## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 10

- 3509 A LBE RT T ROS TEL & S O NS C OMPAN Y, P la intif f-A pp ellee, v. E DWARD N OTZa nd S ANDRA K. N OTZ, D ef endants-A ppell ants
.
A pp eal from the United S t ates Di strictC our t fo r the E astern Di stricto f Wisc onsin
. No . 07- C- 0763

— C.N. Clevert,Jr. , Chief Ju dge .
A RG UE D S EP TE MBE R 21, 2011

— D ECI DE D M AY 10, 2012

Be f o re E A S T E RB R OO K, Chi e f Judg e, a nd T INDERa nd H A MI L T ON, C ircu it Judges . E A S T E RB ROOK, Chi e

f Judg e . Albe r t Tr o st el& S o ns Company( Tr o st el ) was f o unde d i n 1 85 8. B y 2 00 7 th e f ounder’s re l ati ons sti l lo w ned about 11% o fi ts sto ck. Ev e r e t t S mi th Gr o u p , L t d

. ( S mi th ) , wh i c h o wn e d t he o th er 89 % , d ec id ed to ac q u ire th e re m ain in g s h ar es via a freezeou t m erger. V oting w a s a for m ali ty; Sm ith’s s h a r e s a s s u r e d th e me r g e r ’ s ap pr o v a l

. T r o s t e lb e c a me2 N o. 10

- 3509 Sm i th’ s wholly o w ned su b si diary. Edw ar d N otz , o ne o f A lber t Tros tel ’ s gr eat gr andchil dren, w ho own ed 5. 5% ofthe sto ck ( som e dir ectly, som e thro ugh a tr ust) , r ej ecte d th e p roffered com p en sation of $11,900 p e r sh are

— w hi ch c am e t o about $7. 7 m i l l i on f orhi s 5
. 5% i nter est
. N otz conte nd ed that the s hare s were w or th m or e th an twice th at m uch. The r esto fthe outsi de i nvest or s a ccepted th e offer, how ever. W hen i n ve sto rs di sse nt and r ej ect the c om pensati on o ffer ed i n a m er gero r othe r m aj orr est ructu ring, a W i sco nsi n cor pora ti on m ust com m ence a j ud i ci al pro c e e di ngt o h a v e the s t o c ka pp r a i s e d. Wi s . S t at. §180
. 1330 ( 1)
. Tros tel fi l ed i n the U ni ted St at es Dis tr i ct C ou r t f o r the Ea st ern Di st r i cto fW i sc o ns i n un derthe di ve r si ty j ur i sdi ct i o n, 28 U. S
. C. §1 33 2( a) : Tr o st el is incor pora ted i n W i sco ns in and has i ts pri nci pal pl ace ofbusi ness ther e, bo th Edw ar d N otz and the tr us tee ( S an dr a N o tz ) a r e ci ti ze ns o fI l l i no i s, a nd the a m o unt i n c o nt r o v e r s y s ub s t a nt i a l l y e xc e e ds $ 7 5 , 0 0 0
. No t z n o ne thel ess co ntended that the co urt lac ks subj ect- m att er j uri sdic ti on. H e insi ste d that a pp ra i salpro ceedi ngs m ust be co nd ucted i n sta te c ourt
. The di str i ct j ud ge disa gr eed and den ied N otz ’ s m oti on t o dism i ss. 53 6 F. Sup p. 2 d 9 6 9 ( E. D. Wi s . 2 0 0 8 )
. Aft e r a t r i a l, the j ud ge co nc l ude d tha t th e f ai r v alue o fTr o st el ’s stoc ko n the m er ge r d a t e w as $1 1,9 00 p er sh ar e. 20 10 U .S. D ist . L EXIS 1087 78 ( E.D. W i s. S ept. 28 , 2 01 0). N otz ’ s a pp ealco ntest s both the j uri sdic ti onalr uling and the cal cul ati on o f the s toc k’ s v alue. N otz ’ s j uri sdic ti onal argum ent r est s o n W i s. S tat
. §180
. 1330 ( 2) , wh i ch pro vi des that“[ t] he co rpor ati onN o. 10

