Although the concept of majority shareholders owing a fiduciary duty to the other shareholders of the corporation is well settled in all states, Illinois has extended the principle to apply to minority shareholders.
In Rexford Rand Corp. v. Ancel, Ancel, a 25% shareholder, was fired from his position as vice president and treasurer of Rexford Rand Corp. (“Rexford Rand”). Ancel, who retained his corporation’s stock, alleged that he was “frozen out” of the corporation by the majority shareholders. The majority shareholders, however, alleged that Ancel was fired because of his poor job performance.
Rexford Rand was subsequently administratively dissolved as a result of the corporation’s failure to file its annual report with the Secretary of State. Upon learning of the dissolution, Ancel formed another corporation with the Secretary of State using the same name as the dissolved corporation. When the dissolved corporation attempted to become reinstated under its previous name, the Secretary of State refused the reinstatement because the name was being used by the corporation formed by Ancel.
The dissolved corporation filed suit against Ancel alleging Ancel had breached his fiduciary duty to the corporation and other shareholders by misappropriating the corporate name. The court agreed and held Ancel had breached his fiduciary duty to the corporation and other shareholders by misappropriating a corporate asset, despite the fact that Ancel had been fired and that the corporation had already been dissolved.
The court further noted that even though Ancel had been frozen out of the corporation, Ancel had a duty of loyalty to the corporation and its other shareholders. This duty of loyalty prevented Ancel from damaging the corporation’s interests. By taking the corporation’s name, the court stated that Ancel threatened to cause serious damage to the corporation and to the investments made by himself and the majority shareholders. The court emphasized that Ancel should have filed suit against the majority shareholders to seek damages or a dissolution of the corporation rather than taking it upon himself to retaliate against the corporation.
This case demonstrates that minority shareholders in Illinois owe their corporation and its other shareholders fiduciary duties even though they may feel that they are being frozen out of the corporation by the majority shareholders. Further, this case illustrates that in these circumstances courts will not look favorably upon disgruntled minority shareholders who use self-help remedies to allegedly protect their interests rather than filing suit.
If you are a shareholder in a dispute with the other shareholders of a corporation, please telephone a member of the Firm to discuss the appropriate actions to be taken so that you do not violate your fiduciary duties to your fellow shareholders.