Case Name: William N. Ehlinger, Plaintiff-Respondent-Cross-Appellant-Cross-Petitioner, v. Jon A. Hauser and Evald Moulding, Inc., Defendants-Appellants-Cross-Respondents-Petitioners
Court: Wisconsin Supreme Court
Jurisdiction: Wisconsin
Decision Date: 2010-06-25
Citations: 325 Wis. 2d 287
Docket Number: No. 2007AP477
Parties: William N. Ehlinger, Plaintiff-Respondent-Cross-Appellant-Cross-Petitioner, v. Jon A. Hauser and Evald Moulding, Inc., Defendants-Appellants-Cross-Respondents-Petitioners.
Judges: ¶ 121. N. PATRICK CROOKS, J., did not participate.
Reporter: Wisconsin Reports Second
Volume: 325
Pages: 287–369

Head Matter:
William N. Ehlinger, Plaintiff-Respondent-Cross-Appellant-Cross-Petitioner, v. Jon A. Hauser and Evald Moulding, Inc., Defendants-Appellants-Cross-Respondents-Petitioners.
Supreme Court
No. 2007AP477.
Oral argument September 15, 2009.
Decided June 25, 2010.
2010 WI 54
(Also reported in 785 N.W.2d 328.)
For the defendants-appellants-cross-respondents-petitioners there were briefs by Gary A. Ahrens, Daniel J. Vaccaro, Monica M. Riederer, and Michael Best & Friedrich LLP, Milwaukee, and Kristen L. Hauser, Watertown, and oral argument by Gary A. Ahrens.
For the plaintiff-respondent-cross-appellant-cross petitioner there were briefs by Timothy W. Feeley, Sara J. MacCarthy, and Hall, Render, Killian, Heath & Lyman, PC., Milwaukee, and oral argument by Timothy W. Feeley.

Opinion:
ANN WALSH BRADLEY, J.
¶ 1. This case is before the court on a petition and a cross-petition for review of a decision of the court of appeals. It involves a contractual dispute between Jon Hauser ("Hauser") and Robert Ehlinger ("Ehlinger"), who are the joint and equal shareholders of Evald Moulding, Inc. ("Evald"), a Wisconsin corporation located in Watertown. The parties' Buy-Sell Agreement provides that if one of the shareholders becomes totally disabled, the non-disabled shareholder is entitled to purchase his shares at "book value."
¶ 2. Hauser contends that both the circuit court and court of appeals incorrectly concluded that the buyout agreement is unenforceable. First, he asserts that the circuit court erred when it determined that the undefined term "book value" rendered the buyout agreement unenforceable. Second, Hauser argues that the court of appeals incorrectly determined that supporting documentation is a necessary component of a computation under generally accepted accounting practices ("GAAP"). Third, he asserts that the circuit court erroneously exercised its discretion when it denied him further opportunity to challenge and counter the special magistrate's conclusions. He argues that the meaning of "book value" is ambiguous and that he is entitled to a trial to determine the intent of the parties.
¶ 3. We conclude that the circuit court did not err when it determined that the agreement was unenforceable. Both parties agree that Ehlinger is entitled to examine Evald's books to determine whether they accurately reflect the corporation's assets and liabilities, a task that the special magistrate was unable to perform due to the state of Evald's records. Accordingly, we need not resolve whether the contract is indefinite or ambiguous here because under these circumstances, it cannot be enforced.
¶ 4. Additionally, to the extent that Hauser's characterization of the court of appeals' decision is accurate, we determine that his argument about the scope of GAAP fails. The question is not what is required under GAAfi but what is required to determine the parties' rights.
¶ 5. Finally, we conclude that the circuit court did not erroneously exercise its discretion when it denied Hauser the opportunity to subject the special magistrate to a broader scope of cross-examination, to depose the special magistrate, and to present his own expert witness in rebuttal.
¶ 6. In his cross-petition, Ehlinger argues that the circuit court erroneously permitted the defendants' litigation expenses to be paid by the corporation. This decision would not be erroneous if Hauser was entitled to indemnification or if Evald spent its assets in its own defense. We determine that Hauser was not entitled to indemnification by Evald according to the provisions of Wis. Stat. § 180.0855 (2007-08). Further, under these facts, the litigation expenses were not incurred by the corporation for its own defense. Therefore, we conclude that the circuit court erroneously exercised its discretion when it permitted the corporation to pay Hauser's litigation expenses.
¶ 7. Accordingly, we affirm the court of appeals as modified in this opinion and remand to the circuit court for the appointment of a receiver.
I
¶ 8. The procedural history of this case is lengthy. It encompasses over seven years of litigation between two former friends, William Ehlinger and Jon Hauser, the sole and equal shareholders of Evald Moulding, Inc. Both men are corporate officers, but Hauser manages Evald's day-to-day operations.
¶ 9. Evald's shareholders have not held a meeting since 2002, and they last successfully elected corporate officers in 1995. These failures are caused in part by an ongoing dispute over the provisions of a Buy-Sell Agreement executed by Ehlinger and Hauser in 1992.
¶ 10. The agreement provides for the transfer of a disabled shareholder's shares upon total disability. The purchase price for the disabled shareholder's shares is set forth in the agreement as follows:
For transfers of all of a Shareholder's stock . . upon his becoming disabled, the purchase price of a Shareholder's shares of stock shall be $350,000.00 or Book Value whichever is greater . For transfers of all of a Shareholder's stock on threat of involuntary transfer, the purchase price of a Shareholder's shares of stock shall be the book value of said shares as of the end of the last fiscal year.
The agreement was signed by Hauser and Ehlinger in their capacities as corporate officers and as shareholders. Shortly after the parties signed the agreement, Ehlinger developed Parkinson's Disease.
¶ 11. In December 2000, Ehlinger and Hauser met for dinner at a restaurant in Watertown. According to Hauser's notes, Ehlinger said that he had lost interest in the business and asked Hauser to make an offer to purchase his shares. The parties did not agree to any buyout terms at the meeting, but they did agree that Ehlinger was entitled to inspect Evald's books.
¶ 12. On June 20, 2001, Hauser sent a letter to Ehlinger invoking the disability buyout agreement. He stated that he intended to initiate the process of buying out Ehlinger's entire interest in Evald. The letter explained:
According to Section 3 of the Agreement, when a shareholder becomes "totally disabled", that shareholder must sell their interest in Evald Moulding Company. Further, this section also states that the other shareholder has the first right to purchase this interest. Jon Hauser will act on this right to purchase your interest in Evald Moulding Company.
Hauser enclosed Evald's most recent fiscal year-end statement. Based on that statement, Hauser calculated the book value of Ehlinger's shares to be $431,400 and explained that the first payment installment would be sent "immediately upon the acceptance of this purchase offer." Ehlinger did not accept Hauser's offer.
¶ 13. Ehlinger called a meeting of the shareholders on April 22, 2002. He moved that Evald's books be audited in order to determine the value of the corporation, but Hauser declined to second the motion. The shareholders also attempted to hold their annual election of corporate officers, but due to deadlock, they were unable to do so.
¶ 14. Hauser attempted to hold a closing on Ehlinger's shares. On April 30, he sent Ehlinger a check for $86,280, 20 percent of what Hauser calculated to be the book value of the shares. Ehlinger refused the offer and never cashed the check.
¶ 15. Ehlinger filed suit seeking judicial dissolution. He alleged that the shareholders of the corporation were at an impasse and had failed to elect officers for more than two successive years.
