Case Title: Stephen Einhorn v. James D. Culea

Citation: 2000 WI 65

Docket Number: 1997AP003592

State: wisconsin

Court: Wisconsin Supreme Court

Date: 2000-06-22T00:00:00Z

Document:
2000 WI 65 
 
SUPREME COURT OF WISCONSIN 
 
 
Case No.: 
97-3592 
 
 
Complete Title 
of Case: 
 
Stephen Einhorn,  
 
Plaintiff-Appellant-Petitioner, 
 
v. 
James D. Culea, Northern Labs, Inc.  
and Northern Labs Manufacturing, Inc.,  
 
Defendants-Respondents. 
  
 
ON REVIEW OF A DECISION OF THE COURT OF APPEALS 
Reported at: 
224 Wis. 2d 856, 591 N.W.2d 908 
 
 
(Ct. App. 1999 – Published) 
 
 
Opinion Filed: 
June 22, 2000 
Submitted on Briefs: 
      
Oral Argument: 
January 5, 2000 
 
 
Source of APPEAL 
 
COURT: 
Circuit 
 
COUNTY: 
Ozaukee 
 
JUDGE: 
Joseph D. McCormack 
 
 
JUSTICES: 
 
Concurred: 
      
 
Dissented: 
      
 
Not Participating:       
 
 
ATTORNEYS: 
For the plaintiff-appellant-petitioner, there 
were briefs by Robert H. Friebert, Matthew W. O’Neill and 
Friebert, Finerty & St. John, S.C., Milwaukee, and oral argument 
by Matthew W. O’Neill. 
 
 
For the defendants-respondents, there was a brief 
by Dean P. Laing and O’Neil, Cannon & Hollman, S.C., Milwaukee, 
and oral argument by Dean P. Laing. 
 
2000 WI 65 
 
NOTICE 
This opinion is subject to further editing 
and modification.  The final version will 
appear in the bound volume of the official 
reports. 
 
 
No. 97-3592 
 
STATE OF WISCONSIN               :  
IN SUPREME COURT 
 
 
Stephen Einhorn,  
 
          Plaintiff-Appellant-Petitioner, 
 
     v. 
 
James D. Culea, Northern Labs, Inc.  
 
and Northern Labs Manufacturing, Inc.,  
 
          Defendants-Respondents. 
 
 
REVIEW of a decision of the Court of Appeals.  Reversed and 
remanded. 
 
¶1 
SHIRLEY S. ABRAHAMSON, CHIEF JUSTICE.   This is a 
review of a published decision of the court of appeals1 affirming 
a judgment and order of the circuit court for Ozaukee County, 
Joseph D. McCormack, Circuit Judge.  The circuit court dismissed 
the derivative shareholder action of Stephen Einhorn, a minority 
shareholder and member of the board of directors of Northern 
                     
1 Einhorn v. Culea, 224 Wis. 2d 856, 591 N.W.2d 908 (Ct. 
App. 1999).  
FILED 
 
JUN 22, 2000 
 
Cornelia G. Clark 
Clerk of Supreme Court 
Madison, WI 
 
 
 
 
 
No. 
97-3592 
 
 
2 
Labs.2  The circuit court concluded that the threshold for 
determining whether a member of the special litigation committee 
is independent within the meaning of Wis. Stat. § 180.0744 
(1997-98) is "extremely low" and found that the special 
litigation committee was independent.  Accordingly, the circuit 
court 
dismissed 
Einhorn's 
derivative 
action 
pursuant 
to 
§ 180.0744(1).3 
¶2 
The court of appeals affirmed the judgment of the 
circuit court, concluding that the circuit court's assessment of 
whether each member of the special litigation committee was 
independent was based on facts supported by the record and was 
not clearly erroneous. 
¶3 
The issue raised in the present case is the proper 
interpretation and application of the standard set forth in Wis. 
                     
2 For purposes of this opinion, Northern Labs, Inc., and 
Northern Labs Manufacturing, Inc., are treated as the same 
corporate entity, and will be referred to collectively as 
"Northern Labs." 
3 Unless otherwise noted, all references to the Wisconsin 
Statutes 
are 
to 
the 
1997-98 
volumes. 
 
Wisconsin 
Stat. 
§ 180.0744, the sole statute in question in this appeal, was 
adopted and amended in 1991.  It has not been amended 
thereafter. 
Wisconsin Stat. § 180.0744(1) reads as follows:  
 
180.0744.  Dismissal 
(1) The court shall dismiss a derivative proceeding on 
motion by the corporation if the court finds that [a 
special litigation committee] . . . has 
determined, 
acting in good faith after conducting a reasonable 
inquiry upon which its conclusions are based, that 
maintenance of the derivative proceeding is not in the 
best interests of the corporation . . . . 
 
No. 
97-3592 
 
 
3 
Stat. § 180.0744 of whether a member of a special litigation 
committee is independent.  The issue is not whether the 
derivative action will succeed, but whether the derivative 
action should be dismissed on the basis of the decision of the 
special litigation committee.4  For the reasons set forth, we 
conclude that the circuit court and the court of appeals erred 
in declaring that the threshold established by the legislature 
in § 180.0744 in determining whether a member of a special 
litigation committee is independent is "extremely low."  We 
further conclude that in deciding whether members of the special 
litigation committee are independent, the circuit court should 
determine 
whether, 
considering 
the 
totality 
of 
the 
circumstances, a reasonable person in the position of the member 
of the special litigation committee can base his or her decision 
on 
the 
merits 
of 
the 
issue 
rather 
than 
on 
extraneous 
considerations or influences.  In other words, the test is 
whether a member of the committee has a relationship with an 
individual defendant or the corporation that would reasonably be 
expected to affect the member's judgment with respect to the 
litigation at issue.  Because the circuit court did not make 
sufficient findings of fact and did not apply the correct legal 
standard to determine whether the members of the special 
litigation committee were independent, we reverse the decision 
of the court of appeals and remand the cause to the circuit 
                     
4 Culea's motion to strike Einhorn's brief because it 
purportedly exceeds the 11,000-word limit by 234 words, Wis. 
Stat. § (Rule) 809.19(8)(c), is denied.  No costs are awarded.  
No. 
97-3592 
 
 
4 
court for further proceedings not inconsistent with this 
decision. 
I 
¶4 
We set forth the background of the dispute here.  
Additional facts relevant to the issue of whether the members of 
the special litigation committee were independent are set forth 
later in the opinion. 
¶5 
In December 1985, James D. Culea (the defendant), 
Stephen Einhorn (the plaintiff), and Einhorn's business partner, 
Orville Mertz, acquired Northern Labs.  The Northern Labs stock 
was distributed as follows: Culea 56.09%, Einhorn 20.60% and 
Mertz 20.06%.5  The remaining stock was owned by other managers 
and directors.  Culea has served as president, manager, director 
and majority shareholder of Northern Labs since 1986.  Einhorn 
has been a director and minority shareholder. 
¶6 
At the time of its acquisition in 1985, Northern Labs 
had annual sales of $16 million and generated little profit.  
During the period between 1986 and 1992, Northern Labs' sales 
and profits increased.  In the 1993 fiscal year, Northern Labs 
generated $33 million in sales and $1.9 million in profits. 
¶7 
In 1992, Culea sought a retroactive performance bonus, 
asserting that he had been undercompensated in the years 
following the acquisition.  In May 1992, he sent a notice to the 
directors scheduling a compensation committee meeting and a 
                     
