Legal Memorandum: Breach of Fiduciary Duty by a Shareholder

Issue: Under Wisconsin law, what are the elements of a cause of action for breach of fiduciary duty by a shareholder in a case involving a squeeze out?

Area of Law: Business Organizations & Contracts
Keywords: Breach of fiduciary duty; Managers and members; Squeeze out
Jurisdiction: Wisconsin
Cited Cases: 218 Wis. 2d 761; 423 N.W.2d 544; 143 Wis. 2d 746; 206 Wis. 2d 435; 82 Wis. 2d 774; 797 F.2d 3
Cited Statutes: Wis. Stat. § 183.0402(1)
Date: 03/01/2015

“In order to show that an individual breached a fiduciary duty, the first element which must be established is that . . . a fiduciary duty is owed.”  Modern Materials, Inc. v. Advanced Tooling Specialists, Inc., 206 Wis. 2d 435, 443, 557 N.W.2d 835 (Ct. App. 1996).  Generally, there are two types of relationships that give rise to a fiduciary duty: “(1) those specifically created by contract or a formal legal relationship such as principal and agent, attorney and client, trust and trustee, guardian and ward, and (2) those implied in law due to the factual situation surrounding the transactions and relationships of the parties to each other and to the questioned transactions.”  Production Credit Ass’n v. Croft, 143 Wis. 2d 746, 752, 423 N.W.2d 544 (Wis. Ct. App. 1988).

With respect to the first category, managers and members of Wisconsin limited liability companies owe both statutory and common law fiduciary duties to other members of the LLC.  See Wis. Stat. § 183.0402(1); Exec. Ctr. III LLC v. Meieran, 823 F. Supp. 2d 883, 890-93 (E.D. Wis. 2011).  Classic “freeze outs” and “squeeze outs” of minority shareholders by the majority are often categorized as breaches of fiduciary duties owed to the minority by the majority (or by the corporation’s officers and directors).  See Northern Air Servs. v. Link, 2012 Wisc. App. Lexis 32 (Wis. Ct. App 2012) (citing Jorgensen v. Water Works, Inc., 218 Wis. 2d 761, 779, 582 N.W.2d 98 (Ct. App. 1998)); Sugarman v. Sugarman,