Last Revised March 10, 2015

Forthcoming, Wisconsin Lawyer, June 2015

WISCONSINS BUSINESS JUDGMENT RULE

By Kenneth B. Davis, Jr.*
One of corporate laws most fundamental principles is that directors are not liable
for an honest mistake of business judgment. Known as the business judgment rule
(BJR), this doctrine is both a rule of substantive law and often the source of procedural
burdens that shareholders and others seeking to challenge a decision by the board of
directors must overcome. The Wisconsin Supreme Court recently considered the latter
context in Data Key Partners v. Permira Advisers LLC.1 In light of that decision, this
article reviews the multiple dimensions of the BJR in Wisconsin.
Different wording; same result?
Wisconsin courts have embraced the BJR for more than a century.2 By 1929,
Justice Rosenberry could cite several Wisconsin decisions for the proposition that:
Courts will not interfere in the internal management of corporate affairs, in the absence
of allegations clearly disclosing abuse of power by corporate officers, bad faith, or willful
abuse of discretion or positive fraud.3
Judicial formulations of the BJR have varied over the years. The Supreme
Courts most recent restatement of the rule came in Einhorn v. Culea,4 where Chief
Justice Abrahamson described the rule as a a judicially created doctrine that limits
judicial review of corporate decision-making when corporate directors make business
decisions on an informed basis, in good faith and in the honest belief that the action
taken is in the best interests of the company. While the specific wording may have
evolved over time, the only circumstance that has consistently led Wisconsin courts to
deny the application of the BJR is bad faith or its equivalent.5 In Data Key the majority
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reaffirmed the vitality of Justice Wickhems 1946 explanation: The business of a

corporation is committed to its officers and directors, and if their actions are consistent
with the exercise of honest discretion, the management of the corporation cannot be
assumed by the court.6
Directors immunity from liability
One function of the BJR is to protect directors from personal liability if a decision
turns out poorly and shareholders incur substantial losses. Without the protections of
the rule, directors might be reluctant to pursue risky new ventures of the shareholders
behalf, or even to continue in office.7 To further address that concern, Wisconsin
enacted an additional layer of protection in 1987.8 Now section 180.0828(1), the
directors immunity statute provides that a director is not liable to the corporation or its
shareholders for damages or other monetary liabilities unless the plaintiff can prove that
the breach of duty fell within any of four categories, all involving willful or illegal
misconduct or improper self-enrichment.9 As a result, a directors failure to exercise
due care or diligence cannot, by itself, give rise to monetary liability.
Section 180.0828(1) and BJR therefore overlap, leading the Data Key court to
characterize the immunity statute as a codification of the judge-made rule.10 It is
important to keep in mind, however, that the statute and rule are separate and
supplement one another. This is more than a semantic quibble the distinction is
significant for several reasons.
First, the directors immunity under section 180.0828(1) may be limited by the
corporations articles of incorporation.11 In other words, the corporation can opt out of
the statutory-based immunity. Were a corporation to do so, its directors would still
have the benefit of the judicially-created BJR to protect them from personal liability.
Conversely, section 180.0828(1) protects directors even though the BJR might
not be available. One example involves claims arising from the directors oversight
function that is, liability premised on losses resulting from the directors failure to
detect or prevent unlawful or unduly risky activities by corporate employees. The BJR
does not apply in these circumstances because no conscious decision by the board is at
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issue.12 In Delaware, a substantial body of recent case law makes clear that even without
the BJR to overcome, the plaintiffs burden remains quite substantial.13 But in
Wisconsin the precedent on the directors duty of care is more than one hundred years
old.14 The immunity statute therefore gives directors the valuable reassurance that
whatever standard of conduct a contemporary Wisconsin court might adopt, no
monetary liability will attach unless the plaintiff can prove willful misconduct, improper
personal benefit or other statutory exclusions.
Protecting transactions
The final reason for emphasizing the distinction between the statute and the rule
is that the BJR protects not only the individual directors but also the boards decision
itself. Suppose a shareholder sues to enjoin the corporation from carrying out a boardapproved decision on the ground that an alternative course of action would create more
value for shareholders. Because the directors monetary liability is not at issue, the
immunity statute has no bearing. The judge-made BJR would nonetheless be available
as a defense. Although the directors are no longer at personal risk, the rules separate
concern for judges invading the province of the board a frequent theme in the
Wisconsin case law through the years15 continues to apply. Courts are therefore
equally willing to apply the BJR in both contexts.16
Presumption, pleading and proof
The procedural dimensions of the BJR are less straightforward than its
substantive role. The rule has often been described as creating a presumption on the
directors behalf.17 But what exactly does this mean? If it merely recognizes that the
burden of proof lies with the party challenging the boards decision, the presumption
label adds little to the substantive rule itself.18 In Reget v. Paige, the Court of Appeals
held that the presumption requires that the plaintiff, to survive summary judgment,
come forward with sufficient evidentiary facts to make a prima facie case that the
directors conduct is not protected by the rule.19 Others have interpreted the BJR
presumption to require more particularized pleading and a higher evidentiary burden
than for other civil actions.20
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Whether presumption is the appropriate terminology,21 the core question

