Court Opinion

ID: 9577029
Source: CourtListenerOpinion
Date Created: 2023-08-21 21:31:02.584354+00
Date Added: 2024-06-11T13:19:51.439564
License: Public Domain

ANN WALSH BRADLEY, J.
¶ 62. (concurring in part, dissenting in part). I agree with the majority that the judicial dissolution claim may continue and that Notz has a direct claim for breach of fiduciary duty relating to the due diligence expenses. I disagree with the majority, however, that Notz's claim for breach of fiduciary duty arising out of corporate usurpation is a derivative rather than a direct claim and that it thus must be dismissed.
*679¶ 63. Instead, based on the facts alleged in the amended complaint, I conclude that Notz states a direct claim for breach of fiduciary duty arising out of the defendants' usurpation of a corporate opportunity. The defendants breached their fiduciary duty to minority shareholders by using their position of trust to further their private interest. Unlike the majority shareholders, Notz was denied continued participation in a thriving growth industry. This injury was unique to him.
¶ 64. Further, I conclude that the majority fails to articulate and apply a consistent analysis. It provides no principled distinction justifying the disparate treatment of the two breach of fiduciary duty claims. Accordingly, I concur in part and dissent in part.
¶ 65. As we have previously explained, when an injury is primarily to a shareholder, that shareholder can bring a direct cause of action. Rose v. Schantz, 56 Wis. 2d 222, 228-29, 201 N.W.2d 593 (1972). When the injury is primarily to the corporation, a shareholder derivative action is appropriate. Id. at 229. Our case law, however, has provided scant guidance for determining whether an injury is primarily to the shareholder or primarily to the corporation.
¶ 66. Presented with a difficult case, the majority splits the difference. According to the majority, when the directors and majority shareholder1 usurp a corporate opportunity and sell the corporation's most valuable asset to their own competitive enterprise, the injury is primarily to the corporation. The majority explains that this is because "[a]ll of the shareholders [] *680were affected equally." Majority op., ¶ 23. However, when corporate assets are spent for due diligence in furtherance of such a scheme, the majority concludes that the injury is primarily to the minority shareholder. It explains that this is because the defendants "received a benefit at the expense of the minority shareholders" and "there was never any intention for the minority shareholder to benefit in any way from this due diligence expenditure[.]" Majority op., ¶¶ 4, 27.
I
¶ 67. I disagree with the majority's conclusion that the Smith Group's breach of fiduciary duty for usurpation gives rise to only a derivative claim. In Rose, we stated, "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." Rose, 56 Wis. 2d at 228-29. Thus, to determine whether an injury is to the corporation, to the individual shareholders, or to both,2 the court must begin by identifying the right that has been violated.
¶ 68. Fiduciary duties confer legal rights. In Wisconsin, officers and directors owe a fiduciary duty to shareholders to act in good faith and to treat each shareholder fairly. Id. at 228. "[T]he directors and officers of a corporation owe a fiduciary duty to not use *681their positions for their own personal advantage ... to the detriment of the interests of the stockholders of the corporation." Borak v. J.I. Case Co., 317 F.2d 838, 842 (7th Cir. 1963) (applying Wisconsin law).
¶ 69. That same fiduciary duty is also owed by majority shareholders to minority shareholders: "The same fiduciary duty is due from a dominant or controlling shareholder or group of shareholders to the minority as is due from the director of a corporation to the shareholders." 12B William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5810 (perm. ed., rev. vol. 2000) (citing Grognet v. Fox Valley Trucking Serv., 45 Wis. 2d 235, 172 N.W.2d 812 (1969)).
¶ 70. Officers, directors, and controlling shareholders breach their fiduciary duties when they treat minority shareholders "differently, and inequitably," or when they "use their position of trust to further their private interests." See Jorgensen v. Water Works, Inc. (Jorgensen II), 2001 WI App 135, ¶¶ 10, 17-18, 246 Wis. 2d 614, 630 N.W.2d 230; see also Rose, 56 Wis. 2d at 228. "If through that control a sale of the corporate property is made and the property acquired by the majority, the minority may not be excluded from a fair participation in the fruits of the sale." S. Pac. Co. v. Bogert, 250 U.S. 483, 488 (1919).