¶ 16. He also sought a declaratory judgment that the buyout agreement was "unenforceable for lack of essential terms," including the definition and means of determining "book value." Further, Ehlinger contended that even if the contract was enforceable, "determining the true book value would be difficult or impossible due to the way the defendant has kept Evald's books." He asserted that "[b]ecause of the ambiguity of the agreement and the defendant's subsequent actions there has never been a meeting of minds between the parties as to the meaning of book value in the 1992 Buy-Sell Agreement."
¶ 17. The parties engaged in discovery. Both parties submitted expert reports purporting to determine the book value and fair market value of Evald. Discovery was completed in September 2003.
¶ 18. Ehlinger moved for summary judgment on two grounds. He argued that Hauser was not entitled to invoke the disability buyout agreement because Ehlinger was not "totally disabled" within the meaning of the agreement. Further, he sought summary judgment ordering the judicial dissolution of Evald due to shareholder impasse.
¶ 19. Hauser argued that no such impasse existed because the corporation had initiated the process of buying out Ehlinger's shares. As a result, Hauser contended, Ehlinger could dispute the price Evald would pay for the shares but he no longer had the authority to vote the shares. Hauser moved for summary judgment declaring that he had validly exercised the disability buyout agreement.
¶ 20. The court issued an order on January 12, 2004. It declined to grant summary judgment to either party regarding the enforceability or applicability of the buyout agreement. Instead, it concluded that there were material issues of fact in dispute.
¶ 21. Further, finding that the shareholders were deadlocked and had failed to elect officers for more than two successive years, the court ordered judicial dissolution pending resolution of the contract issue:
The plaintiffs motion for summary judgment ordering the dissolution and liquidation of Evald Moulding Company, Inc.... and appointing a receiver to make an accounting of the financial affairs of Evald and to dispose of its business for the benefit of its shareholders is granted pending resolution of the parties dispute about defendant's exercise of the option to purchase plaintiffs shares. If defendant prevails, plaintiffs claim for dissolution will be moot. If plaintiff prevails, final judgment of dissolution will be entered.
¶ 22. The court determined that no alternative to dissolution could resolve the deadlock between the shareholders:
While the defendant urges the Court to consider alternatives to dissolution, none resolve the impasse. One solution offered by the defendant is to order an accounting. This exercise has been undertaken at least once . and the underlying conflict continues. Nor will declaration of dividends, capital distribution or money damages provide adequate remedy. The shareholders have been deadlocked for years and remain so today without expectation of extrication.
¶ 23. In May, July, and September of 2005, the court held a five-day bench trial on the applicability and enforceability of the buyout agreement. It found that Ehlinger was "totally disabled" within the meaning of the agreement. Further, the court determined that the agreement "requires the sale of the disabled shareholder's stock on the occurrence of total disability."
¶ 24. The court stopped short of ordering the sale and dismissing the action, however. It determined that there was an outstanding dispute about the enforceability of the agreement that required the court to address the meaning of the term "book value":
The remedy sought by Mr. Hauser is dismissal. And I hesitate to dismiss the case because I perceive additional — an additional unresolved contract dispute regarding the meaning of "book value" and I don't want to leave the parties without recourse in this lawsuit. I don't want to have you come back in some other forum and have that delay.
. I don't want to dismiss if there are further contract terms[]like book value to be interpreted.
.
And what I think I'm going to get from Plaintiff is that there is more than one way to calculate book value, and what I'm going to get from the Defendant is: This is how we have calculated book value for Evald by custom and practice and that's what's determinative.
Thus, the court retained jurisdiction of the case. Neither party objected.
¶ 25. The court ordered each party to provide a definition of "book value." It explained that the parties' definitions would be provided to a special magistrate, who would determine book value according to the court's instructions.
¶ 26. Both parties agreed that "book value" would be defined as "assets minus liabilities." They differed, however, on how to determine which assets and liabilities should be computed in the calculation, and what degree of verification was needed. Ehlinger argued that the company's financial statements were calculated for tax purposes and thus failed to represent the true worth of the assets of the corporation. He further asserted that deficiencies of supporting documentation "make clear that simply focusing on the definition of book value is too simplistic."
¶ 27. The court appointed Del Chmielewski, a certified public accountant, as the special magistrate. During a hearing held in October 2005, the court explained:
Hit's my present intention to instruct the Special Magistrate to review the subject year-end statement and report any deviation from the prior two-years' accounting method, and to report any deviation from generally-accepted accounting methods and to recalculate as necessary to come to book value.... [YJou're required to answer inquiries of the Special Magistrate, but I don't want any advocacy.
Further:
When I say generally-accepted accounting principles, I don't mean to adopt any set of rules. I expect Mr. Chmielewski — [w]ho does plenty of books for plenty of small corporations — to know what's generally acceptable and what's not. And his conclusions could be subject to examination by you folks. You know, I just don't think this is going to be as much of an impediment or as mysterious as you folks fear. I think it's going to be real straightforward.
The court did not specify the statute under which the special magistrate was appointed, or whether he would perform the role of a referee or an expert.
¶ 28. Neither of the parties objected to the special magistrate's appointment or the instructions provided by the court. Hauser's attorney clarified:
I think what the Court's saying is that Mr. Chmielewski is going to look at these things; he's going to say:... in these accounting situations is this good accounting or not? Is this reasonable, accurate accounting or not? If that's the way he's going to do it, I got no problem with that. I wouldn't want there to be some suggestion that there's an elaborate set of rules which is called GAAP in the sense of a formal reference .
¶ 29. In an order setting out instructions for the special magistrate, the court stated:
The Court's special magistrate will determine Evald's March 31, 2001, book value using generally accepted accounting principles which are appropriate for the size, function and structure of this corporation. The special magistrate will advise the Court of any departures from GAAP in his report to the Court. Finally, the special magistrate will report any substantial inconsistencies in the reporting methodology used by Evald in 2001 vis a vis the previous two years.
Neither party objected to the order, and over the next several months, the special magistrate obtained documents from Evald.
¶ 30. During the course of his inquiry, the special magistrate discovered that it was impossible to verify Evald's financial statements. Some of the supporting documentation underlying Evald's computer summaries had been discarded or were otherwise unavailable. The special magistrate determined that he could not confirm that the financial statements represented "book value."
¶ 31. Specifically, his May 8, 2006 report explained:
We have verified that all of the items on Evald's balance sheet have been recorded in accordance with GAAP for F/Y/E 3/31/01 except the following items. Evald has stated that they are not able to provide the information needed to verify items 1 through 5 because their computer software summarizes data and the information for the F/Y/E 3/31/01 is not retrievable.
(1) Physical inventory
(2) Accounts receivable and invoice cutoff procedures
(3) Accounts payable and cutoff procedures
(4) The use of PO clearing account
(5) The use of IC clearing account
.
Since the value of the business is based on the balance sheet, it is necessary to have back up documents to support the numbers reported on the balance sheet. . Without verification of the aforementioned we cannot confirm that the items mentioned above, which are presented on Evald's balance sheet are generated in accordance to Generally Accepted Accounting Principles.
¶ 32. Ehlinger filed a motion asking the court to reconsider its prior decision that he was not entitled to a declaratory judgment. He asserted that the buyout agreement was not enforceable because the book value of Evald could not be calculated. Hauser opposed the motion, and the court set the matter for trial on June 29, 2006. Two days before trial, Hauser requested an opportunity to cross-examine the special magistrate.
¶ 33. At the outset of what the court expected would be a one-day trial, the court clarified the role of the special magistrate:
[O]ur primary purpose today is to address, see if we can determine book value to effectuate the Court's earlier order. I would like to give both counsel an opportunity to give me a brief statement, offer evidence that you might have, and then argument.
