Closely Held Businesses

What Illinois Law Protects Minority Shareholders or LLC Members from Breaches of Fiduciary Duty in Closely Held Companies?

May 10, 2024 | Peter S. Lubin and Patrick Austermuehle

In Illinois, the protections for minority shareholders or LLC members from breaches of fiduciary duty in closely held companies can be found in a combination of statutory provisions and case law.

Firstly, the Illinois Limited Liability Company Act (805 ILCS 180/15-3) specifies that a member of a manager-managed LLC does not owe a fiduciary duty to the LLC unless they are a manager under the terms of the operating agreement (Katris v. Carroll, 362 Ill.App.3d 1140 (2005)), (Tully v. McLean, 409 Ill.App.3d 659 (2011)). This means that members of an LLC who are not managers do not owe a fiduciary duty to the company or to other members (Katris v. Carroll, 362 Ill.App.3d 1140 (2005), (800 South Wells Commercial LLC v. Cadden, 2018 IL App (1st) 162882 (2018). However, members in a member-managed LLC do owe each other fiduciary duties of loyalty and care (Anest v. Audino, 332 Ill.App.3d 468 (2002), (Schultz v. Sinav Limited, — N.E.3d —- (2024).

Secondly, under the Illinois Business Corporations Act (805 ILCS 5/12.50), a minority shareholder may sue a corporation directly for its dissolution if they can establish that the majority shareholders have acted in a way that is illegal, oppressive, or fraudulent. This provides a means for minority shareholders to recover their investment from the corporation when no other methods are available (Kalabogias v. Georgou, 254 Ill.App.3d 740 (1993).

Moreover, under common law, a controlling shareholder in a cash-out merger owes the minority shareholders the default fiduciary duties of loyalty and due care, and courts apply an exacting standard of judicial review known as “entire fairness” (Schultz v. Sinav Limited, — N.E.3d —- (2024). Additionally, LLCs can contractually impose fiduciary duties on their managers. Furthermore, the Illinois courts have held that minority shareholders in closely held corporations may sue company directors for breaches of fiduciary duty (Elleby v. Forest Alarm Service, Inc., 2020 IL App (1st) 191597 (2020)). Continue reading ›

Can Punitive Damages be Awarded in Derivative Actions

April 3, 2024 | Peter S. Lubin and Patrick Austermuehle

Yes, punitive damages can be awarded in derivative actions, but these awards often come with certain conditions. Punitive damages are typically awarded when the tort committed involves fraud, actual malice, deliberate violence or oppression, or when the defendant displays willful or grossly negligent behavior that shows a wanton disregard for the rights of others. This means that the defendant’s conduct must show a high degree of moral culpability for such damages to be awarded.

There are specific cases in which courts have allowed for punitive damages in derivative actions. For instance, in Caparos v. Morton, punitive damages were awarded in a derivative action for a breach of fiduciary duty against general partners.

It’s important to note that punitive damages are generally only awarded in the presence of compensatory damages. As established in Groshek v. Trewin and reaffirmed in Epic Systems Corp. v. Tata Consultancy Services Ltd., punitive damages cannot be awarded when the recovery of compensatory damages is not justified. This suggests that the availability of punitive damages is governed by whether compensatory damages are recoverable, not by whether an “actual injury” has been inflicted.

The case of Exxon Shipping Co. v. Baker also suggests that a punitive award should be limited to an amount equal to compensatory damages.

In Illinois, punitive damages have certain restrictions. For instance, they may not be recovered in cases of medical or legal malpractice.
Continue reading ›

Understanding Fiduciary Duty Law in Illinois: A Comprehensive Guide

December 13, 2023 | Peter S. Lubin and Patrick Austermuehle

Fiduciary duty law is a crucial legal concept that governs the relationships between individuals or entities entrusted with responsibilities to act in the best interests of others. In the state of Illinois, as in many other jurisdictions, fiduciary duty law plays a central role in various contexts, including business, finance, estate planning, and more. In this blog post, we will explore the key principles and applications of fiduciary duty law in Illinois.

What Is Fiduciary Duty?

Fiduciary duty is a legal obligation that requires an individual or entity, known as a fiduciary, to act in the best interests of another party, known as the beneficiary or principal. The fiduciary duty imposes a high standard of care, loyalty, and honesty on the fiduciary, ensuring they prioritize the beneficiary’s interests above their own.

Key Principles of Fiduciary Duty Law in Illinois

Duty of Loyalty: Fiduciaries in Illinois are bound by a duty of loyalty, which means they must put the interests of the beneficiary above their own. They should avoid any conflicts of interest and disclose any potential conflicts when they arise.
Duty of Care: Fiduciaries are required to act with the utmost care and diligence in managing the beneficiary’s affairs. This includes making informed decisions, conducting due diligence, and acting prudently.
Duty of Good Faith: Fiduciaries must act in good faith when carrying out their responsibilities. This means they should make decisions honestly and without any ulterior motives.
Duty of Disclosure: Fiduciaries must provide the beneficiary with all relevant information about the management of their affairs. This transparency helps the beneficiary make informed decisions.

