Notz v. Everett Smith Group, Ltd.

2009 WI 30, 764 N.W.2d 904, 316 Wis. 2d 640, 2009 Wisc. LEXIS 23

• Court: Wisconsin Supreme Court
• Decided: April 29, 2009
• Docket: 2006AP3156
• Status: Published

Opinions

N. PATRICK CROOKS, J.

¶ 1. This review of a published court of appeals decision¹ involves three questions that arise in the context of a minority shareholder's lawsuit against the majority shareholder: (1) whether the allegations in the complaint state a direct claim by the minority shareholder for breach of fiduciary duty; (2) whether an allegation that the majority shareholder benefited from due diligence —paid for by the corporation for the shareholder's own purposes without reimbursement to the corporation— supports a direct claim by the minority shareholder for breach of fiduciary duty; and (3) whether a pending direct claim by the minority shareholder for judicial dissolution (based on oppressive conduct) survives a cash-out merger that eliminates the petitioner's status as a shareholder.

¶ 2. The court of appeals held that the minority shareholder's complaint failed to state a direct claim for breach of fiduciary duty because the primary harm alleged was to the corporation, not to the shareholder. However, the court of appeals held that one allegation —that expenditures for due diligence for a potential acquisition of another company ultimately benefited only the majority shareholder² — would, if true, constitute a "dividend-like" payment to the majority shareholder and thus support a direct claim. The judicial dissolution claim³ the circuit court had allowed to go forward encountered an unforeseen barrier at the court of appeals: while the appeal was pending, a forced merger eliminated the petitioner's status as a shareholder. A motion filed by the majority shareholder brought this to the court of appeals' attention. Ultimately, the court of appeals remanded with directions to enter an order to dismiss that claim on the grounds that the post-claim merger had stripped the petitioner of standing to pursue that claim.

¶ 3. Both the minority and majority shareholders involved sought review by this court of the rulings adverse to them. The minority shareholder, Edward Notz (Notz), appealed the court of appeals' decisions that first, he failed to state a direct claim for breach of fiduciary duty, and second, he had lost standing on the judicial dissolution claim due to the merger. The majority shareholder, Everett Smith Group, Ltd. (the Smith Group), cross-appealed the court of appeals' decision that the direct claim based on the allegations about due diligence costs could proceed.

¶ 4. For the reasons set forth herein, we affirm in part, reverse in part, and remand for further proceedings. We agree with the court of appeals that the claims of harm alleged — the loss of a corporate opportunity and the sale of a subsidiary with high growth potential —caused harm primarily to the corporation, and thus we affirm the dismissal of Notz's direct claim of breach of fiduciary duty as to those allegations. On the cross-appealed issue, we also agree with the court of appeals that the majority shareholder's appropriation of the due diligence paid for by the corporation resulted in a constructive dividend to the majority shareholder because it received a benefit at the expense of the minority shareholders. Thus we affirm the court of appeals' decision permitting that claim to proceed and remand to the circuit court for further proceedings.

¶ 5. Where we disagree with the court of appeals is on the question of Notz's standing to pursue his judicial dissolution claim. Wisconsin Stat. § 180.1106(1) (d) is straightforward in its requirement that a pending claim "may be continued as if the merger did not occur." Notz's judicial dissolution claim, initiated prior to the merger, alleged harm to that shareholder, not to the corporation. Because the statute precludes a merger from operating to strip such a claimant of the right to pursue a pending action, such as his direct action here, and because we find persuasive support for that position, we reverse the court of appeals' decision on that issue. We therefore remand that claim to the circuit court for further proceedings consistent with this opinion.

I. BACKGROUND

¶ 6. The company at the center of this dispute, Albert Trostel & Sons (ATS), evolved and grew from its beginning as one of the tanneries that made Milwaukee a powerhouse in the leather industry in the late 1800s. The story of the company's growth includes names familiar to anyone with a passing knowledge of Wisconsin history: one of Albert Trostel's sons married into the Uihlein family, a major player in another of Milwaukee's then-thriving industries — the brewing of beer. Over the years, ATS acquired subsidiaries and branched out into production of rubber and plastics. Through a series of transactions, control of the company shifted from Trostel's descendants to Everett Smith, who was hired by ATS in 1938 and later became president of the company. Smith formed what would eventually become the Smith Group. At the time this action was commenced, ATS was owned 88.9 percent by the Smith Group, 5.5 percent by Notz, and 5.6 percent by other Trostel descendants who are not parties to this proceeding.⁴

¶ 7. By 2003, ATS's board of directors was comprised entirely of members who were also officers and/or directors of the Smith Group. The Smith Group began making offers to purchase the shares of ATS's minority shareholders. Notz rejected the offers.

¶ 8. At the same time, ATS turned its attention to the potential for growth in plastics. As part of this new strategy, its subsidiary, Trostel Specialty Elastomers Group, Inc. (Trostel SEG), in June 2003 acquired an Iowa custom injection molding company, and ATS contemplated other acquisitions as well.

