Galler v. GallerGaller v. Galler
- Reporters:
- ,
- Before:
- 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,
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
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
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^% of the issued and outstanding shares of the Caller 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
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 upbn 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
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. * * * qq-Lg 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 partners. Every motive which
Again, in 1913, this court in Venner v. Chicago City Railway Co. 258 Ill. 523, 539, followed the Faulds case and said: “There is no statute of this State which prohibits a trust of the stock of a corporation for the purpose of controlling its management. There is no rule of public policy in this State which prohibits the combination of the owners of the majority of the stock of a corporation for the purpose of controlling the corporation. On the .contrary, it has been expressly held that a contract by the owners of. more than one-half of the shares of stock of a corporation to elect the directors of the corporation so as to secure the management of its property, to ballot among themselves for directors and officers if they could not agree, to cast their vote as a unit as the majority should decide so as to control the election, and not to buy or sell stock except for their joint benefit is not dishonest, violative of the rights of others or in contravention of public policy, (Faulds v. Yates, 57 Ill. 416.) This case has been sustained by later decisions of this court, (Higgins v. Lansingh, 154 Ill. 301; Kantzler v. Bensinger, 214 id. 589) has been approved by the decisions of the court of other States [citing cases,] has been cited by text writers announcing the law as therein stated, [citation,] and we regard the decision as sound in principle.”
In Thompson v. Thompson Carnation Co. 279 Ill. 54, 58, we again approved a contract by which the owners of a majority of stock agreed to vote for certain persons for directors so as to secure to themselves the control and management of the corporation and held such an agreement not
In Schumann-Heink v. Folsom, 328 Ill. 321, 330, we said: “In considering whether any contract is against public policy it should be remembered that it is to the interests of the public that persons should not be unnecessarily restricted in their freedom to make their own contracts. Agreements are not held to be void, as being contrary to public policy, unless they be clearly contrary to what the constitution, the statutes or the decisions of the courts have declared to be the public policy or unless they be manifestly injurious to the public welfare. Courts must act with care in extending those rules which say that a given contract is void because against public policy, since if there be one thing more than any other which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty of contract, and that their contracts, when entered into fairly and voluntarily, shall be held sacred and shall be enforced by the courts.”
Later, we said in Electrical Contractors’ Ass’n v. Schulman Electric Co. 391 Ill. 333, 339: “The power by which courts may declare a contract void as against public policy is far-reaching and it is to be exercised only when it clearly appears that it is contrary to a constitutional mandate, a statute, judicial decisions, or that it manifestly tends to injure the public in some way. * * * The question must be determined from the terms of the contract itself and, in considering the ends to which it leads, the courts are not privileged to ascribe illegal purposes where there is nothing in the contract from which such a conclusion may be reasonably drawn. In Kellogg v. Larkin, 3 Pin., Wis., 123, 56 Am. Dec. 164, it was said: ‘Before a court should determine a contract which has been made in good faith stipulating for nothing that is malum in se, nothing that is made malum prohibitum, to be void as contravening the policy of the state, it should be satisfied that the advantage to accrue to the public for so holding is certain and substantial, not theoretical or problematical’.”
The power to invalidate the agreements on the grounds of public policy is so far reaching and so easily abused that it should be called into action.to set aside or annul the solemn engagement of parties dealing on equal terms only in cases where the corrupt or dangerous tendency clearly and unequivocally appears upon the face of the agreement itself or is the necessary inference from the matters which are expressed, and the only apparent exception to this general rule is to be found in those cases where the agreement, though fair and unobjectionable on its face, is a part of a corrupt scheme and is made to disguise the real nature of the transaction. 12 Am. Jur. 671.
