What is a Minority Shareholder?

A minority shareholder is one who possesses less than 50% of the shares in the corporation and no majority control over the operations of the business. In contrast, a majority shareholder has more than 50% of the shares in the company and power over the company’s decisions. While the majority shareholders have the most control in the company, minority shareholders still have certain rights and legal protections.

What are Minority Shareholder Rights?

Majority shareholders owe a fiduciary duty to minority shareholders to act in the company’s best interests. Although minority shareholders have less power than the majority shareholders, they still have certain legal rights. These include the right to receive profit distributions and review financial statements and corporate records.

Specifically, minority shareholders are entitled to the following rights:

• The right to notice of a shareholder meeting and voting rights — Minority shareholders who have voting rights must receive advance notice of shareholder meetings. They may also petition the court to require a meeting if the majority shareholders refuse to hold one.
• The right to inspect the corporation’s books and financial records — Minority shareholders may examine corporate records for a “proper purpose.” In other words, a minority shareholder may examine the books for the purpose of protecting the interests of the company. However, they must first make a demand on the company, identifying which records the shareholder wishes to inspect.
• The right to dissent and receive payment for shares — In some cases, a minority shareholder is permitted to dissent from a corporate action and receive the fair market value of their shares. These instances can involve any situations in which the corporate documents allow for shareholder dissent.
• The right to maintain a derivative action — When a company is harmed by a majority shareholder, officer, or director, a minority shareholder may bring a derivative action on behalf of the company. In order to do so, the minority shareholder must be able to show that they made a demand upon the company before filing suit and such demand was denied, or making a demand would have been futile.

A shareholder agreement can help safeguard minority shareholder rights. This document can give minority shareholders contractual rights beyond those provided by Illinois law. Another option companies may consider is weighted voting rights for certain issues — this gives the minority shareholders’ vote more weight than they would otherwise have based on the percentage of their shares.

What Legal Remedies Do Minority Shareholders Have?

While conflicts between majority and minority shareholders are not uncommon, those with a non-controlling interest may take legal action when their minority shareholder rights have been violated. Critically, shareholder oppression takes place when the majority shareholders of a corporation act in a manner that is fraudulent, illegal, or oppressive toward the minority shareholders. For instance, the majority shareholders might attempt to freeze out a shareholder and force them to sell their shares in the company at an unfair price. The majority shareholders might also deny the minority shareholders the chance to inspect the corporate records, fail to notify them about meetings, or misuse corporate funds.

Minority shareholders have legal recourse in cases involving wrongful behavior by the majority shareholders. A minority shareholder may be entitled to a statutory remedy if they can establish any of the following: (1) the controlling shareholders have acted illegally; (2) corporate assets have been misused; (3) shareholders are deadlocked when it comes to determining corporate affair management; or (4) shareholders are deadlocked regarding filling a board vacancy.

If you are a minority shareholder, it’s important to know your rights in the company. An experienced business law attorney at Litico Law Group can advise you of your rights and help ensure your interests are protected. Schedule a consultation and learn how we can help.

Depending on the facts and circumstances, relief under the Illinois Business Corporation Act can include:

• An accounting with respect to any matter in dispute
• The performance, alteration, prohibition, or setting aside of any action of the corporation or its shareholders
• Cancellation or alteration of any provision in the Articles of Incorporation
• Removal of any director or officer
• Appointment of any individual as a director or officer
• Appointment of a provisional director
• Appointment of a custodian to manage the business
• Payment of dividends
• Submission of the dispute to mediation or another form of alternative dispute resolution
• An award of monetary damages
• The purchase by the corporation of all the petitioning shareholder’s shares
• Dissolution of the company if no other sufficient remedy exists

Minority shareholders should take measures to protect their interests in advance. When negotiating the company’s shareholder agreement, minority shareholders should seek the right to appoint a board member, as well as veto rights for certain decisions. They should also consider the negotiation power afforded by the agreement. Importantly, minority shareholders should only enter into an agreement that clearly outlines their expectations.

Contact an Experienced Illinois Shareholder Dispute Attorney

If you are a minority shareholder, it’s important to know your rights in the company. An experienced business law attorney can best advise you of your rights and help ensure your interests are protected. Located in Rolling Meadows, Litico Law Group provides knowledgeable representation to shareholders, business owners, and entrepreneurs throughout Illinois for a wide array of business matters, including those involving minority shareholder rights. We welcome you to contact us by filling out our online form or calling 847-307-5942 to schedule a consultation to learn how we can assist you.

