Theresa Joynt, an Illinois resident, filed a petition for dissolution of marriage in 2004. Her husband, Michael, owned shares in Mississippi Value Stihl, Inc. (“MVS”). The shareholding ownership of MVS at that time was as follows:
Michael’s father 48%
Michael 33
Michael’s sister 19
100%
MVS was a subchapter S corporation. Michael was president, and a member of the Board of Directors with his sister and father. As president of MVS, Michael received a salary plus biannual bonuses, as compensation for managing the daily operations. His annual compensation was approximately $250,000. Expert testimony in the divorce proceeding indicated that Michael's compensation during the marriage was reasonable and fair for the services he provided to MVS.
MVS’s retained earnings were approximately $3,800,000 at the time Theresa filed the petition. The retained earnings had increased throughout the years, and dividends had periodically been declared and paid. Those retained earnings were held by MVS for future operating expenses. Michael was not able to receive a dividend unless a prorata dividend was paid to and agreed upon by a majority of the shareholders.
Michael also had a buyout contract with his father. The contract provided that, upon his father's death, Michael would become the majority shareholder of the company by purchasing his father's shares. At that time, as the majority shareholder, Michael would possess the authority to declare and pay dividends from retained earnings without approval from the remaining shareholder, his sister.
Theresa claimed Michael's 33% ownership in MVS entitled him to33 % of the retained earnings, or approximately $1,275,000, and such earnings constituted marital property, subject to division in their divorce. Michael was only willing to admit that his cost basis in the MVS stock was $94,000.
Surprisingly, the issue of whether retained earnings should be classified as marital property was one of first impression in Illinois when this case was decided in 2007 by the Illinois Appellate Court. Other states have generally held that retained earnings were non-marital property unless the shareholder-spouse owned a majority of the shares or otherwise had substantial influence over the decision to retain the net earnings or to disburse them in the form of cash dividends.
In this case, the Appellate Court found MVS's stock was owned in unequal percentages by three individuals. Michael possessed only a minority percentage of those shares and was not a controlling shareholder. As only one of three board members, he did not have the authority to unilaterally declare or withhold dividends. Accordingly, the Court held MVS's retained earnings were nonmarital property, and not subject to division in the divorce proceedings.
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