Illinois Appellate Court Rules That Shareholders in a Dispute Cannot Be Forced to Pay for A Provisional Director

On Behalf of | Nov 17, 2016 | Firm News |

Illinois Appellate Court Rules That Shareholders in a Dispute Cannot Be Forced to Pay for A Provisional Director
In Sinkus v. BTE Consulting 2017 IL App (1st) 152135 the First District Appellate Court reversed a trial court’s ruling holding a shareholder in contempt after he refused to obey the Court’s order directing him to contribute to a capital call ordered by the Court to pay for a provisional direction which the Court appointed pursuant to Section 12.56(g) of the Business Corporation Act of 1983 (“Act”) (805 ILCS 5/12.56(g) (West 2014)). The order grew out a lawsuit between two shareholders each owning fifty percent (50%) of the shares of the corporation. The Plaintiff resigned as a director and sued the other shareholder for breach of fiduciary duties and other claims alleging among other things that the other shareholder had diverted corporate business to another company he had formed. Plaintiff moved to disqualify the Defendant shareholder’s attorney from representing both the corporation and the individual shareholder but the trial court denied that motion and appointed a provisional director instead. Because the corporation allegedly did not have sufficient funds to pay the provisional director, the trial court ordered both shareholders to contribute first $25,000 each to pay the provisional director and later another $30,000 each, but the Plaintiff refused to comply with the court’s orders. The Plaintiff allowed the court to hold him in contempt and impose a fine and then appealed the order.
The appellate court held that the trial court lacked the authority to have ordered the Plaintiff to contribute to the payment of the provisional director’s fees. Noting that Section 6.40 of the Business Corporation Act provides that shareholders are not responsible for financial obligations of the corporation other than the payment of the full consideration for their equity shares. 805 ILCS 5/6.40. The Appellate Court then further held that plain language of Section 12.56(g) of the Act requires that the compensation of a provisional director appointed under the Act be paid by the corporation, not its shareholders.
The Court mentioned in passing that shareholders may agree in a written shareholder’s agreement to be subject to capital calls. The Court cited Salce v. Saracco,409 Ill. App. 3d 977 (2011) in which the court considered what is necessary to plead a breach of contract claim for the breach of a capital call provision in a shareholder’s agreement.
In the wake of the ruling in Sinkus, a controlling shareholder’s request to appoint a provisional director in a shareholder dispute will almost certainly result in the corporation and not the complaining shareholder being held responsible for the payment of the provisional director’s fees. And from a business planning perspective, those considering investing in a close corporation should be wary of shareholder agreements that authorize capital calls in the event of a dispute or litigation between shareholders.
Peter M. Storm Posted 20th March 2017 by Peter Storm