NOTICE: Under Supreme Court Rule 367 a party has 21 days after the
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subject to modification, correction or withdrawal at anytime prior
to issuance of the mandate by the Clerk of the Court. Therefore,
because the following slip opinion is being made available prior to
the Court's final action in this matter, it cannot be considered
the final decision of the Court. The official copy of the following
opinion will be published by the Supreme Court's Reporter of
Decisions in the Official Reports advance sheets following final
action by the Court.
Docket No. 79097--Agenda 8--March 1996.
TIMOTHY J. SCHIRMER, Appellee, v. WILLIAM F. BEAR et al.,
Appellants.
Opinion filed October 18, 1996.
JUSTICE McMORROW delivered the opinion of the court:
The question presented in this appeal is whether, under
section 12.55 of the Illinois Business Corporations Act of 1983
(the Act) (805 ILCS 5/12.55 (West 1992)), a plaintiff shareholder
in a close corporation must prove grounds which would justify
dissolving the corporation as a prerequisite to receiving the
statutory remedy of having the corporation purchase his or her
shares. The appellate court concluded that a plaintiff does not
have to establish that dissolution is justified before a
corporation may be forced to buy a complaining shareholder's
corporate stock. 271 Ill. App. 3d 778. We allowed defendants'
petition for leave to appeal. 155 Ill. 2d R. 315. For the reasons
which follow, we affirm the judgment of the appellate court.
Background
Defendant William R. Bear Agency, Inc. (the Agency), is an
independent insurance agency located in Freeport, Illinois. The
Agency was incorporated in 1979, at which time 1,000 shares of
common stock were issued. Of these 1,000 shares, 750 were retained
by Mr. William R. Bear, previously the Agency's sole owner, and his
wife, Mrs. Jean M. Bear. The remaining 250 shares were purchased by
Mr. and Mrs. Bear's son, defendant William F. Bear (William), who
was also an employee of the Agency.
On May 1, 1982, the plaintiff, Timothy Schirmer, began working
for the Agency as an insurance broker. On that same date, two stock
purchase agreements were entered into. In the first, Mr. and Mrs.
Bear agreed to sell William 44 of their shares in the Agency and to
sell plaintiff 187 of their shares. In return for the 187 shares,
plaintiff made a $10,000 down payment and agreed to pay the
remaining balance of $66,670 in monthly installments at an interest
rate of 9.25% per annum. Plaintiff's total obligation for the
shares, including principal and interest, was approximately
$106,000. Also, under the first agreement, plaintiff received an
option to buy 53 additional shares of the Agency at $410 per share,
with further conditions of the sale to be decided at the time of
purchase.
Under the terms of the second stock purchase agreement, the
Agency bought back all of Mr. and Mrs. Bear's remaining 519 shares
for $212,790. This amount was to be paid in monthly installments of
$3,450.65, which reflected a 9.25% annual interest rate. The
Agency's total obligation for the shares was approximately
$290,000. William and plaintiff guaranteed payment for the 519
shares both individually and jointly. Because of the two stock
purchase agreements, as of May 1, 1982, plaintiff and William
became the sole shareholders of the Agency. William owned 294
shares, representing 61.1% of the outstanding stock, and plaintiff
owned 187 shares, representing 38.9%.
From May 1, 1982, until July 1990, plaintiff had a good
working relationship with William. During this time, plaintiff
earned an annual income from the Agency, plus annual bonuses for
increasing revenues by developing new accounts. The gross annual
commissions of the Agency, with plaintiff's help, increased from
$180,653 to $285,000. In addition, during this period, plaintiff
served as a corporate director of the Agency. William and defendant
Lawrence Peck, a retired accountant and friend of Mr. Bear, also
served as corporate directors.
The final installment payments under both of the 1982 stock
purchase agreements were due at the beginning of July 1990. At a
meeting held on July 2, 1990, William and plaintiff presented the
final payments to Mr. and Mrs. Bear and, in return, received their
stock certificates. At the same meeting, William and plaintiff,
acting in their capacity as shareholders, elected the board of
directors for the Agency. As in the past, this board consisted of
William, plaintiff, and Lawrence Peck. The directors' term of
office was to be for one year. Also during the same meeting,
William and plaintiff agreed to extend the terms of the first stock
purchase agreement until such time as a new agreement between
William and plaintiff could be completed. In addition, the value of
the corporation, later contested at trial, was declared to be
$500,000.
