Chicago Business Litigation Lawyer Blog

As Chicago business, shareholder rights and commercial law litigators, we frequently handle cases involving allegations of business fraud or financial mismanagement, often as part of complex business dispute, that require significant expertise in financial issues. When handling a divorce involving a family business or other closely held company, we also sometimes find we need an expert's help properly valuing the business, so we can help our clients get the most equitable possible distribution of marital property.

Our Chicago, Oak Brook, Wheaton and Naperville business trial attorneys have handled many complex business and commecial law litigation matters which have involved presenting or cross-examining accounting witnesses.

While we're confident in our legal skills, these situations call for specialized financial skills. To give our clients the best possible representation in business, shareholder and other commercial disputes, we sometimes retain a forensic accountant or fraud examiner. Both of these jobs are twofold: They help attorneys and their clients understand the complex financial aspects of their cases, and they may also be called to testify as expert witnesses. A forensic accountant's job is to examine a person or corporation's accounts "cold," from the outside; the subject isn’t generally expected to cooperate. Similarly, a fraud examiner delves deep into a company's finances, looking for the source of anything that seems inconsistent or suspicious. Both can serve as expert witnesses who help establish the value of a business or testify to the existence of fraud.

The goal for both forensic accountants and fraud examiners is to make sure the other side of the case is being completely truthful about its income and accounting practices. As you might imagine, this is a frequent concern in divorces involving a spouse who’s part of a small or closely held business, which may need to be properly valued for the divorce. The company may also need to be investigated when the owning spouse is believed to be hiding assets. However, this concern also comes up in business disputes, such as breach of fiduciary duty lawsuits. When minority shareholders believe the majority is withholding important financial information, using a forensic accountant or fraud examiner may be the most reliable way to discover and prove the truth.

This practice is relatively recent but growing; a simple Web search turns up many accountants and examiners who regularly serve as expert witnesses. Two legal journals serving our Midwestern neighbors, The Wisconsin Law Journal and Michigan Lawyers Weekly, offer online articles on the subject for lawyers who want to learn more.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Billing Fraud , Breach of Contract , Breach of Fiduciary Duty , Certified Fraud Examiner , Closely Held Businesses , Forensic Accountant , Illinois Appellate Courts , Illinois Business Corporation Act , Illinois Limited Liability Company Act , Illinois Supreme Court , Shareholder Disputes , Shareholder Freeze Out , Shareholder Squeeze Out , Stolen Corporate Opportunies

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In a shareholder derivative action related to 2004's merger between Bank One and J.P. Morgan Chase, the Illinois First District Court of Appeal upheld the dismissal with prejudice of a complaint filed by Bank One shareholders. Shaper v. Bryan, No. 1-05-3849 (March 8, 2007).

The dispute grew out of the high-profile merger of Bank One with J.P. Morgan Chase. As part of the deal, J.P. Morgan agreed to issue stock to each Bank One shareholder worth 14% more than the Bank One shares' closing price on the day of the merger. In other words, Bank One shareholders received extra value as part of the deal. Bank One CEO James Dimon would serve as president and COO of J.P. Morgan Chase for two years, after which he would take over for the existing CEO. These two men negotiated both the premium and the succession plan themselves.

Media reports soon appeared, suggesting that Bank One shareholders could have gotten a much larger premium from another company or through another negotiator. The media also reported that Dimon was eager to move to New York and take over as the leader of J.P. Morgan Chase, offering to do the deal for no premium at all if he could start as CEO without waiting the two years.

Shareholders for Bank One filed suit, alleging that officers and directors breached their fiduciary duty to shareholders by accepting a lower price than they would likely have gotten by opening bidding to other companies. They also alleged that Dimon had a conflict of interests during the negotiations because he stood to gain higher compensation and CEO status. Finally, they alleged that termination fees that were part of the deal created an insurmountable obstacle to any higher offer. The trial court dismissed their complaint, and the appeals court affirmed.

