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Mccarthy v. Johnson





Appeal from the Circuit Court of Cook County; the Hon. Arthur Dunne, Judge, presiding.


Rehearing denied March 19, 1984.

This is an appeal from the entry of summary judgment in a suit to determine shareholder interest. In anticipation of the dissolution of Federal Asphalt Corporation (Federal), plaintiff sought a declaratory judgment to determine his shareholder interest. It was his position that he owned a 20% interest in the corporation. In response, defendants, the remaining Federal shareholders, filed a motion for summary judgment, requesting the trial court to find that, pursuant to the terms of an option letter agreement, plaintiff had only a 2% shareholder interest in Federal. The trial court granted defendants' motion. The sole issue on appeal is whether genuine issues of fact exist so as to preclude the grant of summary judgment. For the reasons that follow, we affirm the decision of the trial court.

The undisputed facts disclose that at the time of its incorporation on May 17, 1971, Federal had a stated capital of $10,000, which represented the amount paid by defendants for 10,000 shares of Federal common stock. At that time, no funds had been distributed to paid-in surplus.

On May 18, 1971, each defendant executed an option letter agreement with plaintiff which offered him the option to purchase 1,000 shares of Federal stock from each defendant, 500 to be purchased from each by May 18, 1972, and the balance to be purchased by May 18, 1973, at the same price paid by defendants for their shares, "that is, $1.00 per share." The following purchase price contingency clause was included in each agreement:

"In the event that, subsequent to the date hereof, there is any change in the shares of Federal Asphalt which are the subject of the Option by reason of a reorganization, recapitalization, merger, consolidation or split-up, combination or exchange of shares or similar procedure, or in the event of a stock dividend, the number of Federal Asphalt shares (or the securities into which such shares may have theretofore been changed) subject to the Option and the Option purchase price per share shall be equitably adjusted."

On June 14, 1971, Federal filed a "Report of Issuance of Shares and Increases in Stated Capital and Paid-in Surplus" with the Illinois Secretary of State which reflected the addition of $90,000 to paid-in surplus, half of which was contributed by each defendant. No additional shares were issued; the class of stock remained the same; and the par value remained at $1 per share. Subsequently, in May 1972 and May 1973, plaintiff timely exercised his options to purchase 2,000 shares from the defendants at a purchase price of $1 per share and was issued stock certificates indicating his ownership of 2,000 shares of Federal stock, or 20% of the 10,000 issued and outstanding shares.

In 1979, Federal's assets were sold and the proceeds of the sale were deposited in a bank account pending resolution of the controversy regarding plaintiff's rights and legal interest in the paid-in surplus amount of $90,000. In support of his position that he had a 20% shareholder interest, plaintiff alleged, inter alia, that: (1) he was the registered owner of 2,000 shares of Federal common stock; (2) the $90,000 added to paid-in surplus in 1971 by defendants did not represent a loan or a separate stock classification; and (3) he timely exercised his stock options pursuant to the provisions of the stock option agreements. Further, plaintiff argued that at no time during the six-year period between his purchase of the shares and the sale of Federal's assets did defendants request additional payment from him.

In response, defendants filed a motion for summary judgment asking the court to find, as a matter of law, that plaintiff owned a 2% interest in Federal and was entitled to only 2% of the net proceeds from the sale of its assets. In this regard, defendants argued that their contributions of $45,000 each to paid-in surplus in June 1971, effectuated a recapitalization which triggered the purchase price contingency clause in the option agreements and effectively increased the purchase price of their shares from $1 to $10. They predicated the price increase argument on the fact that each defendant contributed a total of $50,000 to the corporation and owned 5,000 shares. Thus, because the option agreements unambiguously state that plaintiff's purchase price is to be the same as that of defendants, and plaintiff paid only one-tenth of the price paid by defendants, plaintiff owned only a 2% interest in the corporation.

In granting defendant's motion for summary judgment, the trial court stated:

"[Plaintiff] is bound by the terms and conditions of the option agreement, which contains a specific paragraph relating to a change in the capitalization of the corporation, and that to the extent that he received shares subsequent to the stock option and subsequent to the capitalization any amounts which he may receive from a sale or distribution of the stock * * * would be diminished by the sum of $9.00 per share."

Accordingly, the court ruled that plaintiff's 200 shares of Federal stock were subject to a set-off of $9 per share or a total of $18,000, payable to defendants. Thereafter, upon denial of plaintiff's motion to reconsider, the court further found that the option agreements were plain and unambiguous on their face.


On appeal, plaintiff asserts that the pleadings, depositions, affidavits and exhibits clearly show that there are issues of material fact which preclude the ...

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