5 Any disagreements among the parties about the exact 
percentages of ownership are not material to our discussion or 
holding.  
No. 
97-3592 
 
 
5 
board of directors meeting for July 29, 1992.  At that time the 
board of directors consisted of Culea, his wife Shelly Culea, 
Einhorn, Mertz, and the company's vice president of finance, 
Robert Bonk.  Culea, Mertz and Bonk comprised the compensation 
committee. 
¶8 
On 
July 
29, 
1992, 
the 
compensation 
committee 
unanimously 
approved 
a 
retroactive 
bonus 
to 
Culea 
of 
approximately $300,000, a portion of which was to be paid with 
Northern Labs stock.  A board of directors meeting was held 
immediately after the compensation committee meeting.  The four 
directors in attendance — Culea, Mertz, Bonk and Shelly Culea — 
voted 
unanimously 
to 
ratify 
the 
compensation 
committee's 
decisions.  Einhorn did not attend the July 29, 1992, board of 
directors meeting.  Following Culea's stock compensation, the 
stock was allocated as follows: Culea 76%, Einhorn 22%, and Bonk 
2%.6   
¶9 
On December 9, 1993, Einhorn filed a direct action 
against Culea, alleging that Culea had willfully breached his 
fiduciary duty to Einhorn by participating in and causing the 
corporation to award a self-dealing retroactive bonus to Culea 
of $300,000 and to issue stock for no consideration or at a 
grossly inadequate price.  Einhorn alleged that he had been 
"damaged by the dilution of his percentage of ownership in the 
companies and by a reduction in the value of his interest in the 
                     
6 Prior 
to 
the 
board 
meeting, 
Mertz 
and 
two 
other 
stockholders had sold their holdings. 
No. 
97-3592 
 
 
6 
companies . . . ."  Einhorn sought a judgment ordering Culea to 
surrender stock to Northern Labs and to reimburse Northern Labs 
for all cash payments received by him for the retroactive bonus. 
¶10 On May 3, 1994, Culea filed a motion for summary 
judgment arguing, among other things, that Einhorn improperly 
filed his suit as a direct action instead of a derivative 
action.  The circuit court agreed with Culea and gave Einhorn 30 
days to amend his complaint. 
¶11 Einhorn amended his complaint in November 1994 to 
state a derivative action with allegations similar to those in 
his original complaint.  The members of the board of directors 
in November 1994 were, pursuant to a stock agreement, appointees 
of Culea and Einhorn.  In addition to himself and his wife, 
Culea appointed his neighbor Dwight Chewning, Northern Labs CFO 
Robert Bonk, and Lolita Chua, a friend of Shelly Culea.  Einhorn 
appointed himself and his business partner, John Beagle. 
¶12 Following Einhorn's amended complaint, on December 9, 
1994, Culea issued a notice of a special meeting of the board of 
directors for December 16, 1994.  Culea's notice indicated that 
Chewning and Chua were new members of the board and that the 
board would be voting on whether the maintenance of Einhorn's 
derivative action was in the best interests of the corporation. 
 Einhorn requested to bring an attorney to the meeting but his 
request was denied by the corporate counsel for Northern Labs.  
Corporate counsel's firm represented Culea in the action filed 
by Einhorn. 
No. 
97-3592 
 
 
7 
¶13 The board of directors met as scheduled on December 
16, 1994.  Northern Labs' corporate counsel advised that because 
Einhorn, Culea and Shelly Culea had an interest in the dispute, 
they should not participate in any vote, whether as directors or 
as potential members of any special litigation committee.  The 
board then created a special litigation committee composed of 
Chewning, Bonk, Chua and Beagle.7 
¶14 After five months of meetings and approximately 500 
hours of inquiry, the special litigation committee voted three 
to one that continuation of Einhorn's derivative action was not 
in the best interests of the corporation.8  Based on this vote 
and pursuant to Wis. Stat. § 180.0744(1), Culea moved the 
circuit court to dismiss Einhorn's derivative action.   
¶15 In a decision and order dated October 30, 1995, the 
circuit court denied Culea's motion to dismiss the action, 
stating that it was not prepared to find that the special 
                     
7 In addition to asserting that the four directors who 
became members of the special litigation committee were not 
independent, Einhorn also asserts that no vote was taken to 
appoint the special litigation committee, as required by Wis. 
Stat. § 180.0744(2)(b).  While the court of appeals recognized 
that "the creation of the SLC [special litigation committee] 
could have been better documented," the court of appeals 
rejected this argument.  Einhorn v. Culea, 224 Wis. 2d 856, 869-
70, 591 N.W.2d 908 (Ct. App. 1999).  While the record does not 
reflect that a formal vote was taken to create the special 
litigation committee, it suggests that the formation of the 
committee was done by consensus of the four directors who 
ultimately served on the special litigation committee. 
8 The lone dissenting vote was John Beagle, Einhorn's 
business partner. 
No. 
97-3592 
 
 
8 
litigation committee met the criteria of being independent set 
forth in Wis. Stat. § 180.0744.  After a seven-day trial to the 
circuit court on the issue of whether the members of the special 
litigation committee were independent under § 180.0744, the 
circuit court concluded that the threshold established by the 
legislature in determining whether members of the special 
litigation committee were independent is "extremely low."  The 
circuit court found that the members of the committee were 
independent within the meaning of § 180.0744, that they acted in 
good 
faith 
and 
that 
they 
made 
their 
determination 
from 
conclusions based upon a reasonable inquiry.9  The circuit court 
dismissed the derivative action.  The court of appeals affirmed 
the judgment of the circuit court. 
II 
¶16 The present case is a derivative action.  A derivative 
action differs from ordinary commercial litigation and from a 
representative action such as a class action.  In a derivative 
action, the claims belong to the corporation, not to the 
complaining 
shareholder. 
 
