Appeal from the Circuit Court of Cook County Honorable Ian H. Levin, judge Presiding.
The opinion of the court was delivered by: Justice Gallagher
William Sims, Marilyn Sims, Michael Sims, David Sims, and Maureen Sims (plaintiffs) filed their five-count, second amended complaint against Robert Tezak, Joseph Cusimano, Quentin Robert Tezak, Sandra Tezak, William Apple, Edwin Akeman and John D'Arcy (defendants) on April 28, 1995, alleging, inter alia, defendants defrauded them and breached various fiduciary duties in connection with the repurchase of stock from certain closely held corporations. The trial court dismissed four counts of the second amended complaint, including plaintiffs' breach of fiduciary duty claim (count I). The trial court also granted summary judgment in favor of defendants on the fraud claim (count IV). Plaintiffs next filed this appeal, challenging only the dismissal of count I and the decision to grant summary judgment on count IV. We affirm in part, reverse in part and remand for proceedings consistent with this opinion.
As the present case comes to us after the trial court's dismissal and entry of summary judgment, we present the facts as plaintiffs have alleged them in their pleadings. Plaintiffs were minority shareholders in certain closely held corporations incorporated under Delaware law-- International Games, Inc. (IGI), Hallnox International Games (Hallnox) and IGI, Ltd. *fn1 Defendants were the majority shareholders, officers and directors of the aforementioned corporations.
In 1981, plaintiffs filed personal and derivative claims in a federal lawsuit against both the corporations and the present defendants. The federal lawsuit alleged that defendants committed various types of fraud, breached their fiduciary duties, and violated multiple securities acts. Ultimately, in 1986, the parties settled the federal lawsuit pursuant to two written agreements under the captions "Settlement Agreement" and "Stock Sale Agreement," both of which were entered into on October 30, 1986. Under the Settlement Agreement, plaintiffs agreed to release all of their claims in the federal lawsuit. *fn2 Under the Stock Sale Agreement, each corporation agreed to repurchase its respective shares from plaintiffs. Plaintiffs received $1.25 million for their IGI shares, $175,000 for their Hallnox shares and $425,000 for their shares in IGI, Ltd. Plaintiffs owned shares in two classes of IGI stock: class A and class B. As part of the Stock Sale Agreement, plaintiffs accepted IGI's proposal that it repurchase their class A shares at $35,000 per share and their class B shares at $30,000 per share. The validity of the Settlement Agreement disposing of the federal litigation was expressly conditioned upon the timely payment of the purchase price for plaintiffs' shares.
Plaintiffs later discovered that at the time of the settlement their IGI stock had been worth significantly more than the amount IGI paid to repurchase it. Accordingly, they commenced suit in April 1994 and filed their second amended complaint on April 28, 1995. In that complaint, plaintiffs set forth the factual allegations forming the basis of their fraud and breach of fiduciary duty claims.
Plaintiffs allege that, during settlement negotiations in February 1985, defendants' counsel orally represented to plaintiffs that the financial condition of IGI was deteriorating and that the fair market value of the corporation was little more than its book value--which was approximately $9 million. Under a $9 million valuation, each share of IGI would be worth less than $36,000. Although the federal litigation did not settle until October of 1986, plaintiffs assert that their ultimate decision to accept the repurchase prices proposed by IGI in the Stock Sale Agreement ($35,000 per class A share and $30,000 per class B share) was premised upon the representation that IGI's market value was only $9 million.
Plaintiffs further allege that defendants intentionally concealed the following information while negotiating for the repurchase of plaintiffs' stock in 1986: (1) IGI was planning an extensive corporate recapitalization; (2) several potential buyers had approached IGI expressing their interest in purchasing the corporation; (3) a valuation company retained by IGI, Valuemetrics, Inc., informed IGI that its fair market value substantially exceeded its book value; (4) IGI had consulted with an investment banker regarding an initial public offering and that banker valued the corporation at between $33 and $39 million; and (5) IGI was projecting 1986 sales of approximately $20 million, which constituted a 50% increase over its 1985 sales. Plaintiffs contend that defendants held all of the aforementioned material information within their exclusive control. Moreover, plaintiffs allege that they had no notice of said information until after 1992 when it was reported in the press.
