FACTS: Action for specific performance on a K b/w shareholders in a close corporation.
Two brothers, Isadore and Benjamin, incorporated their partnership in 1924 and operated as such for over 30 years. In 1955, the 2 brothers drew up a shareholders’ agreement to provide for the financial security of their respective families in the event of either brother’s death. The agreement provided for salary continuation payments to the surviving widow. It further allowed the surviving widow to remain on the board of directors and to name a successor to her husband. Specific dollar amounts of dividends were mandated by the agreement. However, these payments were qualified so as not to impair the capital of the corporation. After Benjamin’s death, his wife Emma sought enforcement of the agreement. Isadore repudiated the agreement, claiming it violated the corporations code of Illinois and the public policy of that state.
ISSUE: Can shareholder agreements pertaining to dividend policy and selection of directors be enforced in the case of a close corporation when such agreements would not be permissible in a publicly held corporation?
HOLDING: Yes. The unique nature of close corporations – close relationship of shareholders; lack of marketability of shares; and overlapping of shareholders and officers – creates a situation which should allow “slight deviations from corporate norms”. These deviations should be permitted so long as they do not operate to defraud or prejudice the interests of minority shareholders or creditors. Since the principals in a close corporation usually have a close relationship, their agreements should be enforced where no clear statutory prohibitions are violated. Since the agreement did not imperil creditors and there were no minority shareholders’ interests involved in this instance, the agreement was valid and enforceable.
Close corporations will not be held to the same standards of corporate conduct as publicly held corporations in the absence of a showing of fraud or prejudice toward minority shareholders or creditors.
Trend is to look the other way in close corp. especially if all the SH’s agree.