A Court Has Wide Discretion in Granting Relief from Oppressive or Illegal Conduct by a Majority Shareholder

Stock Photo - Options 041516When a minority shareholder in a closely held corporation seeks relief from oppressive or illegal conduct by the majority shareholder, a court has wide discretion in deciding what type of relief is appropriate. The Illinois Supreme Court explored what options are available in Schirmer v. Bear, 174 Ill.2d 63 (1996).

In Schirmer, the plaintiff owned 38.9% (187 shares) of the outstanding shares of an insurance agency (the “Agency”), and one of the defendants — William — owned the other 61.1% (294 shares). For about eight years, plaintiff and William had a good working relationship, but things took a turn for the worse after that. Among other things, William refused to allow plaintiff to exercise his option to purchase additional shares, refused to pay bonuses or profit sharing for the year, amended the bylaws to reduce the number of directors on the board of the Agency from three to one, and then nominated and elected himself the sole director. As sole director, William appointed himself president and treasurer of the Agency, and appointed his wife secretary. William removed plaintiff’s name from all the corporate accounts. Plaintiff received no further income, bonuses or other benefits from the Agency. The Agency did offer to purchase plaintiff’s shares, but for less than half of what plaintiff believed they were worth. Plaintiff was informed that if he refused to sell his shares, he faced the possibility of remaining a minority shareholder for quite some time with no input on how the Agency was run.

As a result of William’s conduct, plaintiff sued, alleging that the defendants (including William) wasted corporate assets and acted in an illegal, oppressive and fraudulent manner. Plaintiff requested dissolution of the Agency, or in the alternative, an order requiring the Agency to buy his shares.

After trial, the court concluded that plaintiff’s removal was obviously illegal but that plaintiff failed to prove he was harmed by it. The court declined to exercise its discretion under Section 12.50 of the Illinois Business Corporation Act (the “Act”) to dissolve the corporation, but initially held that Plaintiff could recover the fair value of his shares pursuant to Section 12.55 of the Act. However, the trial court later reversed itself, and held that the remedy of share purchase could not be awarded unless plaintiff had proven that the Agency should be dissolved, which he had not.

Plaintiff appealed. The appellate court reversed, and held that plaintiff did not have to establish that dissolution is justified before the alternative remedy of a forced purchase of shares could be granted under Section 12.55 of the Act.

Defendants appealed. The Illinois Supreme Court affirmed the appellate court, and held that Section 12.55 of the Act provides a basis for relief independent of dissolution pursuant to Section 12.50. The Court went on to explain that before the enactment of Section 12.55, minority shareholders were left without a remedy in those instances where the majority shareholders’ conduct, while wrongful, did not justify dissolving the corporation. Section 12.55 was specifically enacted to correct this problem, by increasing the remedies available to minority shareholders and by enlarging the discretionary authority of trial courts to award relief in situations which do not warrant dissolution, but which do warrant some other, less severe remedy. Therefore, Section 12.55 affords trial courts broad discretion in deciding to award forced purchase of shares, so long as the minority shareholder can prove that the majority shareholder engaged in misconduct under the Act.

While the Schirmer appeal was pending, the Illinois General Assembly revised the Act to afford courts even more remedies to address, among other things, actions by directors or shareholders that are found to be illegal, oppressive or fraudulent, or the misapplication or wasting of corporate assets. Section 12.55 of the Act now applies to public corporations. An additional section — Section 12.56 of the Act — was enacted to govern shareholder remedies for nonpublic corporations. Section 12.56(b) provides a broader range of remedies than the Schirmer court had available to it, including, but not limited to:

• The performance, prohibition, alteration, or setting aside of any action of the corporation or of its shareholders, directors, or officers of or any other party to the proceedings;

• The cancellation or alteration of any provision in the corporation’s articles of incorporation or by-laws;

• The removal from office of any director or officer;

• The appointment of any individual as a director or officer;

• An accounting with respect to any matter in dispute;

• The appointment of a custodian to manage the business and affairs of the corporation to serve for the term and under the conditions prescribed by the court;

• The appointment of a provisional director to serve for the term and under the conditions prescribed by the court;

• The submission of the dispute to mediation or other forms of non-binding alternative dispute resolution;

• The payment of dividends;

• The award of damages to any aggrieved party;

• The purchase by the corporation or one or more other shareholders of all, but not less than all, of the shares of the petitioning shareholder for their fair value; or

• The dissolution of the corporation if the court determines that no remedy specified in subdivisions (1) through (11) [of Section 12.56(b)] or other alternative remedy is sufficient to resolve the matters in dispute. In determining whether to dissolve the corporation, the court shall consider among other relevant evidence the financial condition of the corporation but may not refuse to dissolve the corporation solely because it has accumulated earnings or current operating profits.

Further, Section 12.56(c) of the Act makes clear that the above remedies are not exclusive of other legal or equitable remedies which the court may, in its discretion, impose. Thus, after Schirmer and the amendment, it is clear that a trial court has great discretion in granting a minority shareholder relief for oppressive or illegal conduct by a majority shareholder.

Julie Johnston-Ahlen, Contributing Author

(This is for informational purposes and is not legal advice.)

 

Advertisements
This entry was posted in Shareholder Oppression and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s