Court Opinion

ID: 9884280
Source: CourtListenerOpinion
Date Created: 2023-10-06 02:50:56.055032+00
Date Added: 2024-06-11T07:48:37.200497
License: Public Domain

Mr. Justice Schaefer, dissenting: The last paragraph of the majority opinion is hard to understand. It seems to render meaningless all of the discussion that precedes it. This case is concerned with the Class B stock of Blackhawk Holding Corporation, 500,000 shares of which were issued for $1250 — a price of four shares for one cent. The trial court held that the Class B shares “did not constitute shares of stock; that their issuance by the corporation was an invalid, ultra vires act; and was void ab initio,” because, to quote the majority opinion again, this stock “was not permitted to share at all in the dividends or assets of the corporation.” If this was not the issue in the case, and the Class B stock had some heretofore unsuspected attributes, both the trial and the appellate courts, as well as this court, have wasted considerable time and energy in considering an entirely academic matter. The majority opinion states that “In the area of public policy we must consider that all requirements of the securities division of the office of the Secretary of State” have been met. The fact is, however, that the stated requirement that “the Class B stock be less than Y of the total number of shares outstanding after the public offering” was not met in this case. After the public offering, which the record shows was closed on June 25, 1964, the number of shares of Class B stock substantially exceeded one third of the total number of shares outstanding. The total number of shares outstanding was 1,087,868, of which 500,000 shares were Class B stock. More important in the long run than the factual error, however, is the implication that the public policy of Illinois can be fixed by regulations issued by a Secretary of State. That implication runs counter to what I think is the correct view, stated elsewhere in the majority opinion, that “the public policy of a State must be sought in its constitution, legislative enactments and judicial decisions.” From section 14 of the Business Corporation Act which authorizes the issuance of classes of stock “(c) having preference over any other class or classes of shares as to the payment of dividends,” and “(d) having preference as to the assets of the corporation over any other class or classes of shares upon the voluntary or involuntary liquidation of the corporation” Ill. Rev. Stat. 1969, ch. 32, par. 157.14), the majority apparently concludes that the General Assembly has authorized a class of shares which is not just subject to a preference, but is totally excluded from sharing in dividends or in the assets of the corporation. “Under our laws,” say the majority, “the rights to earnings and the rights to assets — the ‘economic’ rights — may be removed and eliminated from the other attributes of a share of stock. Only the management incident of ownership may not be removed.” This seems to me to be saying that the ownership incidents of ownership may be eliminated. What remains, then, is a disembodied right to manage the assets of a corporation, divorced from any financial interest in those assets except such as may accrue from the power to manage them. In my opinion, what is left after the economic rights are “removed and eliminated” is not a share of corporate stock under the law of Illinois. The governing statute, which has been in effect since 1957, defines “shares” as follows: “‘Shares’ means the units into which the proprietary interests in a corporation are divided.” (Ill. Rev. Stat. 1969, ch. 32, par. 157.2 — 6.) The words “proprietary interests,” naturally interpreted, mean “ownership interests.” To avoid the result which the natural meaning of the words of the statute would compel, the majority reverts to a definition of “shares” which was replaced by the present definition in 1957. That definition was: “ ‘Shares’ are the units into which the shareholders’ rights to participate in the control of the corporation, in its surplus or profits, or in the distribution of its assets, are divided.” (Ill. Rev. Stat. 1955, ch. 32, par. 157.2(f).) The majority then reads this provision as having authorized the issuance of shares of stock which do not represent any significant financial interest in the corporation, yet have the same right to vote as those shares of stock which do. It does so by emphasizing the disjunctive “or” in the superseded statute, so that it is read to mean that corporate shares of stock may represent either (1) an interest in the control of the corporation, divorced from an ownership interest in its surplus or profits or in the distribution of its assets, or (2) an interest in the corporation’s surplus or profits, or (3) an interest in the distribution of its assets, apparently in dissolution. This interpretation of the earlier definition is then considered to control the meaning of the present definition because of a committee comment that stated: “The 1957 amendment enacts the definition in the Model Business Corporation Act, which is simpler than that previously existing. There is no change in legal effect.” 1 Ill. Bus. Corp. Act Ann., par. 2.6, comment, 2d ed. 1966, Pocket supp., p. 5. The emphasis placed upon the use of “or” rather than “and” in the pre-1957 statute is obviously exaggerated, as a host of decisions of this court demonstrate. (See, e.g., Moriarty, Inc. v. Murphy (1944), 387 Ill. 119, 129-30.) Moreover, under the majority’s disjunctive construction, shares of stock could represent a right to share in the corporate assets without a right to vote, a result which has been held to violate section 3 of article XI of the constitution of Illinois. People ex rel. Watseka Telephone Co. v. Emmerson (1922), 302 Ill. 300. If the majority was correct in its interpretation of the pre-1957 statute, it would have been possible in Illinois to issue shares of stock which had no voting rights, or to give voting rights to persons other than owners, such as bondholders. But it was not possible. In People ex rel. Watseka Telephone Co. v. Emmerson (1922), 302 Ill. 300, a corporate resolution which deprived preferred stockholders of the right to vote for directors was held invalid. And a contract that purported to give bondholders the right to vote at stockholders’ meetings was held void as against public policy in Durkee v. People ex rel. Askren (1895), 155 Ill. 354. The only authority cited to support the issuance of shares of stock which “had voting rights only and lacked any substantial proprietary interest” is Lehrman v. Cohen (1966), 43 Del. ch. 222, 222 A. 2d 800. The Delaware court described the situation in that case in these terms: “From its inception [in 1935], the company was controlled by the Cohen and Lehrman families, each of which owned equal quantities of voting stock, designated Class AC (held by the Cohen family) and Class AL (held by the Lehrman family) common stock.” In 1949, after the death of one of the founders and ensuing disputes, a third class of voting stock, consisting of one share of class AD stock with a par value of $10, was issued to Joseph A. Danzanky, who had served as the attorney for the corporation. Apart from the factual differences between this case and the Lehrman case, the Delaware statute there involved expressly permitted the issuance of stock that had no voting rights, and that fact played a significant part in the court’s decision. The court said: “Non-voting stock is specifically authorized by section 151(a); and in the light thereof, consistency does not permit the conclusion, urged by the plaintiff, that the present public policy of this State condemns the separation of voting rights from beneficial stock ownership.” (222 A. 2d at 807.) As has been pointed out, under Illinois law the issuance of non-voting stock was prohibited by section 3 of article XI of the constitution of 1870. Mr. Justice Ward concurs in this dissent.