Court Opinion

ID: 9852764
Source: CourtListenerOpinion
Date Created: 2023-09-24 05:36:21.070188+00
Date Added: 2024-06-11T09:22:34.190573
License: Public Domain

WEDEMEYER, J.,
¶ 27. (concurring/dissenting). I would affirm the trial court on the appeal, and therefore respectfully dissent from ¶¶ 17-18 of part II.A of the majority opinion for reasons set forth below. I *656agree with the majority's analysis and disposition on the cross-appeal in part II.B., and therefore concur in that portion of the opinion.
¶ 28. The majority opinion concludes that Notz's amended complaint alleges one "primary" harm to Notz so as to permit the continuation of the direct action in this case. Majority Opinion, ¶ 17. This "primary" harm was the due diligence costs associated with Trostel's review of whether to acquire Dickten & Masch. I cannot agree with this analysis.
¶ 29. It is important to keep in mind the chronology of the events as they unfolded in this case. In June 2004, the defendants became aware of an opportunity to acquire Dickten & Masch, which was in the same line of business as Trostel's plastics. Due diligence commenced to determine whether the acquisition would be a wise option. The due diligence was a corporate act, based on corporate judgment. After due diligence had been completed, the Trostel Board of Directors decided that Trostel should not acquire Dickten & Masch. The Board, however, authorized the Smith Group to acquire the business. The acquisition closed in October 2004.
¶ 30. In 2005, the Smith Group's Dickten & Masch division purchased Trostel's plastics division in a sale approved by the corporate boards of Trostel and the Smith Group. On August 9, 2005, Notz served a shareholder demand letter on Trostel, as required by Wis. Stat. § 180.0742(1), setting forth allegations he would bring in a derivative claim. Notz alleged that this course of events resulted in a breach of fiduciary duty and a claim for dissolution. He claimed that the due diligence to analyze the potential acquisition of Dickten & Masch constituted a constructive dividend to the Smith Group, which he did not receive. He alleged that Thomas J. Hauske, Jr., Randall M. Perry, Anders Seg-*657erdahl and Steven J. Hartung (the majority shareholders of Trostel and the Smith Group, hereinafter "defendants") engaged in self-dealing and mismanagement by not acquiring Dickten & Masch, then allowing the Smith Group to acquire the division, and also allowing the Smith Group to acquire Trostel's plastics division. He claimed that all of these actions were taken in order to acquire his minority shares in Trostel that he refused to sell to the defendants.
¶ 31. In accordance with the statutory scheme pertinent to derivative claims, Wis. Stat. § 180.0744, Trostel responded to Notz's allegations by electing three independent directors to its board. The three independent directors formed a Special Litigation Committee to investigate Notz's claims. The Committee conducted an investigation, which took eight months and included 22 meetings, many interviews and the review of numerous documents. The cost to Trostel for the review exceeded $700,000. The result was a report dated June 15, 2006, in which the Committee members advised that the actions taken by the Board with respect to the questioned transactions were appropriate. The Committee indicated that it did not find any "intentional behavior or maliciousness on the part of the Company fiduciaries to disadvantage the minority shareholders." The Committee concluded that maintaining a derivative proceeding would not be in the best interest of Trostel.
¶ 32. While this investigation was ongoing, Notz also filed a complaint in the circuit court alleging a direct cause of action against the Smith Group and the individual defendants for breach of fiduciary duty and dissolution. When the determination from the Committee was reported, the defendants in the direct action moved to dismiss Notz's direct action complaint on the *658basis that the claims alleged failed to state a claim because: (1) the breach of fiduciary duty claims were derivative in nature and, based on the Committee's conclusion that it would not be in Trostel's best interest to pursue them, these claims should be dismissed; and (2) Wisconsin law does not recognize Notz's claim for shareholder oppression. The circuit court granted the motion to dismiss in September 2006. The circuit court ruled that Notz had failed to allege any distinct injury to himself. Thus, a written order dismissing the complaint was entered on October 4, 2006. Notz subsequently filed an amended complaint, restating the breach of fiduciary duty causes of action and adding a claim seeking judicial dissolution of Trostel due to "oppressive conduct."
