Einhorn v. Culea - 2000 WI 65, 235 Wis. 2d 646, 612 N.W.2d 78

Rule:

Although the plain language of Wis. Stat. § 180.0744 requires the directors who are members of the special litigation committee to be independent, the statute does not define the word "independent." Rather, § 180.0744(3) merely instructs that whether a director on the committee is independent should not be determined solely on the basis of any of the following three factors set forth in the statute: (1) whether the director is nominated to the special litigation committee or elected by persons who are defendants in the derivative action, (2) whether the director is a defendant in the action, or (3) whether the act being challenged in the derivative action was approved by the director if the act resulted in no personal benefit to the director.

Facts:

Stephen Einhorn, a minority shareholder and member of the board of directors of Northern Labs, brought a derivative shareholder action. The circuit court dismissed the action pursuant to Wis. Stat. § 180.0744(1). Under § 180.0744(1) dismissal of a derivative proceeding was proper if the court found that a special litigation committee determined that the proceeding was not in the best interests of the corporation. The circuit court concluded that the threshold for determining whether a member of the special litigation committee is independent within the meaning of Wis. Stat. § 180.0744 (1997-98) is "extremely low" and found that the special litigation committee was independent. The court of appeals affirmed the judgment of the circuit court, concluding that the circuit court's assessment of whether each member of the special litigation committee was independent was based on facts supported by the record and was not clearly erroneous.

Issue:

Should the derivative action be dismissed on the basis of the decision of the special litigation committee?

Answer:

No.

Conclusion:

The court held that the circuit court and the court of appeals failed to apply the proper standard set forth in § 180.0744 to determine whether each member of the special litigation committee made an independent decision. In particular, the circuit court did not make sufficient findings of fact upon which a reviewing court could apply the legal test set forth § 180.0744. Therefore, the court remanded the matter for further proceedings.