In Dixon v. ATI Ladish LLC, 11-1976, 2012 WL 233641 (7th Cir. Jan. 26, 2012), Irene Dixon (“Dixon”), a shareholder of Ladish Co. (“Ladish”), filed a lawsuit seeking damages and other relief after the board agreed to sell the company to Allegheny Technologies, Inc., (“Allegheny”) in November 2010.  Allegheny agreed to pay $46.75 per share, which constituted a premium of 59% over the trading price of Ladish before the announcement. Shareholders overwhelmingly approved the transaction. 

In her complaint, Dixon alleged that Ladish and the seven Ladish directors violated both federal securities law and Wisconsin corporate law by failing to disclose material facts in the registration statement and proxy solicitation sent to its shareholders. The district court dismissed the claims under federal law because Dixon’s complaint failed to satisfy the requirements of the Private Securities Litigation Reform Act (“PSLRA”), and ruled that the business judgment rule blocked Dixon’s claim under state law. 

Dixon appealed and the Seventh Circuit held that under Wisconsin law, shareholder claims for damages based on a breach of the duty of candor by the board of directors were barred by Wisconsin Statute §180.0828, which precluded monetary liability of directors for breach of duties resulting from their status as directors.

According to Dixon, Ladish directors violated Wisconsin corporate law when they failed to include material information in the Ladish proxy statement.  This included the omission of details about Ladish's, “long-term strategic plan for growth and expansion, the process that Ladish used to select Baird & Co. as its financial adviser for the transaction, the reason Ladish had broken off discussions with a potential acquirer other than Allegheny, and all facts that Baird relied on when issuing its opinion that the transaction [was] fair to Ladish’s [shareholders]...”  With respect to the federal claims, Dixon did not invoke the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), which preempts state-law claims that rest on statements in, or omissions from, documents covered by the federal securities laws in most situations.  Because “[p]reemption under SLUSA is a defense rather than a limit on subject-matter jurisdiction,” the court considered the matter waived.  

As a result, the court focused its analysis entirely on whether the Ladish directors were free from liability under Wisconsin Statute §180.0828. Wisconsin Statute §180.0828 provides for the waiver of liability by directors for certain breaches of their fiduciary obligations.  Unlike the Delaware approach, however, Wisconsin does not require the waiver to appear in the articles of incorporation.  Instead, the statute provides that directors are not liable to the corporation, or its shareholders, for damages or other monetary liabilities arising from a breach of, or failure to perform, any duty resulting solely from his or her status as a director, unless the person asserting liability proves any of the following:

(a) a willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the director has a material conflict of interest, (b) a violation of criminal law, unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful, (c) a transaction from which the director derived an improper personal profit, (d) willful misconduct.

The provision applies unless companies adopt a provision in the articles that opts out of the waiver of liability requirement.

The Seventh Circuit found that the provision eliminated monetary damages against directors of Ladish for any breach of the duty of candor.  The court found that the wording “any duty” applied to all duties a director might have to investors, including the duty of candor. Similarly, the provision eliminated liability for failure to follow decisions such as Revlon and Unocal. Those cases abrogated  the business judgment rule with respect to director decisions regarding mergers.  The court, however, found that the statute had been codified in 1989, five years after the Trans Union case upon which Revlon and Unocal were based.  As a result, the waiver of liability covered “errors that directors may make in connection with a merger . . . unless the directors violate the duty of loyalty or engage in willful misconduct.”  

Dixon never claimed the directors violated their duty of loyalty, and the only potential conflict of interest, the fact that two of the seven directors had “golden-parachute” provisions, was disclosed.  Moreover, since five of the directors did not have these arrangements and the board approved the merger unanimously, the “potential conflict was unimportant.”  The court held the disclosure prevented a finding of unfair dealing under Wisconsin Statute §180.0828(a) and that none of the other sections were even “arguably” applicable to the situation.

The primary materials for this case may be found on the DU Corporate Governance website.