Co-authored by Jason F. Clouser.

The U.S. Court of Appeals for the Seventh Circuit rejected the argument of a dissenting shareholder in a freezout merger that provisions of Wisconsin’s corporate law were binding contractually on a company’s founders and its investors.

Everett Smith Group, Ltd. (Smith), which owned 89% of the stock of Albert Trostel & Sons Company (Trostel) voted to acquire the remaining stock through a freezeout merger. Trostel became a wholly owned subsidiary of Smith and the minority shareholders were to receive $11,900 per share in compensation. Edward Notz, owner of 5.5% of the stock, rejected that amount, contending that the shares were worth twice as much.

The Wisconsin statute provided that when investors reject the compensation offered in a merger, the corporation must commence an appraisal proceeding in the circuit court for the county where its principal office is located. Trostel filed the appraisal action in Wisconsin federal district court, asserting that jurisdiction was proper there based on federal diversity jurisdiction. Mr. Notz moved to dismiss, contending that the district court lacked jurisdiction. He argued that all of Wisconsin’s corporate law—including the provision requiring where such an action must be brought—is part of all articles of incorporation, and thus bound the parties as a contractual matter, even though neither party affirmatively consented. The district court denied the motion and, after a trial, concluded that the fair value of the stock was $11,900 per share.

The Seventh Circuit affirmed. It concluded that the Wisconsin law established a rule of venue applicable within its own judicial system and not a rule allowing corporations to defeat diversity jurisdiction. It found that Wisconsin’s corporate law provisions are legislative and not “contracts” because they do not depend on the consent of private parties.

Albert Trostel & Sons Co. v. Notz, No. 10-3509 (7th Cir. May 10, 2012).