¶ 9. What happened next is the basis of Notz's claims. In June 2004 an opportunity presented itself for ATS to acquire the assets of Dickten & Masch, a competing plastics manufacturing business. ATS conducted due diligence. But in August 2004, the ATS board decided to pass on acquiring Dickten & Masch. Shortly thereafter, the Smith Group, which had no other direct holdings in the plastics field, acquired Dickten & Masch. Within months, the Smith Group's new Dickten & Masch affiliate purchased the assets of ATS's plastics subsidiary, Trostel SEG, from ATS.

¶ 10. In response to the Smith Group's acquisition of both plastics companies, Notz commenced an action⁵ against the Smith Group and four of its directors on April 6, 2006. The initial complaint was dismissed, and an amended complaint was filed September 29, 2006, alleging breach of fiduciary duty by the Smith Group and breach of fiduciary duty by the individual directors, and requesting judicial dissolution pursuant to Wis. Stat. § 180.1430(2)(b) on the grounds that the defendants had acted in a manner that was oppressive to Notz.⁶

¶ 11. At a hearing held on November 22, 2006, the Milwaukee County Circuit Court, the Honorable John A. Franke presiding, found that the injuries alleged in the complaint were common to all shareholders, reasoning that any ancillary benefit the Smith Group received from the transaction did not create a direct injury. The circuit court dismissed Notz's claims of breach of fiduciary duty. However, it declined to dismiss the judicial dissolution claim based on allegedly oppressive conduct.

¶ 12. The court of appeals granted the parties' petitions to appeal the circuit court's order. While the appeal was pending, ATS initiated a cash-out merger under Wis. Stat. §§ 180.1101(2)(c) and 180.1103(3). Despite Notz's opposition,⁷ the merger was approved and became effective May 17, 2007.⁸ As noted above, the court of appeals affirmed the circuit court's holding that the breach of fiduciary duty claim was appropriately a derivative, rather than direct, claim on the grounds that "strippl’ingl Albert Trostel & Sons of its most important assets and divertLing] to the Smith Group Trostel's corporate opportunity to buy Dickten and Masch . . . [was] an injury to Trostel" because "all of the shareholders were affected equally[.]" Notz v. Everett Smith Group, Ltd., 2008 WI App 84, ¶ 17, 312 Wis. 2d 636, 754 N.W.2d 235. It carved out a portion of the claim, however, having to do with money spent for due diligence. Given the Smith Group's ultimate acquisition of Dickten & Masch, ATS's expenditures for due diligence ultimately benefited only that majority shareholder, the court of appeals reasoned, and thus constituted a constructive dividend. Id., ¶ 18. As to the judicial dissolution claim, which had survived in the circuit court, the court of appeals found that an intervening event, the cash-out merger, had stripped the petitioner of standing to pursue the judicial dissolution claim because he was no longer a shareholder. Id., ¶ 26. Therefore, the court of appeals remanded with an order to dismiss that claim for lack of standing. Id.

¶ 13. A petition and a cross-petition for review followed, and this court granted review.

II. STANDARD OF REVIEW

¶ 14. Whether a complaint by a minority shareholder has alleged facts that will support direct claims for breach of fiduciary duty presents questions of law reviewed de novo. See Borne v. Gonstead Advanced Techniques, Inc., 2003 WI App 135, ¶ 10, 266 Wis. 2d 253, 667 N.W.2d 709.

¶ 15. At the motion to dismiss stage,⁹ the court must accept all facts alleged as true and construe "all reasonable inferences that may be drawn from those facts in favor of stating a claim." Peterson v. Volkswagen of Am., Inc., 2004 WI App 76, ¶ 2, 272 Wis. 2d 676, 679 N.W.2d 840. A claim will be dismissed only if "it appears quite certain that no relief can be granted under any set of facts the plaintiffs might prove in support of their allegations." Id.

¶ 16. The application of a statute to undisputed facts is reviewed de novo. DOR v. Menasha, 2008 WI 88, ¶ 44, 311 Wis. 2d 579, 754 N.W.2d 95.

III. THE BREACH OF FIDUCIARY DUTY CLAIMS

A. Acquisitions of the plastics companies

¶ 17. Notz's claims of breach of fiduciary duty are primarily based on the series of transactions in which the Smith Group acquired two plastics companies.¹⁰ The allegations are that the Smith Group, as ATS's majority shareholder, rejected the opportunity ATS had to buy Dickten & Masch; the Smith Group subsequently bought Dickten & Masch itself; and the Smith Group, in its capacity as majority shareholder, orchestrated the sale of ATS's valuable plastics group, Trostel SEG, to its own new acquisition.

