Notz v. Everett Smith Group, Ltd.
| Citation | 764 N.W.2d 904,2009 WI 30 |
| Decision Date | 29 April 2009 |
| Docket Number | No. 2006AP3156.,2006AP3156. |
| Parties | Edward U. NOTZ, Plaintiff-Appellant-Cross-Respondent-Petitioner, v. EVERETT SMITH GROUP, LTD., Thomas J. Hauske, Jr., Randall M. Perry, Anders Segerdahl, Steven J. Hartung and Albert Trostel & Sons Company, Defendants-Respondents-Cross-Appellants-Cross-Petitioners. |
| Court | United States State Supreme Court of Wisconsin |
briefs by Thomas L. Shriner, Jr., G. Michael Halfenger, and Rebecca Wickhem House, and Foley & Lardner LLP, Milwaukee, and oral argument by Thomas L. Shriner, Jr.
This review of a published court of appeals decision1 involves three questions that arise in the context of a minority shareholder's lawsuit against the majority shareholder: (1) whether the allegations in the complaint state a direct claim by the minority shareholder for breach of fiduciary duty; (2) whether an allegation that the majority shareholder benefited from due diligence—paid for by the corporation for the shareholder's own purposes without reimbursement to the corporation—supports a direct claim by the minority shareholder for breach of fiduciary duty; and (3) whether a pending direct claim by the minority shareholder for judicial dissolution (based on oppressive conduct) survives a cash-out merger that eliminates the petitioner's status as a shareholder.
¶ 2 The court of appeals held that the minority shareholder's complaint failed to state a direct claim for breach of fiduciary duty because the primary harm alleged was to the corporation, not to the shareholder. However, the court of appeals held that one allegation—that expenditures for due diligence for a potential acquisition of another company ultimately benefited only the majority shareholder2 —would, if true, constitute a "dividend-like" payment to the majority shareholder and thus support a direct claim. The judicial dissolution claim3 the circuit court had allowed to go forward encountered an unforeseen barrier at the court of appeals: while the appeal was pending, a forced merger eliminated the petitioner's status as a shareholder. A motion filed by the majority shareholder brought this to the court of appeals' attention. Ultimately, the court of appeals remanded with directions to enter an order to dismiss that claim on the grounds that the post-claim merger had stripped the petitioner of standing to pursue that claim.
¶ 3 Both the minority and majority shareholders involved sought review by this court of the rulings adverse to them. The minority shareholder, Edward Notz (Notz), appealed the court of appeals' decisions that first, he failed to state a direct claim for breach of fiduciary duty, and second, he had lost standing on the judicial dissolution claim due to the merger. The majority shareholder, Everett Smith Group, Ltd. (the Smith Group), cross-appealed the court of appeals' decision that the direct claim based on the allegations about due diligence costs could proceed.
¶ 4 For the reasons set forth herein, we affirm in part, reverse in part, and remand for further proceedings. We agree with the court of appeals that the claims of harm alleged—the loss of a corporate opportunity and the sale of a subsidiary with high growth potential—caused harm primarily to the corporation, and thus we affirm the dismissal of Notz's direct claim of breach of fiduciary duty as to those allegations. On the cross-appealed issue, we also agree with the court of appeals that the majority shareholder's appropriation of the due diligence paid for by the corporation resulted in a constructive dividend to the majority shareholder because it received a benefit at the expense of the minority shareholders. Thus we affirm the court of appeals' decision permitting that claim to proceed and remand to the circuit court for further proceedings.
¶ 5 Where we disagree with the court of appeals is on the question of Notz's standing to pursue his judicial dissolution claim. Wisconsin Stat. § 180.1106(1)(d) is straightforward in its requirement that a pending claim "may be continued as if the merger did not occur." Notz's judicial dissolution claim, initiated prior to the merger, alleged harm to that shareholder, not to the corporation. Because the statute precludes a merger from operating to strip such a claimant of the right to pursue a pending action, such as his direct action here, and because we find persuasive support for that position, we reverse the court of appeals' decision on that issue. We therefore remand that claim to the circuit court for further proceedings consistent with this opinion.
