Opinion ID: 1238995
Heading Depth: 2
Heading Rank: 2

Heading: The due diligence expenses

Text: ¶ 24 As noted above, however, the court of appeals did not fully close the door on Notz's direct claim of breach of fiduciary duty. Notz's amended complaint alleged that the Smith Group benefited from ATS's payment of due diligence expenses for the never-consummated acquisition of Dickten & Masch when it subsequently acquired Dickten & Masch for itself. In other words, as ATS majority shareholder, the Smith Group made the decision to let ATS pick up the tab for the due diligence, the benefits of which expense accrued only to the Smith Group, not to ATS's minority shareholders, when the Smith Group made the decision to acquire Dickten & Masch on its own. The court of appeals viewed this allegation as supporting a direct claim of breach of fiduciary duty because the expense was, in the court's words, a dividend-like payment[]. [13] Notz, 312 Wis.2d 636, ¶ 18, 754 N.W.2d 235. It reasoned that this payment fit the description in Jorgensen II, which held that injury due to the act of shareholder-directors that affects a shareholder differently from others gives rise to a direct claim. Id. ¶ 25 On this claim at least, the parties have found common ground. Both argue that the court of appeals improperly distinguished Notz's constructive dividend from the rest of his fiduciary duty claims. Notz strenuously objects to analysis that would treat the due diligence expense claims differently than those concerning the majority shareholder's squandering of corporate opportunities and the sale of corporate assets to itself. [14] The Smith Group, for its part, strenuously objects to the applicability of Jorgensen II to the facts here and argues that the circuit court got it right when it wrote, [T]he complaint alleges injuries that were common to the shareholders generally and the fact that some shareholders may have benefited in a way that balanced out that injury for them does not create a direct injury. . . . The Smith Group says Notz has failed to articulate an injury that he suffered separate from that allegedly suffered by all other ATS shareholders. ¶ 26 As just noted, an injury primarily. . . to an individual shareholder is one which affects a shareholder's rights in a manner distinct from the effect upon other shareholders. Jorgensen II, 246 Wis.2d 614, ¶ 16, 630 N.W.2d 230. ¶ 27 Here, the allegation is that as majority shareholder, the Smith Group got the direct and immediate benefit of the due diligence [15] expenditure as shareholders in the corporation that acquired Dickten & Masch. As a minority shareholder, Notz did not, as the court of appeals noted, receive an offsetting payment. Notz, 312 Wis.2d 636, ¶ 18, 754 N.W.2d 235. The bottom line, as alleged in the complaint, [16] is that there was never any intention for the minority shareholder to benefit in any way from this due diligence expenditure because if the offer [to purchase] the stock was rejected[,] the Smith Group planned to freeze [Notz] out of the plastics business by transferring the entire plastics division from ATS to the Smith Group in two steps. First, the Smith Group rather than ATS would acquire Dickten & Masch. Second, the Smith Group would combine the Dickten operations with the Trostel SEG operations to achieve the synergy savings identified in the due diligence investigation by acquiring the ATS plastics division. After [Notz] rejected the Smith Group's offers to purchase his shares, Defendants proceeded with their plan to freeze out [Notz] from any interest in the ATS plastics business. As the court of appeals noted, it was the Smith Group that was the beneficiary of that expenditure. Notz, 312 Wis.2d 636, ¶ 18, 754 N.W.2d 235. Such dividend-like payments were not made to Notz, and for that reason, Notz's rights as a shareholder were affected in a manner distinct from the effect upon other shareholders. Jorgensen II, 246 Wis.2d 614, ¶ 16, 630 N.W.2d 230. Here, cash that was part of the corporation's assets which could have been used to pay dividends was instead diverted to fund due diligence for a company that the majority shareholder later acquired. It is this type of inequitable treatment that was at issue in Jorgensen II because the defendants had stopped paying [plaintiffs] the pro rata distribution from [the corporation's] cash flow while they continued to pay themselves regular distributions, they treated [plaintiffs] differently, and inequitably, when compared with the treatment accorded all other shareholders. Jorgensen II, 246 Wis.2d 614, ¶ 18, 630 N.W.2d 230. ¶ 28 This is different from Notz's first claim, which is based on the majority shareholder's acquisition of Dickten & Masch and Trostel SEG. Those acquisitions, which effectively ended ATS' expansion into the plastics business, parallel the acts complained of in Rose, acts that were part of a scheme or plan to deplete the corporation of its cash reserves, thereby rendering it incapable of continuing in business, and enabling [the defendant] to successfully engage in a competing business. Rose, 56 Wis.2d at 224, 201 N.W.2d 593. The majority shareholder's decisions with regard to ATS's plastics interest are alleged to do precisely the same thing: to render ATS incapable of continuing in that business and to enable itself to engage in a competing business. For that reason, the claim related to the purchase of Dickten & Masch is controlled by Rose because the injury is primarily to the corporation. The claim as to the due diligence expenses is factually more similar to the claim of unequal distributions alleged in Jorgensen II, as explained above, and is therefore properly governed by that analysis.