APPEAL from the Appellate Court for the First District; heard
in that court on appeal from the Superior Court of Cook County;
the Hon. WALKER BUTLER, Judge, presiding.
MR. JUSTICE UNDERWOOD DELIVERED THE OPINION OF THE COURT:
Plaintiff, Emma Galler, sued in equity for an accounting and for specific performance of an agreement made in July, 1955, between plaintiff and her husband, of one part, and defendants, Isadore A. Galler and his wife, Rose, of the other. Defendants appealed from a decree of the superior court of Cook County granting the relief prayed. The First District Appellate Court reversed the decree and denied specific performance, affirming in part the order for an accounting, and modifying the order awarding master's fees. (45 Ill. App.2d 452.) That decision is appealed here on a certificate of importance.
There is no substantial dispute as to the facts in this case. From 1919 to 1924, Benjamin and Isadore Galler, brothers, were equal partners in the Galler Drug Company, a wholesale drug concern. In 1924 the business was incorporated under the Illinois Business Corporation Act, each owning one half of the outstanding 220 shares of stock. In 1945 each contracted to sell 6 shares to an employee, Rosenberg, at a price of $10,500 for each block of 6 shares, payable within 10 years. They guaranteed to repurchase the shares if Rosenberg's employment were terminated, and further agreed that if they sold their shares, Rosenberg would receive the same price per share as that paid for the brothers' shares. Rosenberg was still indebted for the 12 shares in July, 1955, and continued to make payments on account even after Benjamin Galler died in 1957 and after the institution of this action by Emma Galler in 1959. Rosenberg was not involved in this litigation either as a party or as a witness, and in July of 1961, prior to the time that the master in chancery hearings were concluded, defendants Isadore and Rose Galler purchased the 12 shares from Rosenberg. A supplemental complaint was filed by the plaintiff, Emma Galler, asserting an equitable right to have 6 of the 12 shares transferred to her and offering to pay the defendants one half of the amount that the defendants paid Rosenberg. The parties have stipulated that pending disposition of the instant case, these shares will not be voted or transferred. For approximately one year prior to the entry of the decree by the chancellor in July of 1962, there were no outstanding minority shareholder interests.
In March, 1954, Benjamin and Isadore, on the advice of their accountant, decided to enter into an agreement for the financial protection of their immediate families and to assure their families, after the death of either brother, equal control of the corporation. In June, 1954, while the agreement was in the process of preparation by an attorney-associate of the accountant, Benjamin suffered a heart attack. Although he resumed his business duties some months later, he was again stricken in February, 1955, and thereafter was unable to return to work. During his brother's illness, Isadore asked the accountant to have the shareholders' agreement put in final form in order to protect Benjamin's wife, and this was done by another attorney employed in the accountant's office. On a Saturday night in July, 1955, the accountant brought the agreement to Benjamin's home, and 6 copies of it were executed there by the two brothers and their wives. The accountant then collected all signed copies of the agreement and informed the parties that he was taking them for safe keeping. Between the execution of the agreement in July, 1955, and Benjamin's death in December, 1957, the agreement was not modified. Benjamin suffered a stroke late in July, 1955, and on August 2, 1955, Isadore and the accountant and a notary public brought to Benjamin for signature two powers of attorney which were retained by the accountant after Benjamin executed them with Isadore as a witness. The plaintiff did not read the powers and she never had them. One of the powers authorized the transfer of Benjamin's bank account to Emma and the other power enabled Emma to vote Benjamin's 104 shares. Because of the state of Benjamin's health, nothing further was said to him by any of the parties concerning the agreement. It appears from the evidence that some months after the agreement was signed, the defendants Isadore and Rose Galler and their son, the defendant, Aaron Galler, sought to have the agreements destroyed. The evidence is undisputed that defendants had decided prior to Benjamin's death they would not honor the agreement, but never disclosed their intention to plaintiff or her husband.
On July 21, 1956, Benjamin executed an instrument creating a trust naming his wife as trustee. The trust covered, among other things, the 104 shares of Galler Drug Company stock and the stock certificates were endorsed by Benjamin and delivered to Emma. When Emma presented the certificates to defendants for transfer into her name as trustee, they sought to have Emma abandon the 1955 agreement or enter into some kind of a noninterference agreement as a price for the transfer of the shares. Finally, in September, 1956, after Emma had refused to abandon the shareholders' agreement, she did agree to permit defendant Aaron to become president for one year and agreed that she would not interfere with the business during that year. The stock was then reissued in her name as trustee. During the year 1957 while Benjamin was still alive, Emma tried many times to arrange a meeting with Isadore to discuss business matters but he refused to see her.