Defendants have referred us to cases in other jurisdictions and the Appellate Courts of this State, particularly Odman v. Oleson, 319 Mass. 24, 64 N.E.2d 439, and Teich v. Kaufman, 174 Ill. App. 306. Neither is persuasive, for Odman exemplifies the public policy of Massachusetts whose courts, while not holding agreements such as we have here invalid per se, have not relaxed their requirements of strict statutory compliance when dealing with close corporations, at least where all the stockholders have not signed the agreement in question. Anno: Validity and Effect of Agreement Controlling the Vote of Corporate Stock, 45 A.L.R. 2d 799, 815. In any event, decisions setting forth the public policies of other jurisdictions will not be followed if not harmonious with the judicially declared public policy of Illinois. (Union T. & S. B. v. Kinlock, L. B. T. Co. 169 Ill. App. 309, 314; affirmed 258 Ill. 202; Schnackenberg v. Towle, 351 Ill. App. 497, reversed 4 Ill.2d 561; Faulds v. Yates, 57 Ill. 416, 421.) Teich held the majority agreement
At this juncture it should be emphasized that we deal here with a so-called close corporation. Various attempts at definition of the close corporation have been made. For a collection of those most frequently proffered, see O’Neal, Close Corporations, § 1.02 (1958). For our purposes, a close corporation is one in which the stock is held in a few hands, or in a few families, and wherein it is not at all, or only rarely, dealt in by buying or selling. (Brooks v. Willcuts, (8th cir. 1935) 78 F.2d 270, 273.) Moreover, it should be recognized that shareholder agreements similar to that in question here are often, as a practical consideration, quite necessary for the protection of those financially interested in the close corporation. While the shareholder of a public-issue corporation may readily sell his shares on the open market should management fail to use, in his opinion, sound business judgment, his counterpart of the close corporation often has a large total of his entire capital invested in the business and has no ready market for his shares should he desire to sell. He feels, understandably, that he is more than a mere investor and that his voice should be heard concerning all corporate activity. Without a shareholder agreement, specifically enforceable by the courts, insuring him a modicum of control, a large minority shareholder might find himself at the mercy of an oppressive or unknowledgeable majority. Moreover, as in the case at bar, the shareholders of a close corporation are often also the directors and officers thereof. With substantial shareholding interests abiding in each member of the board of directors, it is often quite impossible to secure, as in the large public-issue corporation, independent board judgment free from personal motivations concerning corporate policy. For these and other reasons too voluminous to enumerate here, often the only sound basis for protection
As the preceding review of the applicable decisions of this court points out, there has been a definite, albeit inarticulate, trend toward eventual judicial treatment of the close corporation as sui generis. Several shareholder-director agreements that have technically “violated” the letter of the Business Corporation Act have nevertheless been upheld in the light of the existing practical circumstances, i.e., no apparent public injury, no apparent injury to a minority interest, and no apparent prejudice to creditors. However, we have thus far not attempted to limit these decisions as applicable only to close corporations and have seemingly implied that general considerations regarding judicial supervision of all corporate behavior apply.
The practical result of this series of cases, while liberally giving legal efficacy to particular agreements in special circumstances notwithstanding literal “violations” of statutory corporate law, has been to inject much doubt and uncertainty into the thinking of the bench and corporate bar of Illinois concerning shareholder agreements. See e.g., Cary, “How Illinois Corporations May Enjoy Partnership Advantages: Planning for the Closely Held Firm,” 48 N.W.U.L. Rev. 427; Note, “The Validity of Stockholders’ Voting Agreements in Illinois,” 3 U. Chi. L. Rev. 640.’
It is therefore necessary, we feel, to discuss the instant case with the problems peculiar to the close corporation particularly in mind.
It would admittedly facilitate judicial supervision of corporate behavior if a strict adherence to the provisions of the Business Corporation Act were required in all cases without regard to the practical exigencies peculiar to the close corporation. West v. Camden, 135 U.S. 507, 34 L. ed.
Again, “As the parties to the action are the complete owners of the corporation, there is no reason why the exercise of the power and discretion of the directors cannot be controlled by valid agreement between themselves, provided that the interests of creditors are not affected.” Clark v. Dodge, 119 N.E. 641, 643, quoting from Kassel v. Empire Tinware Co. 178 App. Div. 176, 180, 164 N.Y.S. 1033, 1035.
Numerous helpful textual statements and law review articles dealing with the judicial treatment of the close
This court has recognized, albeit sub silentio, the significant conceptual differences between the close corporation and its public-issue counterpart in, among other cases, Kantzler v. Bensinger, 214 Ill. 589, where an agreement quite similar to the one under attack here was upheld. Where, as in Kantzler and here, no injury to a minority interest appears, no fraud or apparent injury to the public or creditors is present, and no clearly prohibitory statutory language is violated, we can see no valid reason for precluding the parties from reaching any arrangements concerning the management of the corporation which are agreeable to all.