The 
complaining 
shareholder 
is 
                     
9 The issues of whether the members acted in good faith and 
conducted a reasonable inquiry are not before us.  Einhorn does 
not challenge these conclusions. 
No. 
97-3592 
 
 
9 
challenging, on behalf of the corporation that has been 
unwilling to bring the suit, specific corporate conduct.10 
¶17 A derivative action reflects competing interests: On 
the one hand, the action allows shareholders to assert the 
corporation's rights when corporate management refuses to do so. 
 On the other hand, the board of directors or majority 
shareholders of a corporation, not the courts or minority 
shareholders, should resolve internal conflicts.  A derivative 
action raises the specter of undue judicial interference with 
the business judgment of corporate management.  In other words, 
a derivative action is a means to curb managerial misconduct, 
yet it also undermines the basic principle of corporate 
governance that the decisions of a corporation, including the 
decision to initiate litigation, should be made by the board of 
directors. 
¶18 Courts and legislatures have allowed corporations to 
use special litigation committees to dismiss derivative actions 
                     
10 A 
derivative 
action 
is 
defined 
in 
Wis. 
Stat. 
§ 180.0740(2).  For a discussion of derivative actions and 
special litigation committees, see, e.g., John C. Coffee, Jr., 
and Donald E. Schwartz, The Survival of the Derivative Suit: An 
Evaluation and a Proposal for Legislative Reform, 81 Colum. L. 
Rev. 261 (1981); Michael P. Dooley and E. Norman Veasley, The 
Role of the Board in Derivative Litigation: Delaware Law and the 
Current ALI Proposals Compared, 44 Bus. Law. 503 (1989); James 
L. Rudolph and Gustavo A. del Puerto, The Special Litigation 
Committee: Origin, Development, and Adoption Under Massachusetts 
Law, 83 Mass. L. Rev. 47 (1998); Meg Shevach, Deciding Who 
Should Decide to Dismiss Derivative Suits, 39 Emory L.J. 937 
(1990); Carol B. Swanson, Juggling Shareholder Rights and Strike 
Suits in Derivative Litigation: The ALI Drops the Ball, 77 Minn. 
L. Rev. 1339 (1993). 
No. 
97-3592 
 
 
10
in an attempt to balance the competing interests at issue: the 
shareholders' 
need 
to 
protect 
the 
corporation 
and 
the 
corporation's need to prevent meritless or harmful litigation.11 
 If the special litigation committee is independent from the 
alleged wrongdoers, acts in good faith and conducts a reasonable 
inquiry upon which its conclusion is based, the committee's 
recommendation not to proceed with a derivative action is viewed 
as a proper exercise of the directors' business judgment and the 
court will dismiss the action.12 
¶19 The 
concept of 
the 
special 
litigation 
oversight 
committee flows from the business judgment rule, a judicially 
created doctrine that limits judicial review of corporate 
decision-making when corporate directors make business decisions 
on an informed basis, in good faith and in the honest belief 
that the action taken is in the best interests of the company.13 
 The business judgment rule shields, to a large extent, the 
substantive bases for a corporate decision from judicial 
inquiry. 
 
The 
business 
judgment 
rule 
also 
ensures 
that 
                     
11 2 Model Business Corporation Act Annotated, Introductory 
Comment to Subchapter D, Derivative Proceedings, § 7.40 at 7-
252-253 (3d ed. 1997 Supp.). 
12 Holmstrom v. Coastal Indus., Inc., 645 F. Supp. 963, 965 
(N.D. Ohio 1984). 
13 "The concept of the litigation oversight committee flows 
from the business judgment rule which, in short, constitutes 
judicial recognition of the fact that a private corporation 
should, generally speaking, have the right to control its 
destiny respecting the prosecution of claims held by the 
corporation."  Holmstrom v. Coastal Indus., Inc., 645 F. Supp. 
963, 964 (N.D. Ohio 1984). 
No. 
97-3592 
 
 
11
management remains in the hands of the board of directors and 
protects courts from becoming too deeply implicated in internal 
corporate matters.14 
¶20 Under Wis. Stat. § 180.0744, the corporation may 
create a special litigation committee consisting of two or more 
independent 
directors 
appointed 
by 
a 
majority 
vote 
of 
independent directors present at a meeting of the board of 
directors. 
 
The 
independent 
special 
litigation 
committee 
determines whether the derivative action is in the best 
interests of the corporation.  If the independent special 
litigation committee acts in good faith, conducts a reasonable 
inquiry upon which it bases its conclusions and concludes that 
the maintenance of the derivative action is not in the best 
interests of the corporation, the circuit court shall dismiss 
the derivative action.  The statute thus requires the circuit 
                     
14 In United Copper Securities Co. v. Amalgamated Copper 
Co., 244 U.S. 261, 263-64 (1917), in which Justice Brandeis 
contemplated the question of whether the business judgment rule 
could be employed to insulate from judicial scrutiny the 
conclusions of management not to initiate litigation, he wrote: 
Whether or not a corporation shall seek to enforce in 
the courts a cause of action for damages is, like 
other business questions, ordinarily a matter of 
internal management, and is left to the discretion of 
the directors, in the absence of instruction by vote 
of the stockholders.  Courts interfere seldom to 
control such discretion intra vires the corporation, 
except where the directors are guilty of misconduct 
equivalent to a breach of trust, or where they stand 
in a dual relation which prevents an unprejudiced 
exercise of judgment . . . . 
 
No. 
97-3592 
 
 
12
court to defer to the business judgment of a properly composed 
and properly operating special litigation committee.15 
¶21 The provisions of the Wisconsin statute relevant to 
the present case read as follows: 
 
180.0744.  Dismissal 
 
(1) The court shall dismiss a derivative proceeding on 
motion by the corporation if the court finds, subject 
to the burden of proof assigned under sub. (5) or (6), 
that one of the groups specified in sub. (2) or (6) 
has determined, acting in good faith after conducting 
a reasonable inquiry upon which its conclusions are 
based, that maintenance of the derivative proceeding 
is not in the best interests of the corporation. 
 
(2) Unless a panel is appointed under sub. (6), the 
determination in sub. (1) shall be made by any of the 
following: 
 
 . . .  
 
(b) A majority vote of a committee consisting of 2 or 
more independent directors appointed by majority vote 
of independent directors present at a meeting of the 
board of directors, whether or not the voting, 
independent directors constitute a quorum. 
 
¶22 The most common challenge to the decision of a special 
litigation committee, and the one made in the present case, is 
that the members are not independent.  Given the finality of the 
ultimate decision of the committee to dismiss the action, 
judicial oversight is necessary to ensure that the special 
litigation committee is independent so that it acts in the 
                     
15 2 Model Business Corporation Act Annotated, Introductory 
Comment to Subchapter D, Derivative Proceedings, § 7.40 at 7-253 
(3d ed. 1997 Supp.). 
No. 
97-3592 
 
 
13
corporation's best interest.16  At issue is whether the special 
litigation committee created in the present case under Wis. 
Stat. § 180.0744 was composed of independent directors as 
required by statute. 
¶23 Although the plain language of Wis. Stat. § 180.0744 
requires the directors who are members of the special litigation 
committee to be independent, the statute does not define the 
word "independent."17  Rather, § 180.0744(3) merely instructs 
that whether a director on the committee is independent should 
not be determined solely on the basis of any of the following 
three factors set forth in the statute: (1) whether the director 
is nominated to the special litigation committee or elected by 
persons who are defendants in the derivative action, (2) whether 
the director is a defendant in the action, or (3) whether the 
act being challenged in the derivative action was approved by 
the director if the act resulted in no personal benefit to the 
director. 
 
