost

V CONCLUSION ¶ 38. For the reasons set forth above, we affirm in part, part, proceed- reverse in and remand for further ings. agree appeals We with the court of that the claims alleged corporate opportunity of harm loss of a —the subsidiary high growth potential and the sale of a with primarily corporation, —caused harm and thus affirm we the dismissal of Notz's direct claim of breach fiduciary duty allegations. of appealed as to those On the cross- agree appeals

issue, we also with the court of majority appropriation that the diligence paid shareholder's of the due corporation

for the resulted in a majority constructive dividend to the shareholder be- expense cause it received a benefit at the of the minor- ity appeals' shareholders. Thus we affirm the court of duplication of remedies flowing from the appraisal federal action and the state dissolution action. See HMO-W Inc. v. SSM System, Health Care WI 46, 31, 52, 234 Wis. 2d ¶¶ 611 N.W.2d 250 (discussing the post-merger determination of fair value of dissenters' shares in an action under Wis. Stat. (not § 180.1302 180.1430(2), § Wis. Stat. under which Notz claim)); makes his Application Rabbat, and Robert Share- of Price Discounts and Their Role in Dictating Corporate Behav ior: Encouraging Buy-Outs Elected Through Applica Discount tion, (Winter 2007) 43 Willamette L. Rev. 107 (discussing "the considerations that price control at which the lawfully [shareholder] can minority" eliminate and noting it, that "in states provide that for a controlling can exercise option buy-out his to the complaining shareholder (Wisconsin avoid oppression litigation altogether" statutes do provide not option.)). this proceed permitting and remand to that claim

decision proceedings. to circuit court further disagree appeals the court we with 39. Where standing pursue question to Notz's judicial claim. Stat. his Wisconsin dissolution 180.1106(l)(d) requirement straightforward in its merger "may pending if the be continued as that a claim judicial claim, initi- dissolution did not occur." Notz's merger, alleged prior harm to that share- ated corporation. Because statute holder, not strip operating precludes merger from such pending right pursue action, such claimant persua- here, find and because we as his direct action support position, we reverse the court sive appeals' for that therefore remand

decision on issue. We proceedings for further claim to the circuit court opinion. with this consistent appeals By decision of the court the Court.—The part, part, reversed in and remanded is affirmed proceedings consistent with the circuit court for further opinion. this

¶ ZIEGLER, J., did 40. KINGSLAND ANNETTE participate. not ROGGENSACK, J. DRAKE PATIENCE join majority

(concurring). agree with, I and exception opinion's of that, Albert conclusion with (ATS) diligence expenditures due & for Trostei Sons' potential acquisition Masch, of Dickten & to the related complaint for fails to a direct claim breach LLC, the state alleged primarily fiduciary duty, harm because the (Notz).1 corporation, not to Notz opinion's I also Edward agree majority join in the conclusion with

1 op., Majority

668 complaint that the has stated a claim for relief suffi regard injury cient to survive dismissal in to a direct to diligence Notz based on the expenses & Dickten Masch due by paid ATS.2 agree finally, 42. And I with the

opinion's conclusion that claim Notz's for dissolution of may proceed, ATS albeit on different rationale. I proceed would allow claim to because it all about money, money get i.e., how much can Notz for the payment shares he held ATS. The amount of the due yet Notz is to be determined. separately point

¶ 43. I write out that Notz's judicial proceeding claim for dissolution ATS is at the rights same time isas his claim for dissenter's due to merger ATS into Dickten & Masch. Both claims provide remedy prove will grounds the same if Notz is able dissolution; i.e., fair value of Notz's ATS paid rights shares will be to him. His dissenter's claim is pending action, in a federal court where the fair value of being adjudicated.3 his ATS shares is regard ¶ 44. claims, In two these I make three points. prove grounds First, Notz must for disso lution or exist that claim will be dismissed.4 Wis. Stat. § prove oppres- Second, 180.1433. even if is able to Notz