Google Ads Is Facing a Federal Antitrust Lawsuit

March 3, 2023 | Peter S. Lubin and Patrick Austermuehle

In theory, when people talk about online advertising, they could be talking about advertising on a variety of platforms. In addition to Google, each social media platform has its own advertising options. Amazon and Bing also have advertising. But for most people, online advertising is synonymous with Google Ads. Google has the largest share of online advertising by far, accounting for almost 29% of the total digital advertising revenue generated in 2021.

The U.S. Department of Justice, along with eight states, is suing Google for allegedly abusing its monopoly on digital advertising. According to the lawsuit, Google systematically aimed to control large portions of the high-tech tools involved in digital advertising so they could control the market.

By filing the lawsuit, the Department of Justice is hoping to force Google to sell all of its ad technology products, including the software it uses to buy and sell ads, the marketplace it uses to complete the transactions, and the service it uses to display ads across the internet. The lawsuit is also seeking to force Google to stop engaging in allegedly anticompetitive practices. Continue reading ›

Illinois Supreme Court Puts the Kibosh on Energy Company’s Stolen Corporate Opportunity Claims against Two Former Employees

September 3, 2021 | Peter S. Lubin and Patrick Austermuehle

The Illinois Supreme Court ruled recently that an energy company could not sustain a claim for stolen corporate opportunities against two of its former business developers. In doing so the Court overturned a ruling by the appellate court which had revived the stolen corporate opportunity claim. The ruling, which many consider to be a bombshell in stolen corporate opportunity jurisprudence, was not without its detractors with three justices dissenting from the majority’s decision.

The plaintiff, Indeck Energy Services, is a privately held Buffalo Grove company that develops, owns, and operates independent power plants. Indeck’s lawsuit targets two former Indeck employees, Christopher M. DePodesta and Karl G. Dahlstrom, whom the energy company alleged secretly operated their own company while employed by Indeck and in doing so secured certain opportunities for themselves in breach of their fiduciary duties to Indeck.

Indeck hired DePodesta in 2010 as its vice president of business development and Dahlstrom in 2011 as its director of business development. The two were brought in to help Indeck scout out and secure new opportunities to develop natural gas powered plants within a region of Texas known as the Electrical Reliability Council of Texas.

Dalhstrom founded Halyard Energy Ventures, LLC (HEV) in late 2010. DePodesta became a member of HEV in 2011. HEV is a consulting, management, and administration firm that develops electrical power generation projects. Following DePodesta and Dalhstrom’s departure from Indeck, the two allegedly negotiated a deal for HEV to partner with a private equity fund to develop, construct, and operate electrical power generation plants. Continue reading ›

Court Revives Breach of Fiduciary Duty and Shareholder Oppression Claims against Lumber Executive Accused of Diverting Profits to Son’s Company

August 19, 2021 | Peter S. Lubin and Patrick Austermuehle

An Illinois Appellate Court recently revived a breach of fiduciary duty and shareholder oppression lawsuit filed by minority shareholders against the president, director, and majority shareholder of a lumber company. The suit accused the majority shareholder of diverting nearly a million dollars from the lumber company to a separate company owned by the majority shareholder’s son. The trial court dismissed several of the minority shareholders’ claims and ruled in favor of the majority shareholder following a trial on the breach of fiduciary duty claims. In a blow to the majority shareholder, the Second District appeals court reversed the trial court finding that the majority shareholder did breach his fiduciary duties to the company and engaged in shareholder oppression.

The case provides practitioners and shareholders a useful primer on pleading and evidence requirements for successfully asserting breach of fiduciary duty and shareholder oppression claims against a corporate officer. It also sheds light on the contours and limits of a key legal doctrine implicated in such claims: the business judgment rule doctrine.

The case, Roberts v. Zimmerman, involved four separate but related lumber companies: Our Wood Loft, Inc. (OWL), Outstanding, 3 Corp. Lumber Company, and Lake City Hardwood. The plaintiffs in the case were minority shareholders who collectively owned one-third of OWL, with the defendant, Stefan Zimmerman, owning the other two-thirds of the company. Zimmerman’s son, Thomas, owned Lake City.

The plaintiffs’ complaint alleged that Zimmerman initially sought to have his son buy shares in OWL but the minority shareholders refused. Instead, the plaintiffs agreed to allow Thomas to work as a manager at OWL. While working at OWL, Thomas started Lake City. Shortly thereafter, Lake City began purchasing lumber and re-selling it to OWL at a profit. The complaint alleged that Zimmerman did not reveal the relationship between OWL and Lake City and that Thomas owned Lake City until several years after OWL started buying lumber from Lake City. Continue reading ›

Vicky Cornell Alleges Soundgarden Used Flawed Valuation to Shortchange Her

February 22, 2021 | Peter S. Lubin and Patrick Austermuehle

There are countless stories of a rock band’s members fighting over music and money, but this time it’s the widow of a band’s recently deceased member who’s fighting with the remaining members of the band over the band’s value.

