Strong v. Fromm Laboratories, Inc.

Wisconsin Supreme Court
273 Wis. 159 (1956)

ELI5:

Rule of Law:

Under a statute authorizing court-ordered liquidation for shareholder deadlock, a court must grant liquidation if the statutory requirements are met, such as a failure to elect directors for two consecutive years. The court is not required to find that liquidation would be beneficial to the shareholders if the statute does not explicitly require such a finding.

Facts:

Fromm Laboratories, Inc. was a corporation whose stock was evenly split, with 50% held by the Fromm interests and 50% held in a testamentary trust created by the deceased Dr. Green.
The corporation's by-laws required a four-member board of directors, with two representing each faction, and stipulated that only stockholders could serve as directors.
After Dr. Green's death in 1947, his shares were held by a single trustee, Strong, making Strong the only individual eligible under the by-laws to represent the Green trust on the board.
The Fromm interests refused to amend the by-laws to permit a non-shareholder to serve as a director, preventing the Green trust from being able to elect its second director.
As a result of this 50/50 split in voting power and disagreement over board composition, the shareholders were unable to elect any new directors for approximately seven years, a period covering more than two consecutive annual meetings.
At a shareholders' meeting on October 12, 1954, the Fromm interests cast their 250 votes for their slate of director candidates.
Strong, controlling the Green trust's 250 votes, cast votes for himself as a director and cast the remaining votes against the Fromm candidates.
Another corporate by-law prohibited the board of directors from transacting any business, other than calling a shareholders' meeting, if a vacancy existed on the board.

Procedural Posture:

The plaintiff, Strong, as trustee for the Green estate, filed an action against Fromm Laboratories, Inc. in the Wisconsin circuit court (trial court).
The plaintiff sought the involuntary liquidation of the corporation based on shareholder deadlock under Wis. Stat. § 180.771.
The trial court found that the deadlock had been broken and that liquidation would be detrimental to the shareholders.
The trial court entered a judgment dismissing the plaintiff's action.
The plaintiff (appellant) appealed the judgment to the Supreme Court of Wisconsin.

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Issue:

Under Wisconsin Statute § 180.771(1)(a)4, must a court order the liquidation of a corporation when its shareholders are deadlocked and have failed to elect a board of directors for at least two consecutive annual meetings, even if liquidation may be financially detrimental to the shareholders?

Opinions:

Majority - Currie, J.

Yes. A court must order liquidation when the statutory conditions for shareholder deadlock are met, and the statute does not require a finding that liquidation would be beneficial to the stockholders. First, the shareholder deadlock was never broken. Strong's 250 votes cast against the Fromm candidates were valid and must be counted, as a 50% shareholder must have a legal way to prevent the other 50% faction from electing a majority of the board. Because no candidate received a majority of the votes cast, the deadlock continued. Second, Wisconsin Statute § 180.771(1)(a)4 does not require a court to consider whether liquidation is beneficial or detrimental to the shareholders. Unlike similar statutes in New York and Minnesota, the Wisconsin legislature omitted any such requirement, indicating a clear legislative intent that the existence of a prolonged, unbreakable deadlock is sufficient grounds for liquidation. Finally, it was an abuse of discretion for the trial court to refuse liquidation because there was no alternative corrective remedy. Due to the deadlock and a corporate by-law preventing the board from acting while a vacancy exists, the corporation has been without a legally functioning management for years, defeating the purpose for which it was organized.

Analysis:

This case establishes that statutory provisions for involuntary dissolution due to shareholder deadlock are a powerful remedy for minority or co-equal shareholders in closely held corporations. The court's decision prioritizes corporate governance and statutory remedies over the ongoing financial success of the business, ensuring that one faction in a deadlocked company cannot indefinitely maintain control of a paralyzed corporate structure. By refusing to read a 'shareholder benefit' test into the statute, the ruling gives significant leverage to the party seeking dissolution, forcing a resolution such as a buyout or a sale of the entire business. This precedent reinforces that when a corporation's management structure is fundamentally broken, courts will enforce statutory 'escape hatches' even if it means dissolving a profitable enterprise.

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