In its opinion, the justices wrote that Dimon didn't meet the classic examples of a self-interested officer director -- someone on both sides of the transaction or someone who stood to gain a personal benefit. Furthermore, they said, the courts of Delaware, which govern this transaction, have routinely rejected the argument that maintaining an officer position is a debilitating factor in negotiations. Similarly, the board in the transaction didn't breach its duty of care, they wrote, because it had no special obligation to inform itself of Dimon's no-premium offer, nor is there anything to suggest it didn't know about that offer.

Finally, the shareholders argued that termination fees built into the merger made it impossible to entertain another offer, which constituted a breach of the board's duty of care. Importantly for Illinois business litigators, the justices also wrote that the two-stage test required by the Delaware Supreme Court in Unocal Corporation v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003) didn't apply. The court pointed out that the board retained a "fiduciary out," termination fees were reciprocal and the shareholders retained the right to vote against the merger. Thus, the appeals court upheld dismissal of the case with prejudice.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Breach of Fiduciary Duty , Illinois Business Corporation Act , Shareholder Disputes

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In a shareholder and breach of fiduciary duty dispute arising from a probate case involving a closely held corporation with two shareholders, the Illinois Third District Court of Appeal has ruled that a shareholder agreement made by a decedent does not allow the remaining shareholder to execute the decedent's will in bad faith. In re Estate of Talty, No. 3–06–0669 (Oct. 29, 2007).

Thomas Talty owned 50% of a closely held corporation (an auto dealership in Morris, Illinois), with his brother William Talty. They each also owned half of the land the dealership was built on, and had an interest in half of an adjoining parcel of land owned by a land trust. Thomas wrote a will in 2000 naming William as executor and naming Thomas's wife, Helen Talty, as sole residual beneficiary of the estate.

The will gave William the right to purchase Thomas's shares of the dealership from his estate, but required that the purchase price be determined by an independent appraiser appointed by the probate court. Similarly, it gave William the right to purchase Thomas's half of the land, but at fair market value set by an independent appraiser approved by the probate court. Separately, in 2001, William and Thomas made a corporate agreement allowing their company to buy the shares of any deceased shareholder. It specified that the fair market value of the shares should be determined by an accountant agreed on by the company and the decedent's representative, or, if they couldn't agree, appointed by the probate court.

After Thomas's death in 2001, William, acting as executor, agreed with the company that Robert Gordon would be the accountant to value the stock. Gordon was already the corporation's accountant, Thomas and Helen Talty's personal accountant, and Thomas and William Talty's cousin. A non-relative recommended by William's lawyer appraised the land. In neither case was Helen or the probate court consulted. Both assessed their respective properties considerably less than what they were later revealed to be worth. The closing date for the sales was set for six days from the day Helen's attorney received a letter notifying him; he filed an emergency motion with the probate court to stop the closing as soon as he read the letter. The probate court denied Helen's motion and proceeded with the sales.

Four months later, Helen filed a petition to set those sales aside and remove William as executor. At that trial, the court found that Thomas had waived William's clear conflict of interests, but William acted in bad faith and abused his discretion. Thus, the trial court removed William as executor, set aside the sales, appointed independent appraisers and awarded Helen attorney fees and other costs. The total of the balance of the sales, rents from the land, and fees and costs due to Helen totaled nearly $2 million.

William appealed on a variety of grounds, but the appellate court affirmed. In its analysis, the court noted that the stock agreement may well have superseded Thomas's will, but it was irrelevant -- William breached his fiduciary duty as executor when he failed to make complete disclosures to Helen. Because William admitted to not disclosing important information and their attorneys had minimal contact, the appeals court declined to overturn the trial court's determination of bad faith.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Closely Held Businesses , Illinois Appellate Courts , Illinois Business Corporation Act , Shareholder Disputes

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A minority shareholder may withdraw his complaint under the Illinois Business Corporation Act of 1983, because the majority shareholder failed to meet requirements of that law, the Illinois Third District Court of Appeal ruled in an Illinois shareholder dispute lawsuit. Lohr v. Havens, 3-06-0930 (Nov. 11, 2007).