2Id. Notz, 07-C-0763, See Albert Trostel & Co. v. Sons Case No. Ct., United Dist. States E. Dist. of Wisconsin. n alleged Notz oppression, pursuant has Wis. Stat. 180.1430(2)(b). required circuit court will be determine whether preclusion issue proof oppression, given bars further already this issue was among those addressed Special Litigation Committee to the Board of Directors of Albert (the Company report Trostel & Sons in its dated June Report). App. Special Joint at 95. did not challenge Notz Litigation Committee's conclusions. corpora- legislature ATS, that has decided

sion, the longer to exists due dissolve, to no tion Notz seeks (the Group, merger Ltd. the Everett Smith into ATS's 180.1106(l)(a). § Group). Therefore, Stat. payment corporation dissolve, cash and a there is no merger ATS, Third, due to the is Notz can receive. all paid requested his shares in be the fair value of Notz Accordingly, § pursuant Stat. 180.1323. ATS, to Wis. if court, the circuit this is returned to when case grounds proved, the determination for dissolution are anything, paid to must await the what, if will be Notz of the fair value because federal court's determination paid fair twice for the value of not entitled to be Notz is his in ATS. interest

I. BACKGROUND management displeased with the 45. Notz was complained of directors He the board of ATS. plastics purchase Masch, & not to Dickten decided company, pur and instead caused the Smith selling alleged assets of ATS's it. He also chase subsidiary, wholly Dickten & SEG, Trostel owned made was not in the best interests ATS. Notz Masch pursuant upon ATS's board of directors demands believed were to correct actions he Wis. Stat. 180.0742 damaging ATS.5 Group, alleged Notz that the Smith who was fiduciary its ATS, breached shareholder of by:

duty (1) interest Dickten & Masch LLC—a purchasing an (2) causing usurpation ATS opportunity; of an clear (an SEG thermoplastics business Trostel sale letter, Joint at August App. 2005 demand subsidiary) ATS to Masch Dickten & of LLC —a conflict (3) interest; dividends, avoiding the declaration of de million, spite cash reserves of offering over until $82 initially upon approval dividends conditioned the sale thermoplastics of the ATS interest in [the] business to (4) Group; minority the Smith failing to disclose to the expenses shareholders ATS the administrative of ATS (5) (particularly insider compensation); transferring the plan pension Group ATS explana Smith without (6) tion; engaging and faith negotiations buy in bad to minority the shares of shareholders.6 response pursuant ¶ 47. In demands, to Notz's 180.0744(2)(b), Special Wis. Stat. ATS convened Litigation Committee to evaluate Notz's claims. The Special Litigation composed Committee three independent investigated directors who and evaluated relating corporation the facts to Notz's demand that the Special Litigation take certain actions.7 The Committee appraisers hired and met in excess of times investigation allegations conduct an and evaluate the in Notz's demand letter.8 Upon investigation

¶ 48. the conclusion of its and Special Litigation evaluation, Committee advised (1) Notz as follows: board ATS's of directors would independent continue include at least three directors specified with duties shareholders, relative (2) pay and $1,500,000 would to ATS.9 Beyond Special Litigation concessions, two these Committee concluded it was the best interests of regarding ATS to no take further action the matters 6 Id. at 107.

7 The Report, App. Joint at 92-93. 8 Id. at 92.

9 Id. at 93. Litigation Special The demands.10 Notz's raised "exercising after this conclusion came to Committee conducting, judgment [its] after business informed Litiga Special inquiry."11 upon, a reasonable based no had "identified that it concluded also tion Committee part or maliciousness behavior intentional minority disadvantage shareh [ATS] fiduciaries Litigation Special concluded Committee The olders."12 regard demands, to the Notz that, in [ATS's] or in by is warranted [ATS] further action no regarding allegations concerning the interests best (ii) dividends; (i) the admin to declare failure [ATS's] [ATS] [the expenses charged istrative (iii) purchase of shares for the negotiations Group]; (iv) shareholders; the consolida by the held (v) the claim plan; and pension [ATS's] tion of minority shareholders.13 of the oppression Litigation that with Special then stated Committee above, detailed of the commitments "the fulfillment payment [ATS, the including million to $1.5 effectively Committee] Special Litigation and ad responds Demand equately raised in the the matters brought on in an action could be addressed Letters that upon [B]ased in [ATS's] reasonable our . . . behalf. [ATS] quiry, to take no interest of it in the best ... raise[d] in the Demand matters on the further action Letters."14 challenge any conclu- of the not 49. Notz did Litigation Special Instead, he Committee.

