Articles Posted in Shareholder Oppression

In the business world of closely held companies in Illinois, minority shareholders often find themselves vulnerable to what is known as a “freeze out” or “squeeze out.” This blog post delves into this phenomenon, exploring what it means, how it happens, and the legal backdrop in Illinois that governs such situations.

What is a Freeze Out/Squeeze Out?

A freeze out or squeeze out occurs when majority shareholders in a closely held company engage in practices aimed at marginalizing, reducing, or eliminating the minority shareholders’ stake in the company. This can be done in various ways, such as refusing to declare dividends, terminating employment, or other tactics that essentially force minority shareholders to sell their shares at a reduced value.

Common Tactics Used

  1. Withholding Dividends: Majority shareholders may decide not to declare dividends, thereby cutting off a key financial benefit of holding shares.
  2. Employment Termination: Minority shareholders who are employed by the company might be terminated or demoted.
  3. Denying Access to Information: Minority shareholders might be denied access to important company information, impacting their ability to make informed decisions.
  4. Dilution of Shares: The company might issue more shares, diluting the minority’s ownership percentage.

Legal Framework in Illinois

In Illinois, the rights of minority shareholders in closely held corporations are protected under various statutes and case law. The Illinois Business Corporation Act provides certain protections and remedies for minority shareholders, including the right to a fair valuation of their shares.

  1. Fiduciary Duties: Majority shareholders have fiduciary duties to the minority. Breach of these duties can form the basis for legal action.
  2. Oppression Remedies: The law provides remedies for “oppressive” actions by majority shareholders. This can include actions that are burdensome, harsh, or wrongful.

In Illinois, there are several significant cases that provide guidance on the treatment of minority shareholder or LLC member freeze-outs or squeeze-outs.

In “Vanco v. Mancini”, the court acknowledged the vulnerability of minority shareholders to freeze-outs or squeeze-outs where the majority, for personal rather than legitimate business reasons, deprives the minority shareholder of their office, employment, and salary. The court highlighted the availability of judicial remedies, including the dissolution of the corporation, in such instances.

The case of “Rexford Rand Corp. v. Ancel” further expanded on this issue. The court suggested the necessity of a fiduciary duty on shareholders in a close corporation as a protective measure against oppressive conduct by the majority. It also indicated that a minority shareholder who has been frozen out should rely on an oppressed shareholder lawsuit against the corporation seeking damages or dissolution. Interestingly, the court discussed whether a freeze-out terminates a shareholder’s fiduciary duty to a close corporation and concluded that a minority shareholder who has been frozen out no longer exercises influence over corporate affairs that gives rise to a fiduciary duty.

“Small v. Sussman” held that the injuries alleged by a minority shareholder were injuries to the corporation, thus only a shareholder derivative action was available. It also found that a freeze-out merger that, through a reverse stock split, eliminated a minority shareholder’s fractional share, did not support a constructive fraud claim. The court ruled that a minority shareholder cannot recover on a conversion claim against the majority shareholder and corporation in connection with a freeze-out merger that eliminated his fractional share.

Further to this, “Jaffe Commercial Finance Co. v. Harris” held that a majority, by merely voting its strength to effectively oust minority from participation in the business of a corporation, did not act oppressively within the meaning of the statute authorizing liquidation. Similarly, in “Jahn v. Kinderman”, it was held that frozen-out minority shareholders in closely held corporations may seek dissolution of the entity, and majority shareholders may avoid this result via a buyout of the minority at a “fair value” to be determined by the circuit court if the parties are unable to reach an agreement.

Lastly, “Bone v. Coyle Mechanical Supply, Inc.” found that majority shareholders’ conduct in failing to hold annual meetings, failing to observe corporate formalities in increasing bonuses and compensation, and effectively “freezing-out” minority shareholders could be considered as outrageous, due to evil motive or reckless indifference to the rights of others.

Please note that these cases provide a general outline of the law in Illinois on minority shareholder or LLC member freeze-outs or squeeze-outs, and the specific holdings may vary depending on the facts of each case.

