On January 26, 2012, a three judge panel of the Seventh Circuit Court of Appeals determined that the directors of Ladish would not have liability for approving the $778 million sale of the company to Allegheny Technologies Inc., despite a plaintiff’s claim that Ladish directors failed to disclose material information in the proxy materials. The plaintiff shareholder argued that Wisconsin’s business judgment rule does not apply to public statements and material omissions, because of a separate “duty of candor” outside the business judgment rule. The appeals court panel rejected this argument.
Under Wisconsin law, as in most states, a board’s decisions are governed by the business judgment rule, which recognizes that boards, rather than individual shareholders or the courts, are best positioned to make complex business decisions. Therefore, as long as a board acts in a manner consistent with the exercise of honest discretion, its decisions will be given deference. Wisconsin has codified this rule in a statute (specifically Wisconsin Statute §180.0828), which specifically shields directors from liability for failure to perform “any duty” that a director owes to the corporation or its investors, except only in limited listed situations involving a breach of a director’s duty of loyalty or willful or intentional misconduct.
Despite the Ladish plaintiff’s claim, the appeals court found that “any duty” as used in the statute is as applicable to a board’s “duty of candor” as it is to the general duty of care. In other words, Wisconsin’s business judgment rule does not allow an award of damages to shareholders unless they allege willful or intentional misconduct or breach of the duty of loyalty, which the Ladish plaintiff failed to do (and which is, of course, much more difficult to claim or prove).
Some states, including the common business state of incorporation Delaware, provide further exceptions to the business judgment rule in the context of a sale of the business (we lawyers sometimes call these “Revlon” duties, after a 1986 Delaware Supreme Court case, or in analyzing defensive measures, “Unocal” standards, after a 1985 decision). The Court of Appeals panel in the Ladish case specifically rejected the plaintiff’s contention that Wisconsin would follow these Delaware decisions which would have provided a higher obligation than the simple business judgment rule in the sale context. The panel’s decision reinforces that, when evaluating corporate merger transactions (other than those that implicate duty of loyalty concerns or willful or intentional misconduct), a board’s decision to enter into a merger transaction is governed by the business judgment rule and Wisconsin Statute §180.0828, plain and simple. This is good news for directors of Wisconsin-incorporated businesses.