As we have written about previously, one of the concerns with purchasing a minority stake in a closely held corporation is the potential for shareholder oppression. This concern is even more relevant when a non-family-member considers buying into a family-owned business. One minority shareholder found this out the hard way when he suffered a backlash after raising concerns about the conduct of the founder and majority shareholder of a closely held Illinois corporation.
In 1962, Kenneth Packer founded Packer Engineering Inc. (“PEI”) and its parent company, The Packer Group, Inc. (“TPG”), in Du Page County. Packer soon grew PEI into a well-respected professional engineering firm. Both PEI and TPG shared a number of the same officers and directors, including Packer who served as the board chairman for both companies.
In 1979, Edward Caulfield was hired by PEI as its director of mechanical engineering. In 2002, Caulfield became president and chief technical officer of PEI. Caulfield was offered a minority equity interest in TPG in addition to his base salary of $500,000.
In 2007, Packer personally obtained a loan to purchase a foundry that he reopened and named New Vermillion. Packer did not seek or receive board approval from PEI or TPG for this purchase. Packer acted as New Vermillion’s president.
In early 2009, during a review of TPG’s books, Michael Koehler, TPG and PEI’s CEO, discovered that TPG had allegedly made a series of unidentified payments totaling more than $1.2 million on behalf of New Vermillion. In addition, between 2007 and 2009, Packer allegedly sent numerous PEI employees to work at New Vermillion while keeping them on the PEI payroll. An independent audit later showed that Packer owed TPG over $1.6 million for payments related to New Vermillion.
In March 2010, Caulfield in his capacity as a TPG shareholder wrote a letter to TPG’s board regarding Packer and New Vermillion. Caulfield accused Packer of engaging in financial irregularities potentially amounting to millions of dollars that threatened the financial health of PEI and TPG. The letter formally demanded an independent investigation into the matter. In response to Caulfield’s letter, the board formed a special committee of outside directors who later sent Packer a letter demanding that he reimburse PEI and TPG the full amount of money he had allegedly diverted to New Vermillion and immediately resign from PEI’s board and cease any management role. Packer refused these demands and instead shut down the investigation.
Shortly thereafter, Caulfield and Koehler filed a shareholders’ derivative lawsuit in Cook County alleging that Packer and other board members engaged in improper self-dealing and misappropriated company assets. The next business day, Packer demoted Caulfield, changed his title, and prohibited him from entering offices. Packer also demanded repeatedly that Caulfield dismiss the shareholder derivative suit. In January 2011, PEI, at Packer’s direction, reduced Caulfield’s salary and refused to pay him his bonus from 2010. After Caulfield refused to sit for a seven-hour performance review with Packer in March 2011, he was terminated.
Caulfield then filed a shareholder oppression lawsuit. The case proceeded to trial and the trial court found in favor of Caulfield on his minority shareholder oppression claim. It found that Packer began harassing Caulfield after he filed the shareholder derivative suit, thereby oppressing Caulfield’s exercise of “his legitimate rights as a shareholder.” The trial court found further evidence of shareholder oppression from the corporate voting records which showed that Caulfield was not even listed as a shareholder when the shareholders of PEI and TPG took a crucial vote in May 2012 to approve making an assignment for the benefit of creditors. The trial court awarded $250,000 in damages on this claim.
On appeal, the defendants argued that the trial court erred in finding shareholder oppression because Caulfield only provided evidence of actions taken against him in his capacity as an employee and shareholder oppression requires actions that harm a person’s ability to exercise shareholder rights. The appellate court rejected this argument because it ran contrary to the plain language of Section 12.56(a)(3) of the Illinois Business Corporations Act (“BCA”), the section addressing shareholder oppression. Section 12.56(a)(3) provides that shareholder oppression occurs where “those in control of the corporation have acted . . . 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.”
Thus, the court reasoned, Caulfield could assert a claim for shareholder oppression even if the defendants acted oppressively against him in his capacity as an officer (the president) of PEI. The Court found ample evidence of oppressive conduct including that the defendants precluded Caulfield from being able to carry out his duties as president by, among other things, barring him from the corporate offices, changing his title, and pressuring him to dismiss his shareholder derivative lawsuit. Further, the Court pointed to the fact that Caulfield was not listed as a shareholder in the May 2012 voting records as evidence that he somehow had been divested of his shares or voting rights although no such divestment was documented in the corporate records. This evidence, the Court concluded, supported the trial court’s finding that the defendants acted oppressively toward Caulfield in both his role as a shareholder and officer.
The Court’s entire opinion is available here. Oral arguments in the case are available here.
Our Chicago minority shareholder and LLC member attorneys have litigated minority oppression and breach of fiduciary duty lawsuits for decades.
Super Lawyers named Chicago shareholder, LLC member and partnership dispute attorney Peter Lubin a Super Lawyer and corporate oppression attorney Patrick Austermuehle a Rising Star in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Lubin Austermuehle’s Illinois business trial lawyers have over thirty years of experience litigating shareholder oppression, partnership disputes, and complex business divorce suits as well as myriad other commercial litigation cases involving non-compete agreements, franchise and dealer termination, breach of contract, copyright, trademark, commercial disparagement, and class action defense. Our Wheaton and Naperville minority shareholder lawyers handle emergency business litigation involving TROS, preliminary injunctions, covenants not-to-compete, and trade secret misappropriation. We also assist Chicago, Evanston and Oak Brook area businesses and business owners who are victims of fraud. You can contact us by calling (630) 333-0333. You can also contact us online here.