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In closely held companies, particularly LLCs and corporations with a limited number of shareholders, the issue of compensation for owners and shareholders can be a legal minefield. A significant concern arises when majority owners, often also serving as executives, award themselves excessively high salaries or compensation. This practice, while appearing to be a clever business strategy, can veer into illegality, particularly if it’s done with the intent to minimize or avoid distributions to minority owners.

Understanding the Legal Framework

The legal principles governing such practices are rooted in the fiduciary duties that majority shareholders or LLC owners owe to minority stakeholders. These duties include the duty of loyalty, which mandates that decisions must be made in the best interests of the company and all shareholders, not just a select few.

When majority owners inflate their compensation unjustly, they may be breaching this duty. This is especially true if the inflated salaries negatively impact the company’s profitability or the ability to pay dividends or distributions to other shareholders.

Case Law and Legal Precedents

Various legal precedents highlight this issue. Courts have often scrutinized such practices under the lens of fairness and the fiduciary duties owed. For instance, in cases where the majority shareholders’ salaries are disproportionately high compared to the company’s overall financial health or industry standards, courts have found this to be a breach of fiduciary duty.

In cases such as Fleming v. Louvers International, Inc., courts have found that depriving a minority shareholder of his rightful pro rata distributions through excessive compensation can constitute a breach of fiduciary duty. Another case, Kovac v. Barron, identified a shareholder who committed constructive fraud by causing the corporation to pay him and his wife millions in excessive compensation, which was then concealed as “contract labor” on tax returns.

Certain regulations also provide guidance on this matter. For instance, compensation exceeding the costs that are deductible as compensation under the Internal Revenue Code are deemed unallowable for owners of closely held companies. The Small Business Administration (SBA) views the payment of excessive officers’ salaries as a type of withdrawal from a company, implying that the SBA may see such actions as an attempt to avoid excessive withdrawal limitations. Continue reading ›

In Illinois, the situation regarding LLC minority members bringing a derivative lawsuit for member oppression is quite specific. The Illinois Limited Liability Company Act allows LLC members to file a derivative action to protect the interests of the LLC. This is particularly relevant when the LLC itself has a cause of action, but the managers or members have failed to pursue it. Such a derivative action enables members to enforce the rights of the LLC and recover damages on its behalf.

However, it’s important to understand that a derivative action is distinct from a member oppression claim. While derivative actions are filed on behalf of the LLC for wrongs against the LLC, certain types of member oppression claims are brought by individual members against the controlling members for actions that unfairly prejudice the minority members’ rights or interests and case-specific injury to the minority member but not the LLC as a whole.

For a derivative action to be initiated, certain conditions must be met. The member initiating the action should not be a manager of the LLC, and they must have made a written demand on the managers or members of the LLC to take action to enforce the right. If the managers or members fail to take action within 90 days, the member can then file a lawsuit on behalf of the LLC. It is crucial to note that derivative actions are complex and can be costly, so seeking advice from an experienced business attorney is recommended.

For member oppression, minority LLC members in Illinois have legal options to protect their interests and seek remedies, such as judicial dissolution, breach of fiduciary duty claims, specific performance or injunctive relief, and buyout or monetary damages. Again, legal counsel is crucial in navigating these options and understanding the rights and legal remedies available under the Illinois Limited Liability Company Act.

