Do the co-founders of a franchise company owe a fiduciary duty to each other by virtue of their roles as equal owners of the business? Last week, the Wisconsin Court of Appealsruled that the answer isno,affirming the dismissal of certain claims in a decision recommended for publication by the court.
The estate of one co-founder of Cousins Subs, James Sheppard, sued his co-founder, William Specht, and the Cousins corporate entities. Sheppard's estate alleged a breach of fiduciary duty arising out of failed negotiations to sell the business. Prior to Sheppard’s death, Sheppard and Specht had been negotiating the sale of their shares to Crosslane, a British firm. Sheppard, Specht and the potential buyer had entered into a Memorandum of Understanding (“MOU”), under which Crosslane stated its intention to purchase Cousins for $10 million in cash plus a $2 million promissory note. The MOU was not binding on the parties.
After Sheppard’s death, negotiations between Specht and Crosslane broke off. Sheppard’s estate then filed suit, alleging that (i) Specht had reneged on an agreement between Specht and Sheppard to sell the company if the buyer met a certain price, (ii) that Crosslane had met the price, but (iii) Specht refused to sell after the condition was met.
Wisconsin law does impose a fiduciary duty from a majority shareholder to a minority shareholder. However, no previous reported Wisconsindecision had addressed whether a 50 percent shareholder owes a fiduciary duty to another 50 percent shareholder. Counsel to Sheppard’s estate argued that the court should extend the Wisconsin shareholder fiduciary duty rule to nonmajority shareholders. The Court of Appeals declined to do so, noting that it is mainly an error-correcting court and “cannot declare new law.” Thus, in his role as shareholder, Specht did not owe a fiduciary duty to Sheppard or his estate.
The court then acknowledged that Specht was also a director of the company, and thus owed a fiduciary duty to both the corporation and its shareholders in that role. Although the estate alleged that Specht breached a contract to sell if the shareholders received an offer of $12 million, the MOU was not binding on the parties. The court noted that Specht and Sheppard never agreed on how much of the $12 million would be cash and how much would be seller-financed, the interest rate on any seller-financed amount, or how corporate debt and receivables would be handled in a sale. The court found that the estate failed to state any factual allegations supporting a claim of a breach of fiduciary duty by Specht as a director.
Thebattle among the shareholders of Cousins Subs (which ranks among the five largest Wisconsin-based franchisors, with approximately 150 units operating in six states) is not over. Of course, the estatemay seek review by the Wisconsin Supreme Court. And should theSupreme Courtdecline to hear the case, or if it hears the case andupholds the court of appeals' decision, the trial court still must address an issue that was not appealed — the trial court's finding thata shareholder deadlock exists between the estate and Specht.