Were You a Shareholder Who Was Removed or Financially Harmed By Majority Shareholders or Board of Directors? You May Have Strong WI Law Rights (Even Without a Contract)

On behalf of Peterson, Berk & Cross, S.C.

In some instances, a shareholder of a company is also employed by that company, and compensated via salary, bonuses, dividends or other financial benefits. If you were a shareholder of a Wisconsin company and were removed from duties or suffered financial loss due to actions of majority shareholders or board of directors, you may have strong legal rights. These rights may exist even if you did not have a contract, and even if you were labeled an “at will” employee.

Below I give an overview of what at-will employment is. Then I explain why a Wisconsin at-will employee- if he or she is a shareholder deprived of employment or income- may have strong legal rights notwithstanding an “at-will” label or a lack of a contract.

(Of note, if you were an employee who was fired but were NOT a shareholder, you could read this article describing at-will exceptions and rights that may apply to your situation).

I. Meaning of Employment at Will

Employment at will, as described in Wisconsin law, means an employer may fire an employee “for good cause, for no cause, or even for cause morally wrong, without (the employer) being thereby guilty of legal wrong.” Brockmeyer v. Dun & Bradstreet, 113 Wis.2d 561, 567 (WI SC 1983).

Most States in the U.S. are at-will States, with Montana – which requires terminations be for “cause”- being the notable exception. When employment is at-will, a job termination is usually legal, including most terminations that are done for wrong or unfair reasons.

However, there are important exceptions to the at-will principle. Below I describe strong legal rights that a shareholder may have after being deprived of employment or income, even if lacking a contract or having been labeled “at-will.”

II. No Contract? Don’t Assume (or Accept the Company’s Claim) That “At-Will” Means “Out of Luck”

Often, shareholders have contracts that provide rights and benefits, e.g. buyout or severance provisions that require significant compensation in the event the company takes negative action such as removal. But sometimes that is not the case. Some shareholders lack contracts – or perhaps, lack clear or useful contacts and their rights appear non-existent from the face of corporate documents. The documents that employee-shareholders do have may explicitly state their employment is “at will.”

Based on an understanding they are at-will, shareholders may assume they are out of luck when removed from employment. Plus their former companies are all too quick to encourage the view that “at-will” means “out of luck,” trying to persuade them into accepting the same view.

If you are a shareholder who has been asked to believe these notions, don’t be persuaded. The company people who say this may or may not be right. But their view is self-interested. Consider talking to an attorney to get advice about your side of the situation. As described below, a removed shareholder (even one who is at-will or lacks a contract) may have potentially strong legal rights, depending on the situation.

III. A Threshold Issue: Have the Company’s Actions Caused Large Financial Loss?

As a threshold matter, the potential strength of a removed shareholder’s legal rights depends in large part on this question: have you lost or stand to lose significant money due to the actions against you? If your answer is yes, read on. If the answer is no, then in my view the potential for legal action is less promising. Please know this is my general view, and obviously is not a legal diagnosis for a reader’s specific situation. (Of course, I can only give legal advice about those situations I have specifically discussed).

The legal system can be effective at awarding money that was actually lost. The more financial losses that you incurred and stand to recover from a legal action, the more sense it makes for you to invest your own money in that legal action, or for a contingency-based attorney (paid only if the case wins or settles) to invest his or her time and work.

Legal actions can award extra damages and penalties, including punitive damages in some cases. Such extra damages can considerably exceed the value of actual financial losses such as lost income, lost stock value, etc. However, extra damages are often not available. When they are, they often bear some relationship to the actual financial losses suffered. Rarely does a legal case receive significant damages based on unfair or abusive conduct alone. When unfair conduct is coupled with financial losses to the unfairly-treated shareholder, there is more potential for a successful legal action.

If you are a shareholder who has suffered (or stands to suffer) a significant financial loss, then you have met an important threshold in my view. Depending on other aspects of your situation, you may have strong legal rights and options.

IV. Legal Rights for the At-Will Shareholder Who Has Been Removed or Financially Mistreated

A. Breach of Fiduciary Duty

One potentially strong legal claim is breach of fiduciary duty. Under Wisconsin law, board of directors members and officers owe a fiduciary duty to a shareholder. See McGivern v. Amasa Lumber Co., 77 Wis. 2d 241, 260 (1977). Also, majority shareholders owe a fiduciary duty to a minority shareholder. Reget v. Paige,2001 WI App 73, ¶ 12; Production Credit Ass’n v. Croft, 143 Wis. 2d 746, 754, (WI Ct. App. 1988).

A breach of fiduciary duty claim exists when: (1) the defendant (e.g. majority shareholder) owed the plaintiff (e.g. a minority shareholder) a fiduciary duty; (2) the defendant breached that duty; and (3) the breach of duty caused the plaintiff’s damage. Yates v. Holt-Smith, 319 Wis.2d 756, 769 (Wis.App. 2009), citing Berner Cheese Corp. v. Krug, 2008 WI 95, ¶ 40.

In Jensen v. Christensen & Lee Ins., Inc., the plaintiff Jensen was a minority shareholder who the directors terminated from employment and the board. 157 Wis.2d 758 (Wis.App.,1990). Jensen alleged the terminations were made so that the company could pay him a lower amount for his stock than it would have otherwise had to pay, and alleged the directors’ actions were for the directors’ financial benefit. The Wisconsin Court of Appeals held Jensen had pleaded a breach of fiduciary claim for the employer’s alleged willful failure to deal fairly.

