Illinois Court Rules that Minority Shareholder Failed to Establish Violation of Right to Examine Corporate Books and Records

Minority shareholders in closely held businesses generally lack the ability to control the actions of a company which makes them vulnerable to oppression from the controlling shareholder or shareholders. Minority shareholder oppression claims frequently include allegations that the controlling shareholders have funneled company money or resources to themselves and attempted to hide the misconduct by excluding minority shareholders from accessing books and records. Minority shareholders in Illinois are not without recourse, however, as they have a statutory right to examine the corporation’s books and records. As the First District appellate court recently reminded us, the right to examine corporate books and records demands compliance with certain technical requirements.

The case, Elleby v. Forest Alarm Service, Inc., was filed by a minority shareholder, Ruth Elleby, who owned a 33.5% interest in Forest Alarm Service, Inc. which the complaint described as a family-owned, closed corporation. In addition to Elleby, Forest had three other shareholders: Linda Lichtenauer, Mark Coyle, and Ron Lyngen who owned 33.5%, 16.5%, and 16.5% of Forest, respectively. Coyle was the President and Secretary of Forest in addition to being a shareholder.

In 2017, Elleby contacted Coyle, through her attorney, to indicate that she was interested in “exercising her rights under the Illinois Business Corporation Act” to have Forest or its shareholders purchase her interest in Forest. In an effort to determine whether the offered amount for her shares was reasonable, Elleby’s attorney requested certain corporate records such as “client lists, profit and loss statements, balance sheets” along with credit card statements for credit cards used to pay company invoices. Her attorney followed up with another letter claiming that Elleby’s “access to the on-line company financial and banking records” had been blocked. Forest later produced certain records to Elleby after her attorney sent a letter to Coyle in his capacity as Forest’s “President and Registered Agent.”

Dissatisfied with the production, Elleby filed a complaint against Forest and the other shareholders alleging breach of fiduciary duty and a violation of her right to examine the corporation’s books and records under Section 7.75 of the Illinois Business Corporation Act, 805 ILCS 5/7.75. The defendants moved to dismiss the complaint. The trial court dismissed all claims against the shareholders and granted the company judgment on the pleadings as to the count against it.

On appeal, the appellate court recognized a minority shareholder’s right to examine certain corporate books and records but explained that stating a valid claim required Elleby to allege that she (1) was a shareholder of Forest (2) who made a written demand upon Forest (3) stating with particularity the records she wished to examine and (4) the purpose therefor. Additionally, Elleby was required to allege that her demands went unheeded.

The court first rejected the defendants’ argument that Elleby’s claim failed because she requested “production” of company records and not simply to “examine” them. The court explained that “we do not believe that section 7.75(b) requires shareholders to say the magic word ‘examine’ in order to be entitled to a corporation’s books and record,” because “in order for a shareholder to examine a corporation’s books and records, they must first be produced in some fashion.”

Nonetheless, the court found that Elleby’s claim failed because she could not establish that her demands to examine the company’s books and records was refused. The court found that her initial demand sent to the individual shareholders was insufficient because Section 7.75 expressly requires the demand to be made on the corporation itself. The court found that Elleby had made only one proper request to the corporation itself—a fact it used to distinguish Elleby’s claim from other cases alleging multiple unheeded requests which were found sufficient to state a claim. The court further found that Forest actually did produce documents in response to Elleby’s demand. Accordingly, the court concluded that Forest had not denied Elleby her statutory right to examine the books and records.

The court’s full opinion is available online here.

Our Chicago breach of fiduciary duty and business litigation attorneys have defended and prosecuted minority oppression, business divorce, stolen corporate opportunity and breach of fiduciary duty lawsuits for more than three decades.

Super Lawyers named Chicago and Elmhurst business litigation and fiduciary duty attorneys Peter Lubin and Patrick Austermuehle a Super Lawyer and Rising Star respectively in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Lubin Austermuehle’s Oak Brook and Chicago shareholder oppression lawyers have over thirty-five years of experience litigating complex class action, consumer rights, and business and commercial litigation disputes. We handle emergency business lawsuits involving injunctions, and TROS, covenants not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits in addition to disputes involving breaches of fiduciary duty. In every case, our goal is to resolve disputes as quickly and successfully as possible, helping business clients protect their investments and get back to business as usual. From offices near Aurora and Elgin, we serve clients throughout Illinois and the Midwest.

 

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