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  • WisBar News
    May 11, 2012

    Wisconsin Corporate Law Does Not Control Federal Jurisdiction in Stock Appraisal Suit

    A federal appeals panel clarifies that Wisconsin corporate laws do not create private contracts in corporate charters that are bound to adopt them, and stock appraisal suits by Wisconsin corporations can be filed in federal court on the basis of diversity.

    Wisconsin Corporate Law Does Not Control   Federal Jurisdiction in Stock Appraisal Suit May 11, 2012 – An investor who challenged the value of stock acquired through a freezeout merger recently lost his federal appeals fight to move appraisal proceedings to state court based on Wisconsin corporate law and subject matter jurisdiction.

    Edward Notz held a 5.5 percent stock interest in Albert Trostel & Sons Company, a Milwaukee manufacturer founded in 1858 by Notz’s great grandfather. But the majority shareholder, Everett Smith Group Ltd., forced a freezeout merger to acquire all minority shares.

    Everett Smith Group offered Notz $11,900 per share at $7.7 million. Other minority shareholders accepted the offer. Notz did not, claiming the shares were worth double that amount. His dissent sparked a stock appraisal proceeding under Wis. Stat section 180.1330(1).

    Trostel & Sons, now the wholly-owned subsidiary of Everett Smith Group, filed the stock appraisal suit in the U.S. District Court for the Eastern District of Wisconsin based on diversity jurisdiction. While Trostel & Sons is incorporated in Wisconsin, Notz lives in Illinois.

    Notz objected, claiming the federal court did not have subject matter jurisdiction. The district judge disagreed and also ruled that Notz’s shares were correctly valued on the date of merger.

    Notz appealed both jurisdiction and the district court’s calculation of stock value, but in Albert Trostell & Sons Company v. Notz, No. 10-3509 (May 10, 2012), a three-judge panel for the U. S. Court of Appeals for the Seventh Circuit affirmed.

    Notz argued that Wis. Stat. section 180.1330(2) gives Wisconsin courts exclusive jurisdiction in appraisal actions because it states that corporations must bring such actions “in the circuit court for the county where its principal office … is located.” The appeals panel disagreed.

    “Treating the statute as a claim by a state to oust the jurisdiction of the federal courts would simply render it unconstitutional, for no state may contract jurisdiction created by an Act of Congress,” wrote Chief Judge Frank Easterbrook. The appeals panel rejected Notz’s argument that the appraisal suit belongs in Wisconsin state court as a matter of contract.

    Neither Trostel & Son’s charter nor its bylaws governed the location of stock appraisal suits, but Notz argued that, in the panel’s words, “all of Wisconsin’s corporate law is part of all articles of incorporation and thus becomes contractual, even though no private person has assented.”

    But noting a famous U.S. Supreme Court case from 1819, Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819), the appeals panel explained that the “corporate-charter-as-contract doctrine” faded into history long ago.

    “The provisions of Wisconsin’s corporate law therefore are legislative; they are not ‘contracts’ as private law understands them, for they do not depend on any private party’s consent and are outside the scope of the Contract Clause,” Judge Easterbrook wrote.

    The panel concluded that Wisconsin corporate law “establishes a rule of venue applicable within its own judicial system” but does not block corporations from filing stock appraisal suits based on diversity of the parties.

    Finally, the panel rejected Notz’s argument that Everett Smith Group misappropriated one of Trostel & Sons’ corporate opportunities to its benefit, and this claim should have been included in the value calculation of Notz’s shares.

    However, this issue had been raised in state courts. “His argument that the federal district court should have included elements of value growing out of the way [certain] assets ended up in Smith’s hands … amounts to an effort to relitigate these adverse decisions,” Easterbrook wrote.

     

    Joe Forward is the Legal Writer for the State Bar of Wisconsin

     



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