Opinion ID: 1238995
Heading Depth: 2
Heading Rank: 1

Heading: Acquisitions of the plastics companies

Text: ¶ 17 Notz's claims of breach of fiduciary duty are primarily based on the series of transactions in which the Smith Group acquired two plastics companies. [10] The allegations are that the Smith Group, as ATS's majority shareholder, rejected the opportunity ATS had to buy Dickten & Masch; the Smith Group subsequently bought Dickten & Masch itself; and the Smith Group, in its capacity as majority shareholder, orchestrated the sale of ATS's valuable plastics group, Trostel SEG, to its own new acquisition. ¶ 18 The question is whether those allegations support direct claims for breach of fiduciary duty to a minority shareholder. The parties suggest different cases as guides for our analysis. The Smith Group argues that Rose v. Schantz, 56 Wis.2d 222, 201 N.W.2d 593 (1972), requires a finding that these are derivative claims; Notz argues that the principles articulated in Jorgensen v. Water Works, Inc. ( Jorgensen II ), 2001 WI App 135, 246 Wis.2d 614, 630 N.W.2d 230, and Luther v. C.J. Luther Co., 118 Wis. 112, 94 N.W. 69 (1903), compel a finding that these are direct claims. ¶ 19 In Rose, minority stockholders sued for an injunction for breach of the fiduciary duties owed to them by the directors. Rose, 56 Wis.2d at 223-24, 201 N.W.2d 593. The circuit court denied defendants' motion for summary judgment but was reversed by this court. Id. at 224, 230, 201 N.W.2d 593. We held that though each shareholder has an individual right to be treated fairly by the board of directors, when the injury from such actions is primarily to the corporation, there can be no direct claim by minority shareholders. Id. at 228-29, 201 N.W.2d 593. ¶ 20 In that case, we acknowledged the duty to individual shareholders but set important parameters. It is true the fiduciary duty of a director is owed to the individual stockholders as well as to the corporation. Directors in this state may not use their position of trust to further their private interests. Thus, where some individual right of a stockholder is being impaired by the improper acts of a director, the stockholder can bring a direct suit on his own behalf because it is his individual right that is being violated. Id. (citations omitted). However, a right of action that belongs to the corporation cannot be pursued as a direct claim by an individual stockholder. Id. at 229, 201 N.W.2d 593. As we noted, even where the injury to the corporation results in harm to a shareholder, [11] it won't transform an action from a derivative to a direct one: That such primary and direct injury to a corporation may have a subsequent impact on the value of the stockholders' shares is clear, but that is not enough to create a right to bring a direct, rather than derivative, action. Where the injury to the corporation is the primary injury, and any injury to stockholders secondary, it is the derivative action alone that can be brought and maintained. That is the general rule, and, if it were to be abandoned, there would be no reason left for the concept of derivative actions for the redress of wrongs to a corporation. Id. at 229-30, 201 N.W.2d 593 (citations omitted). ¶ 21 Notz asserts that the principles of Jorgensen II and Luther apply here. In Jorgensen II the court of appeals found that where shareholder-directors stopped making distributions to some minority shareholders while continuing to pay themselves distributions, such shareholder-directors had breached their fiduciary duty, and the injury caused was primarily personal to the minority shareholders. Jorgensen II, 246 Wis.2d 614, ¶¶ 18-19, 630 N.W.2d 230. In Luther, this court found that two shareholder-directors had breached their fiduciary duty when they orchestrated the sale of new shares to an ally in order to gain control of the company. Luther, 118 Wis. at 123, 94 N.W. 69. As for Rose, Notz would have us read it more narrowly, as holding that where the only harm alleged by a minority shareholder is the diminution of the value of the shares, and thus, harm to the corporation, there can be no direct claim. ¶ 22 Notz alleges self-dealing on the part of the majority shareholder, but the cases on which he relies do not stand for the proposition that a shareholder-director's self-dealing transforms an action that primarily injures the corporation into one that primarily injures a shareholder. It is clear from Read v. Read, 205 Wis.2d 558, 556 N.W.2d 768 (Ct.App.1996), that a majority shareholder's self-dealing may result in injury that is primarily to the corporation. In that case, Read, a minority shareholder, had alleged that the controlling stockholders had misappropriated corporate assets and engaged in self-dealing through their transactions with other corporations in which they were stockholders but he was not. Id. at 562, 556 N.W.2d 768. The court of appeals disagreed that any injury was directly to him as the minority shareholder: Here, as in the Rose case, Read's complaint alleges conduct that, if true, means that resulting primary injury is to the corporation, not the individual stockholder bringing the suit. Id. at 570, 556 N.W.2d 768. ¶ 23 We agree with the Smith Group that breach of fiduciary duty claims, based on the lost opportunity to purchase one company and the sale of a subsidiary with great growth potential, are governed by Rose. Our analysis under Rose centers on a determination of whether the primary injury is to the corporation or to the shareholder. Rose does not precisely define when an injury is primar[ily] . . . to the corporation. Rose, 56 Wis.2d at 229, 201 N.W.2d 593. Jorgensen II does, however, define the opposite, an injury primarily. . . to an individual shareholder, as 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. We agree with the court of appeals that the allegations here are essentially that the Smith Group stripped [ATS] of its most important assets and engaged in various acts of self-dealing, and that those are allegations of injury primarily to ATS. Notz, 312 Wis.2d 636, ¶ 17, 754 N.W.2d 235. As the court of appeals noted,  [A]ll of the shareholders [of ATS] were affected equally by the loss of the opportunity to acquire Dickten & Masch and by the sale of Trostel SEG, the plastics division. Id. To hold otherwise would mean, as we said in Rose, that there would be no reason left for the concept of derivative actions for the redress of wrongs to a corporation. Rose, 56 Wis.2d at 230, 201 N.W.2d 593. The situation here involves, as the circuit court noted, the majority's power to sell a part of a company to an entity that it has a hundred percent interest in . . . [a]t a fair price. [12] Such a transaction may give rise to a derivative claim for injury that is primarily to the corporation; under Rose, that is the only claim available.