¶ 18. The question is whether those allegations support direct claims for breach of fiduciary duty to a minority shareholder. The parties suggest different cases as guides for our analysis. The Smith Group argues that Rose v. Schantz, 56 Wis. 2d 222, 201 N.W.2d 593 (1972), requires a finding that these are derivative claims; Notz argues that the principles articulated in Jorgensen v. Water Works, Inc. (Jorgensen II), 2001 WI App 135, 246 Wis. 2d 614, 630 N.W.2d 230, and Luther v. C.J. Luther Co., 118 Wis. 112, 94 N.W. 69 (1903), compel a finding that these are direct claims.

¶ 19. In Rose, minority stockholders sued for an injunction for breach of the fiduciary duties owed to them by the directors. Rose, 56 Wis. 2d at 223-24. The circuit court denied defendants' motion for summary judgment but was reversed by this court. Id. at 224, 230. We held that though each shareholder has an individual right to be treated fairly by the board of directors, when the injury from such actions is primarily to the corporation, there can be no direct claim by minority shareholders. Id. at 228-29.

¶ 20. In that case, we acknowledged the duty to individual shareholders but set important parameters.

It is true the fiduciary duty of a director is owed to the individual stockholders as well as to the corporation. Directors in this state may not use their position of trust to further their private interests. Thus, where some individual right of a stockholder is being impaired by the improper acts of a director, the stockholder can bring a direct suit on his own behalf because it is his individual right that is being violated.

Id. (citations omitted). However, a right of action that belongs to the corporation cannot be pursued as a direct claim by an individual stockholder. Id. at 229. As we noted, even where the injury to the corporation results in harm to a shareholder,¹¹ it won't transform an action from a derivative to a direct one:

That such primary and direct injury to a corporation may have a subsequent impact on the value of the stockholders' shares is clear, but that is not enough to create a right to bring a direct, rather than derivative, action. Where the injury to the corporation is the primary injury, and any injury to stockholders secondary, it is the derivative action alone that can be brought and maintained. That is the general rule, and, if it were to be abandoned, there would be no reason left for the concept of derivative actions for the redress of wrongs to a corporation.

Id. at 229-30 (citations omitted).

¶ 21. Notz asserts that the principles of Jorgensen II and Luther apply here. In Jorgensen II the court of appeals found that where shareholder-directors stopped making distributions to some minority shareholders while continuing to pay themselves distributions, such shareholder-directors had breached their fiduciary duty, and the injury caused was primarily personal to the minority shareholders. Jorgensen II, 246 Wis. 2d 614, ¶¶ 18-19. In Luther, this court found that two shareholder-directors had breached their fiduciary duty when they orchestrated the sale of new shares to an ally in order to gain control of the company. Luther, 118 Wis. at 123. As for Rose, Notz would have us read it more narrowly, as holding that where the only harm alleged by a minority shareholder is the diminution of the value of the shares, and thus, harm to the corporation, there can be no direct claim.

¶ 22. Notz alleges self-dealing on the part of the majority shareholder, but the cases on which he relies do not stand for the proposition that a shareholder-director's self-dealing transforms an action that primarily injures the corporation into one that primarily injures a shareholder. It is clear from Read v. Read, 205 , 556 N.W.2d 768 (Ct. App. 1996), that a majority shareholder's self-dealing may result in injury that is primarily to the corporation. In that case, Read, a minority shareholder, had alleged that the controlling stockholders had misappropriated corporate assets and engaged in self-dealing "through their transactions with other corporations in which they were stockholders but he was not." Id. at 562. The court of appeals disagreed that any injury was directly to him as the minority shareholder: "Here, as in the Rose case, Read's complaint alleges conduct that, if true, means that resulting primary injury is to the corporation, not the individual stockholder bringing the suit." Id. at 570.

¶ 23. We agree with the Smith Group that breach of fiduciary duty claims, based on the lost opportunity to purchase one company and the sale of a subsidiary with great growth potential, are governed by Rose. Our analysis under Rose centers on a determination of whether the primary injury is to the corporation or to the shareholder. Rose does not precisely define when an injury is "primarily] ... to the corporation." Rose, 56 Wis. 2d at 229. Jorgensen II does, however, define the opposite, an injury "primarily... to an individual shareholder," as one which "affects a shareholder's rights in a manner distinct from the effect upon other shareholders." Jorgensen II, 246 Wis. 2d 614, ¶ 16. We agree with the court of appeals that the allegations here are essentially that the Smith Group "stripped [ATS] of its most important assets" and engaged in various acts of self-dealing, and that those are allegations of injury primarily to ATS. Notz, 312 Wis. 2d 636, ¶ 17. As the court of appeals noted, "[A]ll of the shareholders [of ATS] were affected equally" by the loss of the opportunity to acquire Dickten & Masch and by the sale of Trostel SEG, the plastics division. Id. To hold otherwise would mean, as we said in Rose, that "there would be no reason left for the concept of derivative actions for the redress of wrongs to a corporation." Rose, 56 Wis. 2d at 230. The situation here involves, as the circuit court noted, "the majority's power to sell a part of a company to an entity that it has a hundred percent interest in . . . [a]t a fair price."¹² Such a transaction may give rise to a derivative claim for injury that is primarily to the corporation; under Rose, that is the only claim available.

