Lohr v. Havens

Opinion

No. 3-06-0930

_________________________________________________________________ Filed October 31, 2007. IN THE

APPELLATE COURT OF ILLINOIS

THIRD DISTRICT

A.D., 2007

CHARLES R. LOHR, ) Appeal from the Circuit Court ) of the 13th Judicial Circuit, Plaintiff-Appellee, ) La Salle County, Illinois, ) v. ) ) TERRY HAVENS, Individually and ) as a shareholder, director and ) officer of Phoenix Paper ) No. 03-CH-688 Products, Inc.; SAMUEL J. ) MORRIS, Individually and as ) a shareholder, director and ) officer of Phoenix Paper ) Products, Inc.; and PHOENIX ) PAPER PRODUCTS, INC., an ) Illinois Corporation, ) Honorable ) Eugene P. Daugherty, Defendants-Appellants. ) Judge, Presiding. _________________________________________________________________

PRESIDING JUSTICE LYTTON delivered the opinion of the court: _________________________________________________________________

Plaintiff Charles R. Lohr filed a complaint against defendants

Terry Havens, Samuel J. Morris and Phoenix Paper Products, Inc., seeking nonpublic shareholder relief, including the purchase of all

his shares, under the Business Corporations Act of 1983 (Act) (805

ILCS 5/12.56 (West 2002)). Havens filed an election to purchase

plaintiff’s shares under section 12.56(f) of the Act. The trial

court held that the election was defective and allowed plaintiff to

voluntarily dismiss his statutory claim. We affirm.

Lohr owns 44 shares of stock in Phoenix Paper, a privately-

held corporation. The majority shareholder, president and chairman

of the board is defendant, Terry Havens, who owns 56 shares. Two other shareholders, James Durham and Tom Truckenbroad, hold five

shares each.

In October 2002, Durham sent a letter to Havens on behalf of

himself and Lohr, as directors and shareholders of Phonenix Paper,

requesting information regarding the handling of corporate assets.

Much correspondence followed in which Durham and Lohr questioned

the accounting methods and fiscal management of the company. The

letters demanded a meeting of the directors and accused Havens and

the company’s accountant, Samuel Morris, of taking inappropriate

action without shareholder approval.

In November of 2003, after months of dissension among the

directors, Lohr filed a six-count complaint against Havens, Phoenix

Paper, and Morris, alleging that defendants were acting in an

illegal and oppressive manner and that the corporate assets were

being misapplied. Count I asked the trial court, pursuant to

section 12.56 of the Act, to (1) instruct the company, or one or

more of its shareholders, to purchase all of Lohr’s shares for

their fair value, or alternatively, (2) order the dissolution of

the company. Havens filed a timely "Election to Purchase Shares of

Plaintiff Charles R. Lohr Pursuant to 805 ILCS 5/12.56(f)." The

election set forth four alternative amounts Havens offered to pay

in exchange for all of Lohr’s shares.

Within 30 days, Lohr responded to the offer. In addition to

his response to the specific purchase amounts, Lohr noted that the

Act required the company to give notice of an election to all the

shareholders within 10 days. Lohr stated that, in this case, he

2 "did not know if the corporation [had] given written notice to all

shareholders pursuant to 805 ILCS 5/12.56(f)(2)." See 805 ILCS

5/12.56(f)(2) (West 2002) (if an election to purchase is filed, the

corporation shall give written notice within 10 days to all

shareholders).

After two years of discovery between the parties, Lohr moved

to voluntarily dismiss count I of the complaint. Havens objected

and argued that, under section (f)(4) of the Act, the election

prevented Lohr from dismissing his statutory claim unless the court

conducted a hearing and determined that it would be "equitable" to

allow the dismissal. See 805 ILCS 5/12.56(f)(4) (West 2002)

(proceeding may not be discontinued unless the court determines

that it would be equitable to the corporation and the shareholders

to permit the dismissal).

In response, Lohr claimed that because notice of the election

was not provided to the other shareholders pursuant to section

12.56(f)(2), the election itself was defective, and the trial court

had no authority to consider the "equities" of the case. The trial

court agreed that the election was invalid and allowed Lohr to dismiss count I of his complaint.

