Einhorn v. Culea

612 N.W.2d 78 (Wis. 2000)

Facts

In December 1985, James D. Culea (D), P, and Einhorn's business partner, Orville Mertz, acquired Northern Labs. The Northern Labs stock was distributed as follows: D 56.09%, P 20.60%, and Mertz 20.06%. The remaining stock was owned by other managers and directors. Culea has served as president, manager, director and majority shareholder of Northern Labs since 1986. Einhorn has been a director and minority shareholder. In 1992, D sought a retroactive performance bonus, asserting that he had been under-compensated in the years following the acquisition. He sent a notice to the directors scheduling a compensation committee meeting and a board of directors meeting for July 29, 1992. At that time the board of directors consisted of D, his wife Shelly Culea, P, Mertz, and the company's vice president of finance, Robert Bonk. D, Mertz, and Bonk comprised the compensation committee. The committee unanimously approved a retroactive bonus to D of approximately $300,000, a portion of which was to be paid with Northern Labs stock. A board of directors meeting was held immediately after the compensation committee meeting. The four directors in attendance - D, Mertz, Bonk and Shelly Culea - voted unanimously to ratify the compensation committee's decisions. P did not attend the July 29, 1992, board of directors meeting. P filed a direct action against D, alleging that D had willfully breached his fiduciary duty to P by participating in and causing the corporation to award a self-dealing retroactive bonus to D of $300,000 and to issue stock for no consideration or at a grossly inadequate price. Following an amended complaint, on December 9, 1994, D issued a notice of a special meeting of the board of directors for December 16, 1994. D's notice indicated that Chewning and Chua were new members of the board and that the board would be voting on whether the maintenance of P's derivative action was in the best interests of the corporation. P requested to bring an attorney to the meeting, but his request was denied by the corporate counsel for Northern Labs. After five months of meetings and approximately 500 hours of inquiry, the special litigation committee voted three to one that continuation of P's derivative action was not in the best interests of the corporation. Based on this vote and pursuant to Wis. Stat. § 180.0744(1), D moved the circuit court to dismiss P's derivative action. The circuit court denied the motion to dismiss the action but after a seven-day trial to the circuit court on the issue of whether the members of the special litigation committee were independent under § 180.0744, the circuit court concluded that the threshold established by the legislature in determining whether members of the special litigation committee were independent is 'extremely low.' The court found that the directors acted in good faith and that they made their determination from conclusions based upon a reasonable inquiry. The circuit court dismissed the derivative action. The court of appeals affirmed the judgment of the circuit court.