Regarding calling the special magistrate as witness, I didn't talk to Mr. Chmielewski about this, but I would allow either of you to question him regarding just a couple of things which are essentially clarification of his reports. One is any arithmetical calculation he's made; two is what, what sources he had as abase to the figures that he used; and third, the opinions that he made in his report to the Court. He's not anybody's expert witness; but I would, if you have questions just on those aspects of his report, allow him to testify.
¶ 34. Hauser called Evald's accountant and bookkeeper as fact witnesses. He called the accountant that Ehlinger had engaged as an expert witness. Additionally, he called the special magistrate as a witness and cross-examined him extensively. The examination of the special magistrate occupies 126 pages of the trial transcript.
¶ 35. The special magistrate testified that he was unable to calculate Evald's book value based on the financial records that were provided;
The computer records that I [was] given really . were in summarized form. And so the standard that I'm trying to apply is difficult to apply in a summarized manner, because you haven't got any assurances as to what it's made up of because . the accounting procedures that happen on a day-to-day basis are kind of transparent, you can't see them.... And by being able to see that some normal accounting procedures were applied, then you can assure yourself that at least it looks like the documents were prepared properly to support the financial statement.
He testified that he was unable to validate 76 percent of Evald's assets and 90 percent of Evald's liabilities.
¶ 36. Hauser argued that the requisite information was available and blamed the special magistrate for failing to ask for it. Additionally, he requested that the court permit him to present an expert accountant to rebut the special magistrate's conclusions. The court declined to do so, but it adjourned the trial until August so that the special magistrate could conduct more investigation:
I deny your request for a — for time for you to have your own expert provide a report on book value. I will, however, assign the special magistrate to do as he testified this morning he could do, and that is, avail himself of those items which are available and which he mistakenly thought weren't....
¶ 37. On August 10, 2006, four days before the trial was to recommence, Hauser submitted multiple documents to the court. They included a "motion in limine to exclude the expert opinion" of the special magistrate, a "motion for a deposition and full cross examination and the opportunity to present a rebuttal expert," and a "motion that no adverse inference from missing records is appropriate."
¶ 38. On August 11, the special magistrate submitted a revised report stating that he could not substantiate the balance for physical inventory, accounts receivable, or accounts payable. He explained that the problems were due to Evald's accounting software, which summarized reports:
This summarizing caused a lot of reports, which any normal accounting system would have, to be unavailable for the F/Y/E 3/31/01. We could not view a detailed listing or subsidiary ledger report of the A/R aging report, the A/R account, the A/P account, the inventory account, the PO clearing account or the IC clearing account, as of 3/31/01.
¶ 39. The second day of trial was held on Monday, August 14. The court was unable to address Hauser's motions before receiving evidence because they were untimely.
¶ 40. Hauser again cross-examined the special magistrate at length. The special magistrate testified that he was unable to verify Evald's financial statements because the corporation had not retained subsidiary ledgers which were necessary to support the balance sheet.
¶ 41. In a written order dated November 29, 2006, the court determined that the term "book value" was indefinite, precluding the enforceability of the contract. The court concluded that it could not "cure the contract deficiency by grafting a requirement that the value be ascertained by using generally accepted accounting principles appropriate for a corporation of Evald Moulding's size, structure and function." Further:
As the Court's special magistrate made his inquiry, report and presentation, it became clear that the parties' contractual term was too vague to cure. "Book value" could mean anything from simple adoption of the year end statement to an audited determination. The Court's attempt to give definite meaning to the contract term is as arbitrary as any other definition.
Although the parties discussed waiting for the year end statement in their December 2000 meeting, any inference that this discussion ratified Defendants' definition of hook value is vitiated by the parties' agreement to have Plaintiff review the books thereafter. The parties' conduct is insufficient to give definite meaning to the vague term.
(Citations omitted).
¶ 42. Hauser submitted a "motion for reconsideration, and for an order setting for trial the issue of the ambiguity of the term book value in the buy/sell agreement." He argued that "book value" was ambiguous rather than indefinite and that the court committed a manifest error of law. At a January 2007 hearing, he reminded the court of the presumptive validity of contracts:
Counsel: The law is very clear in Wisconsin that courts do not look for ways — look for fingerholes to void contracts.
Court: Well, clearly not what I did here. I sought and struggled to try to hold this contract together.
The court denied his motion.
¶ 43. In February, Ehlinger submitted a motion, titled a motion for reconsideration, requesting an injunction prohibiting Hauser from directing the corporation to pay for the litigation expenses. The court denied the motion, concluding that the corporation had an "interest" in the lawsuit and it would be "impossible as we sit here today" to assign fees between Hauser and the corporation.
¶ 44. Hauser appealed, and Ehlinger cross-appealed. The court of appeals affirmed the circuit court with some modification of its rationale. Ehlinger v. Hauser & Evald Moulding, Inc., 2008 WI App 123, 313 Wis. 2d 718, 758 N.W.2d 476. It did not determine that the term "book value" was indefinite. Id., ¶ 30. Rather, it concluded that the term was ambiguous and that the circuit court resolved the ambiguity by reasonably determining that the parties intended "book value" to be calculated using GAAP rather than by simply accepting the calculation listed on Evald's year-end statement. Id,., ¶ 31.
¶ 45. Regarding Ehlinger's cross-petition, the court of appeals concluded that the circuit court did not erroneously exercise its discretion when it determined that Evald's assets could be used to pay the defendants' litigation expenses. Id., ¶ 46, 48. Additionally, it concluded that Hauser was entitled to corporate indemnification for his own litigation expenses. Id., ¶ 48.
II
¶ 46. This case requires us to examine several decisions of the circuit court and the court of appeals. We must determine whether the circuit court erred when it concluded that the undefined term "book value" rendered the buyout agreement unenforceable. In addition, we must determine whether the court of appeals erred by concluding that supporting documentation is a necessary component of a GAAP computation.
¶ 47. The interpretation of a contract is generally a question of law. Levy v. Levy, 130 Wis. 2d 523, 528-29, 388 N.W.2d 170 (1986). The necessary components of a GAAP computation is also a question of law. We determine questions of law independently of the conclusions rendered by the circuit court and the court of appeals. Id. at 529.
¶ 48. We also must determine whether the circuit court erroneously exercised its discretion when it denied Hauser further opportunity to challenge and counter the special magistrate's conclusions and when it permitted the corporation to fund the litigation expenses incurred in these proceedings. We will uphold the circuit court's exercise of discretion if it "examined the relevant facts, applied a proper standard of law, and, using a demonstrated rational process, arrived at a conclusion that a reasonable judge could reach." DeWitt Ross & Stevens, S.C. v. Galaxy Gaming & Racing Ltd., 2004 WI 92, ¶ 21, 273 Wis. 2d 577, 682 N.W.2d 839.
Ill
¶ 49. We begin by addressing the issues set forth in Hauser's petition for review. Hauser raises three issues: (A) did the circuit court err when it determined that the undefined term "book value" rendered the agreement unenforceable; (B) did the court of appeals err by concluding that supporting documentation is a "necessary component" of a GAAP computation; and (C) did the circuit court erroneously exercise its discretion when it denied Hauser's motion to subject the special magistrate to complete cross-examination, to depose the special magistrate, and to present his own expert witness in rebuttal? We address these issues in turn.