¶24 Wisconsin Stat. § 180.0744(3) provides as follows: 
 
(3) Whether a director is independent for purposes of 
this section may not be determined solely on the basis 
of any one or more of the following factors: 
 
                     
16 2 Model Business Corporation Act Annotated, Introductory 
Comment to Subchapter D, Derivative Proceedings, § 7.40 at 7-253 
(3d ed. 1997 Supp.). 
17 The interpretation of a statute is a question of law that 
this court determines independently of the circuit court and 
court of appeals, benefiting from their analyses.  
No. 
97-3592 
 
 
14
(a) The nomination or election of the director by 
persons 
who 
are 
defendants 
in 
the 
derivative 
proceeding or against whom action is demanded. 
 
(b) The naming of the director as a defendant in the 
derivative proceeding or as a person against whom 
action is demanded. 
 
(c) The approval by the director of the act being 
challenged in the derivative proceeding or demand if 
the act resulted in no personal benefit to the 
director. 
 
¶25 To determine the meaning of the word "independent" in 
Wis. Stat. § 180.0744, we examine the language of the statute, 
and its history, context, subject matter and purpose.  See UFE, 
Inc. v. LIRC, 201 Wis. 2d 274, 282, 548 N.W.2d 57 (1996). 
¶26 The factors identified in Wis. Stat. § 180.0744(3) 
that cannot be solely determinative of whether a director is 
independent would appear at first blush to render a director not 
independent.  For example, by instructing a court that whether a 
director is independent may not be determined solely on the 
basis that the director is a named defendant in the derivative 
action, Wis. Stat. § 180.0744(3)(b) appears to direct a court to 
adopt a relaxed, lenient standard for the word "independent."  
Relying on this subsection and reviewing the legislative 
history, the circuit court concluded that "the threshold 
established 
by 
the 
legislature 
is 
extremely 
low. 
 
This 
conclusion is inescapable under a statute where a director who 
is a defendant in a derivative suit cannot be excluded from an 
independent committee by that fact alone."18 
                     
18 The circuit court declared: 
No. 
97-3592 
 
 
15
¶27 A more nuanced examination of the statute shows, 
however, that the circuit court's reliance on Wis. Stat. 
§ 180.0744(3) for an "extremely low threshold" standard is 
incorrect.  The legislature understood the significance of the 
factors it listed.  It allows the circuit court to give weight 
to these factors; the statute simply states that the presence of 
one or more of these factors is not solely determinative of the 
issue of whether a director is independent. 
¶28 The 
legislature 
recognized, 
for example, that a 
shareholder could prevent the entire board of directors from 
serving on the special litigation committee merely by naming all 
the directors as defendants in the derivative action.  Section 
                                                                  
While reasonable persons may take issue in a generic 
sense with the findings made above [regarding the 
independence of the members of the special litigation 
committee], what is abundantly clear from the record 
and not even subject to interpretation is that the 
criteria for independence established under Wisconsin 
Statute 180.0744(3) was met.  Indeed, independence is 
so broadly defined that the independence of a director 
may not be judged solely upon: (1) whether a director 
was elected by a defendant in the derivative suit, (2) 
whether an elected director is a defendant in the 
suit, or (3) whether an elected director approved of 
the challenged act, as long as that director received 
no personal benefit from the act. 
 
After a review of the legislative history submitted by 
the plaintiff, there does not appear to be anything 
within 
that 
history 
of 
the 
statute 
that 
would 
challenge 
the 
conclusion 
that 
the 
threshold 
established 
by 
the 
legislature 
in 
determining 
independence is extremely low.  The conclusion is 
inescapable under a statute where a director who is a 
defendant in a derivative suit cannot be excluded from 
an independent committee by that fact alone. 
 
No. 
97-3592 
 
 
16
180.0744(3)(b) instructs a court to examine whether a director 
who is a member of the special litigation committee is a nominal 
defendant or a defendant with a personal interest in the 
dispute.  The statute thus instructs the court that this factor 
is not solely determinative. 
¶29 The Official Comment to § 7.44 of the Model Business 
Corporation Act upon which Wis. Stat. § 180.0744 is based19 
explains that "the mere fact that a director has been named as a 
defendant . . . does not cause the director to be considered not 
independent. . . .  It is believed that a court will be able to 
assess any actual bias in deciding whether the director is 
independent without any presumption arising out of . . . the 
mere naming of the director as a defendant . . . ."20 
¶30 We conclude that the circuit court's interpretation 
that the statute sets forth an "extremely low" threshold for 
determining whether a director is independent does not comport 
with the statute.  The legislature directs in Wis. Stat. 
§ 180.0744(3) that a court is not to adopt a per se exclusion of 
                     
19 A court may examine official comments that accompany a 
statute to determine legislative intent.  See, e.g., Armor All 
Prod. v. Amoco Oil Co., 194 Wis. 2d 35, 50, 533 N.W.2d 720 
(1995); Sterman v. Hornbeck, 156 Wis. 2d 556, 564, 457 N.W.2d 
874 (Ct. App. 1990) (examining Model Business Corporation Act to 
interpret statute); Lyons v. Menominee Enter., Inc., 67 Wis. 2d 
504, 509, 227 N.W.2d 108 (1975) (same). 
20 See 2 Model Business Corporation Act Annotated, Official 
Comment to § 7.44 at 7-343 (3d ed. 1997 Supp.).  The Official 
Comment refers to subsection (c)(2) of § 7.44 of the Model 
Business Corporation Act.  The Wisconsin legislature renumbered 
the Act while retaining the language of (c)(2) verbatim, and 
references in this opinion are to Wis. Stat. § 180.0744(3)(b).  
No. 
97-3592 
 
 
17
directors from the special litigation committee when these 
directors have certain relations with the corporation.  Instead 
the legislature directs a court to examine the characteristics 
of each member's relationship to a defendant director and the 
corporation carefully to determine whether the member is 
independent. 
¶31 The 
statute 
requires 
judicial 
adherence 
to 
the 
decision of a special litigation committee that is independent 
and is operating in accordance with the statute.  Judicial 
review to determine whether the members of the committee are 
independent and whether the committee's procedure complies with 
the statute is of utmost importance, because the court is bound 
by the substantive decision of a properly constituted and acting 
committee.  The power of a corporate defendant to obtain a 
dismissal of an action by the ruling of a committee of 
independent directors selected by the board of directors is 
unique in the law.21  The threshold established by the 
legislature in Wis. Stat. § 180.0744 to determine whether 
members of a committee are independent is decidedly not 
"extremely low," as the circuit court stated.  We conclude the 
legislature intended a circuit court to examine carefully 
whether 
members 
of 
a 
special 
litigation 
committee 
are 
independent. 
                     