On July 18, 1990, plaintiff wrote to William expressing a
desire to exercise his option to purchase 53 additional shares of
the Agency pursuant to the terms of the first stock purchase
agreement. Plaintiff enclosed a proposed payment plan with his
letter which stated that payment amounts and payment dates were to
be left to the discretion of the buyer. Two days later, on July 20,
1990, William met with plaintiff and rejected the offer. At the
same time, William informed plaintiff that, for business reasons,
he had closed the books of the Agency, thereby forgoing any bonuses
or profit sharing for the year.
On August 10, 1990, plaintiff wrote William a letter in which
he strongly protested William's decision to close the books of the
Agency and declared that doing so was not in the best interest of
the stockholders. Plaintiff further alleged that William had wasted
corporate assets. Plaintiff stated that he could not see himself
continuing with the Agency under current conditions and requested
that the Agency pay him $195,000 for his shares. This figure was
based on his percentage interest in the Agency and the $500,000
valuation established at the July 2, 1990, meeting. Plaintiff also
stated that once his shares were purchased, he would be willing to
either terminate his relationship with the Agency or continue on as
an employee with an annual salary equal to William's. The next day,
August 11, 1990, William wrote plaintiff a letter in which he
rejected plaintiff's proposals and advised plaintiff to have his
attorney contact William's attorney, John B. Whiton.
On August 20, 1990, William sent plaintiff a letter notifying
him of an annual directors' meeting to be held on August 30, 1990.
The letter did not contain any notice of intent to hold a
shareholders' meeting, to amend the bylaws, or to reduce the size
of the board of directors.
On August 27, 1990, Whiton, who also served as counsel for the
Agency, wrote to plaintiff, stating that plaintiff's letter of
August 10 was deemed a resignation effective no later than
September 15, 1990. Whiton also rejected plaintiff's asking price
for his stock and instead offered the price of $76,670. This figure
was derived from the first stock purchase agreement, which
permitted Mr. and Mrs. Bear to reacquire plaintiff's shares for the
principal price he paid if plaintiff resigned from the Agency or
was discharged for his conduct. Whiton's letter also noted that if
plaintiff refused to sell his stock, he faced the possibility of
remaining, for quite some time, a minority shareholder with no
input into how the Agency was run.
On August 30, 1990, at a meeting of the board of directors at
which plaintiff was present, William moved to amend the Agency's
bylaws to reduce the number of directors from three to one. William
voted his 61.1% of the Agency's shares in favor of the motion and
plaintiff voted his 38.9% against. The motion passed. William then
nominated himself as sole director of the Agency and was elected,
again on the strength of his ownership of 61.1% of the Agency's
shares. As sole director, William appointed himself president and
treasurer of the Agency, and appointed his wife secretary. William
also removed plaintiff's name from all corporate accounts and set
plaintiff's termination date for September 15, 1990. After that
date, plaintiff received no further income, bonuses, or other
benefits from the Agency.
On December 7, 1990, plaintiff filed the instant lawsuit in
the circuit court of Stephenson County, alleging that the
defendants wasted corporate assets and acted in an illegal,
oppressive, or fraudulent manner. No allegations were made
regarding corporate deadlock. At trial, plaintiff argued that he
had been exploited by William. Plaintiff maintained that William
had used him to finance the stock purchase agreements and then,
once the payments required under the agreements were completed,
illegally removed him from the Agency. Plaintiff prayed for
dissolution of the corporation or, in the alternative, an order
directing the Agency to buy plaintiff's shares.
After trial, the court concluded that plaintiff's removal as
corporate director and officer at the August 30, 1990, meeting was
"obviously illegal, but the record is devoid of any evidence that
plaintiff was harmed thereby." The court noted that the decision to
dissolve a corporation is discretionary, even when a finding of
illegal conduct has been made. 805 ILCS 5/12.50 (West 1992) ("A
Circuit Court MAY dissolve a corporation: ***" (emphasis added)).
The court declined to exercise its discretion, concluding that
plaintiff had failed to prove that defendants engaged in conduct
which justified dissolving the Agency. However, the court held that
plaintiff could recover the fair value of his shares pursuant to
section 12.55 (805 ILCS 5/12.55 (West 1992)). The court then
ordered a hearing to be held to assess the value of plaintiff's
stock. Subsequently, upon defendant's motion to reconsider, the
court reversed itself, based solely upon the first district of the
appellate court's ruling in Coduti v. Hellwig, 127 Ill. App. 3d 279
(1st Dist. 1984). The Coduti court held that the Act's alternative
remedy of a purchase of plaintiff's shares could not be awarded
unless the plaintiff proved all of the elements necessary to
warrant dissolving the corporation. Coduti, 127 Ill. App. 3d at
294.