A
¶ 50. The disability buyout agreement sets the price for the disabled shareholder's shares at "book value." Nevertheless, the agreement does not define "book value." Both parties agree that in the absence of a contractual definition, "book value" refers to the value of the assets of a company after deducting its liabili ties. The parties disagree, however, as to which assets and liabilities should be included in the calculation and how those values should be calculated.
¶ 51. In his complaint, Ehlinger alleged that the agreement was unenforceable because, among other reasons, it did not indicate how "book value" would be computed. Over the course of several years of circuit court proceedings, the court attempted to give meaning to the term.
¶ 52. During the proceedings at the circuit court, Hauser asserted that the parties intended "book value" to refer to the value of assets minus liabilities computed on the year-end financial statements, which are calculated in order to minimize tax liability. By contrast, Ehlinger argued that "book value" refers to the value of assets minus liabilities, computed according to generally accepted accounting principles (GAAP).
¶ 53. Hauser now argues that the circuit court erred when, without holding a trial on the intent of the parties, it concluded that the term "book value" was "too vague to be cured." He asserts that the term may be ambiguous, but it is not indefinite. Therefore, he argues that a trial on the parties' intent is necessary to solve what he considers to be a contractual ambiguity.
¶ 54. There are two distinct questions embedded within our inquiry. First, can the parties' agreement be interpreted to give meaning to the term "book value"? Second, if it can be so interpreted, what was the dollar amount of "book value" on March 31, 2001?
¶ 55. The circuit court concluded that the term "book value" was vague and indefinite, and that the agreement was therefore unenforceable. The court of appeals rejected the circuit court's conclusion that the term was indefinite. Rather, it concluded that the term was ambiguous.
¶ 56. A contract can be ambiguous without being indefinite. See Management Computer Servs., Inc. v. Hawkins, Ash, Baptie & Co., 206 Wis. 2d 158, 178, 557 N.W.2d 67 (1996) ("An ambiguous contract is not necessarily indefinite."). A contract is ambiguous when it is "fairly susceptible of more than one construction." Id. at 177. If a contract term is ambiguous, extrinsic evidence may be used to help construe its meaning. Id.
¶ 57. By contrast, "the definiteness requirement is relevant to contract formation, not interpretation." Id. at 178. A contract requires mutual assent of the parties and "must be definite as to the parties' basic commitments and obligations." Id. Mutual assent is judged based on an objective standard, looking to the express words used in a contract. Id. "Vagueness or indefiniteness as to an essential term of the agreement prevents the creation of an enforceable contract." Id.
¶ 58. We have explained that "[b]ook value is a term of ambiguous meaning" when it is not further defined by a contract. Schumann v. Samuels, 31 Wis. 2d 373, 376, 142 N.W.2d 777 (1966). Under some circumstances, an undefined term might not only be ambiguous, but it might he indefinite as well. If a contract term is indefinite, a trial cannot cure the contract deficiency.
¶ 59. Here, however, we need not resolve whether the buyout agreement is indefinite, ambiguous, neither, or both because resolution of that question would not change the outcome of this case. If we concluded that the contract was indefinite, further fact-finding could not cure the deficiency and the agreement would not be enforced. Moreover, if we determined that the agreement was ambiguous, a trial on the parties' intentions would be a superfluous exercise due to the specific circumstances presented in this case. Because Ehlinger cannot now validate any claimed "book value," the contract cannot be enforced regardless of how the term could be defined.
¶ 60. The parties agree that Ehlinger is entitled to examine the books in order to validate that the buyout price accurately reflected Evald's book value. See Townsend v. LaCrosse Trailer Corp., 254 Wis. 31, 35 N.W.2d 325 (1948). This is a task that the special magistrate was unable to perform due to the state of Evald's financial records.
¶ 61. In Townsend, we concluded that the employee-stockholder had the "right to go behind the financial statement in order to examine all of the books, records, and files of the defendant corporation which might reflect the book value" of his stock. Id. at 37. In that case, a contract between an employee and his employer provided that upon the employee's termination, the corporation had the right to buy out the former employee's stocks at a price equal to one-half of their book value. We evaluated the employee's request to examine accounting records to support his argument that the corporation's financial statements did not accurately reflect the book value of the corporation.
¶ 62. The corporation argued that the employee "should be limited to an examination of the financial statement prepared by the company's auditors . because such statement definitely sets the book value of the stock." Id. at 36. We rejected the corporation's contention that a financial statement "definitely sets the book value of the stock," holding that the book value is not just any value that may be arbitrarily entered upon the books of a company. Id. at 37.
¶ 63. In this case if we decided that the contract was ambiguous and a trial on the meaning of "book value" was warranted, the fact-finder might accept Hauser's position that the parties intended "book value" to mean the value of assets minus liabilities calculated for tax purposes as recorded on the year-end statement. Under those circumstances, Ehlinger would be entitled to "go behind the financial statement in order to exam ine all of the books, records, and files" of Evald which might reflect that value. This task cannot now be performed.
¶ 64. Alternately, the fact-finder might accept Ehlinger's position that the parties intended "book value" to mean the value of assets minus liabilities, computed according to GAAE Again, Ehlinger would be entitled to examine the books, records, and files, which cannot now be done.
¶ 65. Here, regardless of whether the parties intended assets and liabilities to be computed on a cost basis, a tax basis, a fair market value basis, or any other basis, the unavailability of Evald's financial records prevents Ehlinger from exercising his right to examine the books in order to assess the accuracy of the buyout price. From both a practical and a legal standpoint, the unavailability of the records precludes this agreement from being enforced.
¶ 66. Typically, an appellate court should decide cases on the narrowest possible grounds. State v. Blalock, 150 Wis. 2d 688, 703, 442 N.W.2d 514 (Ct. App. 1989). Issues that are not dispositive need not be addressed. Gross v. Hoffman, 227 Wis. 296, 300, 277 N.W. 663 (1938). A court generally will not engage in an exercise which circumstances have rendered purely academic. State ex rel. Olson v. Litscher, 2000 WI App 61, ¶ 3, 233 Wis. 2d 685, 608 N.W.2d 425.
¶ 67. Here, the resolution of whether the term "book value" is indefinite or ambiguous has no practical effect upon the existing controversy. We therefore need not resolve the question. We conclude that, under the circumstances presented, the circuit court did not err when it determined that the buyout agreement could not be enforced.
B
¶ 68. In addition, Hauser contends that the court of appeals erred by concluding that supporting documentation is a "necessary component" of a valid GAAP computation. See Ehlinger, 313 Wis. 2d 718, ¶ 35. He asserts that under GAAP a compilation does not require supporting documentation.
¶ 69. As a threshold matter, Hauser may be misconstruing the court of appeals' conclusion. It is not clear whether the court of appeals made a general statement that supporting documentation is a necessary component of a valid GAAP computation in all cases, or whether it determined only that supporting documentation was required under the facts of this case.
¶ 70. Even if Hauser correctly construes the court of appeals' conclusion, Hauser's assertion misses the mark. The question before the court is not what is required to do a compilation under GAAP but what is required to determine the parties' contractual rights.
¶ 71. During the two-day trial over the corporation's book value, Hauser cross-examined the special magistrate. The special magistrate agreed that accountants perform three levels of service under GAAP: compilations, reviews, and audits. He agreed that it was not necessary to verify financial statements when performing a compilation.
¶ 72. Hauser argues that, based on the circuit court's instructions, the special magistrate was required to "accept the representations of Evald Moulding, Inc. and Hauser." He asserts that in performing a compilation, the special magistrate was not permitted to express any assurance on the statements.
