Court Bars Business Oppression Even Though Shareholders Were in Litigation
Business oppression occurs when the shareholder majority exercises its voting power to abuse the ownership rights of the minority. A lawsuit alleging such abuse is a disruptive event that forever changes the relationship among shareholders. However, it does not end the parties’ fiduciary responsibilities to the company, or to others with a stake in the company. An Illinois court recently held that honest, open communication regarding significant business issues is still required even if fellow shareholders are engaged in litigation.
In Arndt v. Nardulli, the an Illinois appellate court declared that a minority shareholder could sue the majority owner of Redhawk Financial Services for breach of fiduciary duty and fraud that allegedly occurred during the settlement of a previous lawsuit. The decision could bear on other issues that can arise when stakeholders are feuding in court, such as:
- Access to financial records — During the initial lawsuit, Samuel Arndt alleged minority business oppression and other unlawful actions, claiming that when he sought access to Redhawk’s financial records, he was removed as an officer and director. This allegedly let the majority owner represent the company’s fiscal health dishonestly, leading Arndt to settle for less than if he had known the truth.
- Effect of non-reliance clause —The agreement settling the original case included a clause declaring that neither party relied on information not included within the agreement in deciding to settle. Defendant Nicholas Nardulli, the controlling shareholder, argued that this clause barred Arndt’s claims of fraudulent inducement and constructive fraud. The court rejected that argument, holding that Nardulli’s fiduciary responsibility could not be waived with respect to the incorrect financial information he allegedly provided.
- Release claim voided — Likewise, the settlement’s release provision did not bar the second lawsuit because the agreement rested on the defendant’s breach of fiduciary duty of which the plaintiff was unaware, the court held.
This decision highlights the importance of honoring one’s fiduciary responsibilities even when problems arise among ownership. If you are unsure of how to proceed or believe that violations have occurred, seeking counsel from a lawyer well versed in these issues can be very beneficial.
Schwartz & Kanyock, LLC represents clients in litigation and negotiations stemming from business oppression claims. For a consultation regarding your circumstances and options, please call 312-436-1442 or contact us online. Our office is on North Dearborn Street in Chicago.