Shareholder oppression occurs when the majority shareholders or directors of a nonpublic corporation act in a manner that is oppressive, fraudulent, or illegal toward the minority shareholders. Such actions can be detrimental to individual minority shareholders and the company as a whole. In such cases, the aggrieved parties are afforded a number of remedies under the Illinois Business Corporation Act. In some instances, the minority shareholders may also be able to obtain an award of attorneys’ fees from the defendants personally, even in the absence of a contract or statute.
Shareholder oppression can take many forms in a corporation. Typically, it occurs when the majority shareholders act in a way that prejudices the minority shareholders. A common example of this is a “squeeze out.” This term refers to situations where the majority shareholders develop a plan to force the minority shareholders to sell their interest in the corporation at an unfair price. Shareholder oppression may also take the form of a “freeze out,” where the majority shareholders try to deny the minority shareholders their rights and benefits.
Additionally, shareholder oppression can arise when the majority shareholders deprive the minority shareholders of stock ownership, drain profits by inflating salaries for the majority shareholders, and fail to notify minority shareholders about meetings. It can also occur when a majority shareholder tries to physically lock a minority shareholder out of the premises, denies them the opportunity to inspect business records, or terminates their employment.
Typically, a lawsuit commenced by a shareholder who has suffered a direct injury as a result of shareholder oppression will be brought as a “direct action.” In contrast, if a controlling shareholder harms the company by breaching its fiduciary duties toward it, the shareholder must bring a claim derivatively on behalf of the company since it was the corporation that suffered the injury.
There are a wide range of remedies available to minority shareholders under the Illinois Business Corporation Act for shareholder oppression. Under 805 ILCS 5/12.56, the remedies awarded by the court in matters involving shareholder oppression can include the following:
Depending on the circumstances of the case, a court may also order the corporation, or one or more shareholders, to purchase all the shares of the petitioning shareholder at fair value. If no other remedy would resolve the matter in dispute, a judge may order dissolution of the corporation.
While shareholders who bring a direct action are generally responsible for their own attorneys’ fees and expenses, Illinois courts have long recognized that a plaintiff who prevails in a derivative suit may also be awarded attorney’s fees. In such cases, the courts reason that a party who has conferred a benefit upon another due to litigation may obtain a share of attorneys’ fees from those who would receive the benefit — this is known as the “common fund” doctrine. The doctrine is an exception to the “American Rule” which requires that each party incur their own costs associated with litigation, including attorneys’ fees.
Importantly, a plaintiff may be able to recover attorneys’ fees from the defendants individually, rather than from the common fund. In fact, the Appellate Court of Illinois in the First Judicial District decided a case last year that addressed this specific issue. In Tsai v. Karlik, the court held that its broad powers granted under the common fund doctrine permitted the imposition of attorney fees against an unsuccessful defendant in a derivative suit. The court determined that it had the authority to order such an award, regardless of whether it is specified by contract between the parties or in a specific statute.
Shareholder oppression can result in serious harm to a company — and its minority shareholders. It’s vital for the shareholders who suffered injury to take the appropriate legal measures. Located in Rolling Meadows, Litico Law Group's business litigation attorneys provide high-quality legal services in Illinois for a broad scope of business disputes, including those involving shareholder oppression. We welcome you to contact us at 847-307-5942 to schedule a consultation to learn how we can help.