When a multi-member LLC is formed, members usually have the best intentions. But disputes can sometimes arise when members don’t agree on how the business should be operated — or members with a controlling interest engage in conduct that is oppressive to the minority members. Conflicts can also occur when a controlling LLC member excludes the minority members from management decisions or distributions are withheld. In cases involving a controlling member’s abuse or wrongdoing, a minority member may be entitled to file a claim for LLC member oppression and ultimately, for dissolution of the business.

What Is LLC Member Oppression?

“Oppression” generally refers to the actions taken by one or more members in an LLC to wrongfully deprive minority members of their rights. While there are many types of oppressive conduct that can be inflicted upon a minority LLC member, “squeeze-outs” are one of the most common forms of oppression. In such cases, the controlling LLC members transfer the LLC’s assets into a newly formed LLC, and ultimately force the minority member to give up their ownership. Similarly, a “freeze-out” happens when a controlling LLC member attempts to limit the income of a minority member or the control they have over it.

Other common forms of LLC member oppression may include:

• Reducing the minority LLC member’s income from the company
• Excluding the minority LLC member from business matters
• Failing to notify minority LLC members regarding a vote
• Keeping the minority LLC member out of management decisions
• Refusing to allow the minority LLC members to access business records
• Failing to make proper distributions

Oppressive behavior can also involve engaging in conduct that leads to waste of business assets, as well as failing to follow the LLC operating agreement. Importantly, the business judgment rule assumes controlling LLC members will make decisions in good faith that are in the best interests of the company — it shields them from liability, even if the outcome is poor. But the doctrine does not protect LLC members from liability for fraud, bad faith, willful misconduct, or a breach of fiduciary duty.

Remedies for LLC Member Oppression

If you are facing an LLC member oppression claim, Litico Law Group can advise you regarding your remedies and guide you through the process of filing suit. Schedule a consultation to learn how we can assist you.

LLCs are different from corporations when it comes to matters involving oppression. While the Illinois Business Act provides 12 statutory remedies for shareholder oppression — dissolution is the only remedy specified under the Illinois LLC Act in cases involving oppression or fraud by members with a controlling interest. Dissolution means ultimately ending the LLC’s legal existence. Once dissolution has been ordered, the LLC is required to stop conducting all business and begin winding up its affairs. Creditors must also be put on notice and all debts must be settled during this time.

In some cases, a judge has the discretion to award a remedy other than dissolution — including a buyout of the minority member’s distributional interest. A distributional interest refers to the member’s economic right to receive monetary distributions from the LLC’s assets, but no other interests of a member.

LLC member oppression claims should not be confused with derivative actions. Specifically, if the LLC itself has a cause of action, and the managers or members have failed to pursue a claim, members may file a derivative action to recover damages on behalf of the LLC. This mechanism allows members to take action to protect the interests of the LLC when it becomes necessary to enforce its rights. However, it’s essential to understand that this vehicle can only be used when the claim belongs to the LLC, rather than an individual member.

Preventing LLC Member Oppression With an Operating Agreement

One of the best ways to safeguard the interests of minority members and prevent LLC member oppression is with a well-drafted operating agreement. This document details how the LLC will operate, decisions will be made, profits will be distributed, and losses will be handled. Critically, an operating agreement can specify the rights of minority members — including their economic rights, voting rights, the right to inspect records, and the right to an appraisal. It can also specify the circumstances under which a member can be expelled from the LLC and establish a method for resolving disputes.

Every LLC is unique and has different requirements. It’s important not to use boilerplate operating agreements as these do not always adequately outline the rights and responsibilities of members. It’s best to have the assistance of a skillful business attorney who can help draft an operating agreement that fits the needs of the LLC.

Contact an Experienced Illinois Business Attorney

If you are facing an LLC member oppression claim, a knowledgeable Illinois business law attorney can advise you regarding your remedies and guide you through the process of filing suit. Located in Rolling Meadows, Litico Law Group serves the legal needs of small businesses, LLCs, and corporations throughout Illinois for a wide variety of matters. We welcome you to contact us or give us a call at (847) 307-5942 to schedule a consultation to learn how we can assist you.

