203 N.E.2d 577 (Ill. 1964)
From 1919 to 1924, Benjamin and Isadore Galler were equal partners in the Galler Drug Company, a wholesale drug concern.1 In 1924, the business was incorporated under the Illinois Business Corporation Act, with each brother owning one half of the 220 outstanding shares.2 In 1945, each brother contracted to sell six shares to employee Rosenberg for $10,500 per block, payable over ten years, with guarantees to repurchase if employment ended.3 Rosenberg remained indebted for the twelve shares in July 1955 and continued payments after Benjamin Galler's death in 1957.4
In March 1954, Benjamin and Isadore decided to enter into an agreement to protect their families financially and ensure equal control of the corporation after either's death.5 Benjamin suffered a heart attack in June 1954 and another in February 1955, after which he could not return to work.6 On a Saturday night in July 1955, the accountant brought the prepared agreement to Benjamin's home, where the two brothers and their wives executed six copies.7 The accountant collected the signed copies for safekeeping, and the agreement was not modified before Benjamin's death in December 1957.8
Benjamin executed two powers of attorney in August 1955 authorizing transfers related to his bank account and voting his 104 shares.9 In July 1956, Benjamin created a trust naming Emma as trustee covering his shares, which were endorsed and delivered to her.10 When Emma sought transfer of the certificates, defendants sought her agreement to abandon or modify the 1955 agreement.11 Benjamin died in December 1957, and defendants had decided prior to his death not to honor the agreement without disclosing their intention.12
Shortly after Benjamin's death, Emma demanded that the terms of the 1955 agreement be carried out, but Isadore and Aaron refused and offered modifications instead.13 Emma filed suit in 1959 seeking an accounting and specific performance of the agreement.14 In 1961, defendants purchased the twelve shares from Rosenberg.15 The superior court of Cook County granted the relief prayed in a July 1962 decree.16 The appellate court reversed the specific performance decree and modified the accounting and master's fees orders.17 The supreme court reviewed the case on a certificate of importance from the appellate court.18
Whether the July 1955 shareholders' agreement among Benjamin Galler, Emma Galler, Isadore Galler, and Rose Galler is valid and enforceable?19
Shareholder agreements in close corporations are valid and enforceable when there is no injury to minority interests, no fraud or injury to the public or creditors, and no violation of clearly prohibitory statutory language, because Illinois courts treat close corporations as sui generis and uphold practical arrangements that reflect the parties' intent without public detriment.20
Yes. The Galler Drug Company qualifies as a close corporation because its 220 shares were held by the two brothers and their families with no ready market for the stock.21 All four parties who owned the shares executed the agreement at Benjamin's home in July 1955 after the accountant prepared it to protect the families and ensure equal control.22
No minority shareholder existed at the time of execution or during the period from execution until the 1961 purchase of Rosenberg shares, and even then the parties stipulated the shares would not be voted or transferred.23
Defendants decided before Benjamin's 1957 death not to honor the agreement but never disclosed that intent to plaintiff.24 The corporation maintained earned surplus well above the $500,000 threshold with net earnings after taxes exceeding $172,000 in 1958 and 1959, so the dividend and salary provisions created no creditor risk.25 The agreement therefore satisfies every element of the rule.26
The July 1955 shareholders' agreement is valid and enforceable.27
Whether the absence of a fixed termination date in the 1955 agreement renders the agreement unenforceable due to its duration?28
A shareholder voting control agreement without a specific termination date remains enforceable if its purposes are accomplished upon the death of the survivor of the parties.29 It does not separate ownership from voting rights in the manner prohibited for voting trusts.30 The legislature has imposed a ten-year limit only on voting trusts and has left straight contractual voting agreements unregulated.31
No. The agreement states it binds heirs and assigns but is fairly construed to operate only while one of the original parties lives, with its family-protection purposes fulfilled at the death of the survivor.32 Benjamin died in December 1957 and the agreement was never modified between execution and that date.33 It is a direct contractual voting arrangement among shareholders, not a voting trust that divorces voting power from ownership.34 The legislature restricted voting trusts to ten years in 1947 yet left such control agreements untouched despite their common use since Faulds v. Yates in 1870.35
The absence of a fixed termination date does not render the 1955 agreement unenforceable.36
Whether the agreement's provisions requiring election of specified persons as directors and officers for fixed periods are enforceable?37
Agreements among shareholders to elect designated persons as directors and officers for stated terms are enforceable when executed by all shareholders of a close corporation and cause no fraud or injury to minority interests.38 Such arrangements have been upheld since Faulds v. Yates and Kantzler v. Bensinger as legitimate exercises of the right to contract for control.39
Yes. The 1955 agreement required amendment of the bylaws to create a four-director board with a three-director quorum and ten days' notice, and obligated the shareholders to elect Isadore, Rose, Benjamin, and Emma as directors.40 All four signatories owned the entire outstanding stock at execution.41 The same structure was upheld in Kantzler v. Bensinger where all stockholders agreed to elect specific officers for fixed periods.42
No minority interest existed to be harmed, and the provision merely secured the equal family control the brothers intended.43
The agreement's provisions requiring election of specified persons as directors and officers for fixed periods are enforceable.44
Whether the mandatory annual dividend requirements set forth in the 1955 agreement are valid?45
Contractual provisions requiring minimum annual dividends are valid when limited by a substantial earned-surplus floor that protects the corporation and creditors and when all shareholders have agreed.46 Such terms do not violate the Business Corporation Act under the circumstances present in close corporations.47
Yes. The agreement mandates a $50,000 minimum dividend only while earned surplus exceeds $500,000, and permits larger dividends up to fifty percent of net profits after taxes when earnings allow.48 In 1958 the corporation reported $172,964 in after-tax earnings and $1,680,079 in earned surplus, satisfying the protective condition.49 All shareholders consented, and the surplus requirement directly safeguards creditors, satisfying the rule applied in Kantzler v. Bensinger.50
The mandatory annual dividend requirements set forth in the 1955 agreement are valid.51
Whether the salary continuation payments to widows provided in the 1955 agreement are enforceable?52
Salary continuation agreements providing widows a benefit equal to twice the deceased officer's annual salary, payable over five years and conditioned on tax deductibility, are enforceable among all shareholders of a close corporation.53 They constitute common executive compensation arrangements that do not constitute unauthorized gifts when no outside shareholders exist to be injured.54
Yes. The agreement requires the corporation to pay the widow monthly over five years an amount equal to twice the deceased husband's salary, but only if the payments are tax-deductible.55 Both brothers drew $42,000 salaries in the final years, so the benefit is definite and limited.56 Because the only shareholders are the contracting parties, the ultra vires gift objection that arises when outside shareholders exist does not apply, and the tax-deductibility condition further protects the corporation.57
The salary continuation payments to widows provided in the 1955 agreement are enforceable.58
Whether defendants must account for monies received from the corporation in excess of amounts previously authorized?59
Once a shareholders' agreement is held valid, defendants who received salaries or other payments in excess of amounts authorized by the agreement or prior corporate action must account for the excess.60 The agreement controls the parties' financial rights and the trial court properly ordered such an accounting subject only to the appellate modification of master's fees.61
Yes. The superior court granted an accounting that the appellate court affirmed in part.62 Because the 1955 agreement is valid, defendants must account for all monies received from the corporation since September 25, 1956, in excess of amounts theretofore authorized.63 Salary increases to Aaron Galler from $15,000 to $20,000 and any other excess payments fall within this obligation, while the appellate modification of master's fees stands unchallenged.64
Defendants must account for monies received from the corporation in excess of amounts previously authorized.65