APPEAL from the Circuit Court of Lake County; the Hon. J.
SEIDENFELD, Judge, presiding.
MR. JUSTICE SEIDENFELD DELIVERED THE OPINION OF THE COURT:
Rehearing denied December 3, 1970.
This appeal is from a decree wherein the bench denied a petition filed in the probate proceedings for specific performance and general relief against the executors based upon an agreement by decedent to sell his shares in petitioner companies in event of his death. For the reasons set forth herein, we are of the opinion that the court below was in error and that the petition should have been granted so as to effectuate the declared intention of the parties to the agreement.
In 1957 the decedent was the sole owner of two Illinois corporations, Harbro, Inc. and Carey Grain Corporation, having paid $89,000 for all of the corporate shares. For convenience of reference, these corporations will herein be called "Harbro" and "Carey", and will be collectively referred to as "the Companies". In August, 1959, Irwin Cole and his sister, Sylvia Floun Schwartz (both herein called "Cole") purchased 50% of the decedent's interest in each of the Companies for the price of $94,500, with the decedent retaining a 50% interest therein. As a result of that transaction, decedent received more money than he had theretofore invested in the Companies, which at that time had a deficit of approximately $90,000.
Simultaneously with the stock sale, two agreements were entered into. One of these was an agreement by which the decedent and Cole agreed to vote the shares of the Companies to elect four members to the boards of directors of each, two to be designated by decedent "or his personal representative" and two to be designated by Cole "or his personal representative". The other agreement was entitled "Stock Purchase Agreement" (described in greater detail below). The Stock Purchase Agreement, which is very comprehensive, was prepared by decedent's attorneys. The respective boards of directors of the Companies authorized the execution of the Stock Purchase Agreement, and further amended the respective by-laws to provide that the vote of three directors was required for corporate action.
Section 7 of the Stock Purchase Agreement is entitled "Options on Death of a Stockholder," and provides in part as follows:
"Upon the death of either Cole or Brown (hereinafter in this Agreement sometimes called the `First Deceased Stockholder'), the Companies or their designees shall, for ninety (90) days from and after the date of his death, have the right and option to purchase all of his Stock from his estate. * * * If such option shall be exercised as aforesaid, the First Deceased Stockholder's estate shall, within thirty (30) days after receipt of the aforesaid notice, sell all of said Stock to the purchaser at the price and in the manner hereinafter set forth. * * *
(a) The price to be paid for the Stock shall be the greater of
(i) the book value thereof (as determined under the provisions of Section 11) as of the date of death of the First Deceased Stockholder; or
(ii) an amount set forth in a certificate of agreed value to be executed periodically by Brown and Cole and filed with the Companies." *fn1
Section 9 of the Stock Purchase Agreement provided that the shareholders "and the Companies hereby agree to take all other action, required or advisable to effectuate the terms and provisions of this agreement."
Section 11(a) of the Stock Purchase Agreement directs that book value shall be "determined by the regularly employed auditors of the Companies on the basis of standard accounting principles applicable to the business of the Companies". This section directs that "the book value of the Stock as determined by the auditors, shall be binding and conclusive on all persons".
Decedent died December 20, 1968. One of the executors of his estate is Stanley A. Kaplan, a partner of the law firm retained by decedent to prepare the Stock Purchase Agreement. On February 6, 1969, the day decedent's will was admitted to probate and the executors were appointed, the Companies served notice on the executors of their exercise of the option to purchase decedent's shares, pay the book value thereof, and comply with all the remaining provisions of the Stock Purchase Agreement. The Companies offered to pay the executors $22,586 on the basis, as the evidence later showed, that Harbro had a book value of $60,621, while Carey had a negative book value of $15,449, and that the executors were entitled to receive 50% of the combined net book value of the Companies. The executors refused to accept this offer, and the Companies filed a petition seeking an order directing the executors to comply with the terms and conditions of the Stock Purchase Agreement. Cole and Schwartz were added as additional parties to the proceeding.
At the conclusion of the hearing the trial court denied the Companies' petition for the following reasons: (1) the Companies' exercise of the option over the signature of Mr. Cole, its Vice-President and Acting President, was of no effect since it was not properly authorized or ratified by the boards of directors; (2) the amount which the Companies should have offered was $30,310.50, and not $22,586, since the book value of Carey cannot be less than zero; (3) since there is a great disparity between the book and market value of the Companies' shares, a court of equity should not in good conscience grant specific performance; and (4) Section 6 of the Illinois Business Corporation Act prohibits a corporation from purchasing its own shares except out of earned surplus, which did not exist in the case of the Companies.
The Companies thereupon perfected this appeal. We consider the judgment below under appropriate headings:
The Companies' Option was Properly Exercised.
After decedent's death the Companies each had only three directors, and one of these, Mr. Kaplan, was an executor of decedent's estate. The remaining two directors, active at a meeting not attended by Mr. Kaplan, approved the Companies' exercise of the option. The executors contend that this was ineffectual since the by-laws were amended (on the same date of the Stock Purchase Agreement) to provide that the vote of three directors was necessary for corporate action. We disagree with this contention.
By the very nature of the option provisions of the Stock Purchase Agreement, the option could never be exercised if the renewed approval of three directors were necessary. The option, which runs in favor of the Companies, was obviously intended for their benefit; the Companies would exercise it only where the decedent's stock was worth more than its book value or the value periodically certified to by the parties. If the affirmative action of three directors were required, the option would be a nullity since one of the directors would be deceased and another would be his representative on the board. Naturally, the latter would not vote to have the decedent's shares sold for less than their true value (indeed, Mr. Kaplan refused to so vote in the ...