March 14, 2024 – Any injuries that resulted from a company’s majority shareholder creating an employee stock plan and a nonprofit foundation to handle marketing fell on the company and not minority shareholders, the Wisconsin Court of Appeals (District IV) has ruled.

As a result, in an unpublished per curiam opinion in Eichoff v. New Glarus Brewing Company, 2022AP1958 (Feb. 22, 2024), the Court of Appeals upheld the dismissal of the minority shareholders’ lawsuit.

In 1993, Deborah Carey incorporated New Glarus Brewing Company (the Brewery).

At the time of incorporation, the Brewery issued 40,000 shares, valued at $10 per share, to Dierk Eichoff, Roderick Runyan, Steven Speer, and other shareholders.

Carey has managed the Brewery since its founding and has served as the CEO, sole director, and controlling shareholder.

Employee Stock Plan; Distillery

Cary established a stock ownership plan (Employee Plan) for the Brewery’s employees in 2015.

Since 2016, Carey has used the Brewery’s assets and employees to build and operate the Sugar River Distillery. Carey and her family own the distillery.

In 2019, Karin Eichoff, Dierk’s widow, Runyan and Speer each sold some of their shares for $2,071 per share.

Eichoff sold 1,250 voting shares to the Brewery for $2,588,750. Runyan sold 40 voting shares to the Employee Plan for $82,840. Speer sold 625 voting shares to the Brewery for $1,294,375.

In 2020, Carey changed the preamble of the Brewery’s bylaws to read “that the Brewery intends to remain independent and locally owned and that it would be operated (in part) for the benefit of the community.”

In 2021, Cary used the Brewery’s money and employees to create “Only in Wisconsin Giving, Inc.,” a nonprofit foundation that would market the Brewery.

As of February 2023, Carey owned 50.48% of the Brewery’s voting shares. The Employee Plan owned 25.6% of the voting shares.

Eichoff, Runyan, and Speer owned 3.41%, .46% and 1.71% of the Brewery’s voting shares, respectively.

Lawsuit Over Operation of Brewery

In March 2022, Eichoff, Runyan and Speer sued Carey and the Brewery in Green County Circuit Court.

They claimed that the Brewery and Carey had engaged in minority shareholder oppression under Wis. Stat. section 180.1430(2) and securities fraud under section 551.501(2).

The plaintiffs asked the court to issue an order requiring:

• that Carey and Brewery buy their shares at fair market value;

• the appointment of independent directors for the Brewery;

• the re-classification of all non-voting shares as voting shares; and

• the payment of damages and attorney fees.

The plaintiffs argued that Carey and the Brewery were increasingly focused on running the Brewery to benefit the nonprofit foundation and the community.

The plaintiffs also argued that Carey and the Brewery had misrepresented or held back information pertinent to the value of their shares, and by doing so denied them a reasonable opportunity to sell the shares for fair value to outsiders.

Carey and the Brewery each filed a motion to dismiss for failure to state a claim. The circuit court granted the motions, and the plaintiffs appealed.

No Reasonable Expectation

The Court of Appeals began its opinion by explaining that to show minority shareholder oppression, the plaintiffs must show that: 1) they’d been injured by the action complained of; and 2) the action was taken primarily against them as shareholders, rather than the Brewery.

The plaintiffs argued that Carey and the Brewery refused to pay dividends in an amount beyond that calculated to cover the S-corporation taxes on the income the plaintiffs received from Brewery.

But the Court of Appeals pointed out that the private placement memorandum provided to potential investors in 1993 stated that: 1) the Brewery would only pay dividends when authorized to do so by the board of directors; and 2) the Brewery would, at best, attempt to pay dividends to shareholders in an amount calculated to cover their taxes.

“Thus, all shareholders were treated alike in this respect, consistent with the Brewery’s obligation as stated to the plaintiff shareholders when they purchased their shares, and the plaintiff shareholders had no reasonable expectations to the contrary,” the Court of Appeals wrote.

Any Injury Fell on Brewery

Plaintiffs also argued that they had no say in the operation of the Brewery.

But the Court of Appeals noted that the private placement memorandum made clear that Carey would be president and director of the Brewery and would be responsible for the Brewery’s overall operation, including sales and marketing, and vested Carey with voting control.

“Thus, when plaintiff shareholders first invested in the Brewery, they had no reasonable expectation that Carey would act inconsistent with her broad authority and obligations as the sole director and majority shareholder,” the Court of Appeals wrote.

The Court of Appeals reasoned that plaintiffs’ claim that creation of the Employee Plan and the nonprofit foundation meant that the Brewery would be operated for the benefit of the employees and the public instead of the benefit of the minority shareholders described an injury that would land primarily on the Brewery, not the minority shareholders.

The Court of Appeals reasoned that the same was true of the plaintiffs’ allegation that Carey had unilaterally founded the distillery, then converted it to a business owned by her and her husband without consulting the minority shareholders.

As a result, the Court of Appeals concluded, the plaintiffs’ claims about the Employee Plan and the distillery failed to state a claim.

Regarding the plaintiffs’ claims about the fair market value of their shares, the Court of Appeals concluded that the plaintiffs had no reasonable expectation of receiving a fair market price for their sales because the private placement memorandum stated that no public market for the shares existed or was likely to develop.

The Court of Appeals affirmed the circuit court’s dismissal for failure to state a claim.