¶ 71. Notz asserts that the Smith Group identified the thermoplastics business as a growth industry critical to the future success of ATS.3 In 2004, the Smith Group learned of an opportunity to acquire Dickten & Masch, a direct competitor of ATS's thermo*682plastics business. Notz alleges that the Smith Group determined through a due diligence investigation that "acquiring Dickten & Masch and combining it with the ATS plastics operations would result in substantial positive synergies." Instead of authorizing ATS's purchase, the Smith Group caused ATS to pass on the sale and then bought both Dickten & Masch and ATS's plastics division itself. Notz further alleges that the defendants breached their fiduciary duties, and that this breach inflicted an injury on him that the majority shareholders did not suffer.
¶ 72. The Smith Group had an interest in owning 100 percent of a thriving thermoplastics business. However, the Smith Group would own only 89 percent of this business if ATS purchased Dickten & Masch. Thus, Notz asserts, the Smith Group decided to purchase both Dickten & Masch and ATS's plastics business. The Smith Group's interest in fully owning these businesses was adversarial to Notz's interest in maintaining holdings in the plastics industry. The defendants used their positions of trust and control to further their own private interest at Notz's expense. Under these alleged facts, the defendants breached their fiduciary duties to minority shareholders by favoring the corporation in which they had a 100 percent ownership interest. See Fletcher, supra, § 5764.
¶ 73. Whether Notz can maintain his direct action depends on whether the injury was primarily to him, or primarily to the corporation. See majority op., ¶ 23. For determining when an injury is "primarily to the corporation," Wisconsin case law provides no explicit test. See id. As the majority acknowledges, the only articulated test is for an iniury "primarily to an individual shareholder." Id.
*683¶ 74. An injury is primarily to the shareholder when it "affects a shareholder's rights in a manner distinct from the effect upon other shareholders." Id. (citing Jorgensen II, 246 Wis. 2d 614, ¶ 16.) When a breach of a fiduciary duty "inflict[s] a harm on [the minority shareholder] that other shareholders did not suffer," the minority shareholder has a direct cause of action. See Jorgensen II, 246 Wis. 2d 614, ¶ 18.4
¶ 75. After setting forth the test for when an injury is primarily to the shareholder, and with only cursory explanation, the majority summarily concludes: "All of the shareholders of ATS were affected equally by the loss of the opportunity to acquire Dickten & Masch and by the sale of [Trostel's] plastics division." Majority op., ¶ 23.
¶ 76. This conclusion is antithetical to the facts. It is true that all shareholders suffered a common injury in that the value of their investment in ATS depreciated. Nonetheless, Notz suffered an additional injury that was unique to the minority shareholders. The *684Smith Group who planned and executed these transactions received a net gain, but Notz suffered a net loss. Because Notz was squeezed out of the thermoplastics business that the Smith Group took for itself, he was "excluded from a fair participation in the fruits of the sale." See S. Pac. Co., 250 U.S. at 488. Notz's injury was distinct from the "injury" to the controlling shareholder —unlike the defendants, Notz was denied continued participation in a thriving growth industry.
¶ 77. I conclude that Notz states a direct cause of action for breach of fiduciary duty arising out of the defendants' usurpation of a corporate opportunity. Based on the facts presented in Notz's amended complaint, the defendants breached their fiduciary duty to minority shareholders by using their position of trust to further their private interests. This breach caused Notz a unique injury.
II
¶ 78. I also part ways with the majority because of its failure to articulate and apply a consistent analysis. I find no principled distinction justifying the majority's disparate treatment of the two breach of fiduciary duty claims.5 Neither do the parties in this case. In his brief, Notz argued, "Candidly, a consistent policy should apply .... [Tjhere is no meaningful difference between the Smith Group using ATS funds for its own purposes and the Smith Group taking corporate opportunities and then 'selling' corporate assets to itself in an effort to squeeze out minority shareholders."
¶ 79. Nevertheless, having first determined that Notz did not suffer a unique injury when the Smith *685Group usurped a corporate opportunity, the majority changes course. Even though all shareholders presumably suffered the same diminution of their stock value based on ATS's expenditure for due diligence, the majority concludes that this particular injury was primarily to the minority shareholders. It explains that the Smith Group "received a benefit at the expense of the minority shareholders" and "there was never any intention for the minority shareholder to benefit in any way from this due diligence expenditure[.]" Majority op., ¶¶ 4, 27.
¶ 80. When addressing the usurpation claim, the extrinsic benefit to the Smith Group was apparently irrelevant to the majority's analysis.6 If this analysis is correct, then the injury caused by the Smith Group's decision to use ATS's funds to conduct due diligence was an injury primarily to the corporation as well, because extrinsic benefit is irrelevant and "all shareholders were affected equally" by the funds paid for due diligence. Instead of applying a consistent principle, however, the majority opinion carves out the due diligence expenditure paid by ATS and labels it a constructive dividend. See majority op., ¶ 4.