sions 10 Id.

11Id.

12Id. at 94.

13Id. at 95.

14Id. began the us, action that is before in which he has made many allegations of the same that he made in his § Special Stat. demands, 180.0742 and which the Liti- gation already Committee has addressed. Subsequent filing

¶ 50. to Notz's his claim for judicial merged dissolution of ATS, ATS was into Dick- wholly subsidiary Masch, ten & owned of the Smith Group. Notz was served with a notice of dissenter's rights, § pursuant to Wis. Stat. 180.1322. When that payment occurred, Notz demanded for his shares in thereby meeting obligations ATS, his under Wis. Stat. § payment price accept 180.1323. Notz demanded at a pursuant § able to him to Wis. Stat. 180.1328. ATS did accept price not demand, Notz's instead, but ATS filed a court action to determine the fair value of Notz's required shares. Wisconsin Stat. 180.1330 ATS to do currently pending so. That action is in the United States District Court for the Eastern District of Wisc onsin.15

II. DISCUSSION A. Standard of Review

¶ 51. The review us before arose from a motion independently dismiss for failure to state a claim. We question review such a motion as a of law. John Doe 1 v. Milwaukee, 95, Archdiocese 2007 12, WI 303 doing, accept 2d 734 34, Wis. In so N.W.2d827. we alleged complaint facts in the However, as true. Id. we required accept plaintiffs legal are not conclusions. alleged complaint Id. Whether facts in a are suffi oppression question cient to constitute is a of law for independent Paige, Reget App our review. v. 2001 WI ¶73, 11, 242 2d 278, Wis. 626 N.W.2d

15Supra, note 3.

673 B. Dissolution judicial claim for disso has asserted a 52. Notz § thereby invoking 180.1430 ATS, Stat.

lution dissolution) (pro (grounds Stat. 180.1431 and Wis. for dissolution). judicial a harsh Dissolution is cedure for remedy, especially corporation going is con when Bancorporation Lindoe, v. ATS. cern, as was See Pueblo 2001). (Colo. App. Even when Ct. Inc., 37 P.3d proven, grounds are it "iswell-settled that for dissolution corporation is a drastic measure of a solvent dissolution only Cerami v. in extreme circumstances." to be invoked 1980). (Pa. Super. Dignazio, Ct. 424 A.2d majority opinion that all The has concluded complaint allegations except amended one of they upon by allege proceeded Notz because cannot be allegations primarily to ATS.16 Those harm that claim dissolu are not relevant to Notz's for therefore op personally, he, was based on the claim that tion majority by Group. pressed However, the the Smith permitted opinion claims, that "ATS has one of Notz's complete diligence"17 used the due funds were Group, purchase Dickten & Masch the Smith opinion permits proceed. claim to this reality proceed it was in in order to determine whether payment Group dividend-like to the Smith Notz permitted claim is not to share.18 Whether this upon oppression depend to constitute will sufficient upon prove allegation, this able whether Notz response. that the Smith raises the defenses op., 4. Majority 17 Complaint, Amended 31. 18Majority op., 24-28. ¶¶ 674 1. Fair value explained petitions

