Articles Posted in Corporate Law

A new law in Illinois prohibits employers from entering into noncompete contracts with employees who earn $13 per hour or less. The Illinois Freedom to Work Act (Public Act 099-0860) became effective on Jan. 1, 2017. The law makes it illegal for an Illinois employer to enter into a “covenant not to compete” contract with any of its “low-wage employees.”

The term “covenant not to compete” is defined to extend to any agreement restricting a covered employee from the following:

  • Working for another employer for a specified period of time.
  • Working in a specified geographic area.
  • Performing other “similar” work for another employer.

Any contract with a “low-wage employee” who contains any covenant not to compete is “illegal and void.” The act is limited to agreements entered into after the effective date of Jan. 1, 2017. The act comes out of the movement to curb employers from locking lower-level employees into unfair noncompeting contracts.

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The Illinois Appellate Court for the First District recently reviewed a case regarding the piercing of a corporate veil. Piercing the corporate veil is a practice in which a lawyer will prove that the corporation that would otherwise protect its shareowners from personal liability is really a façade or fiction that allows for the “piercing” of that veil to recover from the true owners. The appeals panel reversed a trial court’s decision that dismissed plaintiffs’ claim in a case involving whether the plaintiffs were employees or independent contractors.

Piercing the corporate veil is not a cause of action but instead a “means of imposing liability in an underlying cause of action.”

A firmly established corporate entity stands on its own unless its corporate veil is pierced for different reasons. In many cases, once a party obtains a judgment against a corporation, the party then may attempt to pierce the corporate veil of liability protection and hold the dominant shareholders responsible for the corporate judgment.

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The Illinois Appellate Court has affirmed a Cook County trial judge’s order regarding the effect of an attorney’s lien notice sent to a defendant’s attorneys rather than the defendant directly.

Randy Brown was the owner and operator of a Harold’s Chicken Shack in suburban Broadview, Ill., until Jan. 15, 2009. On that date, the building’s roof collapsed, and the restaurant was destroyed.

The building was leased to Brown by Tap Investment LLC. It was managed by Universal Realty Group. Tap and Universal were defendants in this case. Brown sued both companies and their principals. His lawsuit was filed on Aug. 2, 2010, and the complaint was signed by a lawyer with the law firm representing Brown. The law firm was based in Naperville, Ill.

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Late in 2002, the developer of 1717 S. Prairie Ave. in Chicago, Ill., retained the defendant Hansen & Hempel Co. to complete the masonry work for a 23-story condominium complex. When the building was nearly finished in March 2004, it started to experience water leakage. The condominium association, Board of Directors of the Prairie District Homes Tower Condominium Association, hired an engineering firm to design and implement a repair that was estimated to cost over $6,500,000.

Because of the report on the defects to the building, the association filed a lawsuit wherein the case was tried to a jury on the sole issue of breach of implied warranty of habitability.

The plaintiff board of directors of the condominium association contended that 90% of the through-wall flashing in dams installed by the defendant masonry company were either missing or installed improperly and claimed that because of those material defects it allowed water to penetrate the inner cavity of the building.

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Larry Fabian was hired in 2001 by Cantor Fitzgerald to be a broker at the Chicago Mercantile Exchange. In 2007, he was transferred to BGC, which was a spinoff company of Cantor Fitzgerald.

In 2008, Fabian was named as a partner of “Founding Partner No. 69.” According to Fabian, he earned 100,393 “founding partner units” which could later be converted into common stock of the company.

On March 27, 2009, Fabian quit working for BGC to work for another securities firm. Shortly after leaving BGC, Fabian initiated arbitration before the Chicago Mercantile Exchange where he received $121,758 in commissions that he was owed from Cantor Fitzgerald. This did not include any reimbursement for his “founding partner units.”

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Illinois corporations are governed by the Illinois Corporation Act (805 ILCS 5/1, et seq.) and by the company’s bylaws. In general, the governing principle of the management and control of the corporation is vested in the board of directors, which has a high duty of loyalty to the shareholders of the corporation. The board of directors has a fiduciary duty to uphold the best interests of the corporation and its owners.