B. The due diligence expenses

¶ 24. As noted above, however, the court of appeals did not fully close the door on Notz's direct claim of breach of fiduciary duty. Notz's amended complaint alleged that the Smith Group benefited from ATS's payment of due diligence expenses for the never-consummated acquisition of Dickten & Masch when it subsequently acquired Dickten & Masch for itself. In other words, as ATS majority shareholder, the Smith Group made the decision to let ATS pick up the tab for the due diligence, the benefits of which expense accrued only to the Smith Group, not to ATS's minority shareholders, when the Smith Group made the decision to acquire Dickten & Masch on its own. The court of appeals viewed this allegation as supporting a direct claim of breach of fiduciary duty because the expense was, in the court's words, a "dividend-like payment[]."¹³ Notz, 312 Wis. 2d 636, ¶ 18. It reasoned that this payment fit the description in Jorgensen II, which held that injury due to the act of shareholder-directors that affects a shareholder differently from others gives rise to a direct claim. Id.

¶ 25. On this claim at least, the parties have found common ground. Both argue that the court of appeals improperly distinguished Notz's constructive dividend from the rest of his fiduciary duty claims. Notz strenuously objects to analysis that would treat the due diligence expense claims differently than those concerning the majority shareholder's squandering of corporate opportunities and the sale of corporate assets to itself.¹⁴ The Smith Group, for its part, strenuously objects to the applicability of Jorgensen II to the facts here and argues that the circuit court got it right when it wrote, "[T]he complaint alleges injuries that were common to the shareholders generally and the fact that some shareholders may have benefited in a way that balanced out that injury for them does not create a direct injury.. . ." The Smith Group says Notz has failed to articulate an injury that he suffered separate from that allegedly suffered by all other ATS shareholders.

¶ 26. As just noted, an injury "primarily ... to an individual shareholder" is one which "affects a shareholder's rights in a manner distinct from the effect upon other shareholders." Jorgensen II, 246 Wis. 2d 614, ¶ 16.

¶ 27. Here, the allegation is that as majority shareholder, the Smith Group got the direct and immediate benefit of the due diligence¹⁵ expenditure as shareholders in the corporation that acquired Dickten & Masch. As a minority shareholder, Notz did not, as the court of appeals noted, receive an offsetting payment. Notz, 312 Wis. 2d 636, ¶ 18. The bottom line, as alleged in the complaint,¹⁶ is that there was never any intention for the minority shareholder to benefit in any way from this due diligence expenditure because

if the offer [to purchase] the stock was rejected[,] the Smith Group planned to freeze [Notz] out of the plastics business by transferring the entire plastics division from ATS to the Smith Group in two steps. First, the Smith Group rather than ATS would acquire Dickten & Masch. Second, the Smith Group would combine the Dickten operations with the Trostel SEG operations to achieve the synergy savings identified in the due diligence investigation by acquiring the ATS plastics division. After [Notz] rejected the Smith Group's offers to purchase his shares, Defendants proceeded with their plan to freeze out [Notz] from any interest in the ATS plastics business.

As the court of appeals noted, it was the Smith Group that was "the beneficiary of that expenditure." Notz, 312 Wis. 2d 636, ¶ 18. Such dividend-like payments were not made to Notz, and for that reason, Notz's rights as a shareholder were affected "in a manner distinct from the effect upon other shareholders." Jorgensen II, 246 Wis. 2d 614, ¶ 16. Here, cash that was part of the corporation's assets which could have been used to pay dividends was instead diverted to fund due diligence for a company that the majority shareholder later acquired. It is this type of inequitable treatment that was at issue in Jorgensen II because the defendants had "stopped paying [plaintiffs] the pro rata distribution from [the corporation's] cash flow while they continued to pay themselves regular distributions, they treated [plaintiffs] differently, and inequitably, when compared with the treatment accorded all other shareholders." Jorgensen II, 246 Wis. 2d 614, ¶ 18.

¶ 28. This is different from Notz's first claim, which is based on the majority shareholder's acquisition of Dickten & Masch and Trostel SEG. Those acquisitions, which effectively ended ATS' expansion into the plastics business, parallel the acts complained of in Rose, acts that were part of "a scheme or plan to deplete the corporation of its cash reserves, thereby rendering it incapable of continuing in business, and enabling [the defendant] to successfully engage in a competing business." Rose, 56 Wis. 2d at 224. The majority shareholder's decisions with regard to ATS's plastics interest are alleged to do precisely the same thing: to render ATS incapable of continuing in that business and to enable itself to engage in a competing business. For that reason, the claim related to the purchase of Dickten & Masch is controlled by Rose because the injury is primarily to the corporation. The claim as to the due diligence expenses is factually more similar to the claim of unequal distributions alleged in Jorgensen II, as explained above, and is therefore properly governed by that analysis.

