Forced Buy Out

The Illinois Business Corporation Act 805 ILCS 5/12.56 (“The Act”) allows for a minority shareholder to get paid the fair value of his or her ownership interest if he or she can prove oppression, waste, or deadlock. These claims are much easier to prove than fraud or fiduciary duty and if litigated properly can be employed to win a fair settlement quickly when alleged along with claims seeking harsh penalties.

Section 12.56(f)(6) provides that, if the parties are unable to reach an agreement on the value of the shares, the “court, upon application of any party, shall stay the proceeding under subsection (a) and shall determine the fair value of the petitioner’s shares.”[1] “The goals of dissenters’ rights statutes today are to protect minority shareholders from majority overreaching, self-dealing, and oppressive conduct in an attempt to eliminate a minority shareholder at a price below fair value, or in an attempt to transfer power to the majority.” Sitting in equity, the trial court is to ensure that the valuation conducted results in an outcome that is fair and equitable to all parties.”[2]

Section 12.56(a) of the Act provides that a shareholder may petition the circuit court for a variety of remedies if any of the following is established:

“(1) The directors are deadlocked, whether because of even division in the number of directors or because of greater than majority voting requirements in the articles of incorporation or the bylaws or otherwise, in the management of the corporate affairs; the shareholders are unable to break the deadlock; and either irreparable injury to the corporation is thereby caused or threatened or the business of the corporation can no longer be conducted to the general advantage of the shareholders; or

(2) The shareholders are deadlocked in voting power and have failed, for a period that includes at least 2 consecutive annual meeting dates, to elect successors to directors whose terms have expired and either irreparable injury to the corporation is thereby caused or threatened or the business of the corporation can no longer be conducted to the general advantage of the shareholders; or

(3) 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; or

(4) The corporation assets are being misapplied or wasted.”[3]

The Illinois Supreme Court has held that the word “oppressive,” as used in the statute, does not carry an essential inference of imminent disaster, but can contemplate a continuing course of conduct. The word does not necessarily mean fraud, and even the absence of mismanagement or misapplication of assets does not prevent a finding that the conduct of the dominant director or officer has been “oppressive.” Such term is not synonymous with “illegal” and “fraudulent.”[4] “Oppressive” is defined by Webster’s Dictionary as “unreasonably burdensome; unjustly severe. Tyrannical. Overpowering to spirit or senses.”[5] The word “oppressive” is not synonymous with illegal or fraudulent.”[6] Specific instances of oppression may include testimony regarding the failure of defendant to consult with plaintiff regarding management of corporate affairs, an imperious attitude when questioned about the plaintiff’s salary and dilatory reaction to the plaintiffs’ requests.[7] Accordingly a shareholder oppression claim is easier to prove than any other business tort. When faced with a shareholder oppression claim, majority owners, officers, and controlling shareholders are left with the option of a long expensive fact intensive fight or settlement which bodes well for minority shareholders seeking to force a buyout.

When a minority shareholder is able to prove oppression as discussed above they can ask the court for several remedies the most profitable is usually the purchase of their shares for fair value.

“If you are involved in a business dispute or other litigation, the Chicago lawyers at Stoltmann Law Offices Commercial Litigation Group can provide knowledgeable legal representation on a flat fee or contingent fee basis. We bill for value provided to clients rather than time spent. Our goal is efficiently winning your case rather than running up more billable hours. Call us at 312-332-4200. We represent clients throughout Cook County, including in Evanston, Oak Lawn, and Oak Park, as well as in DuPage County cities such as Naperville and Lisle and Lake County including Highland Park, Waukegan and Lake Forest and handle select cases nationwide with a network of local counsel.”

[1] 805 ILCS 5/12.56(f)(6); Advanced Imaging Ctr. of N. Ill. Ltd. P’Ship v. Cassidy, 335 Ill. App. 3d 746, 749, 781 N.E.2d 664, 667, (2d Dist. 2002).

[2] Brynwood v. Schweisberger, 393 Ill. App. 3d 339, 356, 913 N.E.2d 150, 165 (2d Dist. 2009).

[3] 805 ILCS 5/12.56(a).

[4] Central Standard Life Ins. Co. v. Davis, 134 N.E.2d 653, 658-659, 10 Ill. App. 2d 245, 255 (3d Dist. 1956).

[5] Id.

[6] Gidwitz v. Lanzit Corrugated Box Co., 170 N.E.2d 131, 135 (Ill. 1960).

[7] Compton v. Paul K. Harding Realty Co., 6 Ill. App. 3d 488, 499, 285 N.E.2d 574, 581 (5th Dist. 1972).

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