In a shareholder action against a co-shareholder (co-owners or incorporated business partners, colloquially), a court may order one of the remedies provided for in 805 ILCS 5/12.56(b) if the shareholder shows that “the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent with respect to the petitioning shareholder whether in his or her capacity as a shareholder, director, or officer.”
805 ILCS 5/12.56(a)
This article briefly examines what types of conduct constitute “oppressive” conduct under Illinois case law.
As a preliminary matter, it is important to note that the oppressive conduct must be directed toward the shareholder as a shareholder, director, or officer. Oppression directed to the shareholder as an employee, for example, does not satisfy Section 12.56. See Dady v. Healy, 407 Ill. App. 3d 1191 (2d Dist. 2011) (unpublished).
Black’s Law Dictionary defines oppression as the “act or an instance of unjustly exercising authority or power.” The Illinois Appellate Court has described oppression as conduct that is “arbitrary, overbearing and heavy-handed.” Iverson v. C.J.C Auto Parts & Tires, Inc., 2014 IL App (2d) 130706-U, ¶ 28 (citing Hager-Freeman v. Spircoff, 229 Ill. App. 3d 262 (1992), Compton v. Paul K. Harding Realty Co., 6 Ill. App. 3d 488, 499 (1972)). “Arbitrary, overbearing, and heavy-handed” provides little more guidance than “unjustly exercising authority”, but “oppression” under either definition is a broad, fluid concept.
The Illinois Appellate Court has only addressed the type of oppressive conduct that may entitle a shareholder to Section 12.56 remedies in a limited number of opinions. Examples of conduct deemed oppressive include:
Conduct found not be oppressive includes:
The above list demonstrates types of shareholder action that are considered oppressive. While conduct similar to that listed may give shareholders remedies under Section 12.56, this list is not all-inclusive, and depending on the circumstances of the specific case, a myriad of conduct may be considered oppressive under Section 12.56.
It is useful to bear in mind that the word “oppressive” as used in Section 12.56 does not require a threat of imminent disaster. “Oppressive” is also not synonymous with “illegal” and “fraudulent.” Thus, if shareholder rights have been abused and denied, it is not necessary to show fraud, illegality, or even loss to exhibit shareholder oppression. Gidilitz, 20 Ill. 2d 208.
Illinois law offers a number of remedies for closely held or private corporation shareholders trapped in toxic or dysfunctional relationships with their corporations or fellow shareholders (co-owners). Given the structure of most corporations, 50/50 shareholders and minority shareholders are the most apt to find themselves in these situations.
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:
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:
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.