¶ 73. Hauser's position misconstrues the circuit court's instructions to the special magistrate. The circuit court did not ask the special magistrate to perform a compilation. Instead, it asked him to "determine Evald's March 31, 2001 book value using generally accepted accounting principles which are appropriate for the size, function and structure of this corporation." The special magistrate concluded that he could not determine Evald's book value without knowing the basis from which the numbers on the corporation's financial statements were computed.
¶ 74. The problem with Hauser's argument is that it assumes that by "book value," the parties intended nothing more than the number taken from Evald's year-end statement. Hauser's argument is tantamount to an assertion that Ehlinger is required to accept the value listed on Evald's year-end financial statement without further inquiry. Yet we soundly rejected that argument in Townsend. See supra, ¶ 61-62. Although a corporation may keep its books within the confines of the law and as it sees fit, the company's financial statements do not "definitely set[] the book value of the stock." Townsend, 254 Wis. at 36.
C
¶ 75. Finally, Hauser contends that the circuit court erroneously denied his motion to depose and fully cross-examine the special magistrate and to present an expert witness in rebuttal. He asserts that the special magistrate was appointed not as a referee under Wis. Stat. § 805.06, but rather as a court-appointed expert under Wis. Stat. § 907.06. As such, Hauser argues that the court erred by preventing him from using all of the tools of the adversary system to challenge and counter the special magistrate's conclusions.
¶ 76. The Wisconsin statutes authorize a court to appoint a referee to determine "matters of account" and other complicated issues. "The role of a referee is to help the court in cases where the expertise of the referee is needed" to assist the court in obtaining facts and arriving at a correct result in complicated litigation. Patricia Graczyk, The New Wisconsin Rules of Civil Procedure Chapters 805-807, 59 Marq. L. Rev. 671, 683-84 (1976).
¶ 77. The procedure for appointing a referee in Wisconsin is similar to the procedure for appointing a master under the Federal Rules of Civil Procedure, Rule 53. The court order appointing a referee and describing the referee's powers is called a "reference." If a party wishes to contest the reference, it should move the court to revoke the reference. 3A Jay E. Grenig, Wisconsin Practice Series: Civil Procedure 35 (3d ed. 2003) (citing La Buy v. Howes Leather Co., 352 U.S. 249 (1957)).
¶ 78. Section 805.06(3) provides a circuit court with broad discretion in crafting the reference. Although a referee is generally permitted to conduct hearings and subpoena witnesses, the reference may specify or limit the referee's powers. It may direct the referee to "receive and report evidence only." Wis. Stat. § 805.06(3); see also Grenig, supra, at 36 ("The order may direct the referee to report only upon particular issues, to do or perform particular acts, or to receive and report evidence only.").
¶ 79. The referee must file his or her report with the clerk of court. Wis. Stat. § 805.06(5)(a). Parties may-object to the referee's report within 10 days of filing. Upon objection and after a hearing, the court is permitted to adopt the report, modify it, reject it in whole or in part, receive further evidence, or recommit it with instructions. Wis. Stat. § 805.06(5)(b).
¶ 80. Wisconsin statutes also permit a court to appoint an expert witness. See Wis. Stat. § 907.06. When the court appoints an expert witness, the parties may take the expert's deposition and the expert can be called as a witness by either the court or a party. Hauser contends that because the referee did not conduct hearings or file his report with the court, he was an expert witness, subject to discovery and full cross-examination.
¶ 81. The court did not cite to either the referee statute or the court-appointed expert witness statute when it appointed the special magistrate and instructed him to determine the book value of Evald. Nevertheless, it is apparent from the record that at the time of appointment, the parties and the court understood the role of the special magistrate to be analogous to a referee or a master. Computation of Evald's book value was a "matterO of account" that had proved to be a complicated issue which the parties had disputed over the course of several years. It appears that the court determined that it required the expertise of the special magistrate to help the court obtain facts and arrive at a correct result.
¶ 82. In its order appointing the special magistrate, the court specified the magistrate's role as follows: he "will determine Evald's March 31, 2001 book value," "will advise the Court of any departures from GAAfi" and "will report any substantial inconsistencies" in Evald's books. During a hearing, the court clarified that the special magistrate was to receive and report evidence only. The court stated: "[YJou're required to answer inquiries of the Special Magistrate, but I don't want any advocacy." Further, the court prohibited ex parte conversations.
¶ 83. Hauser agreed to the procedure outlined by the court. During a hearing, his attorney stated:
I think what the Corat's saying is that Mr. Chmielewski is going to look at these things; he's going to say:... in these accounting situations is this good accounting or not? Is this reasonable, accurate accounting or not? If that's the way he's going to do it, I got no problem with that.
It was only after the special magistrate's report was complete and he concluded that he was unable to verify Evald's assets and liabilities that Hauser first objected to the proceedings. The record does not evince an understanding by the parties that the, special magistrate was appointed as an expert witness.
¶ 84. The court first discussed the special magistrate's appointment at a hearing held on October 19, 2005. Over the course of the following nine months, the special magistrate investigated Evald's books, communicated with the parties, and prepared drafts of his report.
¶ 85. Neither party asserted a right to cross-examine the special magistrate until June 27, 2006, two days before trial. At that point, Hauser first asserted that the special magistrate was an expert witness subject to cross-examination. The circuit court permitted a limited cross-examination of the special magistrate, but it clarified that "[h]e's not anybody's expert witness."
¶ 86. Further, neither party requested an opportunity to depose the special magistrate or present rebuttal expert testimony until after the trial had already commenced. Toward the end of the first day and in response to an objection by opposing counsel, Hauser's attorney first suggested that he should be entitled to depose the special magistrate and present his own expert witness.
¶ 87. Under these circumstances, Hauser forfeited his right to object to the procedures specified by the court in the reference. See State v. Ndina, 2009 WI 21, ¶ 29-30, 315 Wis. 2d 653, 761 N.W.2d 612. We conclude that the circuit court did not erroneously exercise its discretion when it denied Hauser the opportunity to subject the special magistrate to a broader scope of cross-examination, to depose the special magistrate, and to present his own expert witness in rebuttal.
¶ 88. At oral argument, both parties expressed admiration for the circuit court's persistent and pragmatic attempts to resolve this complicated litigation. Nevertheless, Hauser points to certain procedural irregularities at the circuit court. For instance, although the special magistrate submitted his report to the court and the clerk of courts provided the report to the parties, there is no indication that the clerk of courts filed the report in the circuit court record. See Wis. Stat. § 805.06(5)(a). Further, during Ehlinger's cross- examination of the special magistrate, he asked the magistrate about his opinions "to a reasonable degree of accounting certainty" — a phrase generally reserved for expert witnesses.
¶ 89. Because referee appointments are an exceptional procedure, the court, the parties, and the referee will often be unfamiliar with the process. It would have been better had the reference more clearly defined the special magistrate's powers and responsibilities. A reference should clearly delineate the court's expectations regarding the types of evidence the referee should examine and the form of the report, including whether the referee should make findings of fact and conclusions of law. Explicit parameters that are enu merated in a reference will help clarify the procedures and keep the court, the parties, and the referee on track.
¶ 90. Nevertheless, on this record we are satisfied that at the time the order appointing the special magistrate was issued, the court and the parties contemplated that the special magistrate would fulfill the role of a referee. We are also satisfied that the parties were given a full opportunity to object to the special magistrate's factual determinations. We therefore conclude that the circuit court's exercise of discretion was not erroneous.
IV
¶ 91. We turn next to Ehlinger's cross-petition for review, which presents an issue of first impression in Wisconsin. Ehlinger argues this is primarily a dispute between shareholders and it was improper for Hauser's litigation expenses to be paid from the corporate till.
