ILLINOIS APPELLATE COURT HOLDS THAT, TO RESOLVE CORPORATE DEADLOCK, CIRCUIT COURTS MAY ORDER THE SALE OF THE SHARES OF A SHAREHOLDER WHO DID NOT PETITION THE COURT FOR RELIEF

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.

While twelve specific remedies are listed in listed in subsection (b), subsection (c) provides that those remedies “shall not be exclusive of other legal and equitable remedies that the court may impose.”  However, despite the non-exclusive language of subsection (c), upon a finding that the directors are deadlocked, courts generally order one of the remedies listed in subsection (b).

In Osaghae, Mabel and Bello requested that the court order competing remedies to resolve the deadlock.  Mabel requested that the court either appoint a receiver to run the company, order the parties to mediate, or dissolve the corporation.  Bello, on the other hand, requested that the court order Mabel to sell her shares to the corporation for the previously stipulated value of a fifty percent interest in the corporation.  In evaluating the different remedies suggested by the parties, the trial court balanced the equities and ordered the remedy requested by Bello- that the corporation purchase Mabel’s shares for their stipulated value.

On appeal, Mabel argued that the court did not have authority to order that she sell her shares because she was not the shareholder that had petitioned the court for relief to resolve the deadlock and the purchase of the non-petitioning shareholder’s shares is not one of the authorized remedies listed in subsection (b).  She argued that, because subsection (b) authorizes the court to order the purchase of the petitioning shareholder’s shares by the corporation or the other shareholders, the Illinois legislature only intended to provide courts with authority to order the sale of a petitioning shareholder’s shares.  However, the court rejected that argument relying on the language of subsection (c) that provides that the remedies listed in subsection (b) are not exclusive.  Thus, the court held that subsection (c) does provide courts with discretionary authority to order the sale of a non-petitioning shareholder’s shares.

In evaluating the court’s exercise of that discretion, the court examined another rarely analyzed portion of Section 12.56 – subsection (d).  Subsection (d) provides that: “In determining the appropriate relief to order pursuant to this Section [12.56], the court may take into consideration the reasonable expectations of the corporation’s shareholders as they existed at the time the corporation was formed and developed during the course of the shareholders’ relationship with the corporation and with each other.”

Applying that guidance, the court observed that Oasis was Bello’s project and that she had operated the business since its inception, Mabel had never been directly involved in the operation of the business, and Mabel had expressed no interest in either purchasing Bello’s shares or running the company.  The court further noted that the dissolution remedy suggested by Mabel is a drastic remedy and the other remedies that she suggested such as the appointment of receiver to manage the company would all involve substantial cost.  The court, therefore, held that the trial court had properly exercised its discretionary authority under Section 12.56 in ordering that Mabel sell her shares to the corporation and that the remedy ordered was equitable.

It is noteworthy that, in determining that the forced sale of Mabel’s shares was the appropriate remedy, the court took into account the fact that Mabel had not expressed any interest in purchasing Bello’s shares.  Had both shareholders requested that the circuit court order the other shareholder’s shares be purchased, it is possible that the appellate court would not have found the forced sale the non-petitioning shareholder’s shares to be equitable.

Thus, in Osaghae, the Illinois Appellate Court analyzed two subsections of Section 12.56 that have been infrequently discussed in prior cases addressing Section 12.56- subsections (c) and (d).  The case is significant as the court made clear that, in cases of deadlock, pursuant to subsection (c), a circuit court can order that a non-petitioning shareholder’s shares be sold to the corporation or the other shareholders.  The case is also significant as the court further made clear that, pursuant to subsection (d), a circuit court may examine the shareholders’ respective roles in the company in determining whether the purchase by the corporation or the other shareholders of a non-petitioning  shareholder’s shares is an appropriate remedy.

[1]  2021 IL App (1st) 200515

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