Business Corporation Act Section 12.56 Remedies for Oppressed Shareholders

Illinois law offers a number of remedies for closely held or private corporation shareholders trapped in toxic or dysfunctional relationships with their corporations or fellow shareholders (co-owners). Given the structure of most corporations, 50/50 shareholders and minority shareholders are the most apt to find themselves in these situations.

Section 12.56 of the Illinois Business Corporations Act of 1983 provides shareholders of closely held, or non-public, corporations a number of remedies to resolve corporate conflicts. Under Section 12.56 a non-public corporation is one that unlisted on the exchange and is not traded by members of a “national or affiliated securities association.” In other words, shareholders of family businesses, partnerships structured as corporations, medical corporations, and other non-publicly traded corporations may find relief under Section 12.56.

In order to obtain the remedies provided by Section 12.56, a shareholder filing suit must prove one of the following:

1. that the corporation is deadlocked in the “management of corporate affairs”, that the shareholders cannot resolve the deadlock, and that the deadlock threatens irreparable harm to the business, or that the corporation cannot continue business for the “general advantage of the shareholders”, including the petitioning shareholder;
2. that the shareholders are deadlocked (e.g., two 50/50 shareholders with opposing positions) and have failed for two consecutive annual meetings to elect new directors after prior directors’ terms have expired, and the deadlock threatens irreparable harm to the business or its ability to continue business for the “general advantage of the shareholders”;
3. that the controlling directors or shareholders have, are, or will act illegally, oppressively, or fraudulently toward the petitioning shareholder; or
4. that the corporation’s assets are being misapplied or wasted.

805 ILCS 5/12.56(a).

If a shareholder establishes one of the above corporate shortcomings, a court may then award one or more of the twelve remedies set forth in Section 12.56(b). These remedies are remarkably flexible and provide a wide range of options to correct a dysfunctional or oppressive corporate situation. The enumerated remedies are:

1. A court may order the “performance, prohibition, alteration, or setting aside of any action of the corporation or of its shareholders, directors, or officers…”;
2. The alteration or termination of the corporation’s governing documents;
3. The removal of a director or officer;
4. The appointment of a director or officer;
5. An accounting;
6. The assignment of a custodian to manage the business pursuant to conditions set by the court;
7. The appointment of a temporary director to serve under conditions set by the court;
8. Submission of the dispute to non-binding dispute resolution, such as mediation;
9. The issuance of dividends to the shareholder or shareholders;
10. An award of damages to the wronged shareholder;
11. The purchase of the petitioning shareholder’s shares for fair value by the corporation or other shareholders; or
12. The dissolution of the corporation.

805 ILCS 5/12.56(b).

The breadth of the remedies under Section 12.56 is extensive. The result is a legal out for shareholders trapped in dysfunctional corporations, a situation common in closely held corporations owing to the unmarketability of shares and/or restrictions on transfers of ownership. Rather than being frozen out of a corporation, waiting it out on the sidelines, and hoping for an eventual sale, a shareholder may avail herself to the remedies set forth in Section 12.56, force the issue, and either rectify the situation or force a takeover or buyout.