¶ 92. Both Hauser and Evald are named parties in this dispute. During the proceedings in circuit court, Ehlinger learned that Hauser was directing the corporation to pay for the defendants' litigation expenses. On four occasions, Ehlinger asked the circuit court to enjoin Hauser from paying for the litigation with corporate funds.
¶ 93. In addressing Ehlinger's concern, the circuit court opined that it presented a close call. Without further discussion, the court concluded that the corporation had an interest and that is was more than a nominal party in the litigation:
I think that the prospective attorney fee sourcing is a closer issue. But it seems to me that the Corporation is more than a nominal party; it does have an interest here and, seems to me, would be impossible for the Court as we sit here today to ascertain prospectively how to assign any attorney's fees.
Accordingly, it denied Ehlinger's motion.
¶ 94. Ehlinger contends that this action is primarily a dispute between two shareholders, and that the corporation is only a party to the action so that the court has jurisdiction to order its dissolution. Thus, he argues that it was improper for the defendants' litigation expenses to be paid from the corporate till.
¶ 95. Under these circumstances, it would be appropriate for the corporation to fund the lawsuit if either Evald indemnified Hauser for actions he took in his capacity as a corporate officer or the corporation spent its funds in its own defense. We address these arguments in turn.
¶ 96. In his brief to this court, Hauser contended that he had been indemnified by the corporation for expenses incurred on his behalf as a corporate officer. Wis. Stat. § 180.0851(1) and (2) require indemnification of an officer under certain circumstances when the officer "was a party because he or she is a director or officer of the corporation."
¶ 97. Under the statute, however, indemnification is not self-executing. Rather, certain formalities are required. There is a good policy reason for these formalities. They prevent after-the-fact justification for taking corporate funds for personal use. Without these formalities, an officer could direct the corporation to pay funds for his own defense and only later assert that he had been indemnified by the corporation.
¶ 98. "A director or officer who seeks indemnification under [180.0851] shall make a written request to the corporation." Wis. Stat. § 180.0851(3). Further, if the officer wants the corporation to pay the expenses in advance of a final disposition, the officer must provide the corporation with "[a] written affirmation of his or her good faith belief that he or she has not breached or failed to perform his or her duties to the corporation" as well as "[a] written undertaking, executed personally or on his or her behalf, to repay the allowance" if it is later determined that indemnification is not required. Wis. Stat. § 180.0853.
¶ 99. An officer who is "successful on the merits or otherwise" is entitled to indemnification under section 180.0851(1). An officer who was not successful may still be entitled to indemnification under sub. (2), but there must be a "determination of whether indemnification is required." Wis. Stat. § 180.0851(2)(b). Section 180.0855 prescribes six procedures by which the determination that a director is entitled to indemnification can be made.
¶ 100. Given the deadlock of the board of directors in this case, the only viable option would have been a court order. Section 180.0854(1) provides that "a director or officer who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction." The court "shall order indemnification" if it determines that the director is entitled to indemnification under the statute or that the officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances. Id. § 180.0854(2).
¶ 101. In his brief in this court, Hauser contended that the circuit court ordered his indemnification under Wis. Stat. § 180.0854(1). The record does not support this assertion.
¶ 102. Hauser did not follow any of the formalities described above. There is no indication in the record that Hauser made a written request to Evald for indemnification as required by section 180.0851(3). Further, there is no indication that he provided a written affirmation of his good faith belief and a written undertaking to repay the allowance if necessary as required by section 180.0853. Finally, there is no indication that he applied to the court for indemnification under section 180.0854. Rather, it appears that he simply directed the corporation to pay all legal expenditures for the pending lawsuit.
¶ 103. We need not determine here whether Hauser could have been indemnified by court order had he followed the statutory procedure. Rather, we simply observe that Hauser did not follow that procedure and was therefore not entitled to indemnification by Evald.
¶ 104. At oral argument, Hauser abandoned the assertion that he had been indemnified and instead argued that under these circumstances, he could have been indemnified. When his attorney was asked to pinpoint the order for indemnification, he responded that he could not:
Well, let me bury this indemnification issue. I don't think it was ever asked for, and frankly I don't think the trial court ever explicitly ordered it. I think the court of appeals was essentially saying that the trial court could have done so and perhaps impliedly did so when it denied all of Dr. Ehlinger's motions.
¶ 105. Having abandoned the argument that he was indemnified by Evald, Hauser now rests exclusively on the assertion that the litigation expenses were incurred in defense of the corporation. He notes that Evald is a named party, and he asserts that Evald could retain counsel to represent its own interest in a dissolution proceeding.
¶ 106. Hauser cites to Petition of Levitt, 492 N.Y.S.2d 736 (N.Y. App. Div. 1985), as authority for his argument. That case, however, tends to undermine his argument. The Levitt court clearly states that "in the usual dissolution proceeding,. . . the corporation appears as a nominal party and the proceeding amounts to a dispute between the shareholders[.]" Id. at 742. The corporation appears as a party "for the limited and passive purpose of rendering it amenable to the orders of the court." Id. (citing Matter of Clemente Bros., 239 N.Y.S.2d 703 (N.Y. App. Div. 1963)).
¶ 107. The Levitt court acknowledged that there are exceptions to this general rule:
[T]here appears to be merit to [the non-dissenting stockholder] Toohey's claim that, inasmuch as he had already exercised his buy-out option under [New York law], all that remains is a determination of the fair value of the [other shareholder's] stock, and once that is made, he will be the beneficial owner of all the corporate stock. Therefore, it may be found that, as to the period after Toohey's exercise of the buy-out option . , there was no impropriety in his use of corporate funds to pay his own legal expenses. Corporate funds could not, however, be properly used to pay his counsel fees incurred prior to that election.
Id.
¶ 108. In this case, the question at the core of the parties' dispute was whether Hauser was entitled to invoke the disability buyout agreement and thus become the "beneficial owner of all the corporate stock." The circuit court concluded that he was not. As such, this case does not fit under the exception enumerated in Petition of Levitt. Rather, this is "the usual dissolution proceeding," which "amounts to a dispute between the shareholders."
¶ 109. We acknowledge that under some circumstances, a corporation can and does retain counsel for its own defense in a dissolution proceeding. In Esposito v. Riverside Sand & Gravel Co., 191 N.E. 363 (Mass. 1934), the defendant caused the corporation to retain counsel to resist dissolution and directed the payment of corporate funds for the litigation expenses. The court concluded that these actions were reasonable:
[T]he corporation was attacked; [] both a temporary and a permanent receiver for the corporation was prayed for in the bill; and [] there was a prayer for the liquidation of the assets of the corporation. . . the practical danger to the corporation cannot be pronounced so negligible that it could well have ignored the plaintiffs suit as the plaintiff now contends. The corporation was not a mere nominal defendant.
Id. at 364.
¶ 110. We have repeatedly stressed, however, that the interests of shareholders and the corporation are not always the same. See, e.g., Button v. Hoffman, 61 Wis. 20, 20 N.W. 667 (1884); Milwaukee Toy Co. v. Industrial Commission, 203 Wis. 493, 234 N.W. 748 (1931). Additionally, the corporation may not assume a "militant alignment on the side of one of two equal, discordant stockholders." Matter of Clemente Bros., 239 N.Y.S.2d at 706. In this case, Evald does not have an interest in whether Ehlinger remains a shareholder.