¶ above, As for dissolution rarely corporation. result in the actual dissolution many jurisdictions It Id. is also instructive to note that adopted § Corporation have Model Business Act 14.34, "Election Dissolution," to Purchase Lieu of wherein a corporation or the other can shareholders elect to purchase all the held shares the shareholder who Corpo seeks dissolution.19 Under the Model Business parties try agree Act, ration are to to come to an purchased.20 on ment the fair value of the be shares to parties agreement However, if the do not come an on price, the court will determine the fair value of the day petition shares before the for dissolution was petition Septem filed.21Notz's dissolution filed ber Corporation

¶ 55. The Model Business Act does components § describe not of fair under value 14.34 pending. an However, when action for dissolution is § explain may official comments to 14.34 it be "useful to consider valuation methods that would be judicial appraisal relevant to a of shares under section Corporation 13.30."Section 13.30 Model Business judicial isAct the section that addresses the determi- during rights nation of fair value a dissenter's action subsequent corporate merger. type to a This is the same pending action Notz has in federal district court § pursuant to Wis. Stat. 180.1330.

19 see, Corporation 14.34(a); Model e.g., § Business Act Ala. § 10-2B-14.30; 10.06.630; § Code Alaska Stat. Ariz. Rev. Stat. (West). § 10-1434; Corp. § Ann. Cal. Code 2000 14.34(c). Corporation Model Business Act 14.34(d). Id., § have an Election does not 56. Wisconsin Corporation provision Act. its in Business Purchase § provision parallel to 14.34 The absence a Wisconsin may Corporation be Act due Model Business § to the Model Business 14.34 was added the fact Corporation its 1990 enacted Act in and Wisconsin Corporation prior However, Act to 1990. Wis. Business provides § for determination of 180.1330, which Stat. subsequent to a shares the fair value of a dissenter's parallel provision merger, to the fair value deter is the Corporation § of the Model Business mination of 13.30 provided compo legislature Therefore, has Act. determining relevant to nents that it has concluded are compo addition, fair In we have addressed value.22 rights in action. of fair a dissenter's nents value Sys., 46, v. Care 2000 WI 234 Inc. Health HMO-W SSM 707, 611 Wis. 2d N.W.2d Merger important 180.1330 is circuit 57. Section dissolution claim be-

court's consideration Notz's merged Masch. cause ATS has into Dickten & When corporation, corporation merged another into 180.1106(l)(a) subsequent controls consider- Stat. 22 jurisdictions in have that fair other concluded Courts rights subsequent merger value in a dissenter's action subsequent equivalent petition fair determined to a value Inc., Chemicals, e.g., dissolution. See Balsamides v. Protameen 1999) (N.J. (concluding fair in an A.2d value 733 alleging thing the same as fair value oppression action means Robblee, action); Robblee v. 841 P.2d dissenting (Wash. 1992) that fair value in App. (concluding Ct. rights action is fair value an action equivalent dissenter's oppression). based on

ation the merged corporation and the shares held in 180.1106(1) that corporation. Section provides in rel- part: evant

(1) All of the following occur when a merger takes effect:

(a) Every entity other business party that is merger merges into the surviving entity, business the separate every of entity existence business that is a party to merger, except surviving business entity, ceases.

(b) The by title all property to owned each business entity that to party merger is vested in the surviving entity business without reversion impair- or ment.

(f) The shares... of entity each business that is party to the merger that are to be converted into ... cash converted, or other property are and the former holders of shares or only interests are entitled the rights provided in the articles merger of or to their rights under ss. 180.1301 to 180.1331 or otherwise under applicable the laws entity to each business that is party to the merger.

Because of ATS's merger Masch, into Dickten & ATS no 180.1106(l)(a). § exists. longer Because the merger was a cash-out merger, Notz's shares in ATS were converted 180.1106(l)(f). § to cash. Therefore, the most that can result from Notz's claim is a dissolution determination of the fair value of Notz's former shares in ATS. 58. Notz's conduct shows he understands effect of the merger ATS, his former shares in as he a filed claim asserting rights dissenter's pursuant requested payment § for his Notz Stat. 180.1323. acceptable price to him at of ATS a former shares § pursuant did ATS not Stat. 180.1328. When to Wis. requested, agree pay a court ATS filed what Notz as it was his shares the fair value action determine required 180.1330. do Wis. Stat. any us, de in the action before Therefore, shares must of the fair value Notz's