remains how does the spirit of the BJR, and the accompanying judicial reluctance to
intervene in the corporations internal affairs, affect the plaintiffs burden of production
or proof? This was the setting for the Supreme Courts recent decision in Data Key.
Data Key
Data Key was a shareholder suit challenging the sale of Renaissance Learning,
Inc. to Permira Advisers, LLC. Terms of the sale called for Permira to pay $15 per share
to Judith and Terrance Paul, who held 69-percent of Renaissance Learnings stock, and
$16.60 per share to the minority holders. The board rejected a competing bidders offer
to pay $16.90 for all of the shares. After its efforts to enjoin the sale failed, Data Key
Partners, a Renaissance shareholder cashed out in the merger, filed a class action
against the companys directors and controlling shareholders, seeking to recover
damages. Among its claims were that the directors breached their fiduciary duty by
approving the sale, and that their actions fell within the exclusions from immunity
under section 180.0828(1).
Citing Wisconsins liberal standards of notice pleading, the Court of Appeals held
that these claims were sufficient to survive a motion to dismiss. It reasoned: courts in
notice pleading jurisdictions traditionally disfavor application of the business judgment
rule at the motion to dismiss stage because application of the rule generally requires a
fact-intensive analysis that would be incompatible with notice pleading.22
In a 4-3 decision, the Supreme Court reversed. Writing for the majority, Justice
Roggensack began by examining Wisconsins pleading requirements in light of the U.S.
Supreme Courts recent Twombly decision,23 and concluded: Twombly makes clear the
sufficiency of a complaint depends on substantive law that underlies the claim made
because it is the substantive law that drives what facts must be pled. Plaintiffs must
allege facts that plausibly suggest they are entitled to relief.24 Treating section
180.0828(1) as Wisconsins codification of the BJR, the court held that under the
Twombly standard:

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In order to fall outside of the protection that the legislature has granted directors,
plaintiffs must plead facts that create a plausible claim that the directors acts
were taken in contravention of 180.0828(1). Therefore, to survive a motion to
dismiss, plaintiffs must plead facts sufficient to plausibly show that the directors
actions constitute: (1) a willful failure to deal fairly with the minority
shareholders on a matter in which the director has a material conflict of
interest; (2) receipt of an improper personal profit; or (3) [w]illful
misconduct.25
In applying this plausible claim standard to the complaint, the Court examined each of
the alleged benefits that, according to the plaintiffs, caused the directors to improperly
favor Permira over other bidders, and concluded that none met the statutory criteria.26
There remains the important question of how Data Key will be received in the
federal courts. As the Chief Justice observed in her dissent, cases under federal notice
pleading do not rely on the business judgment rule at the motion to dismiss phase.27
The Seventh Circuits view, for example, is that the BJR is a defense and therefore, even
after Twombly and Iqbal, cannot be the basis for a motion to dismiss.28 Should the
same logic apply, however, to the immunity statute, which explicitly places the burden
of proof on the plaintiff?
Closely-held corporations
Data Key involved a publicly-traded company. But the overwhelming share of
Wisconsin cases applying the BJR have involved close corporations. In that context, as
recognized by Wisconsin courts early on, the rule operates to uphold the majority
shareholders prerogative to decide corporate policy, over the objection of the
minority.29
In recent years, however, a countervailing concern has emerged, one that
recognizes the special vulnerability of the close corporation shareholder, who has no
outside market for his or her stock and is therefore particularly susceptible to being
taken advantage of by those in control. The challenge for corporate law is that the
conduct at issue often involves matters such as dividends, employment and salaries
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traditionally entrusted to the board. Courts across the country have struggled with
defining the boundary between permissible business judgment and unlawful
exploitation of the minority. It remains a work in progress, but two principal
approaches have emerged.
One stems from a line of Massachusetts cases that analogizes the close
corporation to a partnership and on that basis imposes more stringent fiduciary duties
than those applicable to corporations generally.30 Rather than the protections of the
BJR, any action that treats the minority differently from those in control is closely
scrutinized to determine whether the business purpose asserted by the board could have
been achieved by alternative means, less harmful to the minority.31 In Jorgensen v.
Water Works, Inc. (Jorgensen I), the Court of Appeals recognized a minority
shareholders individual right of recovery against the directors and majority
shareholders,32 and cited one of the Massachusetts cases in support. But the issue
before the court was only the existence of a direct (rather than a derivative) claim,33 not
the level of duty entailed. Thus, in claims for breach of fiduciary duty, the traditional
BJR should remain available as a defense for directors of Wisconsin close corporations,
including majority shareholders when acting in their capacity as directors.34
What role does the immunity statute play in this context? Although enacted
more out of concern for outside directors of publicly-traded corporations,35 than to
strengthen the hand of majority shareholders of close corporations, the prospect of early
dismissal under Data Key will no doubt increase resort to the statute by defendants in
the latter context as well. It is therefore important to recognize exactly what the statute
does, and does not do. First is the confusing question of burden of proof. The statute
does not alter the underlying substantive law governing the directors fiduciary duties.
Thus, for example, in a case charging the directors with excessive compensation or selfdealing, the burden remains on the defendants to prove the fairness of those
arrangements unless, they have been independently approved.36 If they fail to do so, the
burden then shifts to the plaintiff, but simply to show that the basis for any monetary
recovery falls within one or more of the statutory exclusions. But does the statute even
apply? Those in control of closely-held corporations typically play a variety of roles,
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including as officers, directors, and majority shareholders each of which

