Articles Posted in Shareholder Squeeze Out

After partners in a closely held corporation entered into years of adversarial litigation, a settlement agreement was reached. One of the partners later sued the other two, alleging that he was fraudulently induced into agreeing to the settlement when the defendant’s counsel misrepresented the financial position of the corporation at the time of the settlement. The circuit court dismissed the plaintiff’s complaint, finding that the defendants did not owe him a fiduciary duty during the litigation settlement discussions. The appellate court reversed, determining that because there was no document specifying that the parties’ relationship had been dissolved at the time of the settlement talks, the defendants still owed the plaintiff a fiduciary duty, and there was a question of material fact as to whether the resulting settlement agreement was valid. The appellate panel then reversed the decision of the circuit court.

Samuel Arndt, III, Nicholas Nardulli, and Diana Johnson were shareholders in Redhawk Financial Services, Inc. Arndt owned 49 percent of Redhawk’s shares; Nardulli was the controlling shareholder, a director, and the president of Redhawk; Johnson was a shareholder, a director, and the secretary of Redhawk. In December 2012, Redhawk filed a complaint against Arndt for breach of fiduciary duty. The complaint alleged that Arndt withdrew over $100,000 from Redhawk without an apparent business justification and also diverted Redhawk’s commissions into Arndt’s personal bank account. Arndt filed a counterclaim against Redhawk as well as a third-party complaint against Nardulli and Johnson, alleging breach of fiduciary duty and oppression of him as a minority shareholder. Continue reading ›

Investing is supposed to be a long-term strategy to build wealth, but expecting shareholders to wait more than 60 years before they can get a fair return on their investment is far beyond what any investor would consider reasonable.

That was allegedly the case for the minority shareholders of Promega Corp., the biotechnology company based in Fitchburg, Wisconsin. According to a lawsuit filed by shareholders back in 2016, Bill Linton, Promega’s founder and CEO, allegedly used manipulative and bullying tactics to become a majority shareholder of the company. His actions allegedly left the minority shareholders with no hope of getting a decent return on their investments before 2078 at the earliest.

Circuit Judge Valerie Bailey-Rihn, who has been hearing the case, has said that she was leaning towards the plaintiffs and agreeing that they had been oppressed by Linton’s actions. Now the only two things left to determine are 1) how to punish Promega and provide restitution for the minority shareholders who were allegedly oppressed by Linton’s actions; and 2) how to determine the price of the stocks for which the minority shareholders are allegedly owed compensation. Continue reading ›

After CEO and Chairman of closely held company was removed by board of directors, he sued, requesting specific performance of the removal of the other members of the board. The Chancery Court dismissed several claims in the complaint for want of personal jurisdiction, and also denied the CEO’s motion for summary judgment, finding that each side of the litigation alleged disputed facts and complex legal theories not appropriate for resolution on summary judgment.

In 2016, Craig Bouchard founded Braidy Industries, Inc., a Delaware corporation with principal places of business in Kentucky and Massachusetts whose purpose is to manufacture efficient and eco-friendly aluminum alloys. Bouchard served as CEO, Chairman of the board of directors, and Secretary. The board also consisted of John Preston, Charles Price, Michael Porter, and Christopher Schuh. All members of the board were Braidy stockholders.

In 2018, Bouchard and the other directors entered into an Amended and Restated Voting Agreement. The directors and Bouchard executed the agreement in their capacity as stockholders. The board unanimously approved the agreement, and the agreement was referenced throughout the Braidy bylaws. The agreement specified that only persons who were nominated in accordance with the agreement were eligible for election as directors. The agreement also contained provisions regarding the removal of directors. Continue reading ›

We obtained justice in a shareholder dispute and shareholder oppression case after Defendants hired a former partner of the judge.

The Sun-Times reported the story as follows:

Lawyer’s motives questioned after judge’s recusal 

Did lawyers for one side of a case hire the judge’s former law partner just so the judge would recuse himself?