On appeal, the second district of the appellate court
essentially agreed with the circuit court's original ruling and
findings. The appellate court acknowledged, but declined to follow,
the interpretation of section 12.55 that was adopted in Coduti.
Instead, the appellate court held that a plaintiff does not have to
establish that dissolution is justified before the alternative
remedy of a forced purchase of shares may be granted under section
12.55. The appellate court reversed the circuit court's decision
refusing to order the Agency to purchase plaintiff's shares and
remanded the cause for a hearing to determine the fair value of
plaintiff's shares. This appeal followed.
Analysis
The provision at issue in this appeal, section 12.55 of the
Act, provides in pertinent part:
"(a) In either an action for dissolution pursuant to
Section 12.50 or in an action which alleges the grounds
for dissolution set forth in Section 12.50 but which does
not seek dissolution, the Circuit Court, in lieu of
dismissing the action or ordering dissolution, may retain
jurisdiction and:
* * *
(3) In an action by a shareholder, order a purchase
of the complaining shareholder's shares as provided in
subsections (f) and (g) below.
* * *
(f) The court, at any time during the pendency of
the action and upon the motion of the complaining
shareholder, may order the corporation to purchase the
shares of the complaining shareholder at a fair price
determined by the court ***.
(g) Either the corporation or any shareholder or
group of shareholders may, any time after filing of an
action for dissolution pursuant to subsection (b) of
Section 12.50, petition the court to purchase the shares
of a complaining shareholder ***." 805 ILCS 5/12.55 (West
1992).
Section 12.50 of the Act provides in pertinent part:
"§12.50. Grounds for judicial dissolution. A Circuit
Court may dissolve a corporation:
***
(b) In an action by a shareholder, if it is
established that:
***
(2) The directors or those in control of the
corporation have acted, are acting, or will act in a
manner that is illegal, oppressive or fraudulent; or
(3) The corporate assets are being misapplied or
wasted." 805 ILCS 5/12.50(b) (West 1992).
Plaintiff argues that section 12.55 does not require, as a
condition precedent to relief, proof of conduct which would entitle
him to corporate dissolution under section 12.50. Plaintiff notes
that by its express terms, section 12.55 permits alternative
remedies not only in actions brought solely under section 12.50,
but also in actions "which allege[ ] the grounds for dissolution
set forth in Section 12.50 but which [do] not seek dissolution."
805 ILCS 5/12.55(a) (West 1992). In addition, plaintiff notes that
the circuit court is given the discretion to order alternative
remedies "in lieu of dismissing the action or ordering dissolution"
(805 ILCS 5/12.55(a) (West 1992)) and, further, that under
subsection (f) the court may order a forced purchase of shares "at
any time during the pendency of the action" (805 ILCS 5/12.55(f)
(West 1992)). Based on this language, plaintiff maintains that the
filing of "an action which alleges the grounds for dissolution set
forth in Section 12.50" (805 ILCS 5/12.55(a) (West 1992)) is
essentially a threshold requirement for obtaining the alternative
remedies available under section 12.55. Once this requirement is
met, the court need only be apprised of the relevant facts.
Thereafter, if equity requires the awarding of an alternative
remedy, the court is permitted to grant one. Continuing, plaintiff
argues that because he filed an action which alleged grounds for
dissolution under section 12.50, i.e., waste, illegality and
oppression, and because the equities were in his favor, the trial
judge properly acted within his discretion when he initially
awarded the buyout of plaintiff's shares.
In contrast, defendants argue that the only way to effectuate
fair and uniform results under section 12.55 is to require a
plaintiff to prove all of the elements necessary to justify
dissolving the corporation under section 12.50. Defendants point
out that the decision to grant dissolution under section 12.50
remains discretionary even when it has been established that the
defendants engaged in illegal or oppressive acts, or wasted
corporate assets. 805 ILCS 5/12.50 (West 1992) ("A Circuit Court
may dissolve a corporation: ***"). Thus, defendants maintain that
in order to prove all the elements for dissolution in this case,
plaintiff must establish both that defendants engaged in the
alleged misconduct and that the conduct was severe enough to
warrant judicial dissolution. Because the trial court concluded
that dissolution was not warranted in the case at bar, despite the
finding of illegal conduct, defendants argue that the alternative
remedy of a buyout of plaintiff's shares should not be available.