termination by the United States the fair value determination await Wisconsin, District of for the Eastern District Court statutory determination is action to make that where paid currently pending.23 to be is not entitled Notz ATS— former shares in for the fair value his twice merger rights in the due to his claim dissenter's once proceedings, only as the viable alternative for and once proven claim dissolution. Why with his would choose to continue Notz mystery However, to me. until for dissolution is claim States District value is determined the United fair along majority opinion's go I the Court, will with pro- permit for Notz's claim dissolution decision to Accordingly, respectfully I concur. ceed.

¶ am that Justice 61. I authorized state joins J. GABLEMAN this concurrence. MICHAEL (concurring ¶ BRADLEY,J. 62. ANN WALSH majority dissenting part). agree part, I that with may judicial continue dissolution claim fiduciary duty claim for breach of has a direct Notz disagree relating diligence expenses. I with the due majority, however, claim breach Notz's fiduciary corporate duty arising usurpation is a out of and that it thus rather than direct claim derivative be dismissed. must

23Supra, note 3. ¶ alleged Instead, based on the facts in the complaint, amended I conclude that Notz states a direct fiduciary duty arising claim for breach of out of the usurpation corporate opportunity. defendants' of a The fiduciary duty defendants breached their to by using position shareholders their of trust to further private majority their interest. Unlike the sharehold- participation ers, Notz was denied continued in a thriv- ing growth industry. injury unique This to him. majority Further, I conclude that the fails to apply analysis. provides articulate and a consistent It principled justifying disparate no distinction treat- fiduciary duty ment of the two breach of claims. Accord- ingly, part part. I concur in and dissent in previously explained, 65. As we have when an injury primarily is to a shareholder, that shareholder bring can a direct cause of action. Schantz, Rose v. (1972). Wis. 2d 228-29, 201 N.W.2d593 When the injury primarily corporation, is to the a shareholder appropriate. derivative action is Id. at 229. Our case provided guidance law, however, has scant for determin- ing injury primarily whether an to the shareholder or primarily corporation. to the majority 66. Presented with case, a difficult

splits According majority, the difference. when majority usurp corpo the directors and shareholder1 opportunity corporation's rate and sell the most valu competitive enterprise, able asset to their own injury primarily corporation.

explains "[a]ll [] that this is because of the shareholders

1 brought Notz against shareholder, suit controlling ATS's Group, directors, and four of ATS's officers and all of belong whom Group. to the Smith I officers, will refer to ATS's directors, and controlling collectively shareholder as the "Smith Group" or "the defendants."

679 op., Majority However, equally." 23. were affected diligence spent in corporate for due are assets when majority concludes scheme, the such a furtherance of minority injury primarily shareholder. that the "received explains defendants this is because It that minority expense shareholders" at the a benefit any for never intention and "there way any due dili- from this to benefit shareholder op., Majority ¶¶ expenditure[.]" 4, 27. gence I majority's disagree conclusion with the I 67. fiduciary duty Group's breach of the Smith only Rose, usurpation gives claim. In derivative rise to right a stockholder some individual stated, "where we improper director, the being impaired of a acts bring his own behalf suit on can a direct stockholder being right violated." that is his individual because it is whether Thus, to determine Rose, 2d at 228-29. 56 Wis. corporation, injury the individual share is to the an identifying begin by both,2 court must holders, or right has been violated. rights. legal Fiduciary In confer Wis- duties fiduciary duty owe a and directors consin, officers good treat each and to faith to act shareholders "[T]he fairly. directors and Id. at duty fiduciary corporation to not use owe officers of a 2 direct and may give rise to both of conduct single A course owing to a duties both "when there are derivative claims Am. Johnson v. personally." and to a stockholder corporation (D.D.C. 1969); 802, see also Co., Supp. 296 F. Gen. Ins. 659, Ass'n, 661-62 405 F.2d Men's v. Buschmann Professional Bank, (7th 458 So.2d 1969); First Miss. Nat'l Vickers v. Cir. (Miss. Am. v. Valdak 1984); Ins. Co. Empire 1063-64 Life 1972). (5th F.2d Cir. Corp., 468 positions personal advantage their for their own ... of of the detriment the interests the stockholders of the corporation." v. Co., Borak J.I. 838, Case 317 F.2d 842 1963) (7th law). (applying Cir. Wisconsin fiduciary duty 69. That same is also owed minority shareholders to shareholders: "The fiduciary duty same is due from a dominant or control ling group or of shareholders to the minor ity corporation as is due from the director of a shareholders." 12B William Meade Fletcher, Fletcher Cyclopedia Corporations § the Law Private 5810 of 2000) (perm. (citing Grognet Valley ed., rev. vol. v. Fox (1969)). Trucking Serv., 235, 45 2dWis. 172 N.W.2d812 controlling Officers, directors, and share fiduciary they holders breach their duties when treat "differently, inequitably," shareholders and or they position when private "use their trust further their Jorgensen Works,