¶ 81. The term constructive dividend is inapt. Before this case, Wisconsin courts have not used the term "constructive dividend" outside of the context of tax statutes. See, e.g., Wis. Dep't Rev. v. Sentry Fin. *686Servs. Corp., 161 Wis. 2d 902, 469 N.W.2d 235 (Ct. App. 1991). The majority opinion fails to define the term here.
¶ 82. I am not sure what it means in the context of this case. Black's Law Dictionary, however, defines a constructive dividend as a "taxable benefit derived by a shareholder from the corporation even though the benefit was not designated a dividend." Black's Law Dictionary 492 (7th ed. 1999).
¶ 83. In Jorgensen II, the court of appeals did not use the term "constructive dividend" when it concluded that some shareholders were disproportionately paid directors' fees. See 246 Wis. 2d 614. In that case, however, "it was obvious" that the fees were "related to profits of the corporation" rather than salaries paid "as compensation for work done." Id,., ¶ 6. That is, the court concluded that these fees were in reality a share of the corporation's profits and should have been distributed evenly to all shareholders. It is unclear, however, if the directors' fees in Jorgensen II would have fit the Black's Law Dictionary definition of a constructive dividend.
¶ 84. In this case, however, the Smith Group did not receive anything resembling a dividend. First, the expenditure was a business expense, and the Smith Group could not be taxed based on ATS's expenditure for due diligence. Second, the money used for due diligence was not paid to the Smith Group. Instead, the due diligence funds would have been paid to various third-parties as compensation for their work evaluating whether ATS should purchase Dickten & Masch. Thus, it is incorrect to characterize the due diligence expenditure as a "constructive dividend" or a "dividend-like payment."
*687¶ 85. Stripped of the inapt term, the inconsistent analysis becomes apparent. The majority attempts to explain why the due diligence expenditure gives rise to a direct action: "The bottom line ... is that there was never any intention for [Notz] to benefit in any way from this due diligence expenditure" because the Smith Group planned to freeze Notz out of a profitable growth industry. Majority op., ¶ 27. Put another way, the majority determines that the due diligence expenditure was an injury to Notz because the Smith Group put its own interest before Notz's interests, causing a harm unique to minority shareholders. Yet, this is the exact conduct underlying Notz's fiduciary duty claims, which the majority previously determined were derivative because the injury was to the corporation.7
¶ 86. The only true distinction I see between Notz's two claims is that a dollar value is more easily assigned to the claim for the due diligence expenditure. This is not a distinction that is relevant in determining whether the injury was primarily to the shareholder or to the corporation.
¶ 87. The majority analysis does not provide a coherent and consistent principle to explain why the due diligence claim gives rise to a direct action when the usurpation claim gives rise to only a derivative action. Ultimately, its analysis provides little guidance to either a shareholder asserting a claim or the party defending against it.
*688¶ 88. I conclude that if Notz's allegations are true, the Smith Group's conduct was in breach of their fiduciary duties to Notz, causing the minority shareholders a unique injury. Allegedly, the Smith Group put its own self-interest ahead of the minority shareholders' interests when it decided that ATS, rather than the Smith Group, should fund the due diligence. Additionally, the Smith Group put its own self-interest ahead of the minority shareholders' interests when it cut out minority shareholders' participation in a thriving growth industry by causing ATS to pass on purchasing Dickten & Masch and by deciding to sell ATS's plastics division to itself. The minority shareholders were uniquely injured because they were denied continued participation in the thermoplastics industry.
¶ 89. In sum, based on the facts presented in the amended complaint, I conclude that Notz states a direct claim for breach of fiduciary duty arising out of the defendants' usurpation of a corporate opportunity, and that breach caused the minority shareholders a unique injury. Further, I conclude that the majority fails to articulate and apply a consistent analysis. There is no principled distinction justifying the majority's disparate treatment of the two breach of fiduciary duty claims. Accordingly, I concur in part and dissent in part.
¶ 90. I am authorized to state that Chief Justice SHIRLEY S. ABRAHAMSON joins this concurrence in part and dissent in part.