It doesn’t matter — it “just simply looks bad,” Dorothy Kirie Kinnaird, presiding judge of the Cook County Circuit Court’s Chancery Division, wrote in a rare order knocking attorney Myron “Mike” Cherry off a case. Cherry is a heavyweight fund-raiser for Democrats such as former President Bill Clinton and 2004 presidential candidate
John Kerry.

Kinnaird found Cherry’s 11th-hour entry into the case of Yvonne DiMucci vs. Anthony DiMucci suspicious because the judge in the case, Peter Flynn, practiced law with Cherry for 23 years as the firm of Cherry & Flynn. And Cherry’s entry into the case just two days after Flynn ruled against Anthony DiMucci on some motions prompted Flynn to recuse himself.
Yvonne DiMucci’s lawyers suggested that could have been the goal of Anthony DiMucci’s’ attorneys. Yvonne alleges her brother-in-law, Anthony, froze her out of a business in which he and her late husband, Salvatore DiMucci, were equal partners. The case has dragged on for six years.

“The court believes that the filing of the appearance by Mr. Cherry under the circumstances of this case constitutes the appearance of impropriety and that no objective, disinterested observer would perceive otherwise,” Kinnaird wrote. “This court is specifically not finding that Mr. Cherry entered the case in order to force Judge Flynn’s recusal or in an attempt to
incur favor with him.” However, Kinnaird wrote, given that Flynn recused himself the last time Cherry was on a case, “a persuasive argument
can be made that . . . Mr. Cherry should have known that such a recusal would occur.”

Kinnaird called it “egregious” for Cherry to file his appearance on behalf of Anthony DiMucci without getting Flynn’s
permission, a sentiment echoed by other Chancery Court judges. Judges rarely, if ever, refuse to allow an attorney to join an existing legal team for a case, unless there appears to be
some conflict of interest, as charged in this case. Cherry did not appear in court to file his appearance as Kinnaird said is the custom. Rather, he sent Flynn a copy of the notice that he was joining the case.

“This court has never seen or heard of a situation in the Chancery Division where an attorney has filed an appearance without leave of court and then sent a copy of that appearance by messenger directly to the judge,” Kinnaird wrote. Kinnaird’s solution was to strike Cherry’s appearance from the record and transfer the case back to Flynn. Cherry can
seek Flynn’s leave to join the case. She ascribes no “ill motive” to Cherry or anyone else in the case. Cherry respectfully disagrees with Kinnaird’s ruling, saying the law allows anyone to have the attorney of his choice.

Cherry’s reading of the law is backed by Northwestern University Law Professor Steve Lubet and former Cook County Judge Brian Crowe, who authored an affidavit served on the court.
The law further states that a judge need only recuse himself for three years after practicing with a lawyer. Flynn left Cherry’s firm five years ago. Kinnaird said some Chancery Court judges continue to recuse themselves from cases involving their old firms 20 years after leaving them. Continue reading ›

When two sisters, minority shareholders and directors of a moving company, were denied access to corporate books, the trial court erred in finding that, as corporate directors, they had absolute access to corporate records. Rather, they had presumptive access and the corporation was required to demonstrate that request for documents was made for the improper purpose.

Barbara Munroe-Diamond, Sally Sharkey, James P. Munroe, and Michael F. Munroe are siblings and the shareholders and directors of the Pickens-Kane Moving and Storage Company. In the winter of 2013, the board of directors hired Ft. Dearborn Partners, Inc. to provide a fair market value for the company’s stock. The next summer, a valuation of $3158 per share for controlling share and $1522 per share for minority shares was issued. Controlling shares of the company were entirely owned by James and Michael Munroe, while Barbara and Sally owned minority shares.

The board of directors unanimously authorized the company to redeem minority shares for $1522 per share. In early 2015, following negotiation, the company paid $1600 per share for minority shares. Every minority shareholder except Barbara and Sally redeemed their stock. Both sit on the board of directors. In July 2016, Barbara and Sally made a demand upon the company to make available for inspection and copying any and all documents pertaining to the corporate minutes, stock certificates, lists of assets and liabilities, and other business records. James and Michael refused to comply with the request, arguing that Barbara and Sally gave no purpose for their request or how their request related to their duties as directors.