Directors and officers of a corporation, as well as managers and members of an LLC, must always act in the best interests of the company. A derivative lawsuit is a mechanism that can be used to protect shareholders from abuse by a corporation’s officers and directors by ensuring accountability when those in control fail to pursue legal action. Similarly, these types of actions can also be used when an LLC has been wronged by a manager or member. If you’re a corporate shareholder or LLC member, it’s important to understand what a derivative action is — and when it is necessary to bring one.

What Is a Derivative Action?

A derivative action allows a shareholder to bring a lawsuit on behalf of the corporation or LLC when the company itself has been harmed. Not to be confused with direct claims, these types of lawsuits are typically brought by a minority shareholder or LLC member to address the misconduct of a director, officer, or LLC manager who is not acting in the best interests of the company. They can also be brought by a minority shareholder, or a group of minority shareholders, against a majority shareholder.

A derivative action can be used to address a wide range of wrongdoing, including the following:

• Breach of fiduciary duty
• Allegations of fraudulent activity
• Unjust enrichment
• Corporate waste and abuse of company assets
• Self-dealing and conflicts of interest
• Insider trading

Derivative actions can be crucial for safeguarding the interests of shareholders and LLC members. These lawsuits help to ensure that the company enforces its rights and can recover the damages to which it is legally entitled. In addition to an award of monetary damages and equitable relief, a prevailing plaintiff in a derivative suit may also be awarded their attorneys’ fees.

Requirements for a Derivative Action

Derivative actions are complex, and it is essential to have a skilled business law attorney by your side to help you navigate the legal process. We welcome you to schedule a consultation to learn how our business lawyer can help.

When a company has suffered damages, the board of directors (or managers in an LLC that is manager-managed) typically make the decision regarding whether to file a lawsuit. A derivative suit can be brought when those who control the company fail to act. However, certain criteria must be satisfied before a legal action can be commenced.

One of the requirements that must be met before a derivative action can be filed is that a demand must first be made on the corporation’s board of directors, or managers/members of the LLC. This requirement may be waived if it can be shown that the demand would be futile — making a demand is usually not necessary in matters where the directors would be defendants in the case. In some instances, a lawsuit can be avoided if the board is able to resolve the issue after the demand has been made.

In addition, the shareholder bringing the suit must have been a shareholder of the company at the time the harm occurred, although there are specific exceptions to this rule. For example, a shareholder may have standing to bring a derivative suit if they acquired their shares by operation of law from a person who was a shareholder at the time the misconduct took place. A shareholder may also proceed with a derivative suit at the court’s discretion, if they acquired their shares prior to disclosure of the wrongdoing that is the basis of the action.

How Is It Determined Whether a Claim Is Direct or Derivative?

Sometimes, it can be difficult to determine whether a claim should be brought as a direct or derivative action. However, the legal processes and requirements for each type of lawsuit are different. If a shareholder is seeking a legal remedy which would benefit themselves, such as in cases involving a freeze-out, the suit would be brought as a direct action. If the company would benefit from the outcome of the action, the lawsuit would be a derivative action. Simply put, an action would be considered a derivative suit if the funds to be recovered belong to the company.

Some types of claims can only be brought as a derivative action. Others can be brought as either a direct claim or derivative claim, such as those involving conspiracy or a breach of confidential relationship, depending upon whether the injuries were suffered by the shareholder in their individual capacity or the corporation. Importantly, a demand to the board of directors must only be made in a derivative action — this requirement does not apply if the lawsuit is a direct action.

Contact an Experienced Illinois Business Litigation Attorney

Derivative actions are complex, and it is essential to have a skilled business law attorney by your side to help you navigate the legal process. Located in Rolling Meadows, Litico Law Group’s business litigation attorneys provide reliable representation and capable counsel for a wide array of business disputes in Illinois, including those involving derivative actions. We welcome you to contact us at (847) 307-5942 to schedule a consultation to learn how we can help.

Business partnerships can come with many benefits and help owners accomplish much more than they would as a sole proprietor. But partners will rarely agree on everything all the time, and business disputes are not uncommon. Unfortunately, when difficult scenarios arise, the company’s future and its bottom line can be placed at risk. It’s important to understand that there are many measures partners can take in advance to plan for challenging situations — and help prevent conflict.

How Do Partnership/Business Disputes Occur?

Two or more partners in a business endeavor will rarely agree on everything. Accordingly, there can be many causes of partnership disputes. Some common reasons for conflict among partners can include breach of fiduciary duty matters, financial disputes, and lack of specific provisions in a partnership agreement. Conflicts can also arise when partners disagree regarding who is doing what work or if tasks are not distributed evenly.