¶ 33. The defendants again moved to dismiss Notz's amended complaint. The trial court dismissed the breach of fiduciary duty causes of action, ruling that they were derivative in nature, not direct claims. The trial court allowed the dissolution cause of action to remain. As noted above, I would affirm the trial court's dismissal of the breach of fiduciary duty causes of action in total. I agree with the trial court that "the 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 as that term was developed through the cases." The majority does a thorough job in analyzing why the trial court's opinion in this regard was correct.
¶ 34. However, in ¶¶ 17-18 of the majority opinion, this court holds that the allegation in the amended complaint contained a sufficient allegation of direct injury to Notz to withstand the motion to dismiss. Namely, the direct injury came in the form of a "con*659structive dividend" relating to the due diligence costs expended in relation to the Dickten & Masch acquisition and the sale of the Trostel plastics division. It is with this portion of the majority opinion that I must respectfully dissent. Before explaining my reasons, it is important to clarify exactly which cause of action the majority allows to survive. Notz's amended, complaint asserts three causes of action: (1) a direct action of breach of fiduciary duty against the Smith Group; (2) a direct action of breach of fiduciary duty against Har-tung, Hauske, Perry & Segerdahl, and (3) a dissolution action based on oppression. With regards to the dissolution action, the majority dismisses the dissolution action on the basis that Notz no longer has standing to pursue this claim. I concur with this determination.
¶ 35. The majority upholds the trial court's dismissal of the direct action against the Smith Group and the individual defendants because the injury alleged— breach of fiduciary duties to Notz by taking from Trostel a corporate opportunity and assets, and using that opportunity and those assets for their benefit and to Notz's harm — is an injury to the Trostel corporation, rendering any resulting harm to Notz as derivative. I also agree with this analysis.
¶ 36. The majority, then, however, carves out from the direct action causes of action, a single allegation, which it believes constitutes a "primary" harm to Notz. This primary claim is from the direct action portion in the amended complaint and is based on the allegation therein that the Smith Group "orchestrated] constructive dividends from [Trostel] to the Smith Group, and by acting with the intent to harm the plaintiff' and that the individual cjefendants "allow[ed] improper constructive dividends to be paid to the Smith Group (in the form of the costs of the due diligence for *660the Dickten & Masch acquisition, the costs of integrating the business operations of Dickten & Masch with Trostel SEG and Techniplas prior to the Smith Group's acquisition of those plastics operations, and the cost of the valuation of Trostel SEG), and by approving the sale of Trostel SEG to the Smith Group without a fair process." I cannot agree that the foregoing allegations either sufficiently allege a primary harm against the defendants so as to survive the motion to dismiss. Further, I do not believe that such allegations can be severed from the general analysis of the direct action claims.
¶ 37. First, Notz's claim of improper constructive dividends asserted in the amended complaint is an allegation of a legal conclusion, rather than a sufficient fact. It is also a faulty legal conclusion. The allegation presumes that a shareholder actually owns the corporation's assets. That is not so. "An individual shareholder, by virtue of his ownership of shares, does not own the corporation's assets." Dole Food Co. v. Patrickson, 538 U.S. 468, 475 (2003). Thus, if the corporation, in the exercise of business judgment, expends money on due diligence relative to a potential purchase, an individual shareholder does not acquire a direct claim, even if the expenditure involves one of self-dealing or mismanagement. Rather, such expenditure affects the corporation as a whole, and in turn, the shareholders derivatively.