IV THE JUDICIAL DISSOLUTION CLAIM

¶ 29. The court of appeals remanded with an order to dismiss the judicial dissolution claim after a forced cash-out merger was instituted while the case was pending on appeal. Notz, 312 Wis. 2d 636, ¶ 26. Following that merger, Notz was no longer a shareholder in ATS.¹⁷

¶ 30. Notz argues that Wis. Stat. § 180.1106(1)¹⁸ explicitly preserves all pending civil claims after a corporate merger. Subsection (d) states "a civil. . . proceeding pending .. . against any business entity that is a party to the merger may be continued as if the merger did not occur ... Wis. Stat. § 180.1106(l)(d). This statute is not limited or qualified in any way, Notz argues, and it expressly preserves the standing of plaintiffs with pending claims against merged corporations, and ensures that liability follows the merged entities.

¶ 31. The Smith Group argues that the merger statute cannot preserve a claim that Notz lacks standing to pursue.

¶ 32. The court of appeals agreed with the Smith Group; it held that the statute "does not address who is entitled to maintain a previously commenced action; it merely says that those actions survive." Notz, 312 Wis. 2d 636, ¶ 25.

¶ 33. As we have noted in other cases where we construed Wis. Stat. § 180.1106, this provision is based on Model Business Corporation Act § 11.07, "Effect of Merger or Share Exchange."¹⁹ See generally Model Bus. Corp. Act Ann. § 11.07 (Supp. 1998/99) (listing all fifty states as having adopted this rule under the Model Business Corporation Act). While cases dealing with one aspect or another of this provision or its variations abound, the Smith Group has not pointed to any case precisely on point where this provision has been found to work the way the Smith Group says it must. It argues that the provision should be read as allowing a merger to strip shareholder status, and thus standing, from a plaintiff with a non-derivative claim that predates the merger.

¶ 34. We begin by observing that a claim for judicial dissolution based on oppressive conduct, as here, is not a derivative claim. See 12B William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5820.10 (rev. ed. 2000) ("An action for relief from oppressive conduct has been distinguished from a derivative action, since in the former the complaining shareholder is ordinarily seeking some type of individual relief, while in the latter the action is generally for relief on behalf of the corporation as well as other similarly situated shareholders.") Direct claims of a shareholder predating a merger have been upheld, even when brought by a shareholder who after filing the claim lost shareholder status, on the basis that this statute preserves such claims. For example, after determining that some of the plaintiffs claims "state[d] personal, as opposed to derivative, causes of action," the Connecticut Supreme Court addressed the effect of the merger on such claims under Connecticut's statute, which like Wisconsin's was based on the Model Business Corporation Act:²⁰

Nor does the fact of the [corporation's] merger prohibit the plaintiff from proceeding in an individual capacity against [defendants]. The provisions of s. 33-369(e) of the General Statutes clearly state that the post-merger, surviving corporation shall be responsible for the liabilities, including liability to dissenting shareholders, of each of the merging corporations, and that any claim existing at the time of merger against one of the corporations may be prosecuted as if the merger had not taken place. Put another way, the merger does not destroy the existing liabilities and obligations of the individual corporations; to hold otherwise would depart from the clear mandate of the statute and allow for perpetration of a fraud upon corporation creditors or others who, like the plaintiff, possess outstanding claims against the merged corporation.

Yanow v. Teal Indus., 422 A.2d 311, 322 (Conn. 1979). That court went on to distinguish derivative claims by-noting that a derivative claim "could only be pursued by one who was a stockholder . . . both at the time of the alleged corporate delict and at the time of the filing of suit." Id. at 323. We have not located any case where a merger was permitted to strip a shareholder of standing he indisputably held at the commencement of the claim.²¹

¶ 35. Far from finding authority in favor of allowing a merger to defeat a pending direct or non-derivative claim, we have found significant case law that supports the opposite inference. Delaware, a jurisdiction to which Wisconsin courts often look for "guidance on corporate law,"²² recognizes a relevant exception to the general rule that a loss of standing as a shareholder for any reason, including a merger, is fatal to a derivative claim.²³ Under Delaware law, the exceptions to that well-settled rule include when a merger is "perpetrated merely to deprive shareholders of the standing to bring a derivative action[.]" Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 354 (Del. 1998); see also In re First Interstate Bancorp Consol. S'holder Litig., 729 A.2d 851, 867 (Del. Ch. 1998).