In addition, business disputes among partners can happen if they have differing opinions concerning the expansion of the company or the services being offered. There can also be disputes if one or more partners wish to leave the partnership. Regardless of the reason, there are a few measures partners can implement to avoid the potential for conflicts and the possibility of legal action.

How Can Business Disputes Be Avoided?

Partners will rarely agree on everything all the time, and disputes are not uncommon. Before difficult scenarios arise, contact an Experienced Illinois Business Attorney at Litico Law to help you understand the many advance measures partners can take to help prevent conflicts.

Many business partnership disputes can be resolved before they occur by making sure all partners are on the same page. It’s essential that partners communicate effectively with each other and understand each other’s responsibilities and obligations. Here are a few steps business partners should take to avoid future disputes that can result in legal action:

Identify the Goals and Objectives of the Partners

Business disputes often arise because partners do not share the same values, or they have different long-term goals for the company. Partners should discuss their objectives for the company and consider their ideas on the type of growth strategy they will employ and the leadership style that will be implemented. By taking the time to understand each other’s perspectives from the outset, partners can be confident in knowing that their approaches to operating the business are consistent.

Have a Written Partnership Agreement in Place

Having a formal, written agreement in place is one of the most crucial steps partners can take to avoid disputes and the possibility of litigation. Although a written partnership agreement is not required by law, it can be critical to protect the company and safeguard the financial interests of the partners. A partnership agreement can do the following:

• Resolve legal issues in advance
• Address the capital contributions of each partner
• Decide compensation and distributions
• Specify decision-making procedures
• Outline the methods to be used for conflict resolution
• Determine what will happen if a partner fails to perform their duties
• Address the circumstances under which the business can be terminated

While a partnership agreement is meant to help partners avoid conflict, it’s important to make sure it is as detailed as possible. Any ambiguity in terms or vague provisions could lead to disputes — and ultimately, litigation.

Clearly Define Each Partner’s Role and Authority

Partners should be clear regarding each other’s roles and authority when it comes to how the business will be run. Even if the partners share equal percentages of ownership, it’s vital to determine in advance who will handle the company’s day-to-day operations — and which partner will be responsible for the accounting and recordkeeping. The details of the partners’ roles should be put in the written partnership agreement.

Address Dispute Resolution Matters

Even when all partners get along, partnership disputes are inevitable. Partners should take the time to discuss all issues that could arise early on. They should also agree on a method of dispute resolution before conflicts occur. While litigation should only be used as a last resort, alternative dispute resolution methods such as mediation or arbitration can help to resolve disputes cost-effectively and efficiently. The partners’ preferred method of resolving conflicts should be specified in the written agreement.

Work With a Business Disputes Attorney

A business dispute attorney can not only assist business partners with handling disputes when they arise — they can also help them avoid conflicts. An attorney can work closely with the partners to prepare the necessary paperwork and agreements to help ensure the company thrives. They can also help the partners devise a strategy tailored to meet the company’s vision and specific needs.

Contact an Experienced Illinois Business Attorney

If you are forming a business partnership, it’s important to have an experienced business law attorney on your side who can help you avoid future legal disputes and complications. Located in Rolling Meadows, Litico Law Group provides skillful representation to business partners and entrepreneurs throughout Illinois for a broad scope of business matters. We welcome you to contact us by filling out our online form or call (847) 307-5942 to schedule a consultation to learn how we can assist you.

The Smith case, pending in the U.S. District Court for the Eastern District of Michigan, involves issues that regularly present in shareholder oppression cases. First, despite corporate success and the controlling shareholders receiving millions through compensation and self-dealing, the minority shareholder receives nothing of value. Second, the controlling shareholders provide inadequate information for the minority shareholder to recognize the controlling shareholders’ actionable conduct and take legal action.

Judge Mark A. Goldsmith recently issued an opinion touching on these themes in the course of ruling on the parties’ motions for partial summary judgment in Smith. This paper synthesizes the parties’ positions and the court’s analysis of those positions, which provide an illustration of how minority shareholders, majority shareholders, and courts address common issues in shareholder disputes.