¶ 38. Second, the legislature in Wisconsin has elected, as a matter of policy, to set forth specific rubrics with regard to corporations and allegations of injury to shareholders. This statutory framework is set forth in ch. 180 of the Wisconsin Statutes. The statutory framework "requires the circuit court to defer to the business judgment of a properly composed and properly operat*661ing special litigation committee." Einhorn, 224 Wis. 2d 856, ¶ 20. As pertinent to the facts of this case, the statutory scheme was followed in Notz's derivative claim, wherein independent directors were appointed and an exhaustive inquiry was conducted to determine whether the challenged transactions were improper. The independent review by the special litigation committee concluded that it would not be in the best interests of the corporations to pursue the allegations made by Notz. In the derivative action, after a thorough review, the ultimate conclusion was that the transactions were appropriate. If the Smith group "used" Tros-tel funds to its benefit, then the harm, in the form of fees spent on due diligence, damaged the corporation as a whole, and not Notz individually. Even if the individual defendants, as members of the Smith group benefited from the due diligence, and Notz did not, any wrongful conduct on their part in the form of a constructive dividend was detrimental to Trostel, not just Notz. Accordingly, I see no individual injury to Notz based on the allegations he sets forth in the amended complaint. The special litigation committee concluded that the conduct challenged was proper and did not "disadvantage the minority shareholders." We must defer to the business judgment of that committee.
¶ 39. Third, I cannot agree that Notz's attempt to excise out of the transaction the costs expended by Trostel on due diligence, by asserting that such costs resulted in a constructive dividend is the equivalent to the dividend payments in Jorgensen. Jorgensen is completely distinguishable from the facts here. The holding in Jorgensen is that a shareholder can only maintain a direct breach of fiduciary duty claim for those injuries that have a primary and unique effect on the complaining shareholder that is distinct from their general effect *662on the corporation. Id., 2001 WI App 135, ¶ 18, 246 Wis. 2d 614, 630 N.W.2d 230. In Jorgensen, we concluded that the minority shareholders could maintain a direct claim to recover for payments of non-pro-rata profit distributions, which plainly have no injurious effect on the corporation, made to the defendant majority shareholders, but not to the plaintiffs. Id.
¶ 40. Notz's assertions regarding the "constructive dividends" are simply not the same as the profit distributions in Jorgensen. The "constructive dividends" were not profit payments that the Smith group defendants received and Notz did not. Rather, they were costs paid by the Trostel corporation. Thus, if costs paid by Trostel accrued to the benefit of the Smith group, to the detriment of Trostel, the harm is to the corporation primarily and not Notz individually. As the respondents in this case point out:
Importantly, nowhere does Mr. Notz allege that he has not received the same distributions as have all other shareholders. Nowhere does he allege that he has been singled out or treated somehow differently in his capacity as a shareholder than all other shareholders, including both the other minority shareholders and the majority shareholder, [Smith Group], In fact, Mr. Notz acknowledges that he received his share of the proceeds from the sale of Trostel [plastics] to [Smith Group].
¶ 41. Although this court can sympathize with Notz's position that he was "squeezed out" and understand how he may not want that to happen given the history of the Trostel corporation, the allegations here that the defendants intended to harm him in some fashion cannot turn his claims into "direct" claims. Whether an action is a direct or a derivative claim depends not on the motivation behind the conduct, but on the effect of the conduct. In Einhorn, the plaintiff *663alleged that acts of corporate waste were part of the main defendant's "improper effort... to squeeze [him] out, id., 224 Wis. 2d at 861, and were "intentionally designed to dilute the value of [his] shares," id. at 864. We rejected the contention that bad intent should allow a direct action to be pursued. We held that regardless of such intent, "the depletion of corporate assets which results in dilution of a shareholder's stock can only be asserted as a derivative, not individual, action." Id. at 864.
¶ 42. Notz's claim, therefore, that Trostel's expenditure of due diligence funds, which ultimately benefit-ted the defendants, but not him, does not constitute a direct claim. Any wrongful expenditure of funds was an injury primarily to the Trostel corporation itself and not a direct injury to Notz. As noted above, as a result, the claims asserted by Notz are derivative in nature, and that derivative claim has already been pursued and rejected by the independent Special Litigation Committee. Accordingly, I would affirm the trial court's dismissal of the direct action claims in toto; thus, I respectfully dissent from that portion of the majority opinion which allows Notz to maintain a direct action claim. I concur in the majority's decision on the cross-appeal, which dismisses the dissolution action.