- 3509 3 shal lb rin g [the a pp ra i salact i on] i n the ci rcui t co urt f or the c ounty w here i ts pri nci pal o ffi ce . . . i s l oca ted. ” S ubsect ion (4) a d d s th at “[t]he j urisd iction of th e cou rt i n whi c h the s pe c i a lp r o c e e di ngi s b r o ughtu nder su b . (2) is p len ar y a n d ex c lu siv e.” W i sco nsi n draw s i ts cor pora te code fro m the M odel Bu si ness Corpor ati on Act, so thi s la nguage orso m ethi ng si m i l arappears i n the sta tute boo ks of30 st ate s. Se ver alo ther state s, i ncl ud i ng Del aw ar e, have functio n ally id en tic al p ro vis ion s. Truck Com pone nts Inc . v. Be at r i c eCo
. , 1 4 3 F
. 3 d 1 0 5 7, 1 0 6 1

– 6 2 ( 7 th Ci r . 1 9 9 8 ) , h o l ds that Dela w ar e’ s v er si on co ncer ns ve nue ra therthan j uri sdic ti on. S ee al so TBKPar t ners , Lt d. v. We s t e r n Unio n Corp
. , 675 F.2d 456 , 460 n.3 (2d C ir. 1982) (dic t u m un d erst an di ngNew Yo r kl aw the s ame way )
. T reat i ngthe sta tute as a cl ai m bya sta te to oust the j u ris dict i on o f th e fede r alc o ur ts woul d s im pl y r en deri t unc o ns ti tu
ti onal, f orno sta te m ay contr act j uri sdic ti on crea ted byan A c t o f C on gr es s. Se e, e.g ., M ’K im v. V o o rhies , 11 U
. S. (7 C ra n c h ) 27 9 (1 81 2); Rail way Co. v. W hitton ’s Adm i nis t r at or, 80 U .S. (13 W all.) 27 0 (1 87 2). C f. Chic ago v. Int e r nat i onal Coll egeof

Su rge ons , 5 22 U. S
. 1 56 ( 19 97 ) ( p r o ce eding for rev iew of a s t at e a ge n c y’s d ec isio n is re m ov ab le n otwithstandi ng the st ate ’ s desi re thati ts cour ts re tain contr ol )
. U n d er the Supre m acy Clause , federa ll aw p re va ils ov er co n flict in g s ta t e la w . W e s aid inTruck C om ponents thati t i s be st to re ad l anguage such a s D el aw ar e’s ( a n d W isc on sin ’s) a s a lloc at in g a u th or ity w ith in its ow n j ud ici ary. W hy treat a state as claim ing m ore pow erthan it h as ? The co m m entar y t o the M odel Bu si ness Co rp or atio n A ct s how s that the drafter s s et4 N o. 10

- 3509

o u tt o c r e a t e a “ p r o v i s i o n [ ]
. . . r e l a t i n gt o v e n u e ”
. AB A, M o d e l B usin ess Co rpo rati o n A ct A nn o ta ted§1 3. 30 at 13–1 00 to 13–1 01 ( 4th ed

. 20 08 & 20 11 re v. )
. There ’ s no r eas on no tt o t a k e the a utho r s a tthe i r wo r d. N otz co ncedes a l lo fthi s but m ai ntai ns th at i t i s i rr el evant. H e tel l s us that the sui t bel ongs i n sta te cour t n ot as a matt ero f stat ute, b uta s a m at te r o fc o nt r ac t. Co ntr actualf or um - sel ecti on cl auses are enfo rce d even th o ug h the y po i ntt o s ta te c o ur ts , a rbi tr alpa ne l s, o r the c ou rt s o f oth er n at ion s. Se e, e.g ., C a rniv a l C ruis e L ines, Inc. v. Shute, 499 U .S. 58 5 (1 99 1); M i t s ub i s hi M ot ors Corp. v. So l e rChrys l e r - Plymouth, Inc ., 47 3 U .S. 61 4 (1 98 5); The Br e men v . Za pa t a Off

- S ho r eCo
. , 40 7 U .S. 1 ( 1972 )
. S ecti on 180. 1330 ( 2) is n ot parto fa pri vate co ntra ct b etween T rostel’s fou nd ers an d i ts invest ors

— and N otz co ncedes th atne i th erTr o st el ’ s char te r no r i ts b y l aws c o nt ains any l an gu age speci fyi ng wh er e a pp ra i salpro ceedi ngs m ust be co nd ucted