 Notz brought suit against ATS's controlling shareholder, the Smith Group, and four of ATS's officers and directors, all of whom belong to the Smith Group. I will refer to ATS's officers, directors, and controlling shareholder collectively as the "Smith Group" or "the defendants."

 A single course of conduct may give rise to both direct and derivative claims "when there are duties owing both to a corporation and to a stockholder personally." Johnson v. Am. Gen. Ins. Co., 296 F. Supp. 802, 808 (D.D.C. 1969); see also Buschmann v. Professional Men's Ass'n, 405 F.2d 659, 661-62 (7th Cir. 1969); Vickers v. First Miss. Nat'l Bank, 458 So.2d 1055, 1063-64 (Miss. 1984); Empire Life Ins. Co. Am. v. Valdak Corp., 468 F.2d 330, 335 (5th Cir. 1972).

 Specifically, the amended complaint alleges that the defendant and president of ATS explained in 2003, "We have a very focused acquisition strategy in the rubber and plastics platform that will provide additional scale for their future growth."

 Wisconsin is not alone. Other jurisdictions recognize that breaches of fiduciary duty resulting in unique harm to minority shareholders can give rise to direct suits:
In general, actions for breach of fiduciary duties are to be brought in derivative suits. However, a breach of fiduciary duty alleged by minority shareholders against shareholders who control a majority of shares in a close corporation, and use their control to deprive minority shareholders of the benefits of their investment, may be brought as an individual action.
12B William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5909 (perm. ed., rev. vol. 2000). Further,
[Wjhere there is no question that plaintiffs are claiming an injury that was not suffered by all shareholders, but only by minority shareholders, that action is properly classified as [direct] rather than derivative.
Id. § 5908.

 Notably, Notz's amended complaint did not distinguish between the claims. However, the court of appeals treated the claims separately.

 The majority never states why, exactly, an exclusive benefit to officers, directors, and controlling shareholders is irrelevant to the analysis. The majority does imply that a shareholder-director's self-dealing does not transform an action that primarily injures the corporation into one that primarily injures a shareholder. See majority op., ¶ 22. Further, the majority quotes, apparently with approval, the circuit court's determination that "any ancillary benefit the Smith Group received from the transaction did not create a direct injury" to minority shareholders. See majority op., ¶ 11.

 The majority further distinguishes the two claims by stating that the facts underlying the fiduciary duty claim are more similar to Rose, and the facts underlying the claim for the due diligence expenditure are more similar to Jorgensen II. Majority op., ¶ 28. The "factual similarity" the majority points to does not serve as a substitute for a controlling legal principle.