When the singer Chris Cornell died, his widow, Vicky Cornell, inherited his share of the interest in the band, Soundgarden. The other members have offered to buy Cornell’s share for $278,000, but she alleges that amount represents just a fraction of what her share in the band is worth.

Cornell is suing the remaining members of Soundgarden for allegedly devaluing her share in the band, and has asked a judge to decide on an appropriate buyout price based on the value of Soundgarden’s master recordings. Additionally, Cornell is also asking the court to factor in the potential for future sales, including merchandise, tours, and even new music that could be created with artificial intelligence using extant recordings of Chris Cornell’s vocals.

A representative for Soundgarden said the remaining members of the band have acted in good faith in trying to buy out Cornell’s share of interest in the band. The amount they offered was allegedly based on the value of the band as estimated by Gary Cohen, a valuation expert who they claim is highly regarded and respected in the music industry. In trying to settle their disputes with Cornell, the surviving members of the band have allegedly offered to pay Cohen’s estimated value several times over. They say it’s about their music and their legacy, not about the money. But Cornell tells a different story. Continue reading ›

Promega Settles Lawsuit with Minority Shareholders

November 30, 2020 | Peter S. Lubin and Patrick Austermuehle

We talked about the lawsuit between Promega Corp., a biotech company based in Madison, Wisconsin, and its shareholders a couple months ago in this blog post. At the time, Circuit Judge Valerie Bailey-Rihn said she was convinced minority shareholders had been oppressed by the company and its founder and CEO, Bill Linton, but she was unsure of the best way to remedy the situation and make sure the oppressed shareholders received a fair return on their investment. If she accepts the settlement agreement reached by both parties, she might not have to spend any more time deliberating.

Over the summer, both parties had said they were willing to have a third party buy the shares from the minority investors. All that was needed was to define the terms of the settlement, which they did. Afterwards, they submitted an order to dismiss the case.

The third party is Eppendorf AG, a German company that makes life science instruments. Having a third party buy the shares off the minority investors is a solution that works for everyone because the minority shareholders get a return on their investment without the company having to liquidate any assets to come up with the money to buy the shares back. The judge had mentioned the option of dissolving the company in order to come up with the funds to pay back the minority shareholders, but that would have been a drastic option.

The amount of the settlement has not been made public, but Karen Burkhartzmeyer, a spokesperson for Promega, has said the settlement is fair to all parties and affirms Promega’s commitment to remaining a private company. Continue reading ›

Illinois Appellate Court Affirms Dismissal of Breach of Fiduciary Duty Claims against Independent Auditor

March 25, 2020 | Peter S. Lubin and Patrick Austermuehle

When a corporation hires an independent auditor to inspect its financials does that auditor owe fiduciary duties to its client? If no fiduciary duties exist as a matter of law, do they arise by virtue of a “special relationship” between the parties? In a matter of first impression, an Illinois appellate court wrestled with these questions and answered both in the negative.

Asian Human Services, Inc. (“AHS”) is a non-profit organization dedicated to helping lower income immigrants obtain health, dental, and employment assistance. After AHS was sued by another non-profit organization, AHS brought a third-party claim for breach of fiduciary duty against its long-time independent auditor, James Wong.

AHS alleged that Wong owed fiduciary duties to the non-profit by virtue of the special circumstances of the parties’ relationship. The complaint alleged that Wong had served as the independent auditor of AHS for more than a decade during which time he became an important advisor to the organization. Additionally, the complaint alleged that AHS relied heavily on Wong and that he even served an integral role in AHS’s hiring process for four separate Chief Financial Officers.

Wong filed a section 2-619 motion to dismiss AHS’s claim arguing that: (1) independent auditors do not stand in a fiduciary relationship with their clients, and (2) there were no special circumstances that created a fiduciary relationship. After briefing and oral argument on the motion, the trial court granted appellee’s motion to dismiss, with prejudice, and included Supreme Court Rule 304(a) language.

AHS appealed and argued that the trial court erred in relying on a federal case, Resolution Trust Corp. v. KPMG Peat Marwick, 844 F. Supp. 431 (N.D. Ill. 1994), which held, as a matter of law, that generally, an independent auditor does not owe a fiduciary duty to its client. Instead, the non-profit argued that the trial court should have relied on case law from various other state courts which have found that independent auditors owe fiduciary duties to their clients.

The appellate court acknowledged that no Illinois case law addressed the issue of whether independent auditors owe fiduciary duties to their clients. But ultimately the appellate court found that AHS waived the argument. In the trial court, AHS expressly stated that it was “not arguing that Mr. Wong became a fiduciary to AHS because he acted as an auditor.” AHS’s attorney in the trial court told the trial judge at oral arguments on the motion to dismiss: “One thing I want to make clear is that we’re not arguing that Mr. Wong became a fiduciary to AHS because he acted as an auditor. Now, clearly that would be the antecedent relationship and it makes his actions that much more strange, but that’s not the basis.” Continue reading ›

Court Finds that Engineering Firm Oppressed Minority Shareholder who Raised Concerns with Owner’s Self-Dealing

February 16, 2020 | Peter S. Lubin and Patrick Austermuehle

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. Continue reading ›