¶ 36. Notz has never pursued a derivative claim in this action, and, as noted above, his judicial dissolution claim is not a derivative claim.²⁴ Delaware's narrow exception to loss of standing as a shareholder is instructive: it illustrates the courts' recognition that mergers can be used fraudulently to attempt to strip plaintiffs of the opportunity, based on the lack of standing or on mootness, to pursue previously filed claims.²⁵

¶ 37. The language of the statute is remarkably clear and is cast in the broadest of terms: "A civil, criminal, administrative, or investigatory proceeding pending by or against any business entity that is a party to the merger may be continued as if the merger did not occur, or the surviving business entity may be substituted in the proceeding for the business entity whose existence ceased." Wis. Stat. § 180.1106(l)(d) (emphasis added). In applying the text of the statute to the facts in the instant case, it is important to note that the civil proceeding instituted by Notz was pending at the time of the merger. The statute could hardly be written more explicitly to preserve such a claim: "as if the merger did not occur." If the merger did not occur, Notz would not have been forced out as a shareholder, and the claim would continue. Therefore, we are satisfied that the judicial dissolution claim may continue.²⁶ The circuit court should consider the judicial dissolution claim based on oppression in light of the allegations set forth in Notz's amended complaint. Under the circumstances, Notz has not lost standing.

V CONCLUSION

¶ 38. For the reasons set forth above, we affirm in part, reverse in part, and remand for further proceedings. We agree with the court of appeals that the claims of harm alleged — the loss of a corporate opportunity and the sale of a subsidiary with high growth potential —caused harm primarily to the corporation, and thus we affirm the dismissal of Notz's direct claim of breach of fiduciary duty as to those allegations. On the cross-appealed issue, we also agree with the court of appeals that the majority shareholder's appropriation of the due diligence paid for by the corporation resulted in a constructive dividend to the majority shareholder because it received a benefit at the expense of the minority shareholders. Thus we affirm the court of appeals' decision permitting that claim to proceed and remand to the circuit court for further proceedings.

¶ 39. Where we disagree with the court of appeals is on the question of Notz's standing to pursue his judicial dissolution claim. Wisconsin Stat. § 180.1106(l)(d) is straightforward in its requirement that a pending claim "may be continued as if the merger did not occur." Notz's judicial dissolution claim, initiated prior to the merger, alleged harm to that shareholder, not to the corporation. Because the statute precludes a merger from operating to strip such a claimant of the right to pursue a pending action, such as his direct action here, and because we find persuasive support for that position, we reverse the court of appeals' decision on that issue. We therefore remand that claim to the circuit court for further proceedings consistent with this opinion.

By the Court. — The decision of the court of appeals is affirmed in part, reversed in part, and remanded to the circuit court for further proceedings consistent with this opinion.

¶ 40. ANNETTE KINGSLAND ZIEGLER, J., did not participate.

1 Notz v. Everett Smith Group, Ltd., 2008 WI App 84, 312 Wis. 2d 636, 754 N.W.2d 235.

2 The majority shareholder ultimately acquired the company for itself.

3 Wisconsin Stat. § 180.1430(2)(b) (2005-06):

The circuit court. .. may dissolve a corporation in a proceeding:

(2) By a shareholder, if any of the following is established:

(b) That the directors or those in control of the corporation have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent.

All subsequent references to the Wisconsin Statutes are to the 2005-06 version unless otherwise indicated.

4 Notz, the plaintiff-petitioner, is a descendant of Albert Trostel; the defendants-cross-petitioners are three directors of ATS who were affiliated with the Smith Group, and the Smith Group itself, now controlled in part by descendants of Everett Smith.

5 Notz had also sent a demand letter to ATS, pursuant to Wis. Stat. § 180.0742, stating, "the minority shareholders are required to make a written demand for ATS to take action with regard to these derivative claims. This letter shall serve that purpose." The letter demanded, among other things, that the purchase of Trostel SEG by Dickten & Masch be rescinded and independent directors be elected to ATS's board. In response to Notz's letter and a similar letter from the other minority shareholders, on October 4, 2005, ATS elected three independent directors to ATS's board and created a special litigation committee to investigate the allegations in the demand letters. The special litigation committee consisted of the three independent directors. The committee subsequently issued a report concluding there was "no intentional behavior or maliciousness on the part of [ATS] fiduciaries to disadvantage the minority shareholders" and making certain recommendations that are not relevant to the questions we are concerned with here. No derivative claim was ever pursued by Notz; the dispute presented here centers on his direct claims.

6 The amended complaint describes the oppressive conduct as "includ[ing], among other things, a concerted effort by the Smith Group and the Individual Defendants to oppress the Plaintiff and force him to sell his shares in ATS to the Smith Group for less than a fair value and to freeze Plaintiff out of the plastics business in retaliation for refusing to sell his shares at less than fair value."

7 The other minority shareholders received cash for their shares. Notz perfected his dissenter's rights to have a court determine the fair value of his shares. That case is currently pending as a separate proceeding in the United States District Court for the Eastern District of Wisconsin. See, infra, ¶ 37 n.26.

8 There are some procedural peculiarities in this case in that the record contains no documentation related to the merger because the record was already complete before it happened. The court of appeals accepted briefing on the merger's effect on Notz's judicial dissolution claim and clearly based its ruling on standing on the materials presented in those briefs; it did not permit the parties to supplement the record. The result was that the parties cited in their briefs here materials considered by the court of appeals that were never made part of the record. We therefore rely as well on the materials submitted to the court of appeals.

