This article originally appeared on Law360 and is republished here with permission.
Wisconsin courts continue to distinguish Wisconsin law from that of other jurisdictions, most notably Delaware. In late 2018, the dismissal of shareholder lawsuits against National Research Corp., or NRC, and its directors in Wisconsin state court and federal court in Nebraska again proved the point. (NRC is headquartered in Nebraska, but incorporated under Wisconsin law.) These cases are the latest in a recent Wisconsin corporate-law trend delineating the duties and potential liability of directors of Wisconsin corporations.
Unlike in decades past when Wisconsin’s courts looked to Delaware law for guidance to fill perceived gaps in Wisconsin corporate law, Wisconsin courts now consciously depart from Delaware law. Explicitly rejecting Delaware concepts like Revlon-duties and the entire fairness standard, Wisconsin cases uniformly apply the business judgment rule and Wisconsin’s director immunity statute to virtually any corporate decision and permit directors to consider a range of factors beyond shareholder interests and stock value when making decisions.
Legal Landscape
By way of background, Wisconsin’s common-law business judgment rule was adopted more than a century ago. The rule limits judicial review of corporate decisions and provides a presumption that corporate directors have acted in good faith.[1] The rule’s scope and application have been clarified in recent years, beginning with legislation in 1990 and continuing in a series of recent decisions.
Wisconsin’s business judgment rule protects corporate director and officer decisions absent bad faith or narrow statutory exceptions. That Wisconsin’s approach is decidedly different than Delaware’s, for example, is no accident. Wisconsin revised its corporate code after, and partially in response to, certain developments in Delaware law, including cases like Revlon Inc. v. MacAndrews & Forbes Holdings[2] and Unocal Corp. v. Mesa Petroleum Co.[3] Key among the 1990 revisions to Wisconsin’s corporate statutes are the “other constituency” statute, Wisconsin Stat. Section 180.0827, and the director immunity statute, Wis. Stat. Section 180.0828.
Wisconsin was one of more than two dozen states in the late 1980s and early 1990s to adopt an “other constituency” statute following Revlon. Under this statute, directors and officers of a Wisconsin corporation, in exercising their duties to the corporation, may consider the effects of corporate action on “employees, suppliers[,] customers,” and the “communities in which the corporation operates” in addition to “[a]ny other factors” that the directors and officers deem pertinent.[4] In other words, directors and officers may consider more than shareholders’ interests when making corporate decisions.
Wisconsin’s Legislature also revised the director immunity statute, Wis. Stat. Section 180.0828. This latter statute partially codifies the business judgment rule’s limits on director liability. It provides that directors are not liable for claims unless one of few narrow exceptions is met.[5]
The “other constituency” statute and the director immunity statute have been applied by Wisconsin state and federal courts over the past decade and a half in a growing body of case law that confirms that the business judgment rule, as partially codified in these statutes, determines the scope of director and officer liability. These cases initially included a series of Wisconsin trial court decisions — In re Shopko Stores Inc. Shareholder Litigation[6]; Ponds Edge Capital LLC v. Outlook Group Corp.[7]; Praslin v. Bianchi[8]; In re Tomotherapy[9] — and a federal case — Dixon v. Ladish.[10] In each of these cases, the courts dismissed breach of fiduciary duty claims, applying some combination of the common-law business judgment rule, the “other constituency” statute, and the director immunity statute. The courts consistently held that Wisconsin’s business judgment rule governed claims against Wisconsin directors. And these cases have expressly rejected Delaware’s Revlon approach.
A couple of years later, Wisconsin’s supreme court, though not mentioning this emerging body of law, confirmed that the approach taken in these cases was the correct one. Data Key Partners, like the lower state court and federal cases before it, was a shareholder challenge to a merger. In Data Key Partners, the plaintiffs alleged that the majority shareholders controlled the process leading to the sale of the company, accepted a lower bid for the company’s shares rather than fairly investigating a higher bid, received benefits that other shareholders did not receive and had their personal banker serve as financial advisor for the sale of the corporation. Notwithstanding plaintiffs’ allegations about the sale process, the supreme court held that the business judgment rule (as partially codified in Wis. Stat. Sec. 180.0828) controlled the analysis and required dismissal of the complaint.