Martin Smith, the plaintiff, is a 48.5% shareholder in E&E Manufacturing Corporation, Inc. 2020 U.S. Dist. LEXIS, 81240 at *2. Wallace Smith and his wife, Joan Smith, own 51.5% of E&E’s stock. Id. Wallace and Joan are E&E’s sole directors and Wallace is E&E’s president, secretary, and treasurer. Id. Martin is not employed by E&E. Id. at *28.

Between 2012 and 2018, E&E generated annual net income of approximately $3.5 million to $5.0 million. Id. *3. Despite the considerable profits, Wallace and Joan did not make any dividend distributions to E&E’s shareholders. Id. Martin alleges that Wallace and Joan also caused E&E to enter into various transactions, including leases in which E&E paid millions, to companies owned by Wallace, Joan, and their children. Id. at *3-4. Martin also alleges that Wallace received, on average, approximately $1.8 million dollars annually in compensation. Id.*28.

Martin filed suit against Wallace, Joan, and others for shareholder oppression, breach of fiduciary duty, and other statutory relief under Michigan’s corporate statutory scheme. Id. at *5. He seeks a buyout of his shares in E&E, payment of dividends, removal of Wallace and Joan from management, an accounting, profit disgorgement, and damages. Id.*28

The defendants argued that Martin’s claims should be subject to Michigan statutes of limitations of two and three years. Id. at *9-10. The court held that only Martin’s damages claims were subject to those statutes whereas his equitable claims, i.e. all relief other than money damages, were subject to a six-year statute of limitations. Id. at 10-11.

Crucially, the court reserved for trial the issue of whether any application of the statute of limitations should be tolled based on fraudulent concealment. Id. *17-18. Under Michigan law, “fraudulent concealment must be manifested by some affirmative act or misrepresentation, an exception to this rule applies when there is an affirmative duty to disclose material information by virtue of a fiduciary relationship.” Id. at *15. As directors and majority shareholders, Wallace and Joan owed Martin fiduciary duties. Id. at *16.

Martin alleged Wallace and Joan failed to disclose “information bearing on his present claims”, including the sum of Wallace’s compensation, the terms of self-dealing lease agreements, and the value of distributions Wallace, Joan, and their children received through entities receiving rent from E&E. Id. at *16. Additionally, Martin alleges the defendants provided incomplete annual financial reports that excluded information that would have provided notice to Martin of some of his claims. Id. The court agreed with Martin, concluding that “[i]f Wallace and Joan had a fiduciary obligation to disclose this information to Martin—including the information in the full balance sheets—their failure to do so would be consistent with fraudulent concealment.” Id. at *19.

In essence, the court decided which statutes of limitations apply to Martin’s claims with the caveat that whether the statute of limitations are offset by fraudulent concealment for trial. This being a pretrial decision on summary judgment, the final result of the Smith case is as yet undetermined. The opinion nevertheless provides shareholders a case study in the legal issues that arise in what is a remarkably typical shareholder oppression case fact pattern.

If you’re in a business partnership, whether as a partner, shareholder, or member, and you suspect your partner is stealing, embezzling, or otherwise cheating the company, take actions to enable yourself to prove it. Save all financial data that you can. Have access to the company QuickBooks file? Download it, and keep the file somewhere safe. The same goes for bank account statements and credit card statements. Save tax returns, payroll records, invoices, and receipts. If you confront your partner, he or she could, even if illegally, revoke your access to these documents or even to the business generally. Your partner may also start to cover his or her tracks. It’s wise to develop a plan with your attorney before you raise the issue.

Beyond securing accessible records, you should work with your attorney to develop a strategy for rectifying the problem. Tools at you and your attorney’s disposal include statutorily-protected demands for documents, corporate actions to end the misappropriation, forensic accounting audits, removal of the partner, or a fair value buyout of your interest in the company. In some cases, these matters are resolved through negotiation. In others, lawsuits are ultimately necessary.

When partnership problems become apparent, seeking your attorney’s help immediately generally pays dividends in the long run. Self-help early in disputes can create expensive problems to solve in litigation.

The defendants owned 52% of the business at issue, Twin Bay Village, and the plaintiffs owned 48%. The plaintiffs’ involvement in the business was limited, at least recently, and the defendants ran the business, which had been in the family since 1957.