interests." See v. Water Inc. (Jorgensen II), App ¶¶ 135, 2001 10, 17-18, WI 246 2d 614, 230; Rose, 630 see N.W.2d also 2dWis. at through corporate "If that control sale of the property property acquired by is made and the majority, minority may not be excluded from a fair participation in the fruits of the sale." S. Pac. Co. v. (1919). Bogert, 483, 250 U.S. Group

¶ 71. Notz asserts that the Smith identi thermoplastics growth industry fied the business as a critical to the future success ATS.3 In Group opportunity acquire Smith learned of an competitor Dickten & Masch, a direct of ATS's thermo- 3 Specifically, complaint alleges amended the de- explained fendant and president ATS "We have very acquisition plastics focused strategy the rubber and platform provide that will additional scale their future growth." alleges

plastics that the business. Notz diligence investigation through a due determined combining "acquiring it with Dickten & Masch plastics operations result in substantial would ATS authorizing pur- positive synergies." Instead of ATS's pass Group ATS to on the sale caused chase, the Smith bought & and ATS's both Dickten and then Masch alleges plastics the further division itself. Notz fiduciary duties, and that their defendants breached majority injury him that the an this breach inflicted not suffer. shareholders did owning Group ¶ had an interest in The Smith 72. thriving thermoplastics percent How- business. 100 of a percent only Group own ever, the Smith would purchased Thus, if Dickten & Masch. this ATS business purchase both asserts, decided to the Smith Notz plastics and ATS's business. Dickten & Masch Group's fully owning in interest these businesses maintaining hold- interest was adversarial to Notz's ings plastics industry. The used their the defendants positions to their own and control further trust alleged expense. private interest Under these at Notz's fiduciary breached their duties facts, the defendants by favoring minority corporation in the shareholders percent ownership they interest. See which had a 100 supra, Fletcher, 5764.

¶ maintain his direct action Whether Notz can injury primarily depends him, or on whether majority op., primarily corporation. For See "primarily corpo- determining injury is to the when an explicit provides case no test. See ration," law Wisconsin only acknowledges, articulated id. As the iniury "primarily to an individual share- test an is for Id. holder." injury primarily

¶ 74. An is shareholder rights it when "affects a shareholder's in a manner upon from the distinct effect other shareholders." Id. 16.) (citing Jorgensen II, 2dWis. When a fiduciary duty "inflict[s] [the of a breach harm on minority shareholder] that other shareholders did not suffer," the has direct cause of Jorgensen II, action. See 246 Wis. 2d 18.4 setting ¶ 75. After forth the test for when an injury primarily only shareholder, and with cursory explanation, majority summarily concludes: equally by "Allof the shareholders ATS were affected opportunity acquire loss of Dickten & Masch [Trostel's] plastics Majority the sale of division." op., ¶ 23.