Following Data Key Partners, Wisconsin courts have continued to reject Revlon and any form of heightened scrutiny. For example, in Goldfinger v. Journal Communications,[11] the court rejected Revlon based on Wis. Stat. § 180.0827 and Data Key Partners. In Goldfinger, the court described Data Key Partners’ holding as “sweeping” in that it confirmed that a plaintiff cannot “get to first base” unless it can plead what it called the “breach of fiduciary duty exception trio” – (1) willful failure to deal fairly in the case of a material conflict of interest; (2) an improper personal benefit conferred on the directors as a result of the transaction; and (3) willful misconduct — found in Section 180.0828.
NRC Shareholder Litigation — Wisconsin Does Not Recognize the “Entire Fairness” Doctrine
While much of Wisconsin’s recent business judgment rule law was developed in the merger litigation context, the underlying principles apply in other contexts. Recently, a Wisconsin trial court and a federal court in Nebraska applied these principles to a corporate transaction where directors in an allegedly controlled company, National Research Corp., decided to eliminate its dual stock structure by repurchasing and retiring the corporation’s Class B stock.
The NRC shareholder cases arose after NRC proposed to delist its Class B stock and purchase its Class B shares from all shareholders except its founder and CEO, who would be the sole Class B holder. Shareholders filed lawsuits in the federal court in Nebraska and Milwaukee County Circuit Court challenging the transaction. When the Nasdaq exchange, on which both classes of NRC shares were traded, objected, NRC revised the transaction to provide that all Class B shareholders’ shares would be purchase for Class A shares and cash equal to the difference between the value of a Class B share and a Class A share. Nasdaq approved the revised transaction and NRC’s shareholders overwhelmingly approved the transaction. Nevertheless, the plaintiff filed amend complaints challenging the cash price paid to Class B shareholders and the process the directors used in approving the revised transaction. The plaintiffs in the Nebraska federal court case alleged violations of Section 14(a) of the Securities Exchange Act of 1934 and breaches of fiduciary duty under Wisconsin law. The plaintiffs in the state case filed in Milwaukee County Circuit Court brought breach-of-fiduciary-duty claims relating to the process employed in the revised transaction.
The defendants moved to dismiss both complaints, relying on Wisconsin’s business judgment rule and Data Key Partners. The plaintiffs’ oppositions relied almost entirely on Delaware cases and argued that, where Wisconsin law is relatively undeveloped, Wisconsin should look to Delaware for guidance. In particular, the plaintiffs urged the courts to follow Delaware’s heightened “entire fairness” standard rather than the business judgment rule. The plaintiffs’ argument turned on their position that the business judgment rule did not apply because NRC was a controlled company and the founder/CEO received particular benefits, namely liquidity, in the consummated transaction. Relying on Corwin v. KKR Financial Holdings LLC,[12] plaintiffs argued that NRC’s directors should have, among other things, formed a special committee of independent directors to consider the transaction, hired an independent financial advisor to advise the committee, and secure approval of the majority of the minority shareholders — steps NRC’s board admittedly did not take. Plaintiffs also argued that Wisconsin’s Section 180.0828 was not materially different from Section 102(b)(7) of Delaware’s General Corporation Law, which had been interpreted by Delaware courts to require such protections.
The defendants countered that Wisconsin law did not require these procedural protections. Notably, the company at issue in Data Key Partners was also a company controlled by the founders, a husband and wife owning 69 percent of the shares. There, too, there had been no special committee and no independent advisor working with the directors. The defendants looked to the language of Section 180.0828 and the requirement that a plaintiff plead the specific statutory exceptions to the general rule that directors are not liable for monetary damages for alleged breach of their fiduciary duties as directors.