—but N otz subm i ts th at al lo fW i sc onsin’ s co rpor ate l aw i s par t o fal lar ti cl es ofi ncor pora ti o n a nd thus becom es c o nt r ac tu al, e ve n tho ug h n o pr i v a t e p e r s o n ha s a s s e nt e d. Pl en tyo fW i sc o ns i n de ci si o ns c o nt ain sta tement s al o ng the l in es o f “[t ] hese sta tutes ar e a s e ffecti vel y a parto f the pl ai nti ff s’ cer ti fi cate s o fst ockand ofthe cor pora te chart eras tho ugh pri nted ther ei n. ” Jo hn son v. B r a d ley Kn i t t i n g Co
. , 228 W is. 5 66, 574 ( 1938 )
. S ee al so H ul l v. P f i s t e r& Vog e l L e athe rCo ., 23 5 W is. 65 3, 66 6 (1 94 0); M il

w auk eeSanitar ium v. Sw if t, 238 W is. 628, 636 (1941 ); F r an ze n v . F r e d Ru epi n g L e athe rCo
. , 25 5 W i s. 26 5, 27 2 ( 1949 )
. But unle ss W i sco nsi n bel i eve s t h at cor pora teN o. 10

- 3509 5 sta tutes areco ntra cts

— and th u s can’tbe am ended aft er a cor pora ti on adopts i ts ar ti cl es, f or sta tes m ay not “pa ss a ny . . . La w i m p ai r i ngthe Ob l i g at i o n o fCo ntr acts ” ( A rt
. I§1 0 cl

. 1)

— these st at em ents ar e j ust m eta
phors express i ng the c on c l usi on that s tat e co rpor ate l aw bi nd s invest or s a nd m anage rs al i ke. The propo si ti o n tha t co r po r at e l aw i n fo r ce whena fi r m r e c e i v e s i t s c ha r t e r b e c o mes b i nd i nga s a c ontr act l e d t o o n e o fth e mo s tf a mo u s de c i s i o n s i n th e S u p r e me C ou rt ’s h ist or y: D a rtm o uth C o llege v . Wo o dw a rd, 17 U
. S. ( 4 Whe a t
. ) 5 1 8 (18 19)
. T he Co ur th e l d tha tNe w Ha mpsh i r e vi o l at ed Dar tm o uth Co l l eg e’ s r i g ht s unde r the Consti tuti on’ s Contr act Clause wh en a sta tute enacte d in 1816 ch an ged prov isi ons i n th e C oll ege’s ch arter, w h ich h ad be en iss u ed in 1 76 9 b y G eo rg e III w h ile N ew H am p sh ire w a s a crow n colon y. Justice Story’s c on c u rrin g op in ion su gg es te d th at st at es co u ld av oid si m i l aro utcom es f ornewly chart ered corpor ati ons by re ser vi ng the r i ght t o ch an ge ei therge nera lco rpor ate l aw or a p ar ti cul arc ha r te r . S ta te s qui ck l y t o o ka dva ntag e o fthato pp or tuni ty , a nd the cor pora te- chart er - ascontr act doctr i ne f aded i nto hi sto ry . W isc on sin in c lu d ed su c h a res er va tio n inits firstco n st itu ti o n, whi chwas i n f o r ce wheni t en te r ed th e Uni o n. W i sc o ns i n Co ns ti tu ti o n o f1 84 8, Art
. XI I§ 1. The c ur r en t W i sc o ns i n Con st i tu ti o n h as a s i m i l arpr o vi si o n in Ar t. XI §1: “Cor pora ti ons w i thout b an ki ng powers orpri vi l ege s m ay be for m ed un d er genera ll aw s, but shal lnotbe c re ated by s peci alact, exce pt f orm unici pal purposes . A ll generall aw s o r speci alact s e nacted under the pro vi-6 N o. 10