21 Lewis v. Fuqua, 502 A.2d 962, 967 (Del. Ch. 1985).  
No. 
97-3592 
 
 
18
¶32 The legislative history of Wis. Stat. § 180.0744 
supports our interpretation of the word "independent" and the 
role of the circuit court.22 
¶33 Wisconsin Stat. § 180.0744 is based on § 7.44 of the 
Model Business Corporation Act,23 which was adopted in 1989.  The 
Wisconsin version of the Model Business Corporation Act, Wis. 
Stat. § 180.0744, was created by 1991 Act 16, § 27, effective 
May 13, 1991.  Thus our inquiry into the meaning of the word 
"independent" under the Wisconsin statute considers the history 
of the enactment of both the Wisconsin statute and the Model 
Business Corporation Act.   
¶34 The 
language 
of 
Wis. 
Stat. 
§ 180.0744(1), 
as 
originally adopted, differed from § 7.44 of the Model Business 
Corporation Act in its final phrase.  The final phrase of 
§ 180.0744(1) as originally adopted, in contrast to the Model 
Business Corporation Act, provided that a court shall adhere to 
the decision of the special litigation committee to dismiss the 
derivative action "unless the court finds that the members of 
the group so voting were not independent or were not acting in 
good faith"24 (emphasis added). 
                     
22 The legislative history of Wis. Stat. § 180.0744 is 
available on microfiche at the Legislative Reference Bureau, 
Madison, Wisconsin.  
23 See Christopher S. Berry, Kenneth B. Davis, Jr., Frank C. 
DeGuire and Clay R. Williams, Wisconsin Business Corporation Law 
at 7-107 (State Bar of Wisconsin CLE Books 1992). 
24 The original enactment of Wis. Stat. § 180.0744(1) 
provided:  
No. 
97-3592 
 
 
19
¶35 According to the bill-drafting file for Wis. Stat. 
§ 180.0744, the purpose of the final clause, which could be 
considered merely redundant, was to make explicit that under the 
statute a court is to examine the rationality of the decision-
making process and whether the members of the group were 
independent and acted in good faith.25  The final clause "strikes 
a proper balance between shareholders' rights and the business 
judgment principle of corporate governance."26 
                                                                  
(1) The court shall dismiss a derivative proceeding on 
motion by the corporation if one or more of the groups 
specified in sub. (2) or (6) has determined in good 
faith after conducting a reasonable inquiry upon which 
its conclusions are based that maintenance of the 
derivative proceeding is not in the best interests of 
the corporation, unless the court finds that the 
members of the  group so voting were not independent 
or were not acting in good faith (emphasis of the 
final phrase added). 
 
See 1991 Wis. Act 16, § 27. 
Section 7.44(a) of the Model Business Corporation Act reads 
as follows: 
(a) A derivative proceeding shall be dismissed by the 
court on motion by the corporation if one of the 
groups specified in subsections (b) or (f) has 
determined in good faith after conducting a reasonable 
inquiry upon which its conclusions are based that the 
maintenance of the derivative proceeding is not in the 
best interests of the corporation. 
 
25 Letter from Attorney Jeffrey Bartell to Senator Charles 
Chvala dated January 23, 1991, Bill-Drafting File, 1991 Wis. Act 
16, Legislative Reference Bureau, Madison, Wisconsin. 
26 Letter from Attorney Jeffrey Bartell to Senator Charles 
Chvala dated January 23, 1991, Bill-Drafting File, 1991 Wis. Act 
16, Legislative Reference Bureau, Madison, Wisconsin.  
No. 
97-3592 
 
 
20
¶36 According to the legislative history, the statute does 
not dictate judicial adherence to the decision of a special 
litigation 
committee 
unless 
the 
committee 
members 
are 
independent under the statute.27  A court is required to adhere 
to the decision of the special litigation committee regarding 
dismissal of a derivative action on the ground that the 
committee's decision constitutes a matter of business judgment 
delegated by the board of directors to the committee.  Thus, 
under the Wisconsin statute, judicial oversight is necessary to 
determine 
whether 
the 
members 
of 
the 
special 
litigation 
committee are independent. 
¶37 In October 1991, the Committee on Business Corporation 
Law of the State Bar of Wisconsin sought amendment of Wis. Stat. 
§ 180.744(1), as the attorneys explained, to retain the purpose 
of the final phrase but to clarify that the final phrase of the 
Wisconsin statute did not change the burden of proof set forth 
in the statute.28  The amendment proposed by the lawyers, 
                     
27 In Houle v. Low, 556 N.E.2d 51, 58 (Mass. 1990), the 
Massachusetts Supreme Judicial Court explained: 
The value of a special litigation committee is 
coextensive with the extent to which that committee 
truly exercises business judgment.  In order to ensure 
that special litigation committees do act for the 
corporation's best interest, a good deal of judicial 
oversight is necessary in each case. . . .  At a 
minimum, 
a special 
litigation committee 
must be 
independent, unbiased, and act in good faith. 
 
28 Memorandum to the Committee on Business Corporation Law 
from Jeffrey Bartell and Molly Martin dated October 31, 1991, 
Bill-Drafting File, 1991 Wis. Act 16, Legislative Reference 
Bureau, Madison, Wisconsin. 
No. 
97-3592 
 
 
21
described as "nonsubstantive and 'housekeeping' in nature," and 
adopted by the legislature, thus expressly retains the concept 
of judicial review of whether members of the special litigation 
committee are independent.29 
¶38 The legislative history contradicts the conclusion of 
the circuit court and court of appeals in the present case that 
the legislature intended an "extremely low" threshold for 
determining whether members of a special litigation committee 
are independent.  The legislative history of Wis. Stat. 
§ 180.0744 demonstrates the legislature's intent that the courts 
scrutinize whether the members of a special litigation committee 
are independent in order to protect the shareholders' and the 
corporation's interests. 
III 
¶39 We now discuss the appropriate test to be applied to 
determine whether directors who are members of a special 
litigation 
committee 
are 
independent 
under 
Wis. 
Stat. 
§ 180.0744.  This question is one of first impression in 
Wisconsin.  Nothing in the statute expressly states the factors 
to be examined to determine whether directors who are members of 
a committee are independent.  
¶40 The Model Business Corporation Act (upon which Wis. 
Stat. § 180.0744 is based) builds on the law relating to special 
                     
29 See 1991 Wis. Act 173, § 2 (effective April 28, 1992). 
See also Christopher S. Berry, Kenneth B. Davis, Jr., Frank 
C. DeGuire and Clay R. Williams, Wisconsin Business Corporation 
Law at 7-116 (State Bar of Wisconsin CLE Books 1992). 
No. 
97-3592 
 