After negotiations for the records failed, the sisters filed a mandamus action in Illinois court seeking to compel production of the records. The circuit court entered an interim order requiring the brothers to allow access to the books, finding that the sisters, as directors, had an absolute and unqualified right to examine the books and records of the corporation. The brothers then appealed. Continue reading ›

Super Lawyers named Chicago and Oak Brook business trial attorney Peter Lubin a Super Lawyer in the Categories of Class Action, Business Litigation and Consumer Rights Litigation. Lubin Austermuehle’s Oak Brook and Chicago business trial lawyers have over thirty years experience litigating complex class action, consumer rights and business and commercial litigation disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist businesses and business owners who are victims of fraud.

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Members of the board of directors of a corporation have the responsibility to orchestrate the business in such a way that is advantageous to the shareholders and the continued growth and prosperity of the company. However, there are times when those directors may act in a way that serves their own interests, and the only way to protect the business is for shareholders to file a derivative suit on behalf of the company. Lubin Austermuehle is always researching new developments in this field of law, and our Chicago shareholder derivative action attorneys recently came across one such case filed here in the Northern District of Illinois, Eastern District federal court.

Reiniche v. Martin is a double derivative suit brought by individual plaintiffs who are shareholders of a corporation, Health Alliance Holdings (HAH), that itself is a primary shareholder of HA Holdings (Holdings), another corporation. Plaintiffs allege that Defendants sought to freeze them and other HAH shareholders out through a series of illegal and wasteful acts that resulted in an insider transaction to sell Holdings for $10 and debt relief to another company in which Defendants had an interest. That transaction was approved by Holdings’ board of directors in spite of the fact that there was no quorum present to do so, and HAH was denied its right to sit on the board. In doing so, Plaintiffs alleged that the Defendant directors and other shareholders of Holdings breached their fiduciary duties to the company. Defendants then moved to dismiss the suit under Federal Rule of Civil Procedure 12(b)(6), claiming that Plaintiffs lacked standing, their claim was untimely, and the claims are insufficient under the law and barred by the business judgment rule.

The Court held that Plaintiffs did not have double derivative standing because such standing is only granted in the context of a parent/subsidiary relationship, and HAH was only a shareholder in Holdings – it was not a parent or holding company of Holdings. The Court went on to say that because the individual Defendant shareholders were each minority owners, none of them had a controlling interest in Holdings, and therefore did not owe a fiduciary duty to the Plaintiffs. As such, the Court found no policy reason for invoking a double derivative action and granted Defendants’ motions to dismiss.

Continue reading ›

 

Our Oak Brook, Ill. shareholder dispute attorneys and Chicago business law lawyers took note of a recent appeals court decision in a heavily disputed case involving a family business. In Santella v. Kolton and Food Groupie Inc., Nos. 1-08-1329, 08-1357 & 08-1847 consolidated (Ill. 1st July 31, 2009), Rick Santella accused his sister, Mary Kolton, and her husband William of undermining the family’s business to enrich themselves once they became majority shareholders. The business is Food Groupie, Inc., which markets and sells use of anthropomorphic food characters and educational products that promote healthy eating. According to Santella, the intellectual property is the collective work of the family.

When Food Groupie was originally formed in 1987, Santella held a 35% interest; Mary and William Kolton held 25% each; and a non-party, their brother Ron Santella, held 15%. All four were named directors. In 1988, the plaintiff bought Ron Santella’s interest, giving him a 50% interest in the corporation to match the Koltons’ combined 50%. Shortly afterward, plaintiff transferred 1% of his interest to Mary Kolton, with the understanding that William Kolton would transfer his 25% to Mary, giving her a majority 51% interest with the idea that Food Groupie would be more successful if it was known as a woman-owned company. In exchange for this transfer, Santella claims, the parties executed an agreement that company decisions would be made only by a unanimous vote.