¶ 111. Here, only one answer, signed by Attorney Ahrens, was filed in response to the complaint. Throughout the proceedings and in the court filings, Attorney Ahrens repeatedly signed on the defendants' behalf. The singularity of Attorney Ahrens' representation is indicia that only one interest is being represented— that of Hauser, one of the two equal, discordant shareholders.
¶ 112. A review of the record underscores the conclusion that this is a dispute between shareholders and Evald is merely a nominal party. In his complaint, Ehlinger asked the court to enter a judgment declaring that Hauser "has no present right... to require plaintiff to tender his shares of Evald Moulding, Inc. for redemption by that corporation." He sought judicial dissolution of the corporation because "[t]he shareholders of Evald are deadlocked in voting power."
¶ 113. Ehlinger clarified that "Evald is named as a defendant because plaintiff seeks judicial dissolution of Evald because of impasse and because of the actions of defendant Hauser." Under these facts, the corporation was not made a defendant in any way related to the corporation's actions towards Ehlinger. Rather, it is Hauser's actions that form the basis of the complaint.
¶ 114. We have concluded that Hauser was not entitled to indemnification according to the provisions of Wis. Stat. § 180.0855. We further determine that Evald may not militantly align itself on the side of Hauser, one of two equal, discordant shareholders, by paying for expenses incurred by Hauser in defense of his actions as a shareholder.
¶ 115. Here, although the court concluded that Evald had an interest in the dispute, it did not define that interest or apply the relevant law. Therefore, we conclude that the circuit court erroneously exercised its discretion by failing to enjoin Hauser from charging the litigation expenses to the corporation. See State v. Delgado, 223 Wis. 2d 270, 281, 588 N.W.2d 1 (1999).
V
¶ 116. In sum, we conclude that the circuit court did not err when it determined that the agreement was unenforceable. Both parties agree that Ehlinger is entitled to examine Evald's books to determine whether they accurately reflect the corporation's assets and liabilities, a task that the special magistrate was unable to perform due to the state of Evald's records. Accordingly, we need not resolve whether the contract is indefinite or ambiguous here because under these circumstances, it cannot be enforced.
¶ 117. Further, to the extent that Hauser's characterization of the court of appeals' decision is accurate, we determine that his argument about the scope of GAAP fails. The question is not what is required under GAAR but what is required to determine the parties' rights.
¶ 118. We also conclude that the circuit court did not erroneously exercise its discretion when it denied Hauser the opportunity to subject the special magistrate to a broader scope of cross-examination, to depose the special magistrate, and to present his own expert witness in rebuttal.
¶ 119. Finally, we conclude that the circuit court erroneously exercised its discretion when it permitted the corporation to pay Hauser's litigation expenses. We determine that Hauser was not entitled to indemnification by Evald according to the provisions of Wis. Stat. § 180.0855. Further, under these facts, the litigation expenses were not incurred by the corporation for its own defense.
¶ 120. Accordingly, we affirm the court of appeals as modified in this opinion and remand to the circuit court for the appointment of a receiver.
By the Court. — The decision of the court of appeals is modified and affirmed and, as modified, the cause is remanded.
¶ 121. N. PATRICK CROOKS, J., did not participate.
See Ehlinger v. Hauser & Evald Moulding, Inc., 2008 WI App 123, 313 Wis. 2d 718, 758 N.W.2d 476, affirming decisions of the circuit court for Jefferson County, Jacqueline R. Erwin, J.
All subsequent references to the Wisconsin Statutes are to the 2007-08 version.
The first issue addresses whether the buyout agreement is unenforceable. Four justices (Chief Justice Abrahamson and Justices Bradley, Prosser, and Roggensack) conclude that the agreement is unenforceable, although they differ on the rationale. See supra, ¶ 3; concurrence, ¶ 122. Two justices (Justices Ziegler and Gableman) would remand to the circuit court for a determination of whether the contract is enforceable.
In regards to the second issue, all justices agree that we need not decide what is required to do a compilation under GAAP and that Hauser's argument fails.
Answering the third issue, four justices (Chief Justice Abrahamson and Justices Bradley, Prosser, and Roggensack) conclude that the circuit court did not erroneously exercise its discretion when it denied Hauser further opportunity to challenge and counter the special magistrate's conclusions. Two justices (Justices Ziegler and Gableman) would remand to the circuit court for further development on this issue.
Finally, the fourth issue is whether the circuit court erroneously permitted the corporation to pay Hauser's litigation expenses. Four justices (Chief Justice Abrahamson and Justices Bradley, Roggensack, and Ziegler) conclude that the circuit court erroneously exercised its discretion. Two justices (Justices Prosser and Gableman) conclude that the circuit court did not err.
In appointing a receiver, the circuit court shall hold a hearing and describe the powers and duties of the receiver. Wis. Stat. § 180.1432(1), 180.1432(2). The receiver may sell the assets of the business in parts or as a whole. See Wis. Stat. § 180.1432(3)(a).
Hauser is Evald's President, Chief Executive Officer, and Treasurer. He manages Evald's day-to-day operations. Ehlinger is Evald's Secretary.
The opening paragraph of the Buy-Sell Agreement states:
Agreement made this 14 day of August 1992, by and between William N. Ehlinger and his wife, Kathleen L. Ehlinger ("Ehlinger"), and Jon A. Hauser and his wife, Diana M. Hauser ("Hauser"), the Shareholders of all of the issued and outstanding stock of Evald Moulding Company, Inc., a Wisconsin Corporation ("the Corporation").
Upon a Shareholder becoming totally disabled as defined hereafter, for a period of twenty-four (24) consecutive months, the other Shareholder shall have the first right to purchase all or part of the stock owned by the disabled Shareholder.... The disabled Shareholder or his legal representative shall sell all of the stock owned by the disabled Shareholder at the Agreed Purchase Price as defined in Section 6 hereof and upon the terms and conditions set forth herein.
According to the April 22, 2002 minutes taken by Ehlinger and subsequently rejected by Hauser:
Mr. Ehlinger then nominated himself as a director for the coming year. Mr. Hauser then nominated himself as a director for the coming year. Mr. Ehlinger voted all of his shares for his election as a director and Mr. Hauser voted nay. Mr. Hauser voted all of his shares for his election, and Mr. Ehlinger voted nay. Since neither candidate received a vote of a majority of the shares, Mr. Hauser declared that neither candidate had been elected at the meeting and that, accordingly, both directors would remain in office by virtue of their previous election and continuing status as directors.
Ehlinger also sought an accounting of Hauser and Ehlinger's partnership and an injunction preventing Hauser from voting Ehlinger's shares by proxy. These claims are not relevant to this appeal.
Wis. Stat. § 180.1430(2)(a) permits a court to order dissolution of a corporation due to shareholder deadlock. Hauser has not appealed the grant of summary judgment ordering dissolution. Additionally, he has not argued on appeal that the circuit court erroneously exercised its discretion when it determined that grounds for dissolution existed.
Hauser asserted that accounting detail information was lost in a computer system crash. Ehlinger did not argue that the loss of this information was intentional.
Ehlinger had asked for a similar injunction on four occasions during the course of the litigation. The court never granted an injunction.
The court of appeals' mandate neglected to acknowledge the necessity of remanding to the circuit court for further proceedings.
In his brief to this court, Hauser contends that the court of appeals erred when it concluded that "book value" was ambiguous, but then upheld the circuit court's reasonable interpretation of the term without a trial. In his brief to the court of appeals, Hauser argued that the circuit court erred by concluding that the term "book value" was indefinite.
