Business Corporation Act Section 12.56: Defining Shareholder Oppression

In a shareholder action against a co-shareholder (co-owners or incorporated business partners, colloquially), a court may order one of the remedies provided for in 805 ILCS 5/12.56(b) if the shareholder shows that “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 with respect to the petitioning shareholder whether in his or her capacity as a shareholder, director, or officer.”

805 ILCS 5/12.56(a)

This article briefly examines what types of conduct constitute “oppressive” conduct under Illinois case law.

As a preliminary matter, it is important to note that the oppressive conduct must be directed toward the shareholder as a shareholder, director, or officer. Oppression directed to the shareholder as an employee, for example, does not satisfy Section 12.56. See Dady v. Healy, 407 Ill. App. 3d 1191 (2d Dist. 2011) (unpublished).

Black’s Law Dictionary defines oppression as the “act or an instance of unjustly exercising authority or power.” The Illinois Appellate Court has described oppression as conduct that is “arbitrary, overbearing and heavy-handed.” Iverson v. C.J.C Auto Parts & Tires, Inc., 2014 IL App (2d) 130706-U, ¶ 28 (citing Hager-Freeman v. Spircoff, 229 Ill. App. 3d 262 (1992), Compton v. Paul K. Harding Realty Co., 6 Ill. App. 3d 488, 499 (1972)). “Arbitrary, overbearing, and heavy-handed” provides little more guidance than “unjustly exercising authority”, but “oppression” under either definition is a broad, fluid concept.

The Illinois Appellate Court has only addressed the type of oppressive conduct that may entitle a shareholder to Section 12.56 remedies in a limited number of opinions. Examples of conduct deemed oppressive include:

• Deprivation of participation in the management of the corporation;
• Failure to invite a shareholder to meetings he or she is entitled to attend;
• Denying a shareholder control proportionate to his or her stocks in the business;
• Failing to consult with co-shareholders on corporate policy decisions;
• Organizing another corporation with business funds without consulting co-shareholders;
• Loaning money in the name of the business without co-shareholder approval;
• Unfair and arbitrary hiring and setting of salaries and/or terms of employment;
• Lack of annual shareholder meetings as required by Section 26 of the Business Corporation Act;
• Ignoring a shareholder’s request for financial documents; and
• Failure to share profits.

See Murchie v. Sorenson, 2015 IL App (1st) 133719-U; Gidilitz v. Lanzit Corrugated Box Co., 20 Ill. 2d 208 (1960).

Conduct found not be oppressive includes:

• Launching the dissolution of the corporation backed by a shareholder vote. Brynwood Co. v. Schweisberger, 393 Ill. App. 3d 339 (2d Dist. 2009);
• Refusing to approve a share sale to an outsider when not required by the corporation’s governing documents. Iverson v. C.J.C. Auto Parts & Tires, 2014 IL App (2d) 130706-U.

The above list demonstrates types of shareholder action that are considered oppressive. While conduct similar to that listed may give shareholders remedies under Section 12.56, this list is not all-inclusive, and depending on the circumstances of the specific case, a myriad of conduct may be considered oppressive under Section 12.56.

It is useful to bear in mind that the word “oppressive” as used in Section 12.56 does not require a threat of imminent disaster. “Oppressive” is also not synonymous with “illegal” and “fraudulent.” Thus, if shareholder rights have been abused and denied, it is not necessary to show fraud, illegality, or even loss to exhibit shareholder oppression. Gidilitz, 20 Ill. 2d 208.