Disgruntled Shareholders of Privately Held Corporations: Illinois Law Offers a Variety of Remedies
By Autumn L. Sharp
Let's say you're a shareholder in a privately held Illinois corporation, and you are unhappy with the course the business has taken. Perhaps the directors are engaging in illegal, oppressive or fraudulent acts. Or maybe you feel that the corporation's assets are being misapplied or wasted. It could be that the directors have reached a deadlock that is harming the corporation, or that your fellow shareholders are taking so long to replace the directors that the business of the corporation can no longer be conducted. Are you powerless, or do you have remedies under Illinois law?
Relief under Illinois Law
Fortunately, the Illinois Business Corporation Act (805 ILCS 5/12.56) offers some relief. If a disgruntled shareholder files suit against a privately held corporation and it is established that the corporation and the shareholder have in fact suffered harm, an Illinois circuit court can provide a host of remedies, including removing or appointing a director or officer; ordering an accounting with respect to any matter in dispute; appointing a custodian to manage the business and affairs of the corporation; submitting a dispute to mediation or another form of non-binding alternative dispute resolution; ordering the payment of a dividend; and awarding damages to an aggrieved party. The court can even dissolve the corporation if it determines that no other remedy is sufficient to resolve the matters in dispute.
Getting Out: Beware the Pitfalls
What if you're fed up with your shareholder status, and you simply want out? You can ask the court to order the corporation or one or more of the other shareholders to purchase your shares for their fair value. But there is a catch. In the case of a court-ordered share purchase, the court actually determines the fair value of the shares. It also considers any financial or legal constraints on the ability of the corporation or the purchasing shareholder(s) to acquire the shares; specifies the terms of the purchase (including, if appropriate, installment payments, interest, and a covenant not to compete or other restriction on the seller); and requires the seller to deliver all of his or her shares to the purchaser upon receipt of the full purchase price or the first installment. According to the Illinois Business Corporation Act, the share purchase is consummated within 20 days after the date the purchase order is final unless, before that time, the corporation files a notice of its intention to dissolve.
Shareholders may feel that these stipulations give the court a little too much power. After all, the court is able to set the fair value of the shares and specify the terms of the purchase—factors that are often negotiated by a selling shareholder and a corporation. What if the court sets forth terms you do not like? After the purchase order is entered and before the purchase price is fully paid, any party may petition the court to modify the terms of the purchase, and the court may choose to do so if it finds that the proposed modifications are equitable.
There are other concerns that shareholders should consider. Suppose you petition the court for a share purchase, but change your mind before the court actually hands down the order. Maybe the corporation is doing well and your share value is steadily climbing, or perhaps the concerns you had about the direction of the business have been resolved and you'd like to remain a shareholder. If the corporation or one of its shareholders elects to purchase all of your shares for their fair value at any time within 90 days after you filed the petition, then the election is irrevocable—even if the parties themselves agree to cancel the sale or change the terms. Therefore, the only way to stop your shares from being sold is to ask the court to determine that it would be equitable to set aside or modify the election.
Despite a few potential pitfalls, a disgruntled shareholder in a privately held Illinois corporation has options. If you find yourself in one of the situations set forth above, you can rest assured that the Illinois Business Corporation Act offers a number of remedies to help rectify your situation.
Autumn L. Sharp, an Associate in the firm's Litigation & Dispute Resolution group, represents clients in a range of business and commercial disputes, including matters involving state and federal franchise law, federal securities and antitrust law, generally accepted accounting principles (GAAP), trade secrets, government contracts, product liability, breach of contract and breach of warranty. She also participates in all levels of the discovery process, has served as co-counsel of record for multiple administrative hearings and regularly represents clients in mediation and arbitration. Autumn can be reached at 312.521.2631 or asharp@muchshelist.com.
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