The business ran without incident until 2002. During that time, Santella claims Food Groupie made a profit each year between 1992 and 2001 and the three shareholders always unanimously approved compensation. But in 2002, Santella alleges that the Koltons called a shareholders’ meeting without him or Ron Santella, and gave themselves salary increases, bonuses and 401(k) contributions. This cost Food Groupie a total of 45% of gross company sales, despite a profit that year of only $15,000. The alleged ruse was repeated in 2003 and 2004. As a result, Santella claims, he was paid only one dividend of $1,470 during that time, rather than the $28,808 he believes he was entitled to as a 49% shareholder.

When he confronted his sister about this in 2003, he says she froze him out of the business decisions, changed the locks on the office and was interested only in buying him out. He further claims she usurped Food Groupie’s intellectual property by trademarking characters in her own name, and inappropriately licensed the company’s intellectual property without his consent. Finally, he claims the Koltons held a secret shareholder meeting in 2004 at which they voted to replace him with William’s brother, Anthony Kolton. He sued the Koltons, individually and as a shareholder derivative claim, for breach of the shareholder agreement, breach of fiduciary duty, usurpation of corporate opportunities and violations of the Illinois Business Corporations Act.

In 2005, that lawsuit resulted in the court’s appointment of John Ashendon as custodian of Food Groupie. In 2008, Santella filed an emergency motion to stop what he claimed was his sister’s plan to liquidate the company and move its misappropriated intellectual property to a similar business called Healthypalooza. He also alleged that the couple had continued to pay themselves inappropriately high salaries and commissions, and use the company’s profits for their personal legal defense. He sought to remove the Koltons as officers and enjoin them from using the company’s assets or competing with it, among other things. The court eventually found for Santella on some issues, removing the Koltons and ordering them to return the $144,019 in commissions they had been paid in 2005, 2005 and 2007. It said the court would appoint new officers and directors. It did not say any of these remedies were interlocutory or time limited.

The Koltons filed an interlocutory appeal in 2008, but failed to move to stay the repayment order or actually repay the $144,019. The trial court found them in contempt and ordered them to pay a fine for every day they were late. They eventually paid back the $144,019, but not the roughly $20,000 or so in fines.

On appeal, the Koltons argued that the relief granted to Santella was not supported by sufficient evidence or proof. Specifically, they argued that the Business Corporations Act requires a plaintiff like Santella to prove his claims of improper conduct before the court may order return of the allegedly improper bonuses or their removal as corporate officers. For that reason, they said, the court orders must be reversed. Santella made several arguments against the appeal, most notably that the appeals court lacked subject matter jurisdiction over the non-financial claims. The defendants filed their appeal pursuant to Rule 307(a)(1), which applies to appeals concerning injunctions, and Santella argued that the trial court’s orders removing and replacing directors and officers were not injunctions.

The First agreed with this, saying it lacked subject matter jurisdiction over those orders because they were not direct orders to the Koltons “to do a particular thing, or to refrain from doing a particular thing.” In fact, it took the analysis a step further and examined whether it had jurisdiction over the repayment order. That order was an injunction, the First wrote, but it also must be interlocutory to fall under Rule 307(a)(1). If it was a permanent order, it was outside the scope of the rule. The appeals court found that it was a permanent order, because it did not preserve the status quo. In fact, the court noted, the trial judge had specifically said so when she made her contempt ruling. The trial court had also made conclusions about the rights of the parties and had not time-limited the order. For those reasons, the First found that it also lacked subject matter jurisdiction over the repayment order, and dismissed the appeal entirely. The opinion noted that appellants may still seek a finding from the trial court under Rule 304(a).

Continue reading ›

 

As Illinois shareholder dispute and shareholder squeeze out and freeze out litigation attorneys, we were interested in a state appellate decision affirming that corporate bylaws may be abrogated by years of contrary practices. Kern v. Arlington Ridge Pathology, S.C., No. 1-07-2615 (Ill. 1st. Dist. Aug. 7, 2008) arose from corporate governance problems at medical corporation Arlington Ridge Pathology. Dr. Susan Kern was an original shareholder of Arlington when it was incorporated in 1994. Arlington had six shareholders originally, but that number dropped to three in 1999 and stayed there through most of the time until this suit was filed in 2005. The other shareholders and directors were Dr. Richard Regan, elected president of the board in 2005, and Dr. Kishen Manglani. Arlington had an exclusive agreement with Northwest Community Hospital, and its shareholders had offices and practiced there.

