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Stroh v. Blackhawk Holding Corp.

OPINION FILED MAY 21, 1971.

DONALD L. STROH ET AL., APPELLANTS,

v.

BLACKHAWK HOLDING CORPORATION ET AL., APPELLEES.



APPEAL from the Appellate Court of the Third District; heard in that court on appeal from the circuit court of Hancock County; the Hon. EZRA J. CLARK, Judge, presiding.

MR. JUSTICE DAVIS DELIVERED THE OPINION OF THE COURT:

Count I of the plaintiffs' three-count complaint alleged that the Class B shares of stock issued by the defendant, Blackhawk Holding Corporation, were not valid shares of corporate capital stock in that their principal attribute consisted solely of the right to vote. The circuit court of Hancock County granted the plaintiffs' motion for summary judgment on count I and 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. The trial court granted other incidental relief and expressly found no reason for delaying the enforcement or appeal of its decree.

The appellate court (117 Ill. App.2d 301) reversed and remanded the judgment of the circuit court, and held that the shares of stock in question were valid. We allowed the plaintiffs' petition for leave to appeal.

The only issue before this court is the validity of the 500,000 shares of Class B stock, which by the articles of incorporation of Blackhawk were limited in their rights by the provision "none of the shares of Class B stock shall be entitled to dividends either upon voluntary or involuntary liquidation or otherwise." It is the plaintiffs' contention that because of the foregoing limitation — depriving the Class B shares of the "economic" incidents of shares of stock, or of the proportionate interest in the corporate assets — the Class B shares do not in fact constitute shares of stock.

Blackhawk Holding Corporation was organized under the Illinois Business Corporation Act in November of 1963. Its articles of incorporation authorized the issuance of 3,000,000 shares of Class A stock with a par value of $1, and 500,000 shares of Class B stock without par value. In addition to the limitation placed on the Class B stock, set forth above, the articles also provided that neither the Class A nor Class B shares would carry preemptive rights. Pursuant to the preorganization subscription agreements, 21 promoters purchased 87,868 shares of the Class A stock at the price of $3.40 per share ($298,751.20), and the 500,000 shares of Class B stock at 1/4¢ per share ($1,250). Thereafter, the corporation registered the Class A shares with the securities division of the office of the Secretary of State of Illinois for the sale of 500,000 shares thereof to the general public