Buyouts for Shareholders of Closely Held, Non-Public Corporations

A non-public corporation is a corporation that has no shares listed on a national securities exchange or regularly traded in a market maintained by one or members of a national or affiliated securities association. In a shareholder action in a non-public corporation, circuit courts may order one of several remedies listed in Section 12.56 of the Business Corporation Act of 1983. 805 ILCS 5/12.56.

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.