¶ 6 The company at the center of this dispute, Albert Trostel & Sons (ATS), evolved and grew from its beginning as one of the tanneries that made Milwaukee a powerhouse in the leather industry in the late 1800s. The story of the company's growth includes names familiar to anyone with a passing knowledge of Wisconsin history: one of Albert Trostel's sons married into the Uihlein family, a major player in another of Milwaukee's then-thriving industries—the brewing of beer. Over the years, ATS acquired subsidiaries and branched out into production of rubber and plastics. Through a series of transactions, control of the company shifted from Trostel's descendants to Everett Smith, who was hired by ATS in 1938 and later became president of the company. Smith formed what would eventually become the Smith Group. At the time this action was commenced, ATS was owned 88.9 percent by the Smith Group, 5.5 percent by Notz, and 5.6 percent by other Trostel descendants who are not parties to this proceeding.4
¶ 7 By 2003, ATS's board of directors was comprised entirely of members who were also officers and/or directors of the Smith Group. The Smith Group began making offers to purchase the shares of ATS's minority shareholders. Notz rejected the offers.
¶ 8 At the same time, ATS turned its attention to the potential for growth in plastics. As part of this new strategy, its subsidiary, Trostel Specialty Elastomers Group, Inc. (Trostel SEG), in June 2003 acquired an Iowa custom injection molding company, and ATS contemplated other acquisitions as well.
¶ 9 What happened next is the basis of Notz's claims. In June 2004 an opportunity presented itself for ATS to acquire the assets of Dickten & Masch, a competing plastics manufacturing business. ATS conducted due diligence. But in August 2004, the ATS board decided to pass on acquiring Dickten & Masch. Shortly thereafter, the Smith Group, which had no other direct holdings in the plastics field, acquired Dickten & Masch. Within months, the Smith Group's new Dickten & Masch affiliate purchased the assets of ATS's plastics subsidiary, Trostel SEG, from ATS.
¶ 10 In response to the Smith Group's acquisition of both plastics companies, Notz commenced an action5 against the Smith Group and four of its directors on April 6, 2006. The initial complaint was dismissed, and an amended complaint was filed September 29, 2006, alleging breach of fiduciary duty by the Smith Group and breach of fiduciary duty by the individual directors, and requesting judicial dissolution pursuant to Wis. Stat. § 180.1430(2)(b) on the grounds that the defendants had acted in a manner that was oppressive to Notz.6
¶ 11 At a hearing held on November 22, 2006, the Milwaukee County Circuit Court, the Honorable John A. Franke presiding, found that the injuries alleged in the complaint were common to all shareholders, reasoning that any ancillary benefit the Smith Group received from the transaction did not create a direct injury. The circuit court dismissed Notz's claims of breach of fiduciary duty. However, it declined to dismiss the judicial dissolution claim based on allegedly oppressive conduct.
¶ 12 The court of appeals granted the parties' petitions to appeal the circuit court's order. While the appeal was pending, ATS initiated a cash-out merger under Wis. Stat. §§ 180.1101(2)(c) and 180.1103(3). Despite Notz's opposition,7 the merger was approved and became effective May 17, 2007.8 As noted above, the court of appeals affirmed the circuit court's holding that the breach of fiduciary duty claim was appropriately a derivative, rather than direct, claim on the grounds that "stripp[ing] Albert Trostel & Sons of its most important assets and divert[ing] to the Smith Group Trostel's corporate opportunity to buy Dickten and Masch ... [was] an injury to Trostel" because "all of the shareholders were affected equally[.]" Notz v. Everett Smith Group, Ltd., 2008 WI App 84, ¶ 17, 312 Wis.2d 636, 754 N.W.2d 235. It carved out a portion of the claim, however, having to do with money spent for due diligence. Given the Smith Group's ultimate acquisition of Dickten & Masch, ATS's expenditures for due diligence ultimately benefited only that majority shareholder, the court of appeals reasoned, and thus constituted a constructive dividend. Id., ¶ 18. As to the judicial dissolution claim, which had survived in the circuit court, the court of appeals found that an intervening event, the cash-out merger, had stripped the petitioner of standing to pursue the judicial dissolution claim because he was no longer a shareholder. Id., ¶ 26. Therefore, the court of appeals remanded with an order to dismiss that claim for lack of standing. Id.
¶ 13 A petition and a cross-petition for review followed, and this court granted review.
¶ 14 Whether a complaint by a minority shareholder has alleged facts that will support direct claims for breach of fiduciary duty presents questions of law reviewed de novo. See Borne v. Gonstead Advanced Techniques, Inc., 2003 WI App 135, ¶ 10, 266 Wis.2d 253, 667...
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