It is not uncommon that the boards of directors of corporations become disenchanted with the president or other officers of a corporation. In a common fact setting, a special meeting of the board of directors is called for the sole purpose of removing the president of the corporation, who also serves as treasurer. There’s not much an officer can do to ward off such a move at the board level. The president then files the lawsuit against the board of directors and the corporation claiming that the resolution by the board removing this officer is a waste of corporate assets.

In that case the court would look to construe the corporation’s bylaws and apply the general rules of contracts, while addressing the Illinois Business Corporation Act.

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Dr. Linda Bluestein was a shareholder in Central Wisconsin Anesthesiology S.C. and a member of its board of directors. After losing the vote that terminated her employment contract, Bluestein filed a lawsuit against the corporation for allegedly violating three statutes that protect “employees.” Those statutes were the Americans with Disabilities Act (ADA) and Title VII of the Civil Rights Act of 1964. The presiding federal judge concluded, however, that Bluestein was an employer of the corporation and not an employee. The court granted Central Wisconsin’s motion for summary judgment disposing of her lawsuit.

The 7th U.S. Circuit Court of Appeals in Chicago affirmed the trial judge’s order and applied the “non-exclusive list of six factors” that the U.S. Supreme Court adopted in Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440 (2003), as criteria for determining whether a shareholder qualifies as an employee under statutes that don’t provide a “working definition” of the word.

The U.S. Court of Appeals tangled with the question of determining the meaning of the term “employee.” The Supreme Court reasoned that, when the statute (ADA) does not provide a working definition, the courts should turn to the common law test for determining who qualifies as an employee. Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S. 440 (2003).

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The Illinois Business Corporation Act, Section 7.75, gives shareholders the right to inspect a company’s records, “but only for a proper purpose.” The Illinois Business Corporation Act was amended in 1984, requiring shareholders to make their demand in writing, “stating with particularity the records sought to be examined and the purpose therefore.” 805 ILCS 5/7.75.

The plaintiffs in this case, Sunlitz Holding Co. (and three of the company’s shareholders) appealed from an order that dismissed its complaint for mandamus against Trading Block Holdings Inc., which claimed that it had satisfied the “proper purpose” and “particularity” requirements.

The lawsuit complaint contained exhibits attaching two letters the plaintiff sent to Trading Block. In an April 1, 2013 letter, plaintiff Sunliz said it wanted to inspect the corporation’s records “to determine the financial condition of the company, the character of the management of the company and whether the company’s financial practices were appropriate.” In another letter dated May 17, 2013, the plaintiff said he was worried that the corporation was being used “as a piggy bank for the insiders and the board of directors.”

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Daniel Nickell filed a lawsuit against the officers and directors of Engineer Support. He claimed it had improperly diverted financial benefits by backdating stock options, which decreased the value of the corporation for its shareholders. Nickell was a shareholder of Engineer Support Systems Inc. (ESSI). ESSI merged with DRS Technologies in January 2006.

In Nickell’s lawsuit, he alleged that the officers and directors made material misrepresentations to induce the merger at a reduced price for the company in exchange for DRS assuming responsibility for the backdating scheme.

The trial judge dismissed Nickell’s lawsuit on the grounds that his claims were pleaded as a shareholder derivative claim and that he did not have standing to sue the ESSI directors and officers for his individual claims. Nickell appealed to the Supreme Court of Missouri, which affirmed the dismissal of his case.

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Fortunee Massuda was an investor in a group of Panda Express restaurants in Chicago. The restaurants were owned by a joint venture, RC Partnership, made up of Panda Express Inc. and Rezko Concessions Inc. Massuda invested $4 million in the joint venture in exchange for an ownership interest of 11% in the joint venture. The joint venture also owned and controlled PE Chicago, a Delaware LLC. By the year 2001, the value of the RC Partnership was estimated to be $56.4 million.

By 2005, Rezko Concessions’ owner, Tony Rezko, was in deep financial and legal trouble. In April 2006, Massuda went to Panda and informed it of her intent to sue Rezko and asked whether Panda would be interested in buying her 11% share. Panda’s general counsel declined the offer and instead told Massuda that her stake was worthless.

In mid-May 2006, Rezko was urgently in need of money. In order to secure funds, Rezko offered to sell PE Chicago’s interest in RC Partnership to Panda. Panda agreed to pay Rezko $3 million, keep the deal between them secret and grant Rezko personally a buy-back option.

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