The principle of majority rule guides the day to day existence of any corporation. When conflicts arise between shareholders, barring a breach of fiduciary or the commitment of a crime, the majority will win out. If a company’s directors want to merge with a former competitor and the majority of its shareholders agree, assuming the merger is approved by regulatory agencies, the merger will go through no matter how fervent or vocal the opposition to the merger. Deadlock is a situation in which a corporation becomes stuck, when either a majority or greater number of required votes, as provided for by the company’s bylaws, cannot be reached, or when a decision cannot be reached regarding the election of new directors. When corporate deadlock reaches a point where its paralysis is deemed to be detrimental to the company and its shareholders, the courts have authority to intervene to resolve the deadlock. The rules for this intervention vary by state.
In the State of Illinois, one of two conditions must be met for a court to intervene to breakup corporate deadlock. Either the directors are deadlocked by an even split over an issue, or by the inability to acquire the necessary votes to move forward or the shareholders have for two annual meetings failed to elect new directors after the terms of the previous directors have expired. In either case the law further stipulates that the existence of deadlock alone is not enough to justify court intervention. The deadlock must be also be causing demonstrable harm to wellbeing of the company and its shareholders. If one of these conditions is met, the courts are empowered several options by which they may seek to end the deadlock. These rules of intervention also apply, it should be noted, when the court is coming to the defense of an oppressed shareholder, or when it is deemed the corporation or its directors have acted illegally.
Once Illinois courts have grounds for intervention they wield tremendous power. The court may remove or appoint officers and directors and they can also appoint interim directors to serve until the situation is resolved. They may rewrite corporate bylaws or amend corporate charters. They may override the actions of any officer or director. They can cause the payment of dividends, award damages, arrange terms for one shareholder to buy the shares of another, submit the corporation to some form of official dispute mediation, or they can even cause the corporation to dissolve, although this final option is reserved as a last resort solution. Generally a period of court intervention concludes with a new cycle of elections to appoint the board of directors.
For further information, contact Horowitz and Weinstein.
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