ANALYSIS

I. Section 12.56(f): The Illinois Election Remedy Statute

Section 12.56(f) of the Business Corporations Act allows a

closely held company or its shareholders to elect to purchase a

petitioning shareholder’s shares as a remedy in lieu of

dissolution. In relevant part, section 12.56(f) states:

(f) At any time within 90 days after the filing of

3 the petition under this Section, or at such time

determined by the court to be equitable, the corporation

or one or more shareholders may elect to purchase all,

but not less than all, of the shares owned by the

petitioning shareholder for their fair value.

***

(2) If the election to purchase is filed

by one or more shareholders, the corporation

shall, within 10 days thereafter, give written

notice to all shareholders.

(4) After an election has been filed by

the corporation or one or more shareholders,

the proceeding filed under this Section may

not be discontinued or settled *** unless the

court determines that it would be equitable to

the corporation and the shareholders.

805 ILCS 5/12.56(f) (West 2002).

The legislature based the provisions of section 12.56(f) on section 14.34 of the Model Business Corporation Act (Model Act).

See Hamlin v. Harbaugh Enterprises, Inc., 324 Ill. App. 3d 612,

618-19 (2001); 3 ABA Model Business Corporation Act Ann. §14.34 (3d

ed. Supp. 2000, 2001, 2002). Section 14.34 of the Model Act

outlines the requirements for filing an election to purchase a

petitioning shareholder’s stock. Like the Illinois Act, section

14.34(b) provides for an election to purchase within 90 days after

the filing of a petition. Section 14.34(b) also requires notice to

4 the other shareholders within 10 days. 3 ABA Model Business

Corporation Act Ann. §14.34(b) (3d ed. Supp. 2000, 2001, 2002).

The "historical background" of the Model Act states that

section 14.34 was added as an alternative to involuntary

dissolution to avoid the potentially devastating consequences of

dissolution and to provide greater flexibility and certainty to

closely held corporations. The comments note that the section does

so "by providing the corporation or the other shareholders a

limited right to purchase at fair value the shares of the

shareholder who has petitioned to dissolve the corporation." 3 ABA

Model Business Corporation Act Ann. §14.34, historical background,

(3d ed. Supp. 2000, 2001, 2002).

II. Notice Requirement under Section 12.56(f)(2)

On appeal, we are asked to determine whether a corporation’s

failure to provide notice of an election under section 12.56(f)(2)

renders the election defective. We believe that while a proper

election precludes a shareholder from dismissing a petition, a

valid election must include notice to the other shareholders. Both

the language and the intent of the Act support our conclusion. First, to ascertain the meaning of a statute, we must seek

and, if possible, find the intention of the General Assembly in the

express language used in the statute. Segers v. Industrial

Commission, 191 Ill. 2d 421 (2000). The best evidence of

legislative intent is the words of the statute itself, which should

be given their plain and ordinary meaning. Krautsack v. Anderson,

223 Ill. 2d 541 (2006). Where the language is clear and

unambiguous, the statute will be given effect without resorting to

5 other aids for construction. Krautsack, 223 Ill. 2d at 541. Courts

should not read language into a statute that does not exist.

Hamlin, 324 Ill. App. 3d at 618. The statutory provision must be

read as a whole and all relevant parts should be considered. Cole

v. State Department of Public Health, 329 Ill. App. 3d 261 (2002).

The plain language of the statute is clear and unambiguous.

Section 12.56(f)(2) states: "If the election to purchase is filed

*** the corporation shall, within 10 days, give written notice to

all shareholders." 805 ILCS 5/12.56(f)(2) (West 2002). Use of the

word "shall" appearing in a statute ordinarily imposes an

imperative duty. See Cole, 329 Ill. App. 3d at 264 (use of the

word "shall" will not be given a permissive meaning when used with

reference to any right or benefit to anyone). As we noted in

Hamlin, "courts must not depart from a statute’s plain language by

reading into it exceptions, limitations or conditions the

legislature did not express." Hamlin, 324 Ill. App. 3d at 618,

citing Newland v. Budget Rent-A-Car Systems, Inc., 319 Ill. App. 3d

452 (2001). The legislature did not express any exceptions or

limitations in section 12.56(f)(2). Accordingly, the notice requirement is mandatory, not permissive, and must be given to all

shareholders within 10 days.