Defendants also note that plaintiff's construction of section
12.55 does not provide an explicitly defined basis for awarding
relief. Defendants express concern that if this court approves
plaintiff's analysis of the statute, trial courts will have
"unfettered discretion to order the corporation to purchase the
minority shareholder's shares." Defendants urge this court to
follow the interpretation of section 12.55 adopted by the Coduti
court, which held that the provision "contemplates only an
alternative remedy, rather than a distinct action. Consequently,
the right to that remedy depends upon proof of ALL OF THE ELEMENTS
which would have entitled the party to a judicial dissolution ***."
(Emphasis added.) Coduti, 127 Ill. App. 3d at 294.
We agree with plaintiff that the plain language of section
12.55 provides a basis for relief independent of proof of grounds
for dissolution under section 12.50. The statute contemplates broad
discretion in the trial court in deciding to award a forced
purchase of shares, and unambiguously "provides for a separate and
distinct cause of action from Section 12.50." Kimmel v. Wirtz, 793
F. Supp. 818, 820 (N.D. Ill. 1992). Therefore, plaintiff's failure
to prove grounds entitling him to judicial dissolution does not
foreclose the availability of the alternative remedy of a forced
purchase of his shares.
However, we disagree with the remainder of plaintiff's
interpretation of section 12.55. Plaintiff's contention is that
section 12.55 gives the circuit courts the discretionary authority
to order the alternative remedy of a forced purchase of shares
without first making any findings of corporate waste, illegality or
other clearly specified wrongdoing. Defendants correctly point out
that plaintiff's interpretation of section 12.55 leaves the
elements of proof required under the statute completely undefined.
Thus, under plaintiff's interpretation, the circuit courts would be
left with no guidelines for determining what type of behavior
warrants awarding the forced purchase of shares, and reviewing
courts would have no way of determining when, if ever, a circuit
court had abused its discretion in awarding that remedy. Similarly,
under plaintiff's analysis of the statute, defendant corporations
would have no notice respecting what actions taken by the
corporation would justify ordering the forced purchase of a
shareholder's stock. We presume that in enacting section 12.55, the
legislature did not intend to produce an absurd, inconvenient or
unjust result. Baker v. Miller, 159 Ill. 2d 249, 262 (1994).
Accordingly, because plaintiff's proposed construction of section
12.55 poses unavoidable problems of application and raises
substantial questions of fundamental fairness, that construction
must be rejected.
We must also, however, reject defendants' explanation of what
proof is required under section 12.55. Defendants argue that all of
the elements which would entitle a plaintiff to judicial
dissolution must be proved in order for an alternative remedy under
section 12.55 to be available. In other words, defendants argue, a
plaintiff must establish both that the defendants engaged in the
alleged misconduct and that the misconduct was so wrongful as to
justify dissolving the corporation. This interpretation of section
12.55 would provide clarity and guidance for the courts, but it is
also illogical: plaintiffs would be required to prove that a
defendant's conduct was sufficiently egregious to warrant judicial
dissolution in order to receive the far less drastic remedy of a
buyout.
Moreover, defendants' interpretation of section 12.55 is
contrary to the legislative intent behind that provision. Judicial
dissolution is an extreme remedy which courts are properly
reluctant to order. See Coduti, 127 Ill. App. 3d at 283; Central
Standard Life Insurance Co. v. Davis, 10 Ill. 2d 566, 576 (1957).
Prior to the enactment of section 12.55, minority shareholders
seeking redress were left without a remedy in those instances where
the defendant's conduct, even though wrongful, did not justify
dissolving the corporation. Section 12.55 was specifically enacted
to correct this problem by increasing the remedies available to
minority shareholders and by enlarging the discretionary authority
of the circuit courts to award relief in situations which do not
warrant dissolution but which do warrant some other, less severe
remedy. See, e.g., Official Comments of the Advisory Committee to
the Secretary of State on the Illinois Business Corporation Act of
1983, Section 12.55 reprinted in 2 Corporation Law Committee,
Chicago Bar Association, The Illinois Business Corporation Act
Annotated 429 (3d ed. Supp. 1984) ("The Advisory Committee
perceived a need for [alternative] remedies less Draconian than
dissolution, whenever anyone sought dissolution of a corporation").
Requiring plaintiffs to prove not only that the defendants engaged
in misconduct but also that the misconduct was so extreme as to
justify dissolution of the corporation defeats this legislative
intent by severely curtailing the discretion invested in the
circuit courts to order the alternative remedies. Therefore, we
decline to adopt defendants' proposed construction of section
12.55.