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When a shareholder or LLC (Limited Liability Company) member faces a “freeze-out” or “squeeze-out,” they are typically being pushed out of the company’s decision-making process or their economic interests are being diminished. This can be a challenging and complex situation, requiring a careful and strategic approach. Here are some general steps that might be considered:
  1. Understand Your Legal Rights and Documents: Review the company’s governing documents, such as the bylaws, shareholder agreement, or operating agreement. These documents often outline the rights and obligations of shareholders or members and may contain provisions relevant to your situation.
  2. Gather Evidence: Document any actions that contribute to the freeze-out or squeeze-out. This could include meeting minutes, emails, financial statements, or any other relevant communications.
  3. Seek Legal Advice: Consult with an attorney who specializes in corporate law, particularly someone experienced in shareholder/member rights in LLCs or corporations. They can provide advice specific to your situation, including the interpretation of any legal documents and the identification of any breaches of fiduciary duties or violations of state laws.
  4. Explore Negotiation and Mediation: Before taking any legal action, consider whether the situation can be resolved through negotiation or mediation. These alternative dispute resolution methods can often be less costly and time-consuming than litigation.
  5. Consider Your Goals: Identify what you want to achieve. Do you want to regain your position in the company, receive compensation for your lost interests, or simply exit the company in a fair manner? Your goals will guide your strategy moving forward.
  6. Possible Litigation: If negotiations fail and your legal rights are being significantly infringed upon, litigation may be necessary. Your attorney can advise on the likelihood of success and the costs involved.
  7. Financial Implications: Consider the financial impact of your chosen course of action, including legal fees, potential loss of income, and any tax implications.
  8. Communication with Other Shareholders/Members: If other shareholders or members are also being affected, it might be beneficial to communicate with them. There could be strength in numbers, either in negotiations or in legal action.
  9. Understand the Impact on Relationships: Consider the long-term business relationships and how they will be affected by your actions. Sometimes the best legal strategy might not align with your long-term business or personal relationships.
  10. Plan for the Future: Regardless of the outcome, think about your future with or without the company. This might involve considering other business opportunities or roles.

Every situation is unique, and the best course of action will depend on the specific circumstances, the governing laws of the state where the LLC or corporation is registered, and the details of the company’s governing documents. It’s crucial to balance legal considerations with practical business and personal considerations.

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Excessive management fees charged by a majority owner can potentially be the basis for a derivative lawsuit in certain circumstances. In corporate law, a derivative lawsuit is a legal action brought by shareholders on behalf of a corporation against third parties, often including insiders such as officers, directors, or controlling shareholders. The key issues in such a lawsuit typically involve allegations of breach of fiduciary duty, abuse of control, fraud, or mismanagement.

When a majority owner charges excessive management fees, it may be construed as a breach of fiduciary duty or misuse of their position to the detriment of the corporation and its minority shareholders. In such cases, the following elements are often considered:

  1. Breach of Fiduciary Duty: Majority owners owe a fiduciary duty to the corporation and its shareholders. Charging excessive fees could be seen as a breach of this duty, especially if it harms the corporation’s financial health or is not in the best interest of all shareholders.
  2. Fairness and Reasonableness: The fees must be fair and reasonable. If the fees are exorbitant compared to industry standards or the services rendered, it could be a ground for legal action.
  3. Impact on Minority Shareholders: If the excessive fees adversely affect the minority shareholders or the value of their shares, it can be a strong basis for a derivative suit.
  4. Corporate Governance and Approval Processes: The procedures followed in approving the fees are also important. If the majority owner bypassed normal governance processes or used their influence to approve the fees without proper oversight, it could strengthen the case for a lawsuit.
  5. Jurisdiction and Specific Laws: Laws regarding fiduciary duties and shareholders’ rights vary by jurisdiction. The specific legal standards and precedents in the jurisdiction where the corporation is incorporated will play a critical role.

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Choosing the best attorneys for a corporate oppression matter in Illinois involves considering several factors. Look for a legal team with extensive experience in corporate law and specifically in handling shareholder disputes and oppression cases. They should have a strong track record of successfully advocating for minority shareholders’ rights. Also, consider firms that offer personalized attention to understand the unique aspects of your situation and provide tailored legal strategies. It’s important to choose attorneys who are adept in both negotiation and litigation, as resolving these disputes can require a flexible approach. Firms like Lubin Austermuehle, known for their experience in business litigation, including shareholder and LLC member disputes, is a good choice. Continue reading ›

The duty of oversight, often referred to within the context of corporate governance, is a critical aspect of the responsibilities of a corporation’s board of directors. This duty is essentially the requirement that board members are attentive to and oversee the business and affairs of the corporation, including its compliance with the law and its risk management processes. The duty of oversight is a component of the fiduciary duties that directors owe to the corporation and its shareholders.

The case In re McDonald’s Corp. S’holder Deriv. Litig., 2023 WL 387292, C.A. No. 2021-0324-JTL, at *1, *9 (Del. Ch. Jan. 26, 2023) is centered around allegations that the McDonald’s directors overlooked signs of a corporate culture permitting sexual harassment and misconduct from 2015 to 2020. The plaintiffs, who are shareholders, contend that this resulted in harm to the company due to subsequent employee lawsuits, loss of employee trust, and a damaged reputation. Nine directors who served during this period were named as defendants.

