Articles Posted in Disputes Between Business Owners

When corporations are owned equally by two shareholders or two groups of shareholders and those shareholders or shareholder groups have equal representation on the board of directors, if disputes between the shareholders arise, deadlock on the board can result.  The Illinois Business Corporation Act allows shareholders of Illinois corporations to petition a circuit court to order remedies to resolve deadlock on the corporation’s board.  In Osaghae v. Oasis Hospice & Palliative Care, Inc.[1], the Illinois Appellate Court recently addressed, for the first time, the issue of whether the circuit court has authority to order a shareholder that did not petition the court to resolve the deadlock to sell his or her shares to the corporation. The appellate court held that the circuit court does, in fact, have such authority and that the court ordered sale of the non-petitioning shareholder’s shares does not constitute an illegal forfeiture.  The case is also significant because of the emphasis placed by the court on the shareholders’ respective roles in the business in analyzing the appropriate remedy to resolve the deadlock.

The case involved Oasis Hospice and Palliative Care, Inc. (Oasis), a corporation formed by Mabel Osaghae (Osaghe) and Olufolasade Bello (Bello), two former friends, to provide home hospice services.  Mabel and Bello each received fifty percent of the shares.  Bello primarily ran the business while Mabel and her husband provided most of the funding.  Disputes arose between the shareholders as to how Bello was spending the corporation’s funds and as to Mabel and her husband’s claim that the corporation was obligated to repay money that they had advanced to the company.  Because the disputing shareholders had equal representation on the board of directors, a deadlock existed on the board that could not be resolved by the shareholders.  Mabel and her husband sued the corporation for breach of an alleged oral loan agreement.  Bello then intervened in the lawsuit and requested, pursuant to Section 12.56 of the Illinois Business Corporation Act (Section 12.56), that the court order Mable to sell her shares to the corporation to resolve the deadlock.

Where the directors of a corporation are deadlocked, the shareholders are unable to break the deadlock, and the deadlock is either causing irreparable injury to the corporation or preventing the corporation from being conducted to the general advantage of the shareholders, Section 12.56 allows a shareholder to petition the circuit court to order a remedy to resolve the deadlock.  Subsection (b) of Section 12.56 lists twelve different remedies that are available for the circuit court to order to resolve the deadlock.  Those remedies include: the removal from office of any officer or director, the appointment of any individual as an officer or director, the appointment of a custodian to manage the corporation, the submission of the dispute to mediation or another form of non-binding alternative dispute resolution, the purchase by the corporation or one or more of the other shareholders of all of the shares of the petitioning shareholder for their fair value, and the dissolution of the corporation if none of the other listed remedies or any other alternate remedies are sufficient to resolve the deadlock.

In AmerisourceBergen Corp. v. Lebanon County Employees’ Retirement Fund1, the Delaware Supreme Court recently addressed the issue of whether a stockholder seeking inspection of a corporation’s books and records pursuant to Section 220 of the Delaware General Corporation Law (“Section 220”) for the purpose of investigating mismanagement or wrongdoing by the corporation or its fiduciaries must demonstrate that the alleged mismanagement or wrongdoing is actionable in order to establish a proper purpose for the inspection.

There is a divergence in decisions of the Delaware Court of Chancery as to this issue. Some Court of Chancery opinions have held that a stockholder must demonstrate that alleged corporate mismanagement or wrongdoing is actionable in order to state a proper purpose under Section 2202. Other Court of Chancery decisions have held that stockholders are not required to demonstrate that the alleged mismanagement or wrongdoing is actionable in order to assert their Section 220 inspection rights3. The position that stockholders must demonstrate actionable wrongdoing found some support in the Delaware Supreme Court’s summary affirmance of the Court of Chancery’s decision in Southeastern Pennsylvania Transportation Authority v. AbbVie, Inc.4. In AbbVie, the Supreme Court summarily affirmed a Court of Chancery decision holding that a stockholder had not stated a proper purpose for the requested inspection because the corporation’s directors were protected by an exculpatory provision of the corporation’s certificate of incorporation that was authorized by Section 102(b)(7) of the Delaware General Corporation Law (“DCGL”).5

However, in AmerisourceBergen, the Supreme Court squarely addressed the issue of whether a stockholder must establish the actionability of mismanagement or wrongdoing in order to demonstrate a proper purpose under Section 220 and held that a stockholder need not demonstrate that the alleged mismanagement or wrongdoing is actionable6. To the extent that its summary affirmance in AbbVie suggested otherwise, the AmerisourceBergen Court expressly overruled that decision.7

While members of limited liability companies form their companies with the intention of productively working together, the development of disputes between members is common. When those disputes cannot be resolved, it often makes sense for one or more of the members to exit the company. The exit may be accomplished through the redemption by the company or the purchase by the remaining members of the departing member’s interest.

Often a limited liability company’s operating agreement will provide a mechanism for members who no longer wish to remain members to exit the company by requiring the company to purchase their interests and will provide an agreed upon method for valuing those interests. However, where the company’s operating agreement does not address the situation in which a member wishes to exit the company and where the remaining members will not voluntarily agree to purchase or to have the company redeem the departing member’s interest, members of Illinois limited liability companies must look to the Illinois Limited Liability Company Act (the LLC Act), 805 ILCS 180/1 et seq., to determine their right to exit the company through the forced purchase of their interests. Amendments to the LLC Act that became effective on July 1, 2017 have provided a new right to members of Illinois limited liability companies, dissociated members, and transferees of distributional interests, in certain situations, to petition a court for an order requiring that their interests be purchased.

As amended, section 35-1(a)(4) of the LLC Act provides that members or dissociated members of limited liability companies may petition a court for an order requiring the buyout of their interests where: the economic purpose of the company has been or is likely to be unreasonably frustrated, the conduct of all or substantially all of the company’s activities is unlawful, or it is not otherwise reasonably practicable to carry on the company’s business in conformity with the articles of organization and the operating agreement. Additionally, section 35-1(a)(5) provides that members or transferees of distributional interests may petition a court for an order requiring the buyout of their interest where the managers or controlling members have acted, are acting, or will act in a manner that is illegal or fraudulent or the managers or controlling members have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.

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