9 We recognize that material related to the merger was presented to the court of appeals in connection with motions made to that court and pursuant to an October 4, 2007, order, which stated,

Although the court will not permit supplementation of the appellate record, the court recognizes that addressing the mootness issue may require consideration of materials not in the appellate record, since the materials were likely produced after the appeal was filed. Consequently, the court will allow the parties to refer in their briefs and appendices to materials submitted in the motion practice before this court that relate to the mootness issue.

We note that under the unusual circumstances presented here this material does not constitute "matters outside of the pleadings" under Wis. Stat. § 802.06(2)(h) (stating that where such matters are presented to the court, the motion is treated as one for summary judgment). The court of appeals appeared to treat this material as part of the pleadings. Under these circumstances, we see no reason to treat this as an action for summary judgment.

10 The amended complaint states,

Defendant Smith Group breached its fiduciary duty to the Plaintiff by engaging in two related self-dealing transactions that were intended to harm the Plaintiff, by failing to provide Plaintiff with prior notice of the proposed transactions at a time when Plaintiff could have objected and sought to stop the transactions, by orchestrating constructive dividends from ATS to the Smith Group, and by acting with the intent to harm the Plaintiff.

11 We use the terms "shareholder" and "stockholder" interchangeably.

12 It is clear from the case law applicable here that a derivative action is appropriate on the claim to the extent that it is based on the allegations concerning the Smith Group's purchase of Trostel SEG and Dickten & Masch. The approach advocated by the concurrence/dissent would create the possibility of direct actions wherever there are shareholders in common between a parent corporation selling a subsidiary and the purchasing corporation. See concurrence/dissent, ¶ 76. Such an unworkable approach would impose unnecessary costs and uncertainty on routine corporate transactions.

13 The court of appeals also referred to the payment as a constructive dividend. Notz, 312 Wis. 2d 636, ¶ 18. In this opinion, we use the terms "dividend-like payment" and "constructive dividend" interchangeably. Examples of a constructive dividend include "excessive compensation, bargain purchases of corporate property, and shareholder use of corporate property." Black's Law Dictionary 513 (8th ed. 2004).

14 "The distinction perceived by the Court of Appeals ... lacks a coherent underpinning. Candidly, a consistent policy should apply in either case."

15 Due diligence is defined as "[a] prospective buyer's or broker's investigation and analysis of a target company, a piece of property, or a newly issued security." Black's Law Dictionary 488 (8th ed. 2004).

16 As noted above at ¶ 15, at the motion to dismiss stage, the court must accept all facts alleged as true and construe "all reasonable inferences that may be' drawn from those facts in favor of stating a claim." Peterson v. Volkswagen of Am., Inc., 2004 WI App 76, ¶ 2, 272 Wis. 2d 676, 679 N.W.2d 840.

17 The Smith Group sought to have the judicial dissolution claim dismissed as moot; in its decision, the court of appeals characterized the question as one of standing instead. Notz, 312 Wis. 2d 636, ¶ 21.

18 Wisconsin Stat. § 180.1106. Effect of merger or share exchange.

(1) All of the following occur when a merger takes effect:

(d) A civil, criminal, administrative, or investigatory proceeding pending by or against any business entity that is a party to the merger may be continued as if the merger did not occur, or the surviving business entity may be substituted in the proceeding for the business entity whose existence ceased.

19 "We note that this statute is based on the Model Business Corporation Act § 11.07 'Effect of Merger or Share Exchange.' We have previously utilized the official commentary to substantially similar Model Business Corporation Act statutes to inform our discussion of the legislative intent of Wisconsin Business Corporations statutes." Farm Credit Serv. of N. Cent. Wis. v. Wysocki, 2001 WI 51, ¶ 20 n.2, 243 Wis. 2d 305, 627 N.W.2d 444 (citing Einhorn v. Culea, 2000 WI 65, ¶ 29, 235 Wis. 2d 646, 612 N.W.2d 78).

20 All Brand Importers, Inc. v. Dept. of Liquor Control, 567 A.2d 1156, 1163 (Conn. 1989) (discussing General Statutes § 33-369, "Effect of merger or consolidation," and stating, "[t]he Connecticut statute on the effect of merger or consolidation was based on the ABA-ALI Model Business Corporation Act (1969) § 76 . ..").

21 For cases that turn on the holding of shareholder status when an action is commenced, see Crippin Printing Corp. v. Abel, 441 N.E.2d 1002, 1004 (Ind. Ct. App. 1982) (concluding that an agreement obligating a shareholder whose employment is terminated to sell stocks does not deprive plaintiff "of standing to bring suit. . . prior to the actual sale or transfer of his stock"); Artigas v. Renewal Arts Realty Corp., 22 A.D.3d 327, 328 (N.Y. App. Div. 2005) (affirming dismissal of petitions for dissolution "because petitioner sold his interests in these corporations ... before bringing his petitions"); Martin Enter., Inc. v. Janover, 140 A.D.2d 587, 587 (N.Y. App. Div. 1988) (finding that petitioner was without standing because "fpjrior to commencement of the dissolution proceeding, the petitioner ... was divested of her interest in the corporation under an option agreement for repurchase of stock ...") (emphasis added).