 
22
litigation committees developed by a number of states.  We are 
therefore informed by the case law of other states,30 and we 
derive from this case law the following test to determine 
whether 
a 
member 
of 
a 
special 
litigation 
committee 
is 
independent.31 
¶41 Whether members are independent is tested on an 
objective basis32 as of the time they are appointed to the 
special litigation committee.33  Considering the totality of the 
circumstances, a court shall determine whether a reasonable 
person in the position of a member of a special litigation 
                     
30 See 2 Model Business Corporation Act Annotated, Official 
Comment to § 7.44 at 7-341-349 (3d ed. 1997 Supp.). 
31 For discussions and applications of various versions of 
this test, see, e.g., Strougo v. Padys, 27 F. Supp. 2d 442, 448-
451 (S.D.N.Y. 1998); In re Oracle Sec. Litig., 852 F. Supp. 
1437, 1441-42 (N.D. Cal. 1994); Johnson v. Hui, 811 F. Supp. 
479, 486-87 (N.D. Cal. 1991); Peller v. The Southern Co., 707 F. 
Supp. 525, 527-38 (N.D. Ga. 1988); Kaplan v. Wyatt, 499 A.2d 
1184, 1189-90 (Del. 1985); Aronson v. Lewis, 473 A.2d 805, 814-
16 (Del. 1984); Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 
1980); Millsap v. American Fam. Corp., 430 S.E.2d 385, 387-88 
(Ga. Ct. App. 1993); Houle v. Low, 556 N.E.2d 51, 58-59 (Mass. 
1990); Auerbach v. Bennett, 393 N.E.2d 994, 1001-02 (N.Y. 1979); 
Davidowitz v. Edelman, 583 N.Y.S.2d 340, 343-44 (N.Y. Sup. Ct. 
1992); Lewis v. Boyd, 838 S.W.2d 215, 224-25 (Tenn. Ct. App. 
1992).  See also James L. Rudolph & Gustavo A. del Puerto, The 
Special Litigation Committee: Origin, Development, and Adoption 
Under Massachusetts Law, 83 Mass. L. Rev. 47, 51-52 (1998). 
32 "[Courts] 
have 
looked 
to 
an 
array 
of 
objective 
factors . . . as criteria for evaluating the disinterestedness 
and independence of directors . . . ."  1 Roger J. Magnuson, 
Shareholder Litigation § 8.17.60 (1993). 
33 An independent member might stop being independent while 
serving on a special litigation committee. 
No. 
97-3592 
 
 
23
committee can base his or her decision on the merits of the 
issue rather than on extraneous considerations or influences.34  
In other words, the test is whether a member of a committee has 
a relationship with an individual defendant or the corporation 
that would reasonably be expected to affect the member's 
judgment with respect to the litigation in issue.  The factors a 
court should examine to determine whether a committee member is 
independent include, but are not limited to, the following:  
 
(1) A committee member's status as a defendant and 
potential liability.  Optimally members of a special 
litigation committee should not be defendants in the 
derivative action and should not be exposed to 
personal liability as a result of the action. 
 
(2) A committee member's participation in or approval 
of the alleged wrongdoing or financial benefits from 
the challenged transaction.  Optimally members of a 
special litigation committee should not have been 
members of the board of directors when the transaction 
in question occurred or was approved.  Nor should they 
have 
participated 
in 
the 
transaction 
or 
events 
underlying the derivative action.  Innocent or pro 
forma involvement does not necessarily render a member 
not independent, but substantial participation or 
approval or personal financial benefit should. 
 
(3) A committee member's past or present business or 
economic 
dealings 
with 
an 
individual 
defendant.  
Evidence 
of a committee 
member's 
employment and 
financial 
relations 
with 
an 
individual 
defendant 
                     
34 This standard for determining whether a person is 
independent fits the dictionary definitions of independent.  
Black’s 
Law 
Dictionary 
at 
774 
(7th 
ed. 
1999) 
defines 
"independent" as "not subject to the control or influence of 
another."  The American Heritage Dictionary of the English 
Language at 917 (3d ed. 1992) defines "independent" as, among 
other things, "free from the influence, guidance, or control of 
another or others." 
No. 
97-3592 
 
 
24
should be considered in determining whether the member 
is independent. 
 
(4) A committee member's past or present personal, 
family, 
or 
social 
relations 
with 
individual 
defendants.  Evidence of a committee member's non-
financial 
relations 
with 
an 
individual 
defendant 
should be considered in determining whether the member 
is independent.  A determination of whether a member 
is independent is affected by the extent to which a 
member 
is 
directly 
or 
indirectly 
dominated 
by, 
controlled by or beholden to an individual defendant.  
 
(5) A committee member's past or present business or  
economic relations with the corporation.  For example, 
if a member of the special litigation committee was 
outside counsel or a consultant to the corporation, 
this 
factor should 
be 
considered 
in 
determining 
whether the member is independent. 
 
(6) The number of members on a special litigation 
committee.  The more members on a special litigation 
committee, the less weight a circuit court may assign 
to a particular disabling interest affecting a single 
member of the committee.  
 
(7) The roles of corporate counsel and independent 
counsel.  Courts should be more likely to find a 
special 
litigation 
committee 
independent 
if 
the 
committee retains counsel who has not represented 
individual defendants or the corporation in the past.35 
 
¶42 Some courts and commentators have suggested that a 
"structural bias" exists in special litigation committees that 
                     
35 For a discussion of cases involving the independent 
standard for members of special litigation committees, see Jay 
M. Zitter, Propriety of Termination of Properly Initiated 
Derivative Action by "Independent Committee" Appointed by Board 
of Directors Whose Actions (Or Inaction) Are Under Attack, 22 
A.L.R. 4th (1983 and 1999 Supp.). 
No. 
97-3592 
 
 
25
taints their decisions.36  They argue that members of a 
committee, appointed by the directors of the corporation, are 
instinctively 
sympathetic 
and 
empathetic 
towards 
their 
colleagues on the board of directors and can be expected to vote 
for dismissal of any but the most egregious charges.  They 
assert 
that 
the 
committees 
are 
inherently 
biased 
and 
untrustworthy.37  Wisconsin Stat. § 180.0744 and the Model 
Business 
Corporation 
Act 
are 
designed 
to 
combat 
this 
possibility.38 
¶43 Wisconsin 
Stat. 
§ 180.0744 
requires 
that 
only 
independent directors vote to create a special litigation 
committee and only independent directors serve on the committee. 
 The statute recognizes that independent directors serving as 
members of a special litigation committee are capable of 
rendering an independent decision even though they are members 
of the board of directors which includes defendants in the 
derivative action. 
¶44 A 
court 
should 
not 
presuppose 
that 
a 
special 
litigation committee is inherently biased.  Although members of 
                     
