The Wisconsin Court of Appeals recently ruled in the case of Estate of James F. Sheppard v. Specht that a director of a closely held corporation (Cousin’s Subs) did not breach his fiduciary duty to the shareholders when he broke off negotiations to sell the Company to a third party after a shareholder of the Company passed away. The Estate of James F. Sheppard, by Michael E. McMorrow, Personal Representative, v. Specht, 2012 WI App. 124 (2012). The Court acknowledged that the director owed a fiduciary duty to the shareholders of the Company but declined to impose a duty on a 50% non-majority shareholder in a Company.
The Court concluded that, although the Defendant owed the Plaintiff a fiduciary duty as a director in the Company, he did not breach his duty. The Memorandum of Understanding at issue (MOU) contained both vague and uncertain terms and was therefore a “nonfinal agreement”. As a matter of law, this created no enforceable promise among the parties to buy and sell shares in the Company. The Court determined that the Plaintiff’s argument was premised on the fact that there was a valid agreement between the parties and therefore the motion for summary judgment was upheld.
This case involved the two 50% shareholders in two closely held corporations. The shareholders were negotiating the sale of their shares to a third party and had signed the MOU stating that the third party was prepared to purchase the Company for $12 million. After the MOU was executed, one of the shareholders died. Negotiations between the surviving shareholder (the Defendant) and the potential buyer subsequently broke off. The Defendant then offered the estate (the Plaintiff) just over $3 million to purchase the shares of the deceased shareholder, which the Plaintiff rejected. The Plaintiff sued the Defendant claiming that he had breached his fiduciary duty as a 50% shareholder and director of the Company in his negotiations with the potential purchaser in an attempt to buy out the Plaintiff’s shares and then turn around and sell the Company to a third party for profit.
The elements for a breach of a fiduciary duty are: (1) the defendant owes a fiduciary duty to the plaintiff, (2) the defendant breached that duty, and (3) the defendant’s breach of the duty caused the plaintiff’s damages. Berner Cheese Corp. v. Krug, 2008 WI 95, ¶40, 312 Wis. 2d 251, 752 N.W.2d 800. The Court analyzed the nature of the Plaintiff’s fiduciary duty as a 50% shareholder and director of the Company. Wisconsin law does impose a fiduciary duty from a majority shareholder to a minority shareholder. Production Credit Ass’n of Lancaster v. Croft, 143 Wis. 2d 746, 754, 423 N.W.2d 544 (Ct. App. 1988) . This duty has not been extended to non-majority shareholders. See Borne v. Gonstead Advanced Techniques, Inc., 2003 WI App 135, ¶28 n.1, 266 Wis. 2d 253, 667 N.W.2d 709. However, a director owes a fiduciary duty both to a corporation and its shareholders. Yates v. Holt-Smith, 2009 WI App 79, ¶19, 319 Wis. 2d 756, 768 N.W.2d 213. This duty is one of “good faith and fair dealing in the conduct of corporate business” and “prevents directors from using their position of trust to further their own private interests”. Id.