- 3509 si o ns o fthi s se ct i o n may b e alt er ed o r r epe al ed bythe l e g i s l a t u r e a ta n y t i me a ft e r th e i r p a s s a g e . ” T h e S u p r e me Court ofW i sco nsi n ha s h eld thatthi s cl ause ensure s that the sta te can change the ter m s on w h ich co rpor at i o n s o p er at e. Se e, e.g ., At t o r n ey Ge n e r a l v . Ch i c ago & Nor t hwest er n Ry ., 35 W is. 42 5, 57 4 (1 87 4); Wes t Wis consin R y. v. Tre m peale au C ounty, 3 5 W i s. 2 57, 2 70 ( 18 74 )
. The p rovisi ons of W iscons in’s corpo r a te law therefore are legi slative; they are not “con tracts ” as p r ivate law un d erst a nd s the m, f o r the y do n o tde pe nd o n a nyp r i vate party ’ s co nsent and are o utside the sc ope o fthe Contrac t Clause

. W h en th e Su p re m e C ou rtof th e U n ite d Sta te s h eld inM i t s u bish i M o to rs and si m i l arcas es that contr actual f o r um - se l ec ti o n c l au se s m us t be e nf o r ce d, i t us ed “c o ntr actual ” i n the pri vate
- l aw se nse

— the word denote s obligati ons established by the un an im ou s a n d volun tary conse nt o fthe affecte d parti es. That’ s no t a t a l lwh at th e S upr eme Co ur t o fW i sc o ns i n mea ns w he n us i ng the m eta phor that co rpor ate l aw i s r ead i nto a co rpor ati on’ s a rt i cl es. T here i s no thi ng vo l untaryabo ut W i s. St at. 18 0. 1330 ( 2) a nd ( 4)
. These ar e r ule s e stabl i shed by the l egi sl at u re , notdeci si ons by pri vate act or s. W e there

f or e co ncl ud e that W i sco nsi n , l i ke Dela w ar e ( see Truck C om ponents ) h as es ta b lish ed a ru le of v en u e a p p lica b le w i thi n i ts own j ud i ci alsy ste m and has not att em pted to bl ock cor pora ti ons fro m usi ng the dive rs i ty j u ris

d iction of §133 2(a). N o tz do es no t co nt en d tha t th e di st r i ctc o ur t’ s fi ndi ng off act that Tros tel ’ s s hare s we re w or th $1 1, 900 api eceN o. 10

- 3509 7 i s cl ear l y e rr oneo us. H e d oe s co ntend, however, that th e j ud ge m ade a l ega l er ro r by excl ud i ng fro m th e c alcul ati on a cl ai m a ga in st Sm i th thatN otz bel i eve s Tr ost el po s s e s s e d. I n 2 0 0 4 Tr o s t e l ha d a n o pp o r t un i t y to ac qui r e th e as se ts o fDi ck te n & M as chM an uf ac tu r i ng C o. , w hich m ad e plastics. Trostel pa ssed on th at op p ortu nity, bu t Sm ith (w hos e nom inees controlled T rostel’s boar d) d id not; wh at’ s m or e, S m i th the n purchased Tr o st el ’ s pl as ti cs su bs i di ar y, Tr o st el S EG. N o tz co ntends thatthes e t ra nsacti ons m i sappropria ted o ne o f Tros tel ’ s co rpor ate o pp or tuni ti es and dive rt ed ass ets fr o m Tr o st elt o S m i th

. N otz tr i ed to l i ti gat e these cl ai m s in hi s o w n nam e, but bo th Tro ste land Sm ith c onte nd ed that the o nl y way to pu rs ue them i s der i vati ve l i ti gat i on. Tro ste lappo in ted a s p ec ial litig at ion co m m itt ee of in d ep en d en t d ir ec to r s, whi chg av e its bless i ngt o the t r an sa ct i o ns a nd sq ue lched any d erivative suit. T he n th e Sup rem e C ou rt of W is c on sin h eld th at N ot z’s p rin c ip al t h eo ry is in d ee d d er iva tiv e in n at u re . N otz v. E verett Sm i t h Group, Inc. , 3 1 6 Wi s . 2 d 6 40, 6 5 2

– 5 6 ( 2 0 0 9 )
. T he c o ur ta l s o h e l d, h ow ev er , th at N ot z c ou ld p u rs u e t w o th eo rie s in h is own nam e: fi rs t, thatbycausing Tro ste lto i nvest i gat e the Di ckte n & M asch a sse ts, S m i th cr ea ted the functi onalequi val ent o fa divi dend to i tse l f( th e v al ue o f the info rm ati on) , a divi dend thatwas w ith h el d fr om th e m in or ity inv es to rs , id
. at65 6–60 ; se cond, thatT ro ste l w as bei ng r un i n a way that o pp re sse d m i nor i ty shar eho l de r s a nd s houl d b e di s s o l v e d, i d. at66 0–67
. Because the mi no r i t y i nv e s t o r s h a d b e e n c a s he d o uti n 2 0 0 7, th e demand fo r di ss o l ut i o n was eq uiva l en t to a de m an d8 N o. 10

