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Shareholder Inspection Rights
Under Illinois law, shareholders in closed corporations are granted the same inspection rights as those in ordinary corporations. 805 ILCS 5/7.75. Shareholders may inspect and copy certain corporate records and documents after making a demand on the corporation stating with particularity the documents to be inspected. Shareholders must have a proper purpose for making the demand to inspect documents and records.
The shareholder has the burden of establishing a proper purpose. However, if the shareholder limits its request to certain documents—minutes, record of shareholders, or voting trust agreements—the burden shifts to the corporation to establish the absence of a proper purpose. Illinois courts have defined a “proper purpose” as one seeking to protect the interests of both the corporation and the shareholder and is not merely to gratify curiosity or for speculative or vexatious purposes.
Among the documents a shareholder may inspect are the corporation’s books and records of account, minutes, voting trust agreements and record of shareholders. The ability to review these documents is important because it can offer protection against self-dealing by unscrupulous majority shareholders and uncover improper actions or purchases.
If a corporation refuses a proper demand for inspection, the shareholder who demanded the inspection may obtain a writ of mandamus to force the corporation to open its books for inspection. The consequences of refusing a proper inspection request include holding any officer or director who fails to comply with a proper inspection demand is liable to the shareholder for a statutory penalty of up to ten percent of the value of the shareholder’s shares. These statutory damages are available in addition to any other damages or remedies that may be available.
Illinois law provides certain remedies to shareholders whose legal rights have been violated by the majority shareholders or by the officers of a corporation. 805 ILCS 5/12.56(b). When majority shareholders violate the rights of minority shareholders, it is often referred to as shareholder oppression. Importantly, shareholder oppression encompasses more than just illegal or fraudulent actions by the controlling shareholders and shareholder oppression claims do not necessarily need to be based on misuse of corporate assets or funds.
The rights available to an oppressed shareholder include setting aside any action of the corporation or of its shareholders, directors, or officers. A court may remove any director or officer from a corporation or appoint any individual as a director or officer. The court may also grant an accounting for any matter in dispute, require the corporation to pay dividends to shareholders, award damages, or even order a buy-out of the oppressed shareholder.
In addition, shareholders in close corporations owe fiduciary duties to each other similar to those owed by partners in a partnership. Hagshenas v. Gaylord, 199 Ill.App.3d 60 (2d Dist. 1990). This includes a duty of loyalty to the corporation and to other shareholders. The duty of loyalty requires a shareholder to put the interests of the corporation and other shareholders above his or her own personal interests. These fiduciary duties also include a duty not to usurp a corporate opportunity for individual gain.
Super Lawyers named Chicago and Elmhurst business litigation and fiduciary duty attorneys Peter Lubin and Patrick Austermuehle a Super Lawyer and Rising Star respectively. If you’re facing a business shareholder dispute, or the possibility of one, and you’d like to discuss how the experienced Illinois breach of fiduciary duty and shareholder oppression attorneys at Lubin Austermuehle can help, we would like to hear from you. To set up a consultation with one of our Chicago class action attorneys and Chicago business trial lawyers, please call us toll-free at 833-306-4933 or contact us online.