Arlington’s original articles of incorporation are silent on the issue of a quorum for doing business or configuration of the board. However, its bylaws say a quorum is a majority of directors and the board should be made up of four to nine directors who are shareholder employees and doctors. Similarly, the articles of incorporation do not specify requirements for board actions, but the bylaws say the board may remove a director with a vote of 80% of shares. They also require an 80% vote to adopt new bylaws. Despite the board requirement, Arlington operated with a three-member board for most of the time since 1999. According to Kern, there were no regular meetings, no changes to bylaws and only two special board meetings. All actions of the board were unanimous.

Conflicts arose between Kern and Bruce Crowther, chief executive officer at Northwest. She alleges that their relationship was never good, but it became worse after a dispute that led to filing an incident report with Northwest on Sept. 12, 2001. Later, in June of 2005, an Arlington employee filed a report with Northwest accusing Kern of unprofessional and improper behavior. Kern alleged that this led to a “circus investigation,” but Regan met with Crowther to say Arlington would handle it internally. Nonetheless, Kern said, Crowther sent Regan a letter around the same time threatening to end the hospital’s contract with Arlington if it didn’t either fire Kern or send her to professional counseling.

Regan called a special board meeting for Oct. 21, 2005 at 1:30 p.m. — but he and Manglani met beforehand with Arlington’s attorney. They voted to change the articles of incorporation to allow an alternation or amendment of the bylaws with a two-thirds vote. When Kern arrived for the meeting and connected her attorney by speaker phone, she was given the minutes of the earlier meeting and a required five-day notice of the change. Kern and her attorney objected to the earlier meeting, but Arlington’s attorney said they weren’t needed because the directors already knew her position. When the resolution came into force, Manglani and Regan made several more bylaw changes, including one that required a two-thirds vote to remove a director and terminate an employee.

Two days later, Kern filed this action against Arlington and Regan, later amended to include damages for conspiracy and breach of fiduciary duty. At trial, the court granted summary judgment to the defendants and denied Kern’s motion to reconsider. It found that, by operating for years with only three shareholders, Arlington had abrogated its bylaws. Thus, a quorum was present at the Oct. 21 pre-meeting meeting at which Manglani and Regan made their decision, and the amendment was proper, the trial court said. Kern appealed the summary judgment ruing.

On appeal, one controlling issue emerged: whether the trial court was correct to find that the Oct. 21 meeting between Regan and Manglani had a quorum. Kern argued that it did not, according to Arlington’s articles of incorporation and bylaws as well as Illinois caselaw and the Business Corporations Act. Illinois courts have found that articles of incorporation are enforceable contracts between corporations and their shareholders, she said. Furthermore, previous decisions by Arlington’s board had been made unanimously, with all members present. Thus, the absolute minimum number of shareholders for a quorum on Oct. 21 should have been three, she argued, because the bylaws set a minimum number at four. And because the bylaws specified an 80% vote for any change of the bylaws, Kern argued, the shareholders clearly wanted a supermajority.

The appeals court disagreed. It found authority for the trial court’s decision that the Arlington board had abrogated its quorum rule in Johnson v. Sengstacke, 334 Ill. App. 620 (1948) and The First Church of Deliverance v. Holcomb, 150 Ill. App. 3d 703 (1986). In both of those cases , courts found that years of practices that did not follow the bylaws abrogated those laws by implying the board members’ consent. The same is true in this case, the court said.

This formed the basis of its decision in favor of Arlington and Regan on almost all issues. Past practices and the Business Corporation Act dictated that there was a quorum; that a two-thirds rather than 67% vote was appropriate; and that summary judgment on the conspiracy and breach of fiduciary duty claims was proper because the other directors had taken no illegal actions. It also dismissed her conflict of interests claim against Regan and Manglani, saying the relevant section of the law applies only to outside corporate actions, not internal governance matters. The First affirmed the trial court’s rulings on all counts.

Continue reading ›

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.

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