¶ 76. This conclusion is antithetical to the facts. It injury true that all shareholders suffered common depreci- in that the their value of investment in ATS injury Nonetheless, ated. Notz suffered an additional unique minority was the that shareholders. The 4Wisconsin is not alone. jurisdictions recognize Other fiduciary duty breaches of resulting in harm unique minority give shareholders can rise to direct suits: general, fiduciary In brought actions for breach of duties are to be However, fiduciary duty alleged by derivative suits. a breach of minority against majority shareholders shareholders who control a corporation, of deprive shares a close and use their control to minority investment, may shareholders of the benefits of their be brought as an individual action. Fletcher, 12B William Meade Cyclopedia Fletcher the Law 2000). Corporations ed., § Private 5909 (perm. Further, vol. rev. [Wjhere question plaintiffs claiming injury there is no are an shareholders, only by minority that was not all suffered but shareholders, properly [direct] that action is as classified rather than derivative. Id. 5908. Group planned executed these transac- and

Smith who gain, a net loss. Notz suffered received a net but tions thermoplastics squeezed out of the Because Notz was Group itself, he was took for that the Smith business participation fruits in the from a fair "excluded injury Co., 488. 250 U.S. at Notz's sale." S. Pac. See controlling "injury" from the distinct continued defendants, was denied —unlike the Notz thriving industry. growth participation in a a direct cause of I conclude that states Notz arising fiduciary duty out for breach of action corporate opportunity. usurpation of a defendants' presented com- in Notz's amended Based on facts fiduciary duty plaint, their breached the defendants by using position minority their of trust shareholders private This breach caused Notz their interests. further injury. unique

II ways part because of I also with analysis. apply a consistent its to articulate and failure majority's principled justifying the I distinction find no fiduciary duty disparate breach of treatment of two parties brief, in this In case. his claims.5 Neither do ap "Candidly, policy argued, a consistent should Notz [Tjhere meaningful ply difference between is no .... using purposes funds for its own the Smith ATS corporate opportunities Group taking corporate 'selling' in an to itself effort and then assets squeeze out shareholders." having ¶ Nevertheless, first determined that 79. injury unique the not a when Smith did suffer Notz 5 Notably, distinguish not complaint Notz's amended did However, appeals treated the the the court between claims. separately. claims

Group usurped corporate opportunity, majority a the changes though presum- course. Even all shareholders ably suffered the same diminution of their stock value expenditure diligence, major- based on ATS's due for ity particular injury primarily concludes that this was minority explains It Smith shareholders. that the Group expense minority "received benefit at the any shareholders" and "there was never intention for the minority any way shareholder to benefit from this due diligence expenditure[.]" Majority op., ¶¶ 4, 27. addressing usurpation

¶ 80. When claim, the Group apparently extrinsic benefit to the Smith was majority's analysis.6 analysis irrelevant to the If this injury correct, Group's then the caused the Smith diligence decision to use ATS's funds to conduct due injury primarily corporation an well, as because extrinsic benefit is irrelevant and "all shareholders equally" by paid were affected the funds due dili gence. applying principle, Instead a consistent how majority opinion diligence ever, the carves out the due expenditure paid by ATS and it a labels constructive majority op., ¶ dividend. See 4. inapt. 81. The term constructive dividend is case,

Before this Wisconsin courts have not used the term "constructive dividend" outside of the context Dep't e.g., Sentry See, tax statutes. Rev. v. Fin. majority why, exactly, The never states an exclusive ben- directors, officers, efit to and controlling shareholders is irrel- analysis. evant majority imply does that shareholder-director's self-dealing does not transform an action primarily injures corporation primarily into one that See injures Further, shareholder. op., majority quotes, apparently approval, with the circuit court's ancillary determination "any benefit received from injury" the transaction did not create a direct See majority op., shareholders. (Ct. App. Corp., 2d N.W.2d235

Servs. 1991). majority opinion the term fails to define here. context means in the