Perhaps, as has been vociferously advanced, a separate comprehensive statutory scheme governing the close corporation would best serve here. See Note “A Plea for Separate Statutory Treatment of the Close Corporation”, 33 N.Y.U. L. Rev. 700. Some states have enacted legislation
At any rate, however, the courts can no longer fail to expressly distinguish between the close and public-issue corporation when confronted with problems relating to either. What we do here is to illuminate this problem— before the bench, corporate bar, and the legislature, in the context of a particular fact situation. To do less would be to shirk our responsibility, to do more would, perhaps be to invade the province of the legislative branch.
We now, in the light of the foregoing, turn to specific provisions of the 1955 agreement.
The Appellate Court correctly found many of the contractual provisions free from serious objection, and we need not prolong this opinion with a discussion of them here. That court did, however, find difficulties in the stated purpose of the agreement as it relates to its duration, the election of certain persons to specific offices for a number of years, the requirement for the mandatory declaration of stated dividends (which the Appellate Court held invalid), and the salary continuation agreement.
Since the question as to the duration of the agreement is a principal source of controversy, we shall consider it first. The parties provided no specific termination date, and while the agreement concludes with a paragraph that its terms “shall be binding upon and shall inure to the benefits of” the legal representatives, heirs and assigns of the parties, this clause is, we believe, intended to be operative only as long as one of the parties is living. It further provides that it shall be so construed as to carry out its purposes, and we believe these must be determined from a consideration of the agreement as a whole. Thus viewed, a fair construction is that its purposes were accomplished at the death of the survivor of the parties. While these life spans
The clause that provides for the election of certain persons to specified offices for a period of years likewise does not require invalidation. In Kantzler v. Bensinger, 214 Ill. 589, this court upheld an ’ agreement entered into by all the stockholders providing that certain parties would be elected to the offices of the corporation for a fixed period. In Faulds v. Yates, 57 Ill. 416, we upheld a similar agreement among the majority stockholders of a corporation, notwithstanding the existence of a minority which was not before the court complaining thereof. See also Hornstein, “Judicial Tolerance of the Incorporated Partnership,” 18 Law and Contemporary Problems, 435 at page 444.
We turn next to a consideration of the effect of the stated purpose of the agreement upon its validity. The pertinent provision is: “The said Benjamin A. Caller and Isadore A. Caller desire to provide income for the support and maintenance of their immediate families.” Obviously, there is no evil inherent in a contract entered into for the reason that the persons originating the terms desired to so arrange their property as to provide post-death support for those dependent upon them. Nor does the fact that the subject property is corporate stock alter the situation so long as there exists no detriment to minority stock interests, creditors or other public injury. It is, however, contended by defendants that the methods provided by the agreement for implementation of the stated purpose are, as a whole, violative of the Business Corporation Act (Ill. Rev. Stat. 1963, chap. 32, pars. 157.28, 157.30a, 157.33, 157-34, 157-41) to such an extent as to render it void in toto.
The terms of the dividend agreement require a minimum annual dividend of $50,000, but this duty is limited by the subsequent provision that it shall be operative only so long as an earned surplus of $500,000 is maintained. It may be noted that in 1958, the year prior to commencement of this litigation, the corporation’s net earnings after taxes amounted to $202,759 while its earned surplus was $1,543,-270, and this was increased in 1958 to $1,680,079 while earnings were $172,964. The minimum earned surplus requirement
The salary continuation agreement is a common feature, in one form or another, of corporate executive employment. It requires that the widow should receive a total benefit, payable monthly over a five-year period, aggregating twice the amount paid her deceased husband in one year. This requirement was likewise limited for the protection of the corporation by being contingent upon the payments being income tax-deductible by the corporation. The charge made in those cases which have considered the validity of payments to the widow of an officer and shareholder in a corporation is that a gift of its property by a noncharitable corporation is in violation of the rights of its shareholders and ultra vires. Since there are no shareholders here other than the parties to the contract, this objection is not here applicable, and its effect, as limited, upon the corporation is not so prejudicial as to require its invalidation.
Having concluded that the agreement, under the circumstances here present, is not vulnerable to the attack made on it, we must consider the accounting feature of this action. The trial court allowed the relief prayed, an action we deem proper except as to the master’s fees which were modified by the Appellate Court. Since no question is here raised regarding them, we affirm the action of that court in this respect. The questions as to salary which the Appellate Court correctly held were improperly increased became ones of fact to be determined by the trial court.
We hold defendants must account for all monies received by them from the corporation since September 25, 1956, in excess of that theretofore authorized.
Accordingly, the judgment of the Appellate. Court is
Affirmed in part and reversed in part, and remanded with directions.