The defendants’ motions to dismiss were granted in both cases. First, in Wisconsin state court, the Milwaukee County Circuit Judge explicitly held that, notwithstanding the allegations about one shareholder’s control of the company and a supposedly unfair process, “Wisconsin has long held that the business judgment rule is the appropriate standard when examining business decisions, and passing Wis. Stat. Section 180.0828 is just a natural codification of this standard.”[13] The court rejected the plaintiff’s arguments that entire fairness should apply and found that the plaintiff had not pleaded that the directors had not acted in good faith and with an honest belief that their actions were in the best interests of NRC. The court further noted that the benefit received by the purportedly controlling shareholder was not improper because he had received the same consideration as all other Class B shareholders. Just weeks later, the federal district judge in Nebraska dismissed the claims before him on the merits, applying Data Key Partners and the director immunity statute.[14] These cases squarely hold what Wisconsin practitioners have believed — Wisconsin does not follow the entire fairness standard, but rather looks to the business judgment rule and Section 180.0828 as articulated in Data Key Partners.
Wisconsin Courts Have Not Endorsed the Corporation Benefit Doctrine
After the court’s order granting the defendants’ motion to dismiss, the plaintiff in the Wisconsin case filed a petition for an award of attorney fees on the ground that his lawsuit had caused NRC to restructure the transaction. According to the plaintiff, the revised transaction (while still objectionable) was an improvement for NRC shareholders and, as the cause of that benefit, the plaintiff was entitled to a so-called “mootness fee” under the “corporate benefit doctrine.” Again, the plaintiff looked to Delaware law in support of the fee petition. The defendants argued that, while Wisconsin had recognized the “common fund doctrine,” which allows an award of attorney’s fees from a fund, no Wisconsin court had recognized the “corporate benefit doctrine” and required a corporation to pay attorney’s fees in the absence of a damages award. On the facts, the defendants argued that plaintiff’s initial complaint was not meritorious and that there had been no net benefit because, by pursuing their litigation concerning the revised transaction, plaintiffs had damaged NRC by forcing it to incur considerable fees.
The court denied the plaintiff’s fee request, noting that it was unwilling to adopt the corporate benefit doctrine recognized in Delaware. Further, even if the doctrine were recognized in Wisconsin, the court expressed the view that it would not apply under the facts of the case.
Conclusion
Under Wisconsin’s business judgment rule and its statutory scheme, director decisions receive substantial deference. Apart from bad faith conduct or material conflicts of interest, Wisconsin corporate directors can make decisions without being second-guessed by courts. Despite a relative dearth of caselaw, particularly compared to that in Delaware, Wisconsin courts are becoming more comfortable providing Wisconsin directors and officers a certain security and predictability that the business judgment rule was intended to provide.
The authors represented National Research Corp. and its directors in the litigation described herein. Foley & Lardner LLP was counsel in Praslin v. Bianchi; Dixon v. Ladish; Dixon v. ATI Ladish LLC; and Data Key Partners v. Permira Advisers LLC.
[1] E.g., Data Key Partners v. Permira Advisers LLC , 2014 WI 86, ¶ 34.
[2] Revlon Inc. v. MacAndrews & Forbes Holdings Inc., 506 A.2d 173 (Del. 1986).
[3] Unocal Corp. v. Mesa Petroleum Co. , 493 A.2d 946 (Del. 1985).
[4] Wis. Stat. § 180.0827.
[5] Wis. Stat. § 180.0828(1).
[6] In re Shopko Stores Inc. S’holder Litig., No. 05-CV-677 (Brown Cty. Cir. Ct. Sept. 2, 2005).
[7] Ponds Edge Capital LLC v. Outlook Group Corp., No. 06-CV-489 (Winnebago Cty. Cir. Ct. Nov. 29, 2006).
[8] Praslin v. Bianchi, No. 10‐cv‐20015 (Milw. Cty. Cir. Ct. Feb. 22, 2011).
[9] In re Tomotherapy, No. 11‐cv‐1183 (Dane Cty. Cir. Ct. May 12, 2011).
[10]
[11] Goldfinger v. Journal Communications, No. 14-CV-006910 (Milw. Cty. Cir. Ct. Nov. 12, 2014).
[12] Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015).
[13] Apfel v. Hays, 17-CV-13209, at p. 5 (Milw. Cty. Cir. Ct. Sept. 10, 2018).
[14] In re Nat’l Research Corp. S’holder Litig., 4:17-CV-441, at p. 11-14 (D. Neb. Oct. 9, 2018).
