Failure of corporate purpose

Failure of corporate purpose

Failure of corporate purpose occurs when either the directors or shareholders are “deadlocked,” in disagreement, and the corporation cannot be managed in the best interest of the shareholders. 805 ILCS 5/12.55(a)(1-2), 5/12.56(a)(1-2). For example, an Illinois court found that a director deadlock resulting in a corporation’s inability to obtain financing or pursue critical litigation constitutes failure of corporate purpose. Witters v. Hicks, 780 N.E.2d 713, 717 (Ill. App. Ct. 2002).

Failure of corporate purpose is one of the instances under which a shareholder can bring a lawsuit for a court-ordered remedy. 805 ILCS 5/12.55(a), 5/12.56(a). Available remedies include but are not limited to:

  • Ordering corporate or individual action;
  • Cancelling or modifying provisions in the corporation’s by-laws or articles of incorporation;
  • Removing a director or officer;
  • An accounting;
  • Appointing a custodian or provisional director;
  • Directing the dispute to a form of alternative dispute resolution, such as mediation or arbitration;
  • Requiring the payment of dividends;
  • Awarding damages;
  • Forced sale/purchase of shares; and
  • Dissolution of the company.

See, 805 ILCS 5/12.55(b), 5/12.56(b)


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