Appeals Court Rejects Request to Expand Fiduciary Duty of Nonmajority Shareholder

By Joe Forward, Legal Writer, State Bar of Wisconsin

Oct. 18, 2012 – In Wisconsin, majority shareholders have a fiduciary duty to minority shareholders of closely-held corporations. Recently, a state appeals court rejected the argument that 50/50 shareholders have the same fiduciary duty to each other.

William Specht and James Sheppard co-owned Cousins Submarines Inc. and Cousins Subs Systems Inc., closely-held Wisconsin businesses. Each owned 50 percent of the shares.

In 2006, the co-owners entered a “memorandum of understanding” to sell the businesses for $12 million to the Crosslane Group, a British firm. Amidst continuing negotiations, Sheppard died. Specht subsequently cut off negotiations with Crosslane. No deal was reached.

Specht then offered to purchase Sheppard’s shares from Sheppard’s estate for $3.17 million. The estate sued Specht, claiming he purposely ended negotiations with Crosslane to acquire Sheppard’s shares cheap before selling to secure a greater profit for himself. The estate also argued that Sheppard and Specht had an agreement between themselves to sell at $12 million.

The circuit court rejected the estate’s claims that Specht breached fiduciary duties owed to Sheppard, and ruled the purported Specht-Sheppard agreement was unenforceable.

In Estate of James Sheppard v. Specht, 2011AP2534 (Oct. 17, 2012), the District II Wisconsin Court of Appeals affirmed while refusing to expand the state’s corporate fiduciary duty law.

It noted that in Wisconsin, majority shareholders have a fiduciary duty to minority shareholders. But the three-judge panel also noted that Specht was not a majority shareholder.

“The Estate makes several arguments about why we should expand the current Wisconsin fiduciary duty rule to nonmajority shareholders,” wrote Chief Judge Richard Brown. “While this court has a role in developing the law as it exists, we cannot declare new law.”

The appeals panel agreed that Specht did owe a fiduciary duty of good faith and fair dealing to Sheppard and the corporation in his capacity as a director. But evidence of breach was lacking.

“The sole factual allegation supporting this theory is that Specht breached a contract to sell if the two shareholders got an offer of $12 million,” Judge Brown wrote.

“The Estate does not cite to anything in the record that shows Specht and Sheppard made a mutual promise to sell at $12 million dollars, much less what the specifics were.”

Also, damages would be too speculative, the appeals court explained, because Specht never sold and Crosslane had changed the terms of its agreement to purchase for $12 million.