Opinion ID: 4473339
Heading Depth: 2
Heading Rank: 3

Heading: The requirement of identity of ownership

Text: 13 No. 2017AP822 ¶28 As Fish made clear, the de facto and mere continuation exceptions to the rule against successor liability require evidence of identity of ownership.12 For the de facto merger exception, identity of ownership hinges on whether the transfer of ownership was for stock in the successor corporation rather than cash. Fish, 126 Wis. 2d at 301. It is important to recognize that transfer of ownership may still exist even where the successor entity does not have stock to offer the acquired entity. In such cases, proof of identity of ownership may be established through equity ownership.13 For example, equity ownership could take the form of membership interests in a limited liability corporation.14 12As one federal district court correctly noted, it would appear that the Wisconsin Supreme Court [in Fish] has effectively determined that, absent a transfer of stock ownership, other merger factors are insufficient to sustain application of the de facto merger exception. Smith v. Meadows Mills, Inc., 60 F. Supp. 2d 911, 917 (E.D. Wis. 1999). The Smith court also reflected that, it appears that the Wisconsin Supreme Court [in Fish] has made one factor——identity of ownership——a necessary requirement for the mere continuation exception to apply. Id. at 918. 13Lunda contends that there is inconsistency between Wisconsin's statutory merger law, Wis. Stat. § 180.1101, which allows for exchange of shares of one entity for cash or property of another, and the stock transfer requirement under the de facto merger exception. As support, Lunda cites to a footnote in the court of appeals' decision. See Veritas, No. 2017AP822, ¶32 n.11. A statutory merger pursuant to § 180.1101 is distinct from a de facto merger in that it involves two companies formally stating their intentions to merge and following statutory procedures to effectuate the merger. 14 Not all entities will fit within the de facto merger exception. Where there is no ownership interest to be transferred, as in a case involving nonprofit corporations, the de facto merger exception does not apply. As one federal court commented, [t]he policies underlying the no successor liability principle are geared toward encouraging economic actors to function effectively 14 No. 2017AP822 ¶29 As to the mere continuation exception, identity of ownership is established where there 'is a common identity of the officers, directors and stockholders in the selling and purchasing corporations.' Fish, 126 Wis. 2d at 302 (quoting Leannais, 565 F.2d at 440).15 Some evidence, like the common identity of stockholders, will support application of both the de facto merger and mere continuation exceptions. However, unlike the de facto merger exception, the mere continuation exception may be established with evidence of the continuation of the same officers, directors, and stockholders under circumstances where there is no transfer of equity or stock ownership. ¶30 Despite Fish's clear mandate that identity of ownership is the key inquiry, Lunda asserts that Fish significantly expanded the de facto merger and mere continuation exceptions to allow the substitution of identity of management and control for identity of ownership. In support of its argument, Lunda highlights the Fish court's use of the phrase identity of management and control twice in the decision: once, in addressing Tift, where the court said there was an identity of management and control throughout the transformation from sole proprietorship to partnership; and again, in discussing Cody, where the court said there was no in a market economy and have no application in the context of nonprofit and non-stock organizations. Gallenberg Equip., Inc. v. Agromac Int'l, Inc., 10 F. Supp. 2d 1050, 1056 (E.D. Wis. 1998). 15Tift and Fish relied upon Leannais v. Cincinnati, Inc., 565 F.2d 437 (7th Cir. 1977), for the basic principles regarding successor liability. See Veritas, No. 2017AP822, ¶24 n.8 (describing the Leannais case). 15 No. 2017AP822 identity of management and control throughout the transfers of ownership. Fish, 126 Wis. 2d at 302. Lunda further cites to IGL and Gallenberg for the proposition that courts post-Fish have not required identity of ownership. IGL-Wis. Awning, Tent & Trailer Co., Inc. v. Greater Milwaukee Air & Water Show, Inc., 185 Wis. 2d 864, 520 N.W.2d 279 (Ct. App. 1994); Gallenberg Equip., Inc. v. Agromac Int'l, Inc., 10 F. Supp. 2d 1050 (E.D. Wis. 1998). ¶31 Identity of ownership remains the sine qua non of successor liability. Although the phrase identity of management and control was used to describe the transfers of ownership in Tift and Cody, the Fish court maintained that identity of ownership is required to meet the de facto merger and mere continuation exceptions. The Fish court explained that in Tift there was identity of ownership because the identical organization continued to manufacture the same product and in Cody there was not identity of ownership because the successor corporation was an entirely different corporation with 'no common identity of officers, directors and stockholders between the two companies.' Fish, 126 Wis. 2d at 300, 302 (quoted source omitted). ¶32 Contrary to Lunda's assertion, courts post-Fish have required proof of identity of ownership to establish the de facto merger and mere continuation exceptions. Lunda contends that the IGL court impos[ed] successor liability based on a finding that there was 'identity of management and control' of two corporations. However, in concluding that the mere continuation exception applied, the court of appeals in IGL relied upon the circuit court's finding of fact that '[f]or all intents and 16 No. 2017AP822 purposes, only the name of the business changed.' IGL, 185 Wis. 2d at 870.16 The IGL court additionally relied upon the circuit court's finding of fact that [t]he identical organization in substance continued to operate with the same persons . . . including the same director who formed the predecessor nonprofit corporation. Id. at 868, 870. ¶33 Similarly, in Gallenberg, the federal court rejected the plaintiff's successor liability claim because the plaintiff cannot show continuity of ownership, which it described as the common thread of the de facto merger and mere continuation exceptions. Gallenberg, 10 F. Supp. 2d at 1054. The court refused to consider the argument that by actively managing the predecessor corporation for a time period before the asset purchase, the successor corporation's owners were de facto shareholders and exercised pre-transfer control. Id. at 1056. The Gallenberg court concluded that the plaintiff wrongly equate[d] control with ownership. They are not the same. Id. Both IGL and Gallenberg thus required evidence of identity of ownership in order to meet the relevant exceptions to successor liability at issue in each case. 16The mere continuation exception was the only exception to the general rule against successor liability that was addressed by the court in IGL-Wis. Awning, Tent & Trailer Co., Inc. v. Greater Milwaukee Air & Water Show, Inc., 185 Wis. 2d 864, 520 N.W.2d 279 (Ct. App. 1994). 17 No. 2017AP822 ¶34 We reject Lunda's reading of Tift and Fish17 and decline to broaden the exceptions to the rule against successor liability, as we have declined to do in the past. See Fish, 126 Wis. 2d at 303-12 (rejecting the plaintiff's arguments in favor of adopting a product line exception and expanded continuation exception to the rule).18 Identity of ownership, not identity of management and control, remains the essential element that a plaintiff must establish under both the de facto merger and mere continuation exceptions.