¶ I not what it 82. am sure Dictionary, defines a however, Black's Law of this case. by a derived as a "taxable benefit dividend constructive though corporation the even the from designated Law a dividend." Black's not benefit was 1999). (7th Dictionary 492 ed. appeals Jorgensen not II, the did 83. In court when it concluded the term "constructive dividend"

use paid disproportionately were that some shareholders case, how- 2d In that fees. 246 Wis. directors' See "related to the fees were ever, "it was obvious" paid profits corporation" "as rather than salaries of the compensation is, the Id,., 6. That for work done." reality a fees were in share concluded that these court profits corporation's dis- and have been should of the evenly unclear, It is how- to all shareholders. tributed Jorgensen have fit II would ever, if the directors' fees Dictionary definition of constructive the Black's Law dividend. Group case, did however, In this Smith anything resembling First, a dividend.

not receive expense, expenditure Smith business expenditure be taxed based on ATS's could not diligence. money for due Second, used for due Group. diligence paid Instead, was not diligence paid various have been due funds would evaluating third-parties compensation for their work as purchase Thus, Dickten & Masch. whether ATS should diligence expen- due it incorrect characterize the or a "dividend-like a "constructive dividend" diture as payment." Stripped inapt ¶ 85. term, inconsistent analysis apparent. majority attempts becomes The to explain why diligence expenditure gives the due rise to direct action: "The bottom line ... is that there was any any [Notz] way never intention to benefit expenditure" diligence from this due because the Smith Group planned profitable growth to freeze Notz out of a industry. Majority op., way, ¶ 27. Put another the majority diligence expenditure determines that the due injury Group put was an to Notz because the Smith its causing own interest before Notz's interests, a harm unique minority to Yet, shareholders. this is the exact underlying fiduciary duty conduct claims, Notz's which majority previously the determined were derivative injury corporation.7 the because was to the only ¶ 86. The true I distinction see between easily Notz's two claims is that a dollar value is more assigned diligence expenditure. to the claim for the due determining This is not a distinction that is relevant injury primarily whether the was to the shareholder or corporation. the majority analysis provide ¶ 87. The not does principle explain why coherent and consistent the diligence gives due claim rise ato direct action when the usurpation gives only claim rise to a derivative action. Ultimately, analysis provides guidance its little to either asserting party defending a shareholder a claim or the against it. majority The distinguishes by further two the claims stating fiduciary duty underlying facts claim are Rose, similar underlying

more and the facts the claim for the Jorgensen II. diligence expenditure due are more similar Majority op., similarity" 28. The "factual points does controlling not serve as a for a legal principle. substitute allegations true, are that if Notz's I conclude Group's of their in breach conduct

the Smith minority causing fiduciary share- Notz, duties to Group put Allegedly, unique injury. the Smith holders minority shareholders' ahead of self-interest its own ATS, rather than it decided interests when diligence. Group, Addition- fund the due should Smith ally, Group put ahead its own self-interest minority it cut out interests when shareholders' the minority thriving participation in a

shareholders' purchasing causing pass industry by growth ATS to deciding plastics to sell ATS's Dickten & Masch were shareholders to itself. division they injured uniquely continued were denied because industry. thermoplastics participation in the presented in the the facts sum, In based on complaint, states a direct I conclude that Notz amended arising fiduciary duty out of the for breach of claim opportunity, corporate usurpation of a defendants' unique shareholders that breach caused injury. fails to I conclude that Further, analysis. apply There is no a consistent articulate and majority's disparate justifying principled distinction fiduciary duty claims. breach of of the two treatment part. Accordingly, part and dissent in I concur in to state that Chief Justice I am authorized joins this concurrence S. ABRAHAMSON SHIRLEY part. part and dissent

Case Details

Case Name: Notz v. Everett Smith Group, Ltd.

Court Name: Wisconsin Supreme Court

Date Published: Apr 29, 2009

Citation: 764 N.W.2d 904

Docket Number: 2006AP3156

Court Abbreviation: Wis.