Shortly after Benjamin's death, Emma went to the office and demanded the terms of the 1955 agreement be carried out. Isadore told her that anything she had to say could be said to Aaron, who then told her that his father would not abide by the agreement. He offered a modification of the agreement by proposing the salary continuation payment but without her becoming a director. When Emma refused to modify the agreement and sought enforcement of its terms, defendants refused and this suit followed.
During the last few years of Benjamin's life both brothers drew an annual salary of $42,000. Aaron, whose salary was $15,000 as manager of the warehouse prior to September, 1956, has since the time that Emma agreed to his acting as president drawn an annual salary of $20,000. In 1957, 1958, and 1959 a $40,000 annual dividend was paid. Plaintiff has received her proportionate share of the dividend.
The July, 1955, agreement in question here, entered into between Benjamin, Emma, Isadore and Rose, recites that Benjamin and Isadore each own 47 1/2% of the issued and outstanding shares of the Galler Drug Company, an Illinois corporation, and that Benjamin and Isadore desired to provide income for the support and maintenance of their immediate families. No reference is made to the shares then being purchased by Rosenberg. The essential features of the contested portions of the agreement are substantially as set forth in the opinion of the Appellate Court: (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 exceeds 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 from the estate of the decedent the amount of dividends to be received by the heirs is 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.
The Appellate Court found the 1955 agreement void because "the undue duration, stated purpose and substantial disregard of the provisions of the Corporation Act outweigh any considerations which might call for divisibility" and held that "the public policy of this state demands voiding this entire agreement".
While the conduct of defendants towards plaintiff was clearly inequitable, the basically controlling factor is the absence of an adverse effect upon a minority interest, together with the absence of public detriment. Since the issues here presented must be resolved in accordance with the public policy of this State as exemplified in prior decisions or pertinent statutes, it will be helpful to review the applicable case law.
Faulds v. Yates, 57 Ill. 416, decided by this court in 1870, established the general rule that the owners of the majority of the stock of a corporation have the right to select the agents for the management of the corporation. This court observed 57 Ill. 416, 421): "It is strange that a man can not, for honest purposes, unite with others in the protection and security of his property and rights without liability to the charge of fraud and inequity".
In Higgins v. Lansingh, 154 Ill. 301, 357, this court again recognized the right of majority owners of stock to combine to secure the board of directors in the management of the corporation. There, the court went further and denied the corporation and some of its stockholders the right to question the validity of an issue of preferred stock not provided for in the corporate charter, where the stockholders authorized the issue, the corporation paid dividends on it and all treated it as valid for 22 years.
In Kantzler v. Bensinger, 214 Ill. 589, decided in 1905, the issue of statutory violation was raised, and this court again followed Faulds v. Yates, emphasizing and quoting the following (p. 598):
"In Faulds v. Yates, 57 Ill. 416, it was objected that an agreement between certain persons owning a majority of the stock of a corporation that they would elect the directors and manage the business was against public policy. There were other stockholders, but they made no objection. The court upheld the agreement, and on page 420 said: `There was no fraud in the agreement which has been so bitterly assailed in the argument. There was nothing unlawful in it. There was nothing which necessarily affected the rights and interests of the minority. Three persons owning a majority of the stock had the unquestioned right to combine, and thus secure the board of directors and the management of the property. Corporations are governed by the republican principle that the whole are bound by the acts of the majority, when the acts conform to the law of their creation. The co-operation, then, of these parties in the election of the officers of the company, and their agreement not to buy or sell stock except for their joint benefit, cannot properly be characterized as dishonest and violative of the rights of others and in contravention of public policy. * * * The agreement complained of was entered into by Faulds and his partners. The shareholders whom he is so solicitous to defend and protect have not complained. He cannot invoke their shield to fight imaginary wrongs. The transaction which he, through his counsel, denounces as fraudulent and nefarious was conceived and consummated by him as much as by his ...