The defendants:

• held a shareholder meeting in 2001 without notifying the plaintiffs and passed a corporate resolution awarding themselves $80,000 per year bonuses, untied to their performance or that of the company, despite the fact the corporation had not paid dividends to its shareholders since 1995;
• issued 100 shares of stock in 2004, in addition to the 100 shares then outstanding, and then divided those purported shares between themselves without permitting the plaintiffs an opportunity to purchase additional shares, diluting the minority shareholders;
• claimed to have issued $750,000 in loans to the corporation between 2005 and 2013, which their financial evidence did not support; and
• amended the corporation’s bylaws in 2009 to state that a shareholders who had ceased to be active participants in the business could be forced to sell their shares by a majority of shareholders (such as the defendants).

In 2009, the defendants determined that the fair value of the corporation’s shares was $1,139 and demanded that the plaintiff’s sell their shares. The plaintiffs instead filed suit for shareholder oppression in the form of a breach of fiduciary duty and statutory action.

The New York court applied the reasonable expectations standard and found that the plaintiffs’ reasonable expectations that the defendants would protect the interests of all shareholders had been frustrated. The Appellate Court affirmed.

The takeaway of Chomiak is, as in many shareholder or “partnership disputes”, that when your business is organized as a corporation, you are not acting for yourself, but for the corporation and its shareholders. The fact that the controlling shareholders operate or manage the corporation does not diminish the rights of the minority shareholders.

The trial court appointed retired judge Daniel J. Kelley (“Kelley”) as “a provisional director of BTE pursuant to sections 12.56(b)(4) and 12.56(c) of the Act” to “direct the litigation” and “ensure that Thomas does not unduly influence” BTE’s counsel. Id. at ¶ 6. In order to compensate Kelley for his time as BTE’s provisional director, Kelley made capital calls from each shareholder for $25,000.00 and later $30,000.00. Id. at ¶¶ 8-10. Sinkus refused to make either capital contribution stating that he was under no obligation to make additional capital contributions and “that he was not responsible for BTE’s debts.” Id. at ¶ 8. The trial court ordered Sinkus to make both capital contributions, but he continued to refuse and was eventually held in indirect civil contempt. Id. at ¶¶ 9-10.

On appeal, the Court analyzed whether the trial court had the authority to order the shareholders to compensate a provisional director under the Act. Id. at ¶ 14. Section 12.56(b) of the Act provides for several remedies the court may order, including the appointment of a provisional director. Section 12.56(g) of the Act, however, states:

“the court shall allow reasonable compensation to the custodian, provisional director, appraiser, or other such person appointed by the court for services rendered and reimbursement or direct payment of reasonable costs and expenses, which amounts shall be paid by the corporation.”

805 ILCS 5/12.56(g).

BTE argued that Sections 12.56(b)(1) and 12.56(c) give the trial court the authority to order shareholders to pay a provisional director’s fee. Sinkus, 2016 IL App (1st) 152135-U, ¶ 19. Section 12.56(b)(1) of provides the trial court authority to order the “performance . . . of its shareholders” and Section 12.56(c) provides the court authority to fashion “equitable remedies.” See 805 ILCS 5/12.56(b)(1), (c).

The Appellate Court rejected BTE’s argument because if Sections 12.56(b)(1) and 12.56(c) were interpreted to provide trial courts authority to order shareholders to compensate a provisional director, then the “specific directive of section 12.56(g) that the provisional director be compensated by the corporation is rendered meaningless.” Sinkus, 2016 IL App (1st) 152135-U, at ¶ 20. Any interpretation that would render a portion of a statute meaningless must be avoided. Id. at ¶ 15. Therefore, the Appellate Court concluded that Section 12.56(g) of the Act controls and the trial court erred by ordering the shareholders to compensate a provisional director. Id. at ¶ 20.

In sum, pursuant to Section 12.56(g), the coporation itself, and not its shareholders, must must compensate a provisional director appointed pursuant to Section 12.56 of the Business Corporation Act.

In Thazhathuputhenpurac, the parties were former investors and shareholders of JT Enterprises of Chicago, Inc., a corporation which operated a Shell service station. Id. at ¶ 5. The shareholders each invested $115,000 of their own money in the corporation, but Shell insisted that one party be the majority shareholder. Id. The parties agreed that defendant would hold 51% of the shares. Id. Shortly thereafter, defendant formed two more service station corporations, TVA and G&P, in which he was the sole shareholder. Id. at ¶ 6.

