Brief survey of Illinois shareholder law.
Illinois Shareholder Law Survey
Shareholder Inspection Rights
Shareholders in Illinois close corporations have the same inspection rights as those in ordinary Illinois corporations. See 805 Ill. Comp. Stat. 5/7.75 (2005). Record shareholders may inspect and copy certain corporate records and documents for a proper purpose after making a demand on the corporation stating with particularity the documents to be inspected. § 5/7.75(b). The documents available for inspection pursuant to this rule include the corporation’s books and records of account, minutes, voting trust agreements and record of shareholders. Id. If the shareholder seeks to inspect the books or records of account, the shareholder has the burden to establish a proper purpose. § 5/7.75(c). However, the burden is on the corporation to establish the absence of a proper purpose if the shareholder seeks to inspect the minutes, record of shareholders or voting trust agreements. Id. A proper purpose is one that seeks to protect the interests of both the corporation and the shareholder and is not demanded merely “to gratify curiosity or for speculative or vexatious purposes.” Briskin v. Briskin Mfg. Co., 286 N.E.2d 571, 574 (Ill. App. Ct. 1972).
If a corporation refuses a properly demanded inspection, the shareholder seeking inspection may enforce the inspection right through a writ of mandamus. Id. Furthermore, the corporation or any officer or director who fails to comply with a proper inspection demand is liable to the shareholder for a penalty of up to ten percent of the value of the shareholder’s shares in addition to any other damages or remedies that may be available. § 5/7.75(d). However, a corporation’s defenses to a suit under this rule are that within the two years prior to the demand, the demanding shareholder sold or offered for sale a list of shareholders of any corporation, “aided or abetted” another in doing so or improperly used information obtained through a shareholder inspection. Id.
Illinois law provides for involuntary dissolution of a close corporation by its shareholders if 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.” § 5/12.56(12). However, dissolution is a remedy of last resort to be used only when a number of other statutory remedies fail to resolve the dispute. Id. These other remedies include: alteration or setting aside an action of the corporation, officer or director; cancellation or alteration of provisions in the bylaws or articles of incorporation; removal of directors or officers from office; appointment of officers or directors; ordering an accounting; appointment of a custodian or provisional director; ordering mediation; requiring payment of dividends; awarding damages or ordering a buy-out of the aggrieved shareholder. § 5/12.56.
Shareholder oppression encompasses more than just illegal or fraudulent actions by those in control of a corporation and does not necessarily need to be based on misuse of corporate assets or funds. Hager-Freeman v. Spircoff, 593 N.E.2d 821, 830 (Ill. App. Ct. 1992). To dissolve a corporation based on oppression the corporation need not face “imminent disaster,” but rather a “continuing course of heavy-handed conduct” is sufficient to invoke the dissolution remedy. Id.
For example, exclusion of minority shareholders from participation in management and sharing in profits, firing them from employment positions and even a majority shareholder’s “imperious attitude” have all been cited as examples of oppressive conduct justifying dissolution. Id. (listing several previous decisions involving conduct by majority shareholders that was deemed oppressive).
Furthermore, shareholders in close corporations owe fiduciary duties to each other similar to those owed by partners in a partnership. Anest v . Audino, 773 N.E.2d 202, 209 (Ill. App. Ct. 2002). This includes a duty of loyalty not to usurp a corporate opportunity for individual gain. Id.
Shareholder Derivative Suits
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. § 5/7.80. In order to have standing to bring a derivative suit, a plaintiff must have been a shareholder at the time the cause of action arose or received the shares by operation of law from someone who held them at that time. § 5/7.80(a). However, even if a plaintiff does not meet this standing requirement, the court may still allow the suit to commence if it finds that the plaintiff acquired the shares before he or the public became aware of the actions about which he is complaining. Id. The plaintiff’s complaint must state with particularity the demand made on the corporation to take appropriate action or explain why no such demand was made. § 5/7.80(b). A derivative proceeding may be stayed during the pendency of an investigation of the allegations by the corporation; however, court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. § 5/7.80(b), § 5/7.80(c). There is no direct shareholder recovery in a derivative action brought on behalf of the corporation; however, a shareholder may sue directly as an individual for an injury sustained directly. Small v. Sussman, 713 N.E.2d 1216, 1219, 20 (Ill. App. Ct. 1999).