Any time decisions are made – in politics, in business, in choosing what kind of pizza to order for dinner – those in the minority inherently have less power than those in the majority. Being in the minority means you will often find yourself on the losing side of votes, with your opinions and views perhaps considered but ultimately disregarded. This dynamic plays out in closely held corporations all the time.
But while minority shareholders in closely held corporations may not have control, they do have rights. When majority shareholders abuse their power, when they act in ways that are inappropriate, illegal, or “oppressive,” most jurisdictions, including Illinois, provide minority shareholders (those who own less than 50 percent of the company’s shares or otherwise do not control the business’ operations) with mechanisms to protect their rights and protect the corporation from majority malfeasance.
What Is Shareholder Oppression?
Being on the losing side of votes in a closely held corporation may be frustrating and disappointing, but it is not inherently oppressive so as to trigger the rights and remedies provided by the Illinois Business Corporation Act(the “Act”). Those rights and remedies – which can include dissolution of the company – only become available when “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…”
Even though the Act itself does not define what constitutes “oppressive” conduct, Illinois courts have held that the fact that the term “oppressive” stands alongside and separate from “illegal” and “fraudulent” in the statute’s language means that oppression can consist of actions that may not rise to the level of fraud or illegality. As one court put it, “the word need not necessarily savor of fraud or refer to imminent disaster; rather, it can contemplate a continuing course of heavy-handed conduct.”
Actions That May Constitute Shareholder Oppression
Since there is no statutory definition of shareholder oppression in the Act, Illinois courts look at the specific facts of each case to determine whether a majority is acting in an oppressive manner towards the minority. Actions that may rise to the level of shareholder oppression in a closely held corporation in Illinois include:
- Forcing a minority shareholder to sell their shares at unfairly low prices
- Freezing out a shareholder, making their shares essentially worthless through corporate restructuring
- Locking a shareholder out of the company’s property
- Refusing to allow a shareholder to inspect the company’s business records
- Terminating a minority shareholder’s employment
- Creating a redemption plan for stocks that only favors the majority shareholders
- Engaging in a transaction that cuts minority shareholders out of fair compensation
- Refusing to notify shareholders of official shareholder meetings
- Trying to alter minority shareholder terms to reduce their rights
- Falsifying company records or books
- Paying for personal expenses of majority shareholders with corporate funds
Statutory Remedies for Shareholder Oppression
If a court determines that a majority is acting oppressively towards a minority shareholder in a closely held corporation, the Act provides a menu of possible remedies to protect the rights and interests of the minority. These include:
- The performance, prohibition, alteration, or setting aside of any action of the corporation or its shareholders, directors, or officers of or any other party to the proceedings
- The cancellation or alteration of any provision in the corporation’s articles of incorporation or by-laws
- The removal from office of any director or officer
- The appointment of any individual as a director or officer
- An accounting concerning any matter in dispute
- The appointment of a custodian to manage the business and affairs of the corporation
- The appointment of a provisional director to serve for the term and under the conditions prescribed by the court
- The submission of the dispute to mediation or other forms of non-binding alternative dispute resolution
- The payment of dividends
- The award of damages to any aggrieved party
- The purchase by the corporation or one or more other shareholders of all, but not less than all, of the shares of the petitioning shareholder for their fair value, or
- The dissolution of the corporation if any of the other statutory remedies are insufficient
While minority shareholders may often find themselves on the short end of the voting stick, Illinois law gives them a powerful statutory stick with which to fight back if and when the majority abuses their power. If you have questions or concerns about shareholder oppression in closely held Illinois corporations, please contact me at 312-840-7004 or fmendelsohn@burkelaw.com.
