Einhorn v. Culea

Rule of Law:

In determining whether a member of a corporate special litigation committee is 'independent' under Wis. Stat. § 180.0744, a court must examine the totality of the circumstances to decide if a reasonable person in the member's position could base their decision on the merits of the litigation rather than on extraneous considerations or influences. This standard is not an 'extremely low' threshold but requires a careful and rigorous judicial inquiry.

Facts:

• In 1985, James D. Culea, Stephen Einhorn, and others acquired Northern Labs, Inc., with Culea becoming president and majority shareholder (56.09%).
• In 1992, Culea sought a retroactive performance bonus, claiming he had been undercompensated in prior years.
• On July 29, 1992, the company's compensation committee, which included Culea and Robert Bonk, approved a retroactive bonus of approximately $300,000 for Culea, to be paid partially in company stock.
• Immediately afterward, the board of directors, including Culea, his wife Shelly Culea, and Bonk, ratified the bonus. Einhorn was not present at the meeting.
• The stock issuance increased Culea's ownership stake to 76%, thereby diluting Einhorn's minority interest.
• Following Einhorn's legal challenges, Culea appointed new directors to the board, including his neighbor, Dwight Chewning, and a friend of his wife, Lolita Chua.
• A special litigation committee was formed to assess Einhorn's lawsuit, consisting of Chewning, Chua, Bonk (Culea's subordinate who also received a bonus), and John Beagle (Einhorn's business partner and friend).
• The special litigation committee, after a five-month inquiry, voted 3-1 that continuing Einhorn's derivative action was not in the best interests of Northern Labs.

Procedural Posture:

• Stephen Einhorn filed a direct action against James D. Culea in the circuit court for Ozaukee County.
• The circuit court granted Culea's motion for summary judgment, ruling the suit must be a derivative action, and allowed Einhorn to amend his complaint.
• Einhorn filed an amended derivative complaint on behalf of Northern Labs.
• Northern Labs' board of directors formed a special litigation committee, which determined that maintaining the suit was not in the corporation's best interest.
• The corporation moved to dismiss the derivative action based on the committee's recommendation.
• After a seven-day trial on the issue, the circuit court, applying an 'extremely low' threshold for independence, found the committee members were independent and dismissed the action.
• Einhorn (appellant) appealed to the Wisconsin Court of Appeals.
• The Court of Appeals affirmed the circuit court's judgment, finding its factual determinations were not clearly erroneous.
• The Supreme Court of Wisconsin granted Einhorn's petition for review.