In Jorgensen v. Water Works Inc., the Wisconsin Court of Appeals held that the plaintiffs-minority shareholders who were removed from the board of directors, excluded from company actions, and had payments withheld from them (while fees and bonuses were paid to the majority shareholders)- stated a claim for breach of fiduciary duty. 218 Wis. 2d 761 (Ct. App. 1998). The Court of Appeals found the injuries alleged were individualized and non-derivative claims, and there were genuine issues of material fact regarding these issues: (1) whether removing the minority shareholders as directors and withholding payments to them was a breach of fiduciary duty and grounds for judicial dissolution on grounds of oppressive conduct; (2) whether fees and bonuses paid to the majority shareholders were, in fact, dividends. The Court held that the plaintiffs could bring a direct action (i.e. it was acceptable they did not bring a derivative-action lawsuit) because they alleged “an injury that is primarily to the Jorgensens, not primarily to the corporation.”

B. Damages for Breach of Fiduciary Duty May Include Full Compensation for Losses and Punitive Damages

Under Wisconsin law, a minority shareholder who is subject to a breach of fiduciary duty can recover full compensation for losses unfairly suffered, and potentially punitive damages as well. In Wisconsin, breach of fiduciary duty is an intentional tort, Zastrow v. Journal Communications, Inc., 291 Wis.2d 426 (WI SC 2006). As such, punitive damages can be available for a breach of fiduciary duty claim asserted by a minority shareholder.

Wisconsin courts have also recognized that tort claims (including breach of fiduciary duty) provide full compensation for persons who are injured by another’s unreasonable conduct. Merten v. Nathan, 108 Wis.2d 205, 211-12, (1982); Heath v. Zellmer, 35 Wis.2d 578, 600 (1967). Unlike contract law, “[i]n tort actions the tortfeasor is liable for all injuries resulting directly from the tort committed whether they were within the contemplation of the parties or not.” Morse Chain Co. v. T.W. Meiklejohn, Inc., 241 Wis. 45, 52 (1942).

A breaching fiduciary becomes liable for any benefit received as a result of wrongdoing: the duty of loyalty demands that a fiduciary be compelled to disgorge any profits received as a result of the breach. Community Nat’l Bank v. Medical Ben. Adm’rs, LLC, 2001 WI App 98, ¶ 8.

So, generally speaking, a minority shareholder can seek to recover money lost (to him or her as an individual) that was lost due to a breach of fiduciary duty and unfair profiting of the majority shareholders or directors.

Majority shareholders may mislabel money they pay themselves as way to benefit them to the disadvantage of the removed minority shareholder. For example, majority shareholders employed by the company may remove a minority shareholder, stop paying his salary, and pay themselves money they label as “bonuses” (which the minority shareholder may regard as a dividends in reality). A legal decision-maker may determine whether such money is truly a bonus for work performance, or if it is in actuality (despite the “bonus” label) a dividend that was paid in breach of fiduciary duty, and for which a minority shareholder can seek recovery. InYates v. Holt-Smith, the Wisconsin Court of Appeals found “The fact that a distribution is not called a ‘dividend’ by a corporation’s board of directors is not dispositive as to whether the distribution is a dividend within the meaning of the law.” 319 Wis.2d 756, 767-68 (Wis.App. 2009), citing Jorgensen v. Water Works, Inc., 218 Wis.2d 761, 776-77 (Ct.App.1998) and Notz v. Everett Smith Group, Ltd., 2009 WI 30, ¶ 24, and citing Hellmich v. Hellman, 276 U.S. 233, 236-37, 48 S.Ct. 244, 72 L.Ed. 544 (1928) (finding courts generally classify a recurrent payment to the stockholders of a corporation on their stock investment as a dividend).

The bottom line is that a breach of fiduciary duty claim can allow a minority shareholder to contest (and potentially recover significant payment for) wrongful financial decisions and labels that were made by majority shareholders or directors.

C. Other Potential Legal Claims and Rights

Minority shareholders who lack contracts but suffered unfair financial loss may have legal claims other than breach of fiduciary duty that are available to recover their losses. Such potential claims include promissory estoppel and unjust enrichment. If the majority shareholders or directors made negative comments or exhibited negative conduct that interfered with the minority shareholder’s business dealings, other legal claims may apply, such as defamation or tortious interference with prospective economic advantage.

V. Don’t Assume; Evaluate With An Attorney and Decide If Legal Action Is Right

If you are a minority shareholder who has been financially harmed by majority shareholders or directors, don’t assume you have no recourse. Even if you lack contract rights or are told you were an “at-will” employee with no rights, you should not accept at face value that there are no strong legal options. Often there are. So don’t assume. Instead, evaluate.

Please consider speaking with me or another attorney about your potential rights. Keep in mind that it’s better to get an attorney’s evaluation sooner than later. A breach of fiduciary duty claim has a two-year deadline period for filing the claim, and other claims may apply to your situation with shorter or longer deadlines.

Of course, whether you take action after an attorney evaluates your matter is a different decision. You’ll want to have complete information, and the time you need to think things through, before making that decision. In talking to an attorney, you should be prepared to discuss: (1) the details of your situation; (2) the financial losses you have suffered or stand to suffer; (3) the attorney’s evaluation of potential legal claims and options, and the expected process, duration and costs involved; (4) whether the attorney offers a fee arrangement that involves affordable or contingency terms that you find acceptable.

I hope this information is helpful in providing an overview of some of the legal options that can exist for a mistreated minority shareholder.