As further evidence of defendants' alleged deception, plaintiffs point to the fact that, by December 19, 1987, defendants' retained investment banker confirmed the fair market value of IGI to be $37 million. According to the second amended complaint, defendants effectuated IGI's recapitalization through an employee stock ownership plan (ESOP), which came into being on January 1, 1987; this ESOP valued IGI at $45 million. Even under the (lesser) $37 million valuation, IGI's per-share value equals approximately $175,000--at least five times the amount per share tendered to plaintiffs under the Stock Sale Agreement.
Defendants filed several motions seeking to dismiss the second amended complaint and, alternatively, summary judgment. With respect to the issues presented in this appeal, defendants essentially argued that: (1) they owed no fiduciary duty of complete disclosure to plaintiffs in connection with the Stock Sale Agreement because that agreement arose in the litigation settlement context; and (2) because plaintiffs had already accused defendants of dishonesty in the earlier federal litigation, plaintiffs could not justifiably rely upon any representations made by defendants as a matter of law. On December 27, 1995, the trial court dismissed count I (the breach of fiduciary duty claim) pursuant to section 2-615 of the Illinois Code of Civil Procedure (Code)(735 ILCS 5/2-615 (West 1994)). The trial court also granted summary judgment in favor of the defendants on count IV (the fraud claim) pursuant to section 2-1005 of the Code. 735 ILCS 5/2-1005 (West 1994). This appeal followed.
Plaintiffs first charge that the trial court erred in dismissing count I of the second amended complaint when it held that defendants did not owe a fiduciary duty of complete disclosure to plaintiffs in connection with the Stock Sale Agreement. When ruling on a motion to dismiss under section 2-615 of the Code of Civil Procedure, the trial court must accept as true all well-pleaded facts in the complaint and interpret all of the pleadings and supporting documents in the light most favorable to the nonmoving party. People v. Claar, 293 Ill. App. 3d 211, 687 N.E.2d 557 (1997); Stephen L. Winternitz, Inc. v. National Bank, 289 Ill. App. 3d 753, 683 N.E.2d 492 (1997). Dismissal is appropriate only if the plaintiff can establish no set of facts that would support a cause of action. Stephen L. Winternitz, Inc., 289 Ill. App. 3d at 755, 683 N.E.2d at 494. Appellate courts apply a de novo standard of review to dismissals under section 2-615 of the Code. Toombs v. City of Champaign, 245 Ill. App. 3d 580, 615 N.E.2d 50 (1993).
Both sides agree that because IGI is a Delaware corporation, Delaware corporate law applies to the present case. In their brief, plaintiffs contend that defendants, as the officers and directors of IGI, operated under a duty to disclose all information material to plaintiffs' decision whether to sell their IGI stock. Under plaintiffs' view of Delaware law, in all corporate transactions where minority shareholders must decide whether to sell or retain their stock, the board of directors has a duty of candor relating to that decision. To support their interpretation of the duty to disclose, plaintiffs rely upon Lynch v. Vickers Energy Corp., 383 A.2d 278 (Del. 1977), rev'g 351 A.2d 570 (Del. Ch. 1976), and Smith v. Van Gorkam, 488 A.2d 858 (Del. 1985).
We agree with plaintiffs that the Delaware courts have imposed upon corporate directors a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action. Zirn v. VLI Corp., 681 A.2d 1050, 1056 (Del. 1996); Lynch, 383 A.2d at 279. However, we cannot agree with the proposition, espoused by plaintiffs, that Delaware law clearly imposes this duty whenever a corporation repurchases its own shares. As defendants point out, the Delaware cases considering the duty of disclosure all do so in the circumscribed context of shareholder votes and proxy solicitation materials. See generally Stroud v. Grace, 606 A.2d 75, 86 (Del. 1992)("[a]ll of our previous decisions involving disclosure requirements, and subsequent shareholder ratification, involved proxy solicitations"); Zirn, 681 A.2d at 1053-54 (corporation ...