Charles Lohr owned a large minority of the stock in Phoenix Paper Products, Inc., a closely held private corporation in Illinois. He and another shareholder, James Durham, became concerned about possible financial mismanagement by the majority shareholder and president, Terry Havens, and their accountant, Samuel Morris. In months of correspondence, they accused Havens and Morris of taking unspecified inappropriate actions without shareholder approval.

This culminated in a 2003 lawsuit by Lohr alleging that Havens and Morris were misusing the company’s resources and acting illegally. Count I of the suit asked the court to either order a buyout of all Lohr’s stock or dissolve the company. Havens filed a timely election to buy Lohr’s shares, but Lohr accused Havens of illegally doing this without shareholder approval. After two years of discovery, Lohr asked to withdraw Count I and its associated demands, but Havens objected. The trial court found that because Havens hadn’t notified shareholders about the election, it was invalid, allowing Lohr to dismiss Count I of his complaint. Havens appealed.

The Illinois Third District Court of Appeal ruled that because Havens did not notify other shareholders of the election, the election was invalid, leaving Lohr free to drop his claim. In its analysis, the court noted that a proper election would stop a shareholder in Lohr’s position from dismissing a petition -- but the plain language and the intent of the law both require notice of an election to shareholders within ten days. For the same reasons, the court also disagreed with Havens’s contention that the trial court was required to hold a hearing to assess equities before allowing Lohr to dismiss his petition.

As Chicago, Oak Brook and Naperville business and shareholder rights litigators with a substantial practice in business and shareholder disputes we’re always pleased to see clarifications of Illinois business law from the courts.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Breach of Fiduciary Duty , Closely Held Businesses , Illinois Appellate Courts , Illinois Business Corporation Act , Shareholder Disputes

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Experienced Illinois business litigators probably recognize Professor Charles W. Murdock of the Loyola University Chicago School of Law as a former Illinois Deputy Attorney General, former Loyola Dean and expert on Illinois business law. Given his status, it was with great interest that we read some of his scholarship on the concept of fairness in conflicts between shareholders or other parties interested in a business, especially in situations where the majority is using its greater power against a minority. These papers are a few years old, but they directly address some of the issues that are important to our firm and our clients in corporate freeze-out or squeeze-out litigation, breach of fiduciary duty and other internal business disputes in closely held companies.

In Fairness and Good Faith as a Precept in the Law of Corporations and Other Business Organizations, 36 Loy.U.Chi. L.J. 551 (2005), Murdock addresses the fiduciary duty of good faith and fairness that controlling interests of a business owe to minority interests. Noting that this internal duty is a fairly recent legal phenomenon, he surveys caselaw on the subject from around the country that applies to closely held corporations, public corporations and LLCs. Noting that the Uniform Limited Liability Company Act (ULLCA), a model law adopted by several states, doesn't include language that gives members of an LLC fiduciary duties to one another, he praises Illinois for modifying that language to protect members in the updated Limited Liability Company Act.

Another of Murdock's articles that directly addresses issues important to us is 2004's Squeeze-outs, Freeze-outs and Discounts: Why Is Illinois in the Minority in Protecting Shareholder Interests?, 35 Loyola Chicago L.J.737 (2004). As you might expect from the title, Murdock argues in the article that Illinois business law, despite its "pro-shareholder" reputation, fails to protect minority shareholders in "fair value" proceedings. (Fair value proceedings are intended to resolve conflicts when majority shareholders want to do something that would harm the minority shareholders.) Until recently, those proceedings often led to marketability and liquidity discounts imposed on minorities, and the courts usually allowed it -- giving rise to Murdock's criticism. However, amendments to the Illinois Business Corporation Act in 2007 prohibited these discounts "absent extraordinary circumstances." While the article is now out of date, fortunately for minority shareholders in Illinois, it still provides good arguments for the change and a survey of common circumstances under which fair value proceedings might arise.

Posted by Peter S. Lubin and Vincent L. DiTommaso | Permalink | Email This Post

Posted In: Breach of Fiduciary Duty , Illinois Appellate Courts , Illinois Business Corporation Act , Illinois Limited Liability Company Act , Shareholder Disputes , Shareholder Freeze Out , Shareholder Squeeze Out , Stolen Corporate Opportunies

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