We hold that when a plaintiff seeks relief under section 12.55
by filing an action which alleges illegal, oppressive or fraudulent
conduct (805 ILCS 5/12.50(b)(2) (West 1992)), or the misapplication
or wasting of corporate assets (805 ILCS 5/12.50(b)(3) (West
1992)), the plaintiff must establish that the defendant engaged in
the alleged statutory misconduct. However, the plaintiff need not
prove that defendant's wrongdoing was so severe that it would
justify dissolving the corporation. Once the predicate misconduct
is established, the court may, in its discretion, determine which,
if any, remedy is equitable and appropriate for plaintiff under the
statute. We believe this construction of section 12.55 fully
effectuates the legislative intent to increase shareholder remedies
while, at the same time, providing adequate guidance for the
courts. We further note that this construction comports with the
current statutory scheme regulating shareholder remedies for
nonpublic corporations. See 805 ILCS 5/12.56 (West Supp. 1995).
In the instant case, the trial judge found that the removal of
plaintiff as a corporate officer and director at the August 30,
1990, meeting was "obviously illegal" and specifically noted that
the notice for the meeting "failed to comply with the law." In
addition, while the trial judge did not further identify
defendants' illegal acts, the record supports plaintiff's
contentions that the removal of plaintiff was done in violation of
section 10.20 of the Act, which requires "the affirmative vote of
the holders of at least two-thirds of the outstanding shares
entitled to vote" to amend the bylaws (see 805 ILCS 5/10.20(c)
(West 1992)), and section 8.10, which prohibits the shortening of
an incumbent director's term of office (see 805 ILCS 5/8.10(d)
(West 1992)). Here, William was able to amend the Agency's bylaws
with only 61.1% of the shares and plaintiff's one-year term as
corporate director was ended less than two months after it began.
Defendants do not contest the trial judge's finding of
illegality but instead emphasize the judge's additional statement
that plaintiff was not damaged by his illegal removal as corporate
director and officer. Defendants conclude that even under the
construction of section 12.55 adopted herein, and even with the
finding of illegality by the trial judge, the buyout should not
have been ordered because the plaintiff suffered no injury.
It is unclear from the record exactly what the trial judge
meant by his statement that the plaintiff was not damaged by the
events at the August 30, 1990, meeting. The statement was made in
the context of concluding that plaintiff was not entitled to
dissolution of the corporation under section 12.50. Thus, the
statement may simply have meant that plaintiff had not been
sufficiently damaged to warrant the drastic remedy of dissolution.
Clearly, the trial judge did not believe that plaintiff was not
damaged at all; otherwise he would not have ordered the buyout.
Indeed, the judge expressly noted during comments made at the
conclusion of trial that any award which he entered would "reflect
what, if any, injury [had been] inflicted."
Regardless of the precise meaning of the statement, the facts
indicate that plaintiff was forced out of any participation in the
Agency by the actions of an illegally elected sole director. The
parties agree that the decision to order remedies under section
12.55 is left to the sound discretion of the trial judge. We
conclude, based on the record before us, that the trial judge did
not exceed the scope of his discretionary authority when he
initially ordered the Agency to purchase plaintiff's shares. The
judge's subsequent reversal of that decision was based solely on
the Coduti court's interpretation of section 12.55, which today has
been overruled. Therefore, the trial judge's ultimate decision not
to order the Agency to purchase plaintiff's shares must be
reversed.
For the foregoing reasons, the appellate court's judgment
reinstating the trial court's initial order and remanding the cause
for a hearing to determine the fair value of plaintiff's shares is
affirmed.
Affirmed.
JUSTICE HARRISON, specially concurring:
I agree with the result reached by the majority, but write
separately because I disagree with my colleagues' construction of
section 12.55 of the Illinois Business Corporation Act of 1983 (805
ILCS 5/12.55 (West 1992)).
Under the plain language of section 12.55, the court may order
the corporation to purchase the shares of a complaining shareholder
at any time during the pendency of a dissolution action if the
complaining shareholder has moved for such relief. As the appellate
court correctly held, the statute does not require grounds for
dissolution to be proven before this alternative remedy may be
applied. 271 Ill. App. 3d at 787. The remedy is available whenever
the appropriate allegations have been made to state a claim under
section 12.50 of the Act (805 ILCS 5/12.50 (West 1992)) and the
shareholder asks to be bought out, as was the case here. There is
no basis in the law for requiring a petitioning shareholder to do
anything more.