independently gives rise to fiduciary duties. Immunity under the statute is available,
however, only if the duty at issue results solely from the defendants status as a
director.37
The other principal remedy available to minority shareholders in a close
corporation is a suit for dissolution on grounds of oppressive conduct by those in
control.38 In this context, the role to be played by the BJR depends on how oppression
is defined. In Jorgensen I, the court adopted the narrower of the two prevailing tests,
which describes oppression as burdensome, harsh and wrongful conduct; a lack of
probity and fair dealing in the affairs of a company to the prejudice of some of its
members; or a visual departure from the standards of fair dealing, and a violation of fair
play on which every shareholder who entrusts his money to a company is entitled to
rely.39 The court added, however, that it intended the definition to be broad and
flexible, rather than narrow,40 and further expanded the potential boundaries of the
test by observing in a footnote that it saw the language as including consideration of the
frustration of the reasonable expectations of shareholders [the other prevailing test],
when that is appropriate.41
In Reget v. Paige, the court read Jorgensen I to require that the complaining
shareholder prove that those in control of the corporation willfully and wrongfully
inflicted a direct injury upon him that benefited the stockholders who were not
injured.42 Importantly, it added: Decisions of the board made in good faith cannot
satisfy the definition we established for oppressive conduct in Jorgensen.43 Taken
alone, this sentence suggests that in Wisconsin, the BJR is a defense to claims of
oppression. But Regets claims exclusively involved conduct that affected all
shareholders equally.44 It remains to be seen whether Wisconsin courts would take a
similarly narrow view of oppression when, as is more typical, the minority shareholder
has been singled out for unequal treatment.
Whatever the relationship between oppression and the BJR, the role of the
immunity statute is clear-cut. Conduct may be found to be oppressive independent of
whether it meets any of the statutory exclusions from immunity listed in section
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180.0828(1). The immunity statute enters the picture only at the remedy stage. And
only to the extent that the remedy entails monetary damages for the breach of a duty
resulting solely from the defendants status as a director, is the plaintiff required to
prove that one or more of the statutory exclusions apply.
Conclusion
After Data Key, it is important that Wisconsin lawyers and judges remain
mindful of the different roles played by the BJR and immunity statute. While the
immunity statute is an important safeguard against the risk that directors might be held
personally liable for failing to discharge their responsibilities with appropriate care or
attentiveness, it should not constrain the ongoing case-law development of either the
BJR or the protection of minority shareholders.