David Fairhurst, who served as Executive Vice President and Global Chief People Officer of McDonald’s from 2015 until his termination in 2019, was among the defendants. The plaintiffs argued that Fairhurst, as a fiduciary, was aware of potential issues with sexual harassment and misconduct in the company. They claimed that under his leadership, a culture of sexual misconduct and harassment was allowed to develop, leading to coordinated Equal Employment Opportunity Commission (EEOC) complaints, a 30-city walkout, and a second round of coordinated EEOC complaints, followed by a second one-day strike in 10 cities.

To fully grasp how this case has impacted Delaware Law concerning the duty of oversight, it is essential to understand the concept of a Caremark claim. This type of “failure of oversight” theory is observed to be one of the most challenging theories in corporation law upon which a plaintiff might hope to win a judgment. Under Delaware law, plaintiffs must plead with particularity that there were so-called ‘red flags’ that put the directors on notice of problems with their systems, but which were consciously disregarded. Continue reading ›

Illinois is home to a vibrant business landscape, with partnerships being a popular choice for entrepreneurs and professionals seeking to collaborate. However, like any business relationship, disputes can arise in partnerships. When facing a partnership dispute in Illinois, having the right legal representation is crucial. In this blog post, we’ll explore the best lawyers to handle Illinois partnership disputes, guiding you toward skilled professionals who can help you navigate these complex legal waters.

  1. Business Litigation Experience: When dealing with a partnership dispute, you want a lawyer with extensive experience in business litigation. Look for attorneys who concentrate in resolving complex business disputes, including those related to partnerships. They should have a deep understanding of Illinois business laws, contract law, and the intricacies of partnership agreements.
  2. The ADR Alternative: Alternative dispute resolution (ADR) methods, such as mediation and arbitration, can be effective ways to resolve partnership disputes without going to court. Seek out lawyers who are well-versed in ADR processes and can guide you through negotiation and settlement discussions.
  3. The Experienced Negotiator:Effective negotiation is often the key to resolving partnership disputes amicably. Lawyers skilled in negotiation techniques can help you reach favorable settlements, saving time and money in the long run.
  4. The Seasoned Corporate Attorney:Many partnership disputes involve complex corporate structures and governance issues. Lawyers with a background in corporate law can provide valuable insights into the intricacies of partnership agreements and the rights and responsibilities of partners.
  5. The Local Legal Expert: Partner with attorneys who have a deep understanding of Illinois state laws and regulations, as well as familiarity with local court procedures. Local knowledge can be invaluable when navigating the Illinois legal system.
  6. The Collaborative Problem Solver:A lawyer who encourages collaboration and teamwork can often help facilitate smoother resolution processes. Look for professionals who prioritize finding solutions that benefit all parties involved.
  7. The Seasoned Litigator: In some cases, litigation becomes unavoidable. Lawyers with strong litigation skills can represent your interests effectively in court, advocating for your position and protecting your rights.
  8. The Reputation Matters: Investigate lawyers’ reputations within the legal community. Seek referrals or read reviews and testimonials to gain insights into their track record of successfully handling partnership disputes.
  9. The Client-Centered Advocate: Choose attorneys who prioritize your needs and concerns. Effective communication and a client-centered approach can make the legal process more manageable during the stress of a partnership dispute.
  10. The Problem-Solving Team: In complex partnership disputes, assembling a legal team with diverse skills and areas of expertise can be advantageous. Your lawyers should collaborate seamlessly to address all aspects of your case.

