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Galler v. Galler

JANUARY 7, 1964.




Appeal from the Superior Court of Cook County; the Hon. WALKER BUTLER, Judge, presiding. Decree reversed in part, and affirmed in part, and remanded with directions.


Rehearing denied February 10, 1964.

This is an appeal from a decree of the Superior Court of Cook County entered on June 23, 1962, approving the report of a Master and overruling exceptions thereto, and decreeing specific performance of a shareholders' agreement, ordering the defendants to account for all monies received by them from the corporation since September 25, 1956, and retaining jurisdiction of the cause and of the parties to effectuate the aforementioned decrees and orders. The court expressly found that there is no just reason for delaying enforcement or appeal of this decree in accordance with Section 50(2) of the Civil Practice Act.

There is little dispute as to the facts of this case. Defendants never took the stand in their own behalf and the plaintiff established her own version of the facts. This suit was brought by Emma Galler, the wife of the deceased Benjamin Galler, to enforce an agreement entered into between Benjamin and his brother, Isadore, in July, 1955, for the purpose of providing income for the support and maintenance of their immediate families. Benjamin and Isadore each owned 47 1/2% of the stock of the Galler Drug Company. The remaining 5% of the stock was owned by Mandel Rosenberg, a trusted employee, who did not complain of the agreement and who subsequently disposed of his stock to Isadore and his wife Rose. Subsequent to the death of Benjamin Galler, Isadore refused to enforce the provisions of the agreement.

The defendants-appellants attack the decree and orders of the court below for the following reasons: (1) the agreement violates the Illinois Business Corporation Act and is therefore invalid and unenforceable; (2) by her acquiescence in the continuation of a board of three directors, and in the management of the corporation by defendants, and by her acceptance of the benefits thereof, plaintiff is estopped from maintaining this action; (3) the Master erred in excluding relevant testimony; (4) the court erred in ordering an accounting; (5) the Master's fee is excessive.

We can see no substantial basis to appellants' points 2 and 3. No basis for estoppel exits. The plaintiff testified uncontroverted and sufficient justification for her actions appears of record. The testimony which was excluded by the Master was not called to the attention of the Chancellor for review and was therefore waived. Seely v. Rowe, 370 Ill. 336, 344, 18 N.E.2d 874; 3 Nichols Illinois Civil Practice, Ch 52, § 2937, p 357.

Aside from the separate matters of the accounting and the Master's fees, in both of which we think the court erred, the real issue of this appeal is whether the shareholders' agreement as a matter of law violated the Business Corporation Act or the public policy of our state.

The purpose of the agreement is to provide income and support for the immediate families of Isadore and Benjamin. The contested sections of the agreement provide: (2) that the bylaws of the corporation will be amended to provide for a board of four directors; that the necessary quorum shall be three directors; and that no directors' meeting shall be held without giving ten days notice to all directors. (3) The shareholders will cast their votes for the above named persons (Isadore, Rose, Benjamin and Emma) as directors at said special meeting and at any other meeting held for the purpose of electing directors. (4, 5) In the event of the death of either brother his wife shall have the right to nominate a director in place of the decedent.

(6) Certain annual dividends will be declared by the corporation. The dividend shall be $50,000 payable out of the accumulated earned surplus in excess of $500,000. If 50% of the annual net profits after taxes exceed the minimum $50,000, then the directors shall have discretion to declare a dividend up to 50% of the annual net profits. If the net profits are less than $50,000, nevertheless the minimum $50,000 annual dividend shall be declared, providing the $500,000 surplus is maintained. Earned surplus is defined.

(9) The certificates evidencing the said shares of Benjamin Galler and Isadore Galler shall bear a legend that the shares are subject to the terms of this agreement.

(10) A salary continuation agreement shall be entered into by the corporation which shall authorize the corporation upon the death of Benjamin Galler or Isadore Galler, or both, to pay a sum equal to twice the salary of such officer, payable monthly over a five-year period. Said sum shall be paid to the widow during her widowhood, but should be paid to such widow's children if the widow remarries within the five-year period.

(11, 12) The parties to this agreement further agree and hereby grant to the corporation the authority to purchase, in the event of the death of either Benjamin or Isadore, so much of the stock of Galler Drug Company held by the estate as is necessary to provide sufficient funds to pay the federal estate tax, the Illinois inheritance tax and other administrative expenses of the estate. If as a result of such purchase by the estate of the decedent and the amount of dividends to be received by the heirs are reduced, the parties shall nevertheless vote for directors so as to give the estate and heirs the same representation as before (2 directors out of 4, even though they own less stock), and also that the corporation pay an additional benefit payment equal to the diminution of the dividends.

In the event either Benjamin or Isadore decides to sell his shares, he is required to offer them first to the remaining shareholders and then to the corporation at book value, according each six months to accept the offer.

There are several factors which the courts commonly discuss when considering shareholders' agreements: (1) the purpose or object of the agreement; (2) the concepts of public policy prevailing in the jurisdiction regarding literal interpretation of provisions of the Business Corporation Act to close corporations; (3) whether or not all of the shareholders in the corporation are parties to the agreement; (4) the length of time during which the agreement will control the shareholders' right to vote their shares; (5) who is challenging the agreement.

Appellants contend that the rule in Illinois is that an agreement which has as its sole purpose or object the financial support of the families of the shareholders is void. We have not found a case in Illinois in which this argument has been applied although the principal has been stated by text writers (1 O'Neal Close Corporations, Ch V, § 5.15), and appears often as dicta (Venner v. Chicago City Ry. Co., 258 Ill. 523, 101 N.E. 949). Hale Private Corporations, 1916, Ch X, § 140, states the rule at 197:

"In determining whether a voting agreement or a voting trust is valid, we must look to its purpose. Its purpose is always for the benefit of the persons who enter into the trust, otherwise it would not be created; but such benefit to participating stockholders may be achieved through a benefit to the corporation, or at the expense of the corporation, and to the detriment of the nonparticipating stockholders. In order to be legal, a voting trust must contemplate the benefit of its participants through the corporation, i.e., the plan of the trust must be for the benefit of the participants as stockholders and not as individuals, or at least it must not in any of its phases be an injury to the corporation or to the other stockholders. If the voting agreement or trust is for the benefit of the individuals who compose it and not for the benefit of the corporation or its other stockholders, it will be invalid."

This case stands midpoint between those cases striking down agreements which provide that a certain person be elected to a specific office for a number of years and emphasize the disregard of fiduciary duties by the directors to the corporation (Teich v. Kaufman, 174 Ill. App. 306, 312; Amos v. Helwig, 19 Ill. App.2d 220, 153 N.E.2d 245), or the injury or unfairness to noncontracting shareholders (Odman v. Oleson, 319 Mass. 24), and those cases upholding agreements because the purpose of the agreement is to carry out a policy beneficial to the corporation as a whole (Faulds v. Yates, 57 Ill. 416; Kantzler v. Bensinger, 214 Ill. 589, 73 N.E. 874; E.K. Buck Retail Stores v. Harkert, 157 Neb. 867). The agreement in this case is admittedly for the benefit of the families ...

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