Brown v. Tenney

Supreme Court of Illinois · 1988 · Corporations

CorporationsDerivative suitsDouble derivative actionsHolding companiesShareholder standingdouble derivative suitshareholder standingholding company

Facts

Plaintiff was a shareholder of record in T/B Holding Company, an Illinois holding company created by Pioneer shareholders to hold Pioneer stock, which became T/B Holding's principal asset. Plaintiff alleged that defendants, who controlled T/B Holding and also directed Pioneer, abused, diverted, wasted, and converted Pioneer assets and engaged in self-dealing. Plaintiff's proposed second amended complaint asserted derivative claims on behalf of both T/B Holding and Pioneer, even though plaintiff was not a shareholder of record in Pioneer. The parties did not dispute that demand had been fulfilled and that plaintiff could maintain single derivative claims on behalf of T/B Holding; the dispute concerned whether he could sue derivatively for injuries to Pioneer through T/B Holding.

Issue

Does Illinois corporate law recognize a double derivative suit, allowing a shareholder of record in a holding company to enforce a right belonging to a subsidiary controlled or dominated by that holding company? More specifically, may such a shareholder sue on behalf of the subsidiary when both the subsidiary and the holding company fail, refuse, or are unable to redress the alleged injury?

Rule

A double derivative action may be maintained in Illinois by a shareholder of record in a holding company on behalf of a subsidiary controlled or dominated by the holding company, after due demand is made to and rejected by both the subsidiary and the holding company. Because the action is derivative in nature, it is governed by equitable principles, and courts may look through corporate form when it is used to shield wrongful acts.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lena Ortiz owns shares of Lakefront Holdings, Inc., an Illinois holding company based in Chicago. Lakefront owns 100% of Riverbend Milling, Inc. in Peoria, and the same directors run both corporations; after Lena makes written demands on both boards to sue managers who allegedly diverted Riverbend funds to a related entity, both boards refuse.

Under the majority rule, may Lena maintain an action in Illinois seeking recovery for the injury to Riverbend?

Explanation. The majority recognized the double derivative action in Illinois. A shareholder of record in a holding company may sue on behalf of a subsidiary controlled or dominated by that holding company when the claim enforces a right belonging to the subsidiary and due demand has been made to and rejected by both the subsidiary and the holding company. The remedy rests on equitable principles and prevents wrongdoers from using an extra corporate layer to block suit.