Kenneth B. Davis, Jr. holds the George H. Young Chair and is the former Dean of the University of
Wisconsin Law School, and is of counsel at the firm of Reinhart Boerner Van Deuren s.c. Davis was CoReporter for the State Bar committee that recommended the Wisconsin directors immunity statute as
well at the 1990 revision of Chapter 180. A longer version of this article, entitled The Business Judgment
Rule in Wisconsin, is scheduled to appear in Volume 2015, Issue 3 of the Wisconsin Law Review.
*

849 N.W.2d 693 (Wis. 2014).

The rule first appeared in two decisions in the early 1900s. Figge v. Bergenthal, 109 N.W. 581, 589, 592
(Wis. 1906); Theis v. Durr, 104 N.W. 985, 987-88 (Wis. 1905).
2

Polacheck v. Michiwaukee Golf Club Land Co., 223 N.W. 233, 234 (Wis. 1929).

612 N.W.2d 78, 84 (Wis. 2000).

Thauer v. Gaebler, 232 N.W. 561, 563-64 (Wis. 1930); Theis v. Durr, 104 N.W. 985, 988 (Wis. 1905);
Fanetti v. Donald A. and Marilyn J. Fanetti 2004 Rev. Tr., 2014 WI App 63, 55-57 (Wis. Ct. App. Apr.
22, 2014) (unpublished, per curiam); Gebhardt v. Bosben, 2010 WL 2519572, 55-59 (Wis. Ct. App.
June 24, 2010) (unpublished, Vergeront, J.); Yates v. Holt-Smith, 768 N.W.2d 213, 219-21 (Wis. Ct. App.
2009).
5

849 N.W.2d at 701-02, quoting Steven v. Hale-Haas Corp., 23 N.W.2d 620, 628 (Wis. 1946).

See Reget v. Paige, 626 N.W.2d 302, 310 (Wis. Ct. App. 2001) (the BJR contributes to encouraging
qualified people to serve as directors by ensuring that honest errors of judgment will not subject them to
personal liability).
7

Wis. Stat. 180.307 (1987-1988), enacted by 1987 Wis. Act 13. That statute was replaced by the current
version when Chapter 180 was revised in 1990.
8

Wis. Stat. 180.0828(1). The specific categories are: (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.
9

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849 N.W.2d at 701-02. The court below had employed the same characterization. Data Key Partners v.
Permira Advisors LLC, 837 N.W.2d 624, 631 (Wis. Ct. App. 2013), revd, 849 N.W.2d 693 (Wis. 2014).
10

11

Wis. Stat. 180.0828(2).

See Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993); Aronson v. Lewis, 473 A.2d 805, 813 & n.7 (Del.
1984); In re Caremark International Inc. Derivative Litigation, 698 A.2d 959, 967-70 (Del. Ch. 1996); 1
Stephen A. Radin, The Business Judgment Rule Fiduciary Duties of Corporate Directors 87-92 (6th ed.
2009).
12

See, e.g., Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 370 (Del. 2006); Caremark,
698 A.2d at 967 (The theory here advanced is possibly the most difficult theory in corporation law upon
which a plaintiff might hope to win a judgment.); id. at 971 (only a sustained or systematic failure of the
board to exercise oversight such as an utter failure to attempt to assure a reasonable information and
reporting system exists will establish the lack of good faith that is a necessary condition to liability).
13

Killen v. State Bank of Manitowoc, 82 N.W. 536, 545-46 (Wis. 1900); North Hudson Mutual Building &
Loan Assn v. Childs, 52 N.W. 600, 605 (Wis. 1892). Both cases sought recovery from the directors of
financial institutions.
14

See Data Key, 849 A.2d at 701-02; Einhorn, 612 N.W.2d at 84 & n.14; Gauger v. Hintz, 55 N.W.2d 426,
433 (1952); Steven, 23 N.W.2d at 628; Figge, 109 N.W. at 589; Theis, 104 N.W. at 987-88.
15

One commentator has proposed using the term business judgment doctrine in the transactional
context, and confining the BJR to the protection against personal liability. Joseph Hinsey IV, Business
Judgment and the American Law Institutes Corporate Governance Project: the Rule, the Doctrine, and
the Reality, 52 Geo. Wash. L. Rev. 609 (1984). But, consistent with the courts decision to apply the same
rule to the two contexts, the distinction in terminology has never caught on. See id. at 612 ([T]he
essential elements of the rule and doctrine are the same. This commonality of attributes has undoubtedly
contributed to the widespread tendency to overlook the distinction.).
16

See, e.g., Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (the BJR is a presumption that in making a
business decision the directors of a corporation acted on an informed basis, in good faith and in the
honest belief that the action taken was in the best interests of the company);Reget, 626 at 310
(Procedurally, the business judgment rule creates an evidentiary presumption that the acts of the board
of directors were done in good faith and in the honest belief that its decisions were in the best interest of
the company.).
17

