Minority and Majority Shareholders Beware – Lessons from Notz v. Everett Smith Group, Ltd. 2009 WI 30 

In the recent Wisconsin Supreme Court case Notz v. Everett Smith Group, Ltd. 2009 WI 30, there are important lessons for both majority and minority shareholders.

Lessons for Minority Shareholders. If you are a minority shareholder in a corporation and you believe that the majority has breached its fiduciary duty to you and caused you harm by foregoing a corporate opportunity, make sure that you allege and can demonstrate with evidence that it harmed you specifically and be able to allege and show that you were not just harmed the same as all other shareholders. Failure to allege and show specific harm will result in failure or dismissal of your claim, according to the Wisconsin Supreme court. Specifically, the court held that “the loss of a corporate opportunity and the sale of a subsidiary with high growth potential – – caused harm primarily to the corporation . . .” Notz at para. 38, and therefore the court affirmed the dismissal of Notz’s (the minority shareholder) claim for breach of fiduciary duty against the board of directors and majority shareholder. 

In Notz, the majority shareholders of Albert Trostel & Sons’ (ATS) looked closely into buying a plastics company, then directed ATS to forego purchasing such plastics company. Shortly thereafter, the majority shareholders then themselves purchased such plastics company and then sold important plastics related assets of ATS to the plastics company at a favorable price to the majority shareholders. The court held that Notz had no direct claim because such actions harmed ATS as a corporation and negatively affected all of the shareholders equally; therefore Notz’s only claim would have been a derivative claim on behalf of the corporation, which would not be much use to Notz.

Lessons for Majority Shareholders. First, if you are a majority shareholder, you are opening yourself up to a claim for breach of fiduciary duty by making corporate expenditures that ultimately only benefit the majority. Despite the fact that the court held that Notz’s direct claim be dismissed, the court did hold that the expenses incurred by ATS in the due diligence of looking into the target plastics company were ultimately only a benefit to the majority shareholders of ATS, and, therefore, Notz’s direct claim against them for breach of fiduciary duty with respect to such expenses could proceed. Specifically the court held: “ . . .we also agree with the court of appeals that the majority shareholder’s appropriation of the due diligence paid for by the corporation resulted in a constructive dividend to themajority shareholder because it received a benefit at the expense of the minority shareholders . . .” Notz  at para. 39.

            Second, majority shareholders cannot strip a minority shareholder’s standing to sue the majority for judicial dissolution under Wis. Stats. Section 180.1106 by merger with another company if such minority shareholder has already brought an action for judicial dissolution. In Notz, while Notz’s claim for judicial dissolution of ATS was pending, the majority caused ATS to be merged into another corporation through a forced merger. The appellate court held that such merger rendered Notz without standing to continue his judicial dissolution claim. The Wisconsin Supreme court disagreed and held that “Wisconsin Stat. Sec. 180.1106(1)(d) is straightforward in its requirement that a pending claim ‘may be continued as if the merger did not occur.’ Notz’s judicial dissolution claim, initiated prior to the merger, alleged harm to that shareholder, not to the corporation. Because the statute precludes a merger from operating to strip such a claimant of the right to pursue a pending action, such as his direct action here, and because we find persuasive support for that position, we reverse the court of appeals’ decision on that issue.”