Articles Tagged with Director Deadlock

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.

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