Appeals Court Rejects Request to Expand Fiduciary Duty of Nonmajority Shareholder
By org jforward wisbar Joe Forward, Legal Writer,
State Bar of Wisconsin
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
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
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
“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.