But see Schumann v. Samuels, 31 Wis. 2d 373, 377, 142 N.W.2d 777 (1966). In Schumann, the court concluded that in the absence of a contractual definition, "book value" referred to the "market value of the assets of the company after deducting its liabilities." (Emphasis added.) Neither party cites to Schumann for this premise or appears to advance the Schumann definition.
It should be noted that over the course of seven years, the circuit court held seven days of trial regarding the enforceability of the buyout agreement: May 9, 2005, May 10, 2005, July 26, 2005, July 27, 2005, September 7, 2005, June 26, 2006, and August 14, 2006. Additional hearings were held on the following dates: May 7, 2002, October 19, 2005, November 17, 2005, October 31, 2006, January 17, 2007, and February 28, 2007.
In his brief, Hauser agreed that "Shareholders in a Wisconsin corporation have a statutory right to inspect and copy the accounting records of the corporation."
At oral argument, one of the justices sought to clarify Hauser's argument:
Court: Your position is just look at the books. Look at the value of the assets on the books, look at the value of liabilities on the books, and divide it in half, right?
Hauser's attorney: Clearly that's our position. But I do want to clarify it was never our position that Dr. Ehlinger wouldn't have the right to dig into the books to make sure that the books accurately—
Court: Sure.
We accept Hauser's contention that the destruction of some of Evald's books, records, and files was unintentional, and we draw no inference based on their absence. We do not infer that the financial statements prepared by Evald inaccurately represent the corporation's "book value" as valued on a tax basis. Conversely, we cannot make the opposite inference — that Evald's financial statements represent the actual "hook value" valued on a tax basis.
Contrary to Justice Roggensack's assertion, we do not assume that the parties intended Evald's March 31, 2001 balance sheet to be the basis for determining book value. Justice Roggensack's concurrence, ¶ 123. Further, we do not contend that availability of the documents that underlie Evald's balance sheet could cure any ambiguity or indefiniteness in the proposed buy-sell agreement. Id. We simply determine that we need not answer the question of what (if anything) the parties intended by "book value" because resolution of the question would not change the outcome of the case.
The court stated, "[W]e are satisfied that the use of GAAP rather than the use of Hauser's calculations, is the more reasonable construction of 'book value.' In addition, the supporting documentation was a necessary component of a valid GAAP computation." Ehlinger, 313 Wis. 2d 718, ¶ 35.
As the Third Circuit explained, a compilation provides "the lowest level of assurance regarding an entity's financial statements," expressing "neither an opinion nor any level of assurance." Otto v. Pennsylvania State Edu. Ass'n, 330 F.3d 125, 133 (3d Cir. 2003). A review provides "limited assurance on the entity's financial statements." An audit provides "the highest level of assurance," and the accountant "provides verification of the financial statements' claims and assertions, and expresses an opinion on the entity's financials." Id.
By these determinations, we do not require accountants to use GAAP instead of tax accounting principles when keeping their client's books. Instead, we simply reaffirm our prior case law regarding the determination of a corporation's book value in a shareholder dispute.
"A reference shall be the exception and not the rule.... [I]n actions to be tried without a jury, save in matters of account and of difficult computation of damages, a reference shall be made only upon a showing that some exceptional condition requires it." Wis. Stat. § 805.06(2) (emphasis added).
It appears that the parties and the court expected the trial to last only one day and for the court to issue a final judgment based on the court's decision. In fact, due to unresolved questions that emerged during the trial, the court was required to schedule a second day.
Justice Ziegler's concurrence/dissent asserts that the parties could not have been clear about their opportunity to object to the special magistrate's report. See Justice Ziegler's coneurrence/dissent, ¶ 207. Such an assertion is a misread of the record.
The record reveals that the clerk of court provided the special magistrate's report to the parties at some time prior to June 1, 2006 — at least 29 days before the June 29 trial. The record also reveals that Hauser exercised his opportunity to object.
Hauser first objected to the report by letter on June 6. He asserted that the report inaccurately stated that Evald was an S-Corporation rather than a C-Corporation, and that the report failed to account for a calculation of an accrual for deferred income taxes. The special magistrate adjusted his report to reflect that Evald was a C-Corporation.
The June 29 trial was scheduled as a one-day trial. At trial, Hauser again objected to the report, asserting that the special magistrate had failed to consider certain financial documents. The court adjourned the trial so that the special magistrate could consider these documents. However, the special magistrate indicated that the documents did not alter his conclusion that he was unable to determine the book value of Evald.
See Wis. Stat. § 805.06(1).
Wis. Stat. § 180.0851(1) provides that "[a] corporation shall indemnify a director or officer, to the extent that he or she has been successful on the merits or otherwise in the defense of a proceeding, for all reasonable expenses incurred in the proceeding . . ." Hauser does not assert that he is entitled to indemnification under sub. (1), likely because he has not been successful in the defense of this proceeding and did not follow the procedural requirements in section 180.0851(3) and section 180.0853.
Section 180.0855 provides that the director seeking indemnification shall select one of the following six means for determining the right to indemnification: (1) a majority vote of a quorum of disinterested directors; (2) independent legal counsel; (3) a panel of three arbitrators; (4) an affirmative vote of the shares (but not the shares of any shareholder interested in the litigation); (5) court order under § 180.0854; or (6) any other method provided for in any additional right (not applicable here).
The court of appeals mistakenly concluded that "the circuit court did in fact order that Hauser be indemnified." Ehlinger, 313 Wis. 2d 718, ¶ 48. In fact, there is no indication that Hauser ever applied to the court for indemnification, and there is no order for indemnification in the record.
Justice Prosser suggests that by failing to rule on Ehlinger's motions to enjoin the corporation from paying the litigation expenses, the circuit court exercised its discretion to order Hauser's indemnification. See Justice Prosser's concurrence/dissent, ¶ 193. This assertion is incorrect for two reasons.
First, the statute does not authorize indemnification by default. A court's failure to rule on a motion cannot be the functional equivalent of ordering indemnification. Second, when the court finally denied Ehlinger's motion for an injunction in February of 2007, the court did not cite or discuss statutory indemnification at all. See supra, ¶ 93. Accordingly, the circuit court did not "exercise its discretion" on the subject of indemnification. Cf. Justice Prosser's concurrence/dissent ¶ 193-194.
See also Reinschreiber v. Lipp, 416 N.Y.S.2d 31 (N.Y. App. Div. 1979) (concluding that "[t]he trial court abused its discretion in directing that the funds of the corporations he used to reimburse the [shareholder resisting dissolution] for the cost of attorney's fees incurred in defending the dissolution proceedings."); Application of Cantelmo, 104 N.Y.S.2d 282 (N.Y. App. Div. 1951) ("In the dissolution proceeding of the corporation [which had two 50 percent shareholders,] the court had no power to fix the fees of attorneys who were retained by [one of the shareholders] to resist the dissolution.")
For instance, Attorney Ahrens was the only counsel to sign the following documents on behalf of the defendants: Defendants' Motion to Dismiss Pursuant to Wis. Stat. § 805.17(1) (filed August 29, 2005), Defendant's [sic] Motion for Partial Reconsideration of September 9, 2005 Ruling Regarding Particularization and Trial of Any Claim by Plaintiff of Waste By Defendants (filed September 9, 2005); Notice of Motion and Motion in Limine (filed January 27, 2006); Stipulation and Order (stipulating to the entry of exhibits for the 2005 trial, filed June 21, 2006); Notice of Motion and Motion for Reconsideration and for an Order Setting for Trial the Issue of the Ambiguity of the Term Book Value in the Buy/Sell Agreement and Whether Defendant's [sic] Substantially Performed (filed December 11, 2006); Notice of Appeal (filed April 25, 2007).