From 1997 through 2002, the minority, 49% shareholder solely managed JT, though he frequently met with the 51% shareholder to discuss the business. Id. at ¶ 7. In 2002, due to health issues and a disagreement with defendant, plaintiff stopped working at JT and eventually relocated to Florida. Id. at ¶ 8. Prior to his relocation, Shell had substantially increased JT’s rent, and the parties had agreed to sue on behalf of JT. Id. at ¶ 9. Defendant also independently sued Shell on behalf of TVA. Id. Both cases settled in 2005, and defendant signed on behalf of both JT and TVA. Id. Defendant had agreed to surrender “JT to Shell, for a credit of $225,000” and defendant applied the entirety of JT’s credit – excluding the 49% shareholder – to his purchase of the TVA property. Id. at ¶ 9-10.

At no point did the 51% owner discuss or inform the 49% owner of this settlement offer. It was later determined that the 51% owner had also been transferring substantial sums of money between all three entities throughout the years without notifying the 49% owner. Id. at ¶ 12-13. In 2006, the 49% owner sued the 51% owner under Section 12.56 of the Act, tortious interference, and for an accounting, and defendant counterclaimed for breach of fiduciary duty. Id. at ¶ 14. The court awarded the 49% owner $158,699.73 and reasonable attorney fees “as he was successful on his claim brought under the Act,” and found against the 51% owner for his counterclaim. Id. at ¶ 15.

Following a motion to reconsider, the court found that the 49% partner’s award should not be reduced by 49% of the attorney fees incurred by the 51% partner in the settlement with Shell as “there is no evidence that the attorney fees reduced the $225,000 benefit as opposed to being just another cost associated with the closing.” Id. at ¶ 17. The court further held that the 51% partner’s counterclaim “was not litigated in good faith and pursuant to section 12.60(j) of the Act, [and] awarded attorney fees to [the 49% partner] for defending the counterclaim” despite the fact that only one of the claims was covered. Id. The court affirmed that “in fee shifting cases, such as this one, where there are covered and non-covered claims, a party is entitled to fees on a non-covered claim where the two claims ‘arise out of a common core of facts and related legal theories.’” Id. at ¶ 19 (citing Hensley v. Eckerhart, 461 U.S. 424, 435 (1983)).

On appeal, the Appellate Court affirmed the circuit court’s award of reasonable attorney fees to the 49% partner pursuant to Section 5/12.60(j), finding that the 51% partner’s counterclaim was not brought in good faith. Further, the Appellate Court held that the fees should not be limited to the defense of the counterclaim because the claims were “so intertwined that the time that [the 49% shareholder’s] attorney spent on each issue cannot and should not be distinguished.” Id. at ¶ 47.

Thazhathuputhenpurac serves as a warning to business owners and attorneys litigating cases under the Illinois Business Corporation Act. First, despite the emotional nature of “business divorces,” it is prudent for shareholders and their attorneys to carefully consider the strength of their claims before proceeding all the way through a trial. Second, litigants and attorneys should be careful to avoid the unfortunately common litigation practice of lodging weak counterclaims as a strategic counterbalance to plaintiffs’ counts. In a Business Corporation Act case, doing so may be costly.

Section 12.56(f) allows the corporation or shareholders being sued to purchase the petitioner’s shares if it is requested as relief by the petition. The corporation or one or more shareholders can choose to purchase all of the shares owned by the petitioning shareholder for their fair value either within 90 days after filing the petition under Section 12.56 or within a length of time the court finds to be equitable. 805 ILCS 5/12.56.

The provisions regarding a buyout of the petitioner’s shares pursuant to Section 12.56(f) are as follows:

• The amount the electing party will pay for the shares must be in writing. This notice of election can be a formula for determining the purchase price, rather than a specific numerical figure. Midkiff v. Gingrich, 355 Ill. App. 3d 857, 863 (2005);
• The election to purchase shares is irrevocable unless otherwise determined by the court that it is equitable to set aside or modify the election;
• If the election to buy shares is filed by one or more shareholders, the corporation must give notice to all shareholders within 10 days. The notice must state the name and number of shares owned by the petitioner, the name and number of shares owned by each electing shareholder, the amount each electing party will pay for the shares, and advise the recipients of their right to join in the election to buy shares. Shareholders have 30 days after the date of notice to file notice of their intention to join in a purchase. Shareholders who file a notice of their intention to participate in the election become parties and must participate in the purchase in proportion to their ownership of shares at the time the first election was filed. If the corporation does not give notice to all shareholders within 10 days, the corporation or non-petitioning shareholders cannot purchase the petitioning shareholder’s shares in lieu of corporate dissolution. Lohr v. Havens, 377 Ill. App. 3d 233, 235 (2007).
• The court can allow the corporation and non-petitioning shareholders to file an election to purchase the petitioning shareholder’s shares at a higher price. 805 ILCS 5/12.56(f).

