## Facts

- Stephen Einhorn, a minority shareholder and director, filed a shareholder derivative action against James D. Culea and related corporate entities treated collectively as Northern Labs.
- Northern Labs’ board appointed a special litigation committee (SLC) under Wis. Stat. § 180.0744 to decide whether continuing the derivative action was in the corporation’s best interests.
- The SLC recommended dismissal of the derivative action.
- The Ozaukee County Circuit Court characterized the statutory standard for SLC “independence” as “extremely low,” found the SLC members independent, accepted the recommendation, and dismissed the action under § 180.0744.
- The court of appeals affirmed, concluding the circuit court’s independence determinations were supported by the record and not clearly erroneous.
- The Wisconsin Supreme Court granted review to address the proper interpretation and application of § 180.0744’s independence requirement.

## Issues

1. What legal standard governs whether an SLC member is “independent” under Wis. Stat. § 180.0744 for purposes of dismissing a shareholder derivative action.
2. Whether the lower courts erred by applying an “extremely low” threshold for SLC independence and by dismissing the derivative action without adequate findings under the correct standard.
3. What factual findings a circuit court must make when ruling on a motion to dismiss based on an SLC recommendation under § 180.0744.

## Decision

- The Wisconsin Supreme Court reversed the court of appeals and remanded to the circuit court.
- The court rejected the view that § 180.0744 sets an “extremely low” threshold for SLC independence.
- The court adopted a reasonable-person, totality-of-the-circumstances test for independence: whether a reasonable person in the SLC member’s position could decide the matter on the merits rather than on extraneous considerations or influences.
- The court restated the test as whether the member has a relationship with an individual defendant or the corporation that would reasonably be expected to affect the member’s judgment regarding the litigation.
- Because the circuit court applied an incorrect independence threshold and did not make sufficient findings under the clarified standard, dismissal could not stand.

## Legal Principles

- Under Wis. Stat. § 180.0744, a derivative proceeding may be dismissed based on an SLC recommendation only if the court finds the committee was independent, acted in good faith, and conducted a reasonable inquiry supporting its conclusions.
- “Independence” requires more than the absence of formal conflicts; courts must assess, under the totality of circumstances, whether relationships (including financial, business, or personal ties) would reasonably be expected to affect an SLC member’s judgment.
- Independence determinations require trial-court fact-finding; appellate review distinguishes factual findings (clearly erroneous) from application of the legal standard (reviewed independently).
- The § 180.0744 inquiry concerns whether the derivative action should be dismissed in light of the SLC process and recommendation, not whether the underlying claims would succeed on the merits.

## Conclusion

The court clarified that dismissal of a derivative action under Wis. Stat. § 180.0744 demands meaningful judicial scrutiny of SLC independence using a reasonable-person, totality-of-the-circumstances standard, and it remanded because the circuit court applied an incorrect “extremely low” threshold and made insufficient findings.


Einhorn v. Culea, 2000 WI 65, 235 Wis. 2d 646, 612 N.W.2d 78 (Wis. 2000)