Second, the intent and purpose of section 12.56(f) indicate

that mandatory notice is required. The primary rule of statutory

construction is to ascertain and give effect to the true intent of

the legislature. Hamlin, 324 Ill. App. 3d 612. The purpose of the

election remedy is to provide the other shareholders a right to

purchase the shares of the petitioning shareholder’s stock at fair

6 value in proportion to their percentage of shares. See 3 ABA Model

Business Corporation Act Ann. §14.34, historical background, (3d

ed. Supp. 2000, 2001, 2002). Statutory notice is essential to the

nonparty shareholders to protect that right. Notice to the

nonparty shareholders allows all shareholders to participate in the

election and protect their proportionate interest in the

corporation. See generally 805 ILCS 5/12.56 (West 2002); 3 ABA

Model Business Corporation Act Ann. §14.34, historical background,

(3 ed. Supp. 2000, 2001, 2002). If other shareholders are aware of

the number of shares a petitioning shareholder owns and the amount

an electing shareholder is willing to pay, they can determine

whether they wish to participate in the election proceeding.

Mandatory notification promotes that purpose.

Therefore, we conclude that (1) notice of an election must be

given to the other shareholders within 10 days, and (2) an election

is invalid if the corporation fails to comply with section

12.56(f)(2).

III. Consideration of Equities under Section 12.56(f)(4)

Next, Havens claims under section 12.56(f)(4) the court was required to conduct a hearing to assess the equities before

allowing a voluntary dismissal. We disagree.

We determine the intent of the legislature by reading the

statute as a whole and considering all of its relevant parts. See

Sylvester v. Industrial Commission, 197 Ill.2d 225 (2001)

(declining to read subsections of a statute in isolation). We must

construe the statute so that each word, clause, and sentence is

given a reasonable meaning and not rendered superfluous, avoiding

7 an interpretation that would render any portion of the statute

meaningless or void. Sylvester, 197 Ill.2d at 232.

Section 12.56(f)(4) prohibits the dismissal of a claim "after

an election has been filed by the corporation or one or more

shareholders *** unless the court determines that it would be

equitable [to the parties] to permit the discontinuance." 805 ILCS

5/12.56(f)(4) (West 2002). When reading section 12.56(f)(4) in

light of section 12.56(f) as a whole, the term "after an election

has been filed" becomes crucial to our analysis. Section

12.56(f)(4) comes after section 12.56(f)(2) within the procedural

scheme of the election statute. Its location within the election

statute presumes notice required under the preceding subsection has

been given to the remaining shareholders. We have already

determined that the words chosen by the legislature in section

12.56(f)(4) assume that notice has been given and is part of the

process of filing an election. If notice is not given, a valid

election has not been made. Since the corporation failed to give

the shareholders notice of the election, the election was not

effective. Thus, a hearing to determine the equities is not

appropriate in this case.

Nevertheless, Havens cites Hamlin as support for his position

that the trial court is vested with discretion to determine whether

the notification defect should be corrected. Hamlin, 324 Ill. App.

3d 612. In Hamlin, we held that the trial court was required to

conduct an evidentiary hearing to assess equities before allowing

a corporation to file an untimely election. The relevant statute

provided for the filing of an election "at such time determined by

8 the court to be equitable." 805 ILCS 5/12.56(f) (West 2002).

Here, the trial court refused to conduct an evidentiary hearing

because the election was defective, not untimely. Further, the

statutory provision at issue in this case does not contain a

discretionary clause requiring the trial court to consider the

equities before making its determination. We therefore decline to

apply the holding in Hamlin to these circumstances.

Because the election in this case was defective, the trial

court properly allowed Lohr to voluntarily dismiss count I of his

complaint as a matter of law.

CONCLUSION

The judgment of the circuit court of La Salle County is

affirmed.

MCDADE and WRIGHT, JJ., concurring.