Appeal from the Circuit Court of Hancock County, Ninth
Judicial Circuit; the Hon. EZRA J. CLARK, Judge, presiding.
Reversed and remanded with directions.
This is an appeal from a decree of the Circuit Court of Hancock County finding that the issue of 500,000 "Class B Shares" of defendant Blackhawk Holding Corporation, an Illinois corporation, do not constitute shares of stock and that the purported issuance thereof was an invalid and an ultra vires act of the defendant corporation and null and void ab initio. The basis for the finding of invalidity was a provision in the charter of the corporation with respect to the Class B stock which provided that such shares were not entitled to any dividends "upon voluntary or involuntary liquidation or otherwise." Defendant holders of the Class B stock have appealed to this Court.
The record discloses that Blackhawk Holding Corporation was organized under the Illinois Business Corporation Act in November of 1963. The preorganization subscription agreements for stock provided that certain promoters (21 in number) would purchase 87,868 Class A shares of stock at $3.40 per share (a total of $298,751.20) and 500,000 shares of Class B stock were all to be purchased by certain of said promoters for 1/4¢ per share (being a total for said stock of $1,250). The promoters were designated specifically in the Prospectus of the corporation.
The Blackhawk Corporation was authorized to invest in real estate and to finance business ventures by the terms of its charter. The Articles of Incorporation provided for authorization to issue two classes of stock, i.e., Class A stock authorization of three million shares having a par value of $1 per share and Class B authorization for 500,000 shares with no par value. The Articles of Incorporation further provided specifically "none of the shares of Class B stock shall be entitled to dividends either upon voluntary or involuntary liquidation or otherwise. No holder of any of the Class A or Class B shares shall, as such holder, have any right to purchase or subscribe for any stock of any class which the corporation may hereafter issue or sell."
The corporation applied to the Securities Division of the Office of the Secretary of State of Illinois to register the Class A shares for sale to the general public. The plan of the corporation was to sell 500,000 Class A shares to the general public for $4 per share. A prospectus was mailed out which described the Class A and Class B stock and quoted verbatim the restrictions placed on the Class B stock. The prospectus contained the following statement:
"ORGANIZATION AND DEVELOPMENT
"Subscriptions for a total of $300,001.20 were sold to twenty-one persons, representing 87,868 Class A shares, the class now being offered, at the price of $3.40 per share ($298,751.20) and 500,000 Class B shares, at the price of one-fourth of a cent per share ($1,250.00); thus, said subscribers by virtue of a $300,001.20 investment, have control of the corporation having an initial capitalization of $2,000,000.00 after this offering."
In August 1964 at a shareholders meeting there was approval of a 2 for 1 split of the Class A stock and this increased Class A outstanding stock from 587,868 shares to 1,178,736 shares. The Class B stock was not changed. The corporation sold additional Class A shares to the public in 1965 for $4 a share.
The original board of directors which was elected in November of 1963 was reelected in April of 1964 and April of 1965 where the Class B shares represented 35.06% of the stock voted. There was no contest at either of such elections. The seven directors were elected without opposition at the 1966 meeting where the Class B shares represented 49.35% of the votes cast. There was no 1967 meeting and the 1968 meeting was the contested meeting that was held shortly after the present lawsuit was begun. Prior to the June 10, 1968 meeting a group of Class A shareholders (plaintiffs in the instant case) formed a shareholders' protective association and solicited proxies. The plaintiffs also attempted by court action to enjoin the voting of the Class B stock at the June 10, 1968 meeting, but the trial court refused to grant such injunction prior to the meeting. The protective association voted 508,269 Class A shares at the 1968 meeting and the management voted 380,916 Class A shares. The management voted 427,831 Class B shares and the shareholders association voted 51,549 Class B shares. The Class B stock represented 35.47% of the stock voted at such June 10, 1968 meeting. As of June 10, 1968, there were 500,000 Class B shares and 1,237,681 Class A shares outstanding and the Class B shares represented 28.78% of the total voting shares of the company.
Edwin C. Mills, Jr., a former director and attorney for the Blackhawk Company since it was formed, became president of Blackhawk in March of 1967 and Mr. Roncone, a law partner of Mr. Mills became secretary of Blackhawk. Mr. Mills, Mr. Roncone, Mr. Roncone's brother, and Mr. Shea formed a new Illinois corporation known as Mondo Corp., and in 1967 Mondo began buying Class B and Class A stock of the former president of Blackhawk, Mr. Vorhies. Mondo contracted to purchase 52,138 Class A shares and 221,645 Class B shares of Blackhawk from Vorhies for a total consideration of $92,500. The book value of the Class A stock at the time of the purchase was 89¢ a share, making such 52,138 shares worth a book price of $46,402.82. Mondo also purchased Class B stock from other owners, paying the owners about 20 times the original purchase price of the Class B stock.
The Class B stock was first questioned in a letter from one of the plaintiffs to Mr. Mills, then president of Blackhawk in November 1967. On May 28, 1968, plaintiffs filed their complaint in which they sought to enjoin the voting of Class B stock at the June 10, 1968 meeting of Blackhawk Corporation. In the complaint, the allegations recited the history of the organization of the corporation and contended that the Class B shares do not in fact represent any interest in the assets, earnings, or surplus of the defendant corporation and that they were not entitled to receive any dividends or a distribution of any of the assets of the corporation. It is recited in the complaint that for many years until 1961, the Illinois Business Corporation Act defined a share of stock of a business corporation in section 2(f) as "shares are the units into which the shareholders rights to participate in the control of the corporation, in its surplus or profits, or in a distribution of its assets, are divided." It is also alleged that since August 19, 1961, section 2.6 of the current statute provides a definition for shares as meaning "the unit into which proprietary interest of a corporation are divided." It is recited also that since 1947, the Illinois Business Corporation Act has permitted the right to vote to be separated from the ownership of a share of stock through a voting trust agreement but limited such trust agreement to ten year periods and that the Class B shares could not qualify under such provision. It is contended that the Class B shares amount to a permanent proxy in the hands of the holders. Plaintiffs prayed for a decree canceling all such stock certificates and restraining defendants from voting them at any meeting of the shareholders.
In Count III of the complaint reference was made to an escrow arrangement of the proceeds of the sale of Class A stock to be completed before December 1, 1964, and a contended violation of such escrow arrangements by use of a $300,000 loan of corporate funds and certain other activities. The Count prayed that the court appoint a committee of Class A stockholders to take control of the corporation. Following the motion for summary judgment by plaintiffs, the trial court in a written opinion said:
"Now, as to Count 3. I am not prepared on the pleadings before me to grant any present motion in respect to this count. Certainly, I am not prepared on this date of the record to grant the relief requested by the Plaintiff."
Thereafter, a decree was entered which did not dispose of issues raised in Count III but found the Class B shares invalid and found that plaintiffs were not barred by estoppel or laches to raise such issues. The court certified that there was no just reason for delaying enforcement or appeal from the decree. As indicated heretofore, ...