22 Lane v. Sharp Packaging Sys., Inc., 2002 WI 28, ¶ 81, 251 Wis. 2d 68, 640 N.W.2d 788 (Abrahamson, C.J., dissenting) (citing HMO-W Inc. v. SSM Health Care Sys., 2000 WI 46, ¶¶ 29-31, 38, 234 Wis. 2d 707, 611 N.W.2d 250 (following Delaware law in rejecting application of minority discount in determining "fair value" in dissenters' rights proceeding); Jacobson v. Am. Tool Cos., 222 Wis. 2d 384, 397, 588 N.W.2d 67 (Ct. App. 1998) (looking to Delaware law to define fiduciary .duties); Advance Concrete Form, Inc. v. Accuform, Inc., 158 Wis. 2d 334, 344, 462 N.W.2d 271 (Ct. App. 1990) (citing Delaware cases to determine whether request to inspect corporate documents was for a "proper purpose"); Schweiner v. Hartford Accident & Indem. Co., 120 Wis. 2d 344, 351, 354 N.W.2d 767 (Ct. App. 1984) (citing Delaware law for effect of statutory merger on liabilities of merger corporation)).

23 13 William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5972.40 (rev. ed. 2004) ("Where there has been a cash-out merger, a former shareholder cannot maintain a derivative proceeding because the plaintiff would no longer have any interest in a subsequent corporate recovery.").

24 Notz's amended complaint in regard to his direct dissolution claim seeks from the circuit court at least the following remedies:

D. For an order pursuant to § 180.1430(2), Wis. Stats., ordering the dissolution of ATS;

E. For appointment of a receiver pursuant to § 180.1432, Wis. Stats., to dispose of the assets of ATS (including its equitable interest in Dickten & Masch and Trostel SEG) through a public sale to one or more third parties;

F. For an award of damages as compensation for injuries suffered by Plaintiff as the result of Defendants' oppressive conduct, in an amount to be determined at trial;

G. For an award of punitive damages in an amount to be determined at trial;

H. For the costs and disbursements of this action; and

I. For such other relief as may be equitable and just under the circumstances.

25 This is indeed what Notz alleges occurred in this instance, and there was persuasive information submitted to the court of appeals in support of this contention. In a document titled "Information Statement for Special Meeting of Shareholders To Be Held On May 17, 2007," under the subheading "Primary Reasons For The Merger," is a subheading entitled "Protection Against Judicial Dissolution." The text describes the pending litigation between Notz and ATS and says, "[O]ur board of directors believes that the completion of the merger will serve the best interests of our company and our shareholders by making the minority shareholder's dissolution claim moot and, as a result, eliminating any risk that the minority shareholder's dissolution claim will be successful."

26 The parties have made reference to a separate, somewhat related action that was filed in United States District Court, the Eastern District of Wisconsin, after the ATS merger. In that action, Notz is pursuing an appraisal of his shares. That action was filed after the instant case; neither the parties nor the issues are identical. As the district judge noted in denying Notz's motion to stay the federal proceedings, "[T]his action is only concerned with the impact that any misconduct has on the value of shares whereas the state court proceeding which arises from breach of duty and shareholder oppression claims can only address appraisal indirectly." Albert Trostel & Sons v. Notz, 536 F. Supp. 2d 969, 983 (E.D. Wis. 2008). In both Notz's dissolution claim, based on oppression, and in the pending federal appraisal action, the determination of the fair value of the shares Notz held in ATS may be one of the issues. We expect that, regardless of which proceeding concludes first, the parties will undoubtedly bring to the courts' attention any concerns about potential duplication of remedies flowing from the federal appraisal action and the state dissolution action. See HMO-W Inc. v. SSM Health Care System, 2000 WI 46, ¶¶ 18, 31, 52, 234 Wis. 2d 707, 611 N.W.2d 250 (discussing the post-merger determination of fair value of dissenters' shares in an action under Wis. Stat. § 180.1302 (not Wis. Stat. § 180.1430(2), under which Notz makes his claim)); and Robert Rabbat, Application of Share-Price Discounts and Their Role in Dictating Corporate Behavior: Encouraging Elected Buy-Outs Through Discount Application, 43 Willamette L. Rev. 107 (Winter 2007) (discussing "the considerations that control the price at which the majority [shareholder] can lawfully eliminate the minority" and noting that "in states that provide for it, a controlling shareholder can exercise his option to buy-out the complaining shareholder and avoid oppression litigation altogether" (Wisconsin statutes do not provide this option.)).