Navigating partnership disputes in Illinois demands legal expertise, negotiation skills, and a deep understanding of state laws and regulations. The best lawyers to handle these disputes are those who combine these qualities and prioritize finding effective, efficient, and mutually beneficial resolutions. With the right legal team by your side, you can protect your interests and work towards a favorable outcome in your Illinois partnership dispute. Continue reading ›

Shareholder derivative lawsuits can be particularly impactful for closely held companies in Illinois. These lawsuits provide an avenue for shareholders to address wrongdoing by officers, directors, or majority shareholders, and to protect the company’s best interests. In this blog post, we’ll explore the best way to prosecute a shareholder derivative lawsuit for a closely held Illinois company, considering the unique dynamics of such entities.
  1. Understand the Closely Held Company Dynamics:Closely held companies typically have a limited number of shareholders, and often, those shareholders are actively involved in the company’s management. Understanding the close-knit nature of these businesses is essential when prosecuting a derivative lawsuit. Recognize that personal relationships and conflicts of interest may play a significant role.
  2. Engage Experienced Local Counsel:Given the specific nuances of Illinois corporate law and the potential complexities of closely held companies, it is crucial to engage experienced local counsel. Seek attorneys with a track record in closely held corporate litigation, who understand the intricacies of Illinois business statutes and court procedures.
  3. Preserve Evidence and Documents:As with any derivative lawsuit, preserving evidence and relevant documents is paramount. Ensure that you have access to all necessary corporate records and financial documents that may support your claims.
  4. Evaluate Your Standing:Verify that you have standing to bring a derivative lawsuit as a shareholder of the closely held company. This may involve confirming that you were a shareholder at the time of the alleged wrongdoing and that you have maintained your shares throughout the legal process.
  5. Thoroughly Investigate the Allegations:Conduct a thorough investigation into the allegations of wrongdoing within the company. It’s essential to gather evidence and build a strong case that demonstrates how the misconduct has harmed the company and its shareholders.
  6. Attempt Resolution Through Negotiation or Mediation:Given the close relationships in closely held companies, it may be worthwhile to explore options for resolution through negotiation or mediation before proceeding with litigation. Engaging in discussions with the parties involved may lead to an amicable solution that benefits all stakeholders.
  7. Draft a Well-Pleaded Complaint:Create a well-pleaded complaint that clearly outlines the allegations, the harm suffered by the company, and the legal basis for your claims. A well-drafted complaint is crucial to moving the case forward.
  8. Consider the Impact on Company Operations:Recognize that a shareholder derivative lawsuit can disrupt business operations and relationships within a closely held company. Weigh the potential benefits of the lawsuit against its impact on the company’s ability to function effectively.
  9. Stay Committed and Persistent:Legal proceedings for closely held companies may be emotionally charged and protracted. Stay committed to the process, work closely with your legal counsel, and be prepared for potential challenges.
  10. Protect the Interests of Minority Shareholders:If you are a minority shareholder, emphasize the importance of protecting the interests of minority shareholders during the litigation process. Ensure that any potential settlements or resolutions are equitable to all shareholders.

Prosecuting a shareholder derivative lawsuit for a closely held Illinois company requires a thorough understanding of the unique dynamics and challenges that these businesses present. By following the steps outlined above and working closely with experienced local counsel, you can navigate the complexities of closely held corporate litigation and strive to protect the best interests of the company and its shareholders.

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Limited Liability Companies (LLCs) have become a popular choice for business owners due to their flexibility and liability protection. However, in the realm of LLCs, disputes among members can arise, leading to conflicts and, in some cases, member oppression. In the state of Illinois, LLC member oppression is a serious issue that demands attention and understanding to navigate legal complexities and seek appropriate remedies.

Understanding LLC Member Oppression: LLC member oppression refers to situations where the majority members of an LLC engage in conduct that unfairly prejudices the rights or interests of minority members. These oppressive actions can take various forms, such as excluding minority members from decision-making, withholding crucial information, mismanagement of company affairs, or diverting opportunities that could benefit the LLC.

In Illinois, LLCs are governed by the Illinois Limited Liability Company Act (805 ILCS 180). This act provides a legal framework outlining the rights and responsibilities of LLC members and offers avenues for minority members who face oppression within the company.

Rights of LLC Members in Illinois: Under Illinois law, LLC members possess certain rights, including the right to access company records, participate in management decisions (unless otherwise specified in the operating agreement), and the right to fair treatment without discrimination or oppression. However, these rights can sometimes be compromised when majority members wield their power to the detriment of minority stakeholders. Continue reading ›

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