Galler v. Galler

Supreme Court of Illinois · 1964 · Corporations

CorporationsClose corporationsShareholder agreementsVoting agreementsCorporate governanceclose corporationshareholder agreementvoting control agreement

Facts

Benjamin and Isadore Galler, brothers, each owned half of the stock of Galler Drug Company, a closely held corporation, and in 1955 they and their wives signed an agreement intended to protect their families and preserve equal control after either brother's death. The agreement provided for a four-person board including the wives, voting commitments for directors, minimum annual dividends subject to a $500,000 earned-surplus floor, a salary continuation benefit to a widow, and related stock and estate-tax provisions. After signing, defendants decided they would not honor the agreement but did not disclose that intention; after Benjamin died, they refused Emma Galler's demand that the agreement be carried out. Plaintiff then sought specific performance and an accounting, including relief concerning excessive corporate payments to defendants.

Issue

Whether the 1955 shareholders' agreement in this close corporation was void as against Illinois public policy or the Business Corporation Act because of its duration and its provisions governing directors, voting, dividends, and salary continuation. Also, whether defendants could be required to account for monies received from the corporation in excess of previously authorized amounts.

Rule

Illinois will enforce shareholder agreements in close corporations, even if they depart from ordinary corporate norms, when all concerned parties agree and the arrangement causes no apparent injury to minority interests, creditors, or the public and does not violate clearly prohibitory statutory language. Courts should not invalidate such contracts on public-policy grounds unless a corrupt or dangerous tendency clearly appears from the agreement itself or is the necessary inference from its terms.

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

In Peoria, Illinois, all four shareholders of Riverbend Packaging, Inc., a family-owned company with no market for its shares, sign a written agreement. The agreement requires them to vote for a four-member board made up of the four shareholders and to keep equal board representation for each family branch after either founder dies. Years later, one branch refuses to comply, even though no outside shareholders or creditors are affected.

If a court applies the majority rule from this case, the agreement is most likely

Explanation. The majority opinion held that in a close corporation, shareholders may make binding arrangements concerning management and voting when all concerned agree, no injury to minority interests, creditors, or the public appears, and no clearly prohibitory statutory language is violated. The court expressly approved agreements requiring shareholders to vote for specified directors in the close-corporation setting.