Court Opinion

ID: 9739796
Source: CourtListenerOpinion
Date Created: 2023-08-26 20:21:02.784351+00
Date Added: 2024-06-11T07:24:13.973730
License: Public Domain

BURKE, P. J., dissenting in part: The majority opinion agrees with the contention of the defendants that the 1955 agreement violates the Illinois Business Corporation Act and is therefore invalid and unenforceable. I am of the opinion that the agreement is valid, that it does not violate the Business Corporation Act and that it is enforceable. The agreement is not a voting trust. It was never intended to be a voting trust. The agreement does not contain the essential characteristics of that kind of a trust: the divorce of stock ownership from voting control. The shareholders remain shareholders. They hold and vote their own shares. They did not transfer or agree to transfer title or voting rights to any one. There is no alienation, no trust, no trustees or voting agents. Sec 30a of the Business Corporation Act deals only with voting trusts and its 10-year provision is obviously not applicable to the agreement. Agreements such as the one in the instant case have been upheld by the Supreme Court, regardless of their duration, in a line of decisions going back to Faulds v. Yates, 57 Ill 416. The fact that the Galler agreement is not limited to 10 years is of no legal consequence. It is clear that this agreement has an inherent time limitation. Its essential provisions are operative only during the lives of Emma Galler and Rose Galler. They with their husbands agreed to constitute a four-member board of directors, and agreed that when a husband died his widow would have the right to nominate a director to take his place. A wife could be a director and exercise her right to nominate a fellow director only during her lifetime. The duration of the agreement is thus limited. If one Galler family were to dispose of its shares to strangers, the strangers would be bound to cast their votes for the remaining widow and her nominee. If all the husbands and/or wives died, or disposed of all their shares, then the agreement would no longer be operative. Manifestly, the agreement is not for perpetuity. But the time element would have no bearing on its validity because it is not a voting trust and there is no public policy subjecting it to the time limitation imposed by the statute upon voting trusts. In Venner v. Chicago City Ry. Co., 258 Ill 523, 101 NE 949, the court said at 539: “There is no rule of public policy in this State which prohibits the combination of the owners of a majority of the stock of a corporation for the purpose of controlling the corporation.” A policy against agreements in which the voting rights are separated from stock ownership was at one time sanctioned in Luthy v. Ream, 270 Ill 170, 110 NE 273. But straight contractual voting control agreements never fell within the rule of Luthy. This was emphasized in Thompson v. J. D. Thompson Carnation Co., 279 Ill 54, 116 NE 648, wherein a control agreement of indefinite duration was upheld because it does not divest or attempt to divest J. M. Thompson of his control or ownership of his stock, or his right to vote the same. That straight contractual voting control agreements are not to be confused with voting trusts is emphasized in Fletcher Cyclopedia of Corporations, Permanent Vol 5, Sec 2064, at page 254, citing Thompson v. J. D. Thompson Carnation Co. The legislature saw fit when it enacted the voting trust statute in 1947 not to limit all voting control agreements to a 10-year period. The statute makes no reference whatsoever and expresses no public policy with respect to straight voting agreements, although they have been common since before 1870 and they have often extended for more than 10 years, as in the Thompson case approved by the Supreme Court in 1917. Defendants cite Abercrombie v. Davies, 130 A2d 338 (Del 1957) for the proposition that a statute sanctioning voting trusts for a 10-year period must be construed as limiting the duration of nontrust agreements. The Abercrombie decision does not so hold. This decision supports the proposition that the one essential feature that characterizes a voting trust is the separation of voting rights of the stock from other attributes of ownership. The Delaware Court held that the elaborate disguise resorted to in Abercrombie was fruitless and that it could not cover up the fact that the substance of the voting trust already existed. Abercrombie expressly recognizes that the agreement whereby shareholders undertake to combine in voting their own shares without the intervention of “agents,” trustees or irrevocable proxies is valid. The Caller agreement is not a disguised, concealed or camouflaged voting trust. The argument of the defendants that the agreement is violative of the statutory provisions vesting the duty to manage the affairs of the corporation in its board of directors, authorizing the shareholders to elect directors and restricting the corporation’s right to purchase its own stock cannot be sustained. The gist of defendants’ contention is that the 1955 agreement contains provisions which, it is claimed, the owners of 95% of the shares could not enter into without the consent of the then minority shareholder Manuel Rosenberg, who in 1954 contracted to purchase the other 5% of the shares. The enforcement of the contract, as decreed, did not and could not work any advantage to a majority, or injury to a minority, for the reason that the minority interest had ceased to exist a year before the decree was entered. Isadore banned his brother’s widow from the premises and would give her no voice in the affairs, despite the fact that she owned the same number of shares as Isadore. It is clear that the 1955 agreement is valid and binding. Persons owning a majority of shares of a corporation have the unquestioned right to agree in advance to elect themselves directors and officers. Our Supreme Court was among the first to enunciate this rule in Faulds v. Yates, 57 Ill 416, setting a clear precedent which has been followed in other