On January 26, 2012, a three judge panel of the Seventh Circuit Court of Appeals affirmed a Wisconsin district court’s dismissal of a Ladish Co. Inc. shareholder suit alleging that Ladish directors failed to disclose material information regarding the company’s $778 million sale to Allegheny Technologies Inc. 

The panel rejected the plaintiff shareholder’s argument that Wisconsin’s business judgment rule does not apply to public statements and material omissions. The plaintiff had argued that Wisconsin law creates a separate “duty of candor” that is outside the business judgment rule, as is the duty of loyalty, and that directors violate this duty when they fail to reveal all material information related to a proposed merger.

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. Under the business judgment rule, directors’ actions are not subject to judicial review if the board acted in a manner consistent with the exercise of honest discretion. 

The Seventh Circuit ruled that Wisconsin Statute §180.0828, the articulation of Wisconsin’s business judgment rule, shields directors from liability for failure to perform “any duty” that a director owes to the corporation or its investors and is as applicable to a “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 plaintiff failed to do.

The Court of Appeals also affirmed the district court’s rejection of the plaintiff’s contention that Wisconsin would follow Delaware decisions such as Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), and Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). Under Revlon, once a company has decided to enter into a sale that will result in a change of control, the board is “charged with the obligation to secure the best value reasonably attainable for its shareholders, and to direct its fiduciary duties to that end.”  Similarly, defensive measures adopted to thwart a hostile offer for a Delaware corporation are evaluated under the standards articulated in Unocal. The panel’s decision reinforces that, when evaluating corporate merger transactions, neither Revlon nor Unocal apply under Wisconsin law. Instead, in Wisconsin, 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.