36 See, e.g., Houle v. Low, 556 N.E.2d 51, 54 (Mass. 1990); 
Miller v. Register & Tribune Syndicate Inc., 336 N.W.2d 709, 718 
(Iowa 1983); Carol B. Swanson, Juggling Shareholder Rights and 
Strike Suits in Derivative Litigation: The ALI Drops the Ball, 
77 Minn. L. Rev. 1339, 1356-59 (1993). 
37 See, e.g., George W. Dent, Jr., The Power of Directors to 
Terminate Shareholder Litigation: The Death of the Derivative 
Suit?, 75 Nw. U. L. Rev. 96, 98 (1980). 
38 See 2 Model Business Corporation Act Annotated, Official 
Comment to § 7.44 at 7-342 (3d ed. 1997 Supp.). 
No. 
97-3592 
 
 
26
a special litigation committee may have experiences similar to 
those of the defendant directors and serve with them on the 
board 
of 
directors, 
the 
legislature 
has 
declared 
that 
independent members of a special litigation committee are 
capable of rendering an independent decision.  The test we set 
forth today is designed, as is the statute, to overcome the 
effects of any "structural bias." 
¶45 A circuit court is to look at the totality of the 
circumstances.  A finding that a member of the special 
litigation committee is independent does not require the 
complete absence of any facts that might point to non-
objectivity.  A director may be independent even if he or she 
has had some personal or business relation with an individual 
director accused of wrongdoing.39  Although the totality of the 
circumstances test does not necessitate the complete absence of 
any facts that might point to a member not being independent, a 
                     
39 See In re Oracle Securities Litigation, 852 F.Supp 1437, 
1442 (N.D. Cal. 1994), stating: 
A "totality of the circumstances" test does not, 
however, necessitate the complete absence of any facts 
which might point to non-objectivity.  In any business 
setting, associations and contacts of the type which 
[the committee member] has had with some of the 
individual 
defendants 
and 
[the 
corporation] 
are 
certainly neither inappropriate nor such as to suggest 
that [the committee member] would not faithfully 
discharge 
his 
obligations 
to 
[the 
corporation's] 
shareholders.  Business dealings seldom take place 
between complete strangers and it would be a strained 
and artificial rule which required a director to be 
unacquainted or uninvolved with fellow directors in 
order to be regarded as independent. 
 
No. 
97-3592 
 
 
27
circuit court is required to apply the test for determining 
whether a member is independent with care and rigor.  If the 
members are not independent, the court will, in effect, be 
allowing the defendant directors to render a judgment on their 
own alleged misconduct.  The value of a special litigation 
committee depends on the extent to which the members of the 
committee are independent.   
¶46 It is vital for a circuit court to review whether each 
member of a special litigation committee is independent.  The 
special litigation committee is, after all, the "only instance 
in American Jurisprudence where a defendant can free itself from 
a suit 
by merely 
appointing a committee 
to 
review the 
allegations of the complaint . . . ."40  We agree with the 
Delaware Court of Chancery that the trial court must be "certain 
that 
the 
SLC 
[special 
litigation 
committee] 
is 
truly 
independent."41 
 
While 
ill 
suited 
to 
assessing 
business 
judgments, courts are well suited by experience to evaluate 
whether 
members 
of 
a 
special 
litigation 
committee 
are 
independent. 
¶47 The test we set forth attains the balance the 
legislature intended by empowering corporations to dismiss 
meritless 
derivative 
litigation 
through 
special 
litigation 
committees, while checking this power with appropriate judicial 
                     
40 Lewis v. Fuqua, 502 A.2d 962, 967 (Del. Ch. 1985). 
41 Lewis v. Fuqua, 502 A.2d 962, 967 (Del. Ch. 1985). 
No. 
97-3592 
 
 
28
oversight over the composition and conduct of the special 
litigation committee.  
IV 
¶48 The circuit court declined to grant summary judgment 
for the defendant because there was a dispute of material facts. 
 After seven days of testimony on the issue of whether the 
members of the special litigation committee were independent, 
the circuit court made findings of fact and concluded that the 
threshold the legislature established for determining whether 
the members of the committee were independent is "extremely 
low."  Applying this "extremely low" standard, the circuit court 
determined that the members of the special litigation committee 
in the present case were independent.42 
¶49 We briefly explore the relations of the members of the 
special 
litigation 
committee 
to 
the 
corporation 
and 
the 
defendant Culea.  In this case no member of the special 
litigation committee is a named defendant in the derivative 
action. 
¶50 One member of the committee, Robert Bonk, received a 
$25,000 bonus at the same meeting of the compensation committee 
at which Culea's challenged bonus was approved.  The circuit 
                     
42 The question of which party has the burden of proving, 
Wis. Stat. § 180.0744(5), whether members of the special 
litigation committee in the present case were independent has 
been raised in this case.  At the trial before the circuit 
court, plaintiff Einhorn presented his case first.  We do not 
address the issue of burden of proof because it was not fully 
analyzed or fully briefed by the parties. 
No. 
97-3592 
 
 
29
court found that "while [Bonk] did receive a bonus at the same 
meeting of the board where Mr. Culea received his bonus, it does 
not appear that there was a quid pro quo or any other type of 
linkage between the two bonuses.  In fact, it should be noted 
that the plaintiff [Einhorn] has not made Bonk's $25,000 bonus a 
subject of this lawsuit."  Einhorn has made the bonus an issue 
in this court. 
¶51 Bonk 
is 
an 
employee 
of 
the 
corporation, 
is 
a 
subordinate of Culea and considers Culea a friend.  Bonk 
acknowledged that it would be "very difficult for [him] to even 
consider the possibility that Mr. Culea would do something 
improper . . . ."43  Bonk's ability to independently evaluate the 
litigation may have been compromised by his own admission.  The 
circuit court merely stated that "with the exception of him 
being an employee of Northern Labs, this Court fails to find any 
inherent basis upon which his independence could be challenged." 
¶52 Outside counsel retained by the special litigation 
committee 
questioned whether 
Robert 
Bonk was 
independent: 
"[Bonk's] independence is questionable . . . .  Because his 
interests in the financial outcome would [strikethrough in 
original] was affected but it is such a small amount. . . .  The 
input of [Bonk] throughout the process may taint the vote 
because his independence may be questioned." 44  Whether Bonk was 
                     
43 See 12/19/96 Bonk testimony, R. 206 at 35 (reproduced at 
Einhorn's Appendix at 168). 
44 See "Chewning Notes of 5/22/95 Conversations With Outside 
Counsel," Einhorn's Appendix at 95. 
No. 
97-3592 
 