jurisdictions. Rosenberg’s position as a minority shareholder had been secure under the terms of the October 1, 1945 contract with Benjamin and Isadore and would have remained secure had he chosen to remain a shareholder. When the several monetary benefits provided in Rosenberg’s contract are compared to the limited pension provided for a widow under the 1955 agreement, it becomes evident that in ratio to his 5% stock interest the minority shareholder was on a par with, if not actually better treated, than a shareholder with a 47^% interest. It is apparent that the 1955 agreement was not intended and could not have adversely affected the minority shareholder. The Faulds decision was followed by Kantzler v. Bensinger, 214 Ill 589, 73 NE 874; Venner v. Chicago City Ry. Co., 258 Ill 523, 101 NE 949 and Thompson v. J. D. Thompson Carnation Co., 279 Ill 54, 116 NE 648. The defendants support their position by citing Teich v. Kaufman, 174 Ill App 306. This Appellate Court opinion could not and does not take a contrary view to that taken by the Supreme Court in Faulds and Kantzler. The Teich opinion recognizes that a contract entered into by majority shareholders to elect one another as directors, acquire control and management of the company and secure options on one another’s stock is not against public policy. It is significant that the cases cited in Teich all involved agreements enhancing the personal profit of the contracting parties. The Galler agreement does not guarantee any salaries to officers, but contains only a widow’s limited pension arrangement, which is not disproportionate to the death benefit the minority shareholder’s widow or estate would have been entitled to had he died while a shareholder. The Teich case is not applicable to the factual situation of the case at bar. The fact that the Supreme Court cited Faulds v. Yates in its decision in Venner v. Chicago City Ry. Co., following the decision in Teich, makes it clear that Teich is not to be considered as changing the principle announced in Faulds v. Yates with respect to a noncomplaining minority. Where the minority makes no complaint and where it does not appear that their interests would be adversely affected, the Faulds decision is directly in point. The agreement in no way impairs or diminishes the voting rights of the shareholders. Each outstanding share of Galler stock is entitled to one vote and in all elections for directors every shareholder has a right to vote for the number of shares owned by him. The agreement binds the parties to cast their votes for the widow and her nominee. It does not cut off the votes of any shares. The defendants urge that the dividend provisions of the agreement are in conflict with Sec 41 of the Business Corporation Act. Although dividends are to be declared by the board of directors as provided by Sec 41, defendants say that the agreement curtails the discretion of the board. The dividend provisions of the Galler agreement are prudent and unexceptionable. They are predicated upon earned surplus and net earnings. Earned surplus must at all times be maintained at not less than $500,000. The directors are not required to declare any dividend if its payment would reduce the earned surplus to below $500,000. They are only required to declare a minimum dividend of $50,000 if its payment would not reduce the earned surplus below the $500,000 mark. If fifty percent of net earnings after taxes exceeds $50,000, then the directors may, in their discretion, declare a dividend of up to 50% of such annual profits. The reasonableness of these provisions becomes evident in the light of the financial condition of the company. In 1957, it had earned surplus of $1,380,510; its net earnings after taxes that year were $144,885. In 1958, its earned surplus increased to $1,543,270, and its earnings to $202,759. In 1959, its earned surplus further increased to $1,680,079, while its earnings were $172,964. The minority shareholder, had he continued to hold his stock, would have benefited proportionately from the dividend provisions. In Kantzler v. Bensinger, the Supreme Court upheld a provision for dividends in a shareholder’s agreement similar to the one in the instant case. In Fitzgerald v. Christy, 242 Ill App 343, the court approved an agreement which bound the directors not to declare any dividends whatsoever except upon unanimous vote. In Lydia E. Pinkham Medicine Co. v. Gove, 20 NE2d 482 (Mass 1939) the Supreme Judicial Court of Massachusetts upheld the bylaw of a corporation requiring dividends to be declared each year in a sum equal to the net earnings in excess of the amount required to maintain a surplus of $1,000,000. In essence, there is no difference between the bylaw of a corporation and an equivalent agreement of the majority shareholders and directors empowered to establish such a bylaw, as in the case of the Galler agreement. I agree with, the holding of the majority that the plaintiff is not estopped. The evidence establishes that the defendants took unfair advantage of the plaintiff. The principle of estoppel operates only in favor of an innocent party who has changed position to his detriment in reliance upon fraudulent representations. It is the plaintiff who is the innocent party and the defendants who are guilty of oppressive misconduct and breach of faith. There should be an accounting as required by the decree. As the defendants did not ask the Chancellor to review any of the Master’s rulings on the evidence as required by Rule 9.4 of the Superior Court, they are not in a position to urge that the Master erred in the exclusion of the proffered testimony. In 1961 the legislature increased the annual salary of the Circuit and Superior Court Judges of Cook County to $29,000, effective on reelection. In applying the formula discussed in the opinion, effect should be given to the $29,000 salary. The decree should be modified only to the extent required to determine Master’s Fees in accordance with the $29,000 salary discussed, and as modified only as to the Master’s fees should be affirmed.