If the parties reach an agreement on the fair value and terms of the buyout within 30 days of filing the election to purchase, then the court will enter an order directing the purchase upon the terms and conditions agreed to by the parties. 805 ILCS 5/12.56(f)(5). If the parties are unable to reach an agreement within 30 days of filing, the court will determine the fair value of the shares as of the day before the date the petition was filed or as of another date that the court deems appropriate. 805 ILCS 5/12.56(f)(6).

Section 12.56(a) does not define “fair value” but simply states that the negative impact the complained of conduct had on the value of the petitioner’s shares should be factored into the determination of “fair value.” Section 11.70(j) of the Business Corporation Act defines “fair value” as “the value of the shares immediately before the consummation of the corporation action to which the dissenter objects excluding any appreciation or depreciation in anticipation of the corporate action, unless exclusion would be inequitable.” 805 ILCS 5/11.70.

Illinois case law also demonstrates that the Illinois legislature wanted to give courts broad discretion in determining fair value and that it should be distinguished from “fair market value,” although fair market value may be used in a fair-value determination. John T. Schriver & Paul J. Much, Determining Fair Value for Minority Shareholders Who Sue for Corporate Wrongdoing, 91 Ill. B.J. 199, 200 (2003). Thus, there is broad latitude given to the court and parties when determining the shareholder buyout price.

Section 12.56 of the Illinois Business Corporations Act of 1983 provides shareholders of closely held, or non-public, corporations a number of remedies to resolve corporate conflicts. Under Section 12.56 a non-public corporation is one that unlisted on the exchange and is not traded by members of a “national or affiliated securities association.” In other words, shareholders of family businesses, partnerships structured as corporations, medical corporations, and other non-publicly traded corporations may find relief under Section 12.56.

In order to obtain the remedies provided by Section 12.56, a shareholder filing suit must prove one of the following:

1. that the corporation is deadlocked in the “management of corporate affairs”, that the shareholders cannot resolve the deadlock, and that the deadlock threatens irreparable harm to the business, or that the corporation cannot continue business for the “general advantage of the shareholders”, including the petitioning shareholder;
2. that the shareholders are deadlocked (e.g., two 50/50 shareholders with opposing positions) and have failed for two consecutive annual meetings to elect new directors after prior directors’ terms have expired, and the deadlock threatens irreparable harm to the business or its ability to continue business for the “general advantage of the shareholders”;
3. that the controlling directors or shareholders have, are, or will act illegally, oppressively, or fraudulently toward the petitioning shareholder; or
4. that the corporation’s assets are being misapplied or wasted.

805 ILCS 5/12.56(a).

If a shareholder establishes one of the above corporate shortcomings, a court may then award one or more of the twelve remedies set forth in Section 12.56(b). These remedies are remarkably flexible and provide a wide range of options to correct a dysfunctional or oppressive corporate situation. The enumerated remedies are:

1. A court may order the “performance, prohibition, alteration, or setting aside of any action of the corporation or of its shareholders, directors, or officers…”;
2. The alteration or termination of the corporation’s governing documents;
3. The removal of a director or officer;
4. The appointment of a director or officer;
5. An accounting;
6. The assignment of a custodian to manage the business pursuant to conditions set by the court;
7. The appointment of a temporary director to serve under conditions set by the court;
8. Submission of the dispute to non-binding dispute resolution, such as mediation;
9. The issuance of dividends to the shareholder or shareholders;
10. An award of damages to the wronged shareholder;
11. The purchase of the petitioning shareholder’s shares for fair value by the corporation or other shareholders; or
12. The dissolution of the corporation.

805 ILCS 5/12.56(b).

The breadth of the remedies under Section 12.56 is extensive. The result is a legal out for shareholders trapped in dysfunctional corporations, a situation common in closely held corporations owing to the unmarketability of shares and/or restrictions on transfers of ownership. Rather than being frozen out of a corporation, waiting it out on the sidelines, and hoping for an eventual sale, a shareholder may avail herself to the remedies set forth in Section 12.56, force the issue, and either rectify the situation or force a takeover or buyout.