- 3509 f orpaym ent in exces s o f$1 1, 900 ( foro n dis soluti on, as in a m er ge r, all in ve st or s rec eiv e th e va lu e o fth eir shar es) and ther ef or e dupli cate d the apprai salpro c ee d in g t h en p en d in g in fed er al c ou rt
. Id. at675 –78 (R og ge n sa c k, J., co n c u rrin g). O n rem an d , th e C irc u it Cou r t o fM i l wauk ee Co unty c o nc l uded th atthe di ss o l uti on c laim h ad no va l ue to N otz and that the e vi dence d i d n o te s t ab l i s h th e c o n s t r u c t i v e - di v i d e n d c l a i m. The Cir cui t Cour t e nter ed j ud gm en t for al ldefendants. N otz v. E veret t Sm ith Group , Ltd
. , N o. 06 CV 3068 ( Se pt. 7, 20 11 ). N ot z d id n otap p ea l. H is a rg u m en t t h at t h e fe d er al d ist ric t c ou rtsh ou ld have i n cl ud ed el em ents ofvalue gr owing out ofthe w ay the Di c k t e n & M a s c h a s s e t s e nd e d u p i n Sm i th ’ s h a nd s ( w i tho uta nydi v i de nd t o the mi no r i t y s ha r e ho l de rs ) am ou n ts to an ef f or t t o re litig at e t h es e a d ve rs e d ec isi o ns . W i sc o ns i n e nt i tl es s ha r eh o l der s to the f ai r v alue ofthei r sh ares on the date ofthe tr ansact i on that cr eat es the right to di sse nt and apprai sal

. W i s. S tat
. 18 0. 1328
. As o ftha t dat e, Tr o st el ’ s sh ar es di d n o t i nc l ude a ny el em en t ofvalue at tr ibutabl e t o the Di ckte n & M asch tr ansact i on

— except forthe paym ent Tr ost elr ecei ved f orTro ste lS EG , a n d N otz r ecei ved fullcr edi t forthat

. Byth e t i me th e me r g e r c l o s e d , th e s p e c i a ll i t i g a t i o n c o mm ittee had de cid ed not to p urs ue a clai m on T rostel’s behal f

. Deri vati ve l i ti gat i on was a dead i ssue. T h e s p ec ial litig at ion co m m itt ee co n c lu d ed th at a su it w oul d not be i n Tros tel ’ s inter est

— i n oth er w or ds, that th e di sc o unt ed value o fa ny r ec o ve r y was l es s th anthe l i ti gat i on co sts. T h us ev en tho ugh the l aw o fpre cl usi onN o. 10

- 3509 9

m ay not bl ockN otz ’ s e ff or t to re su sci tat e a co rpor ate
o p p o r t u ni t i e s c l a i m, th e r a t i o n a l e b e h i n d th e c o mm i tte e’ s deci si on i m pli es that l i ti gat i on would m ake Tr o s t e lwo r s e o ff

. No t z r e l i e s o n a d e c i s i o n ho l di ng that “f ai r val ue” in an apprai salpro ceedi ng i ncl ud es ri ghts ofr eco ver y b y a fi rm ag ainst i ts m anage rs f or w ro ngs they infl i cted o n the fi rm . S ee HM O

- W Inc . v. SS M Heal th C a re System , 23 4 W i s. 2d 70 7 ( 20 00 )
. Thi s doe s no t hel p, f orthe up shot ofthe deri vati ve cl ai m i s that pu rs uingthe m em ber s ofT ro ste l ’ s boar d w oul d have had negat i ve prese nt val ue. A nd W i sco nsi n’s courts have det er m i ne d tha t th er e i s no th i ngt o Not z’ s in depe nde nt cl ai m s. The di str i ct c ourtthus t ote d up al lo fthe el em ents of val ue thatTro ste lposs ess ed w hen the m er ger c l o s e d. A FFI RMED

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