This observation has been made by several commentators. See, e.g., R. Franklin Balotti & James J.
Hanks, Jr., Rejudging the Business Judgment Rule, 48 Bus. Law. 1337, 1345-46 (1993); see also Melvin
Aron Eisenberg, An Overview of the Principles of Corporate Governance, 48 Bus. Law. 1271, 1283-84
(1993) (describing the presumption concept as frequently ambiguous and especially obscure in the
context of the business judgment rule).
18

626 N.W.2d 302, 311 (Wis. Ct. App. 2001); see also Dixon v. Ladish Co., 785 F. Supp. 2d 746, 750 (E.D.
Wis. 2011) (Thus, at the pleading stage, a plaintiff must necessarily allege facts that make rebuttal of the
presumption plausible. In other words, [the plaintiff] must allege facts that plausibly show the [directors]
failed to act in good faith and with a belief that their actions were in the companys best interest.), affd,
667 F.3d 891 (7th Cir. 2012).
19

20

Balotti & Hanks, supra note 18, at 1347-52.

In Wisconsin, where presumptions are governed by statute, see Wis. Stat. 903.01, with the general
rule that the party relying on the presumption bears the burden of proving the underlying facts a result
that does not fit the operation of the BJR.
21

Data Key Partners v. Permira Advisors LLC, 837 N.W.2d 624, 632 (Wis. Ct. App. 2013), revd, 849 N.W.
2d 693 (2014).
22

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Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 554-63 (2007); see also Ashcroft v. Iqbal, 556 U.S. 662,
677-80 (2009). The Data Key majority saw Twombly as consistent with Wisconsin precedent as
represented by Strid v. Converse, 331 N.W.2d 350 (Wis. 1983).
23

24

849 N.W.2d at 701.

25

Id. at 702.

26

Id. at 704-06.

27

Id. at 719 (Abrahamson, C.J., dissenting).

28

Levin, 763 F.3d at 671 (applying Indiana law).

29

Figge v. Bergenthal, 109 N.W. 581, 589 (Wis. 1906).

Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657, 661-63 (Mass. 1976); Donahue v. Rodd
Electrotype Co., 328 N.E.2d 505, 515-16 (Mass. 1975)
30

See Wilkes, 353 N.E.2d at 663 (removal of minority shareholder from payroll and refusal to reelect him
as a salaried officer and director).
31

32

582 N.W.2d 98, 104-05 (Wis. Ct. App. 1998).

The trial court had interpreted prior cases to limit that right to shareholders in statutory close
corporations under Wis. Stat. 180.1833. Jorgensen I, 582 N.W.2d at 103.
33

See McVeigh v. Grum, 2000 WI App 116, 14 (Wis. Ct. App. Apr. 18, 2000) (unpublished) (rejecting
argument that Jorgensen I adopted the Massachusetts approach).
34

The legislative history cites the enhanced risk to directors caused by mergers and hostile takeovers, and
the resulting difficulty in obtaining adequate liability insurance coverage. See Legislation on Liability
Law & Insurance, Wis. Legis. Council, Rep. No. 6 to the 1987 Legis. 9 (Apr. 14, 1987).
35

Wis. Stat. 180.0831(2); Gauger v. Hintz, 55 N.W.2d 426, 434-35 (Wis. 1952); Jacobson v. American
Tool Cos., 588 N.W.2d 67, 73 (Wis. Ct. App. 1998); Mulder v. Mittelstadt, 352 N.W.2d 223, 226-27 (Wis.
Ct. App. 1984).
36

37

See Data Key, 849 N.W.2d at 706 (immunity statute is not available to majority shareholders).

38

Wis. Stat. 180.1430(2)(b).

582 N.W.2d at 107, quoting Baker v. Commercial Body Builders, Inc., 507 P.2d 387, 393 (Or. 1973).
The Jorgensen I definition was indorsed by the Supreme Court in Northern Air Services, Inc. v. Link, 804
N.W.2d 458, 475 n.32, 478 (Wis. 2011).
39

40

582 N.W.2d at 107, citing Fix v. Fix Material Co., 538 S.W.2d 351, 358 (Mo. Ct. App. 1976).

582 N.W.2d at 107 n.10; see also Edler v. Edler, 2008 WI App. 17, 9 (Wis. Ct. App. Dec. 27, 2007)
(unpublished).
41

42

626 N.W.2d at 313.

43

Id.

These included excessive compensation, the failure to pay dividends, and failure to make a market in
the corporations stock.
44

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