 
30
independent should be determined on the basis of his employment 
status, his financial interest in the outcome and his personal 
relation with Culea. 
¶53 Another member of the committee, John Beagle, was 
characterized by the circuit court as Einhorn's "right-hand 
man."  Beagle admitted that he and Einhorn "have a very good 
business relationship" and are "also very good friends."  Beagle 
wrote, in explaining his lone vote to maintain the derivative 
action, that "the special litigation committee is not, and never 
was, unbiased or independent . . . each of us is too close to 
one 
party 
or 
the 
other 
to 
have 
a 
chance 
at 
being 
independent . . . ."45  John Beagle, plaintiff Einhorn's good 
friend and close business partner, openly admits that he was not 
independent.46 
¶54 The other two members of the special litigation 
committee had personal and social relationships with Culea and 
Culea's wife.  Einhorn argues strenuously that Culea's neighbor 
and friend, Dwight Chewning, and Culea's wife's friend, Lolita 
                     
45 See letter from Beagle to Chewning, June 14, 1995, 
Einhorn's Appendix at 127.  
46 At oral argument, counsel for Culea asserted that 
Einhorn's trial counsel conceded that Beagle was independent.  
It was only when new appellate counsel was hired, Culea argues, 
that Einhorn challenged whether Beagle was independent. 
Wisconsin 
Stat. § 180.0744(3) 
focuses 
the 
inquiry of 
"independent" on the connections of a member of a special 
litigation 
committee 
to 
an 
individual 
defendant 
and 
the 
corporation, not on the connections with a plaintiff.  See Wis. 
Stat. § 180.0744 (3).  We do not address the issue of a member's 
relationship with the plaintiff. 
No. 
97-3592 
 
 
31
Chua, were not independent.  The exact extent of these 
friendships is vigorously contested by the parties, but the 
existence of some relationship is evidenced in the record.  
¶55 The circuit court did not make findings of fact 
specifying the relationships of Chewning and Chua to Culea other 
than describing Chewning as a "neighbor" and Chua as a "social 
friend" of Mrs. Culea.  In its discussion of Chewning and Chua, 
the circuit court examined their performance as witnesses and as 
members of the special litigation committee.  While the care, 
attention and sense of individual responsibility of a member may 
touch on the issue of whether the member was independent, the 
test is primarily concerned with whether factors exist at the 
time the committee was formed that would prevent a reasonable 
person from basing his or her decisions on the merits of the 
issue.  Whether members of the special litigation committee are 
independent is critical.  "Good faith, reasonable inquiry, and 
the best interests of the corporation are not enough."47 
¶56 As we stated previously, mere acquaintanceship and 
social interaction are not per se bars to finding a member 
independent.  Relationships with an individual defendant and the 
corporation are, however, factors the circuit court must 
consider in the totality of circumstances.  
¶57 Einhorn also argues strenuously that the role of the 
corporation's counsel tainted the formation of the special 
                     
47 See Christopher S. Berry, Kenneth B. Davis, Jr., Frank C. 
DeGuire and Clay R. Williams, Wisconsin Business Corporation Law 
at 7-116 (State Bar of Wisconsin CLE Books 1992). 
No. 
97-3592 
 
 
32
litigation committee, in that the corporation's counsel was 
acting both as Culea's personal counsel and as the corporation's 
counsel.  Relatively late in its investigation the special 
litigation 
committee 
retained 
a 
separate 
law 
firm 
from 
Washington, D.C., to act as its counsel.  But the exact extent 
of the corporation's counsel's role in advising the special 
litigation committee is contested.  The circuit court did not 
make findings about the roles of the corporation's counsel and 
outside counsel.  The role of the corporation's counsel should 
be considered as one of the circumstances in determining whether 
the committee is independent.  Several courts have stated that 
retention 
of 
objectively 
independent 
counsel 
is 
highly 
recommended, although failure to do so does not necessarily 
prevent a special litigation committee from being independent.48 
                     
48 See, e.g., In re Par Pharm. Inc., 750 F. Supp. 641, 647 
(S.D.N.Y. 1990) ("Both New York and Delaware law contemplate 
that 
a 
special 
litigation 
committee 
be 
represented 
by 
independent counsel."); Kaplan v. Wyatt, 499 A.2d 1184, 1190 
(Del. 
1985) 
(although 
use 
of 
in-house 
counsel 
is 
not 
recommended, 
it 
is 
not 
fatal 
to 
the 
special 
litigation 
committee's investigation). 
A comment to Wis. SCR 20:1.13 of the Code of Professional 
Conduct states the following about derivative actions: 
The question can arise whether counsel for the 
organization 
may 
defend 
such 
an 
action. 
 
The 
proposition that the organization is the lawyer's 
client does not alone resolve the issue.  Most 
derivative actions are a normal incident of an 
organization's 
affairs, 
to 
be 
defended 
by 
the 
organization's lawyer like any other suit.  However, 
if the claim involves serious charges of wrongdoing by 
those in control of the organization, a conflict may 
arise between the lawyer's duty to the organization 
and the lawyer's relationship with the board.  In 
No. 
97-3592 
 
 
33
¶58 The circuit court did not apply the totality of the 
circumstances standard to determine whether a reasonable person 
in the position of the member of the special litigation 
committee could base his or her decision on the merits of the 
issue rather than on extraneous conditions or influences.  
Considered together, the relationships in the present case raise 
significant questions concerning whether the members of the 
special litigation committee were independent.49  The decision of 
this court is not intended to cast doubt on any committee 
member's integrity, honesty or hard work on the special 
litigation committee.  Rather, we are concerned that, at the 
time of the formation of the special litigation committee, the 
members of the committee had relationships with the individual 
defendant and the corporation that call into question whether a 
reasonable person could base his or her decision on the merits 
of the issue rather than on extraneous considerations or 
influences. 
                                                                  
those circumstances, Rule 1.7 [relating to conflict of 
interest] governs who should represent the directors 
and the organization. 
 
49 Wisconsin Stat. § 180.0744 draws no distinction between 
publicly held corporations and closely held corporations.  See 
§ 180.1801-180.1837 
relating 
to 
close 
corporations. 
 
We 
acknowledge 
that 
it 
may 
be 
difficult 
for 
closely 
held 
corporations to assemble special litigation committees.  If it 
is difficult for the corporation to create an independent 
special litigation committee, the remedy has been provided by 
the legislature.  The corporation may move the court, pursuant 
to Wis. Stat. § 180.0744(6), to "appoint a panel of one or more 
independent persons to determine whether maintenance of the 
derivative 
proceedings 
is 
in 
the 
best 
interests 
of 
the 
corporation." 
No. 
97-3592 
 
 
34
¶59 The application of a statute to undisputed facts is 
ordinarily a question of law that this court determines 
independently of the circuit court and the court of appeals, 
benefiting from the analyses of these courts.  But in this case 
the facts are in dispute, and the circuit court has not made 
sufficient findings of fact upon which this court can apply the 
legal test set forth.  Accordingly, we remand the cause to the 
circuit court to make findings of fact and to apply the proper 
legal standard to the facts of this case.  
By the Court.—The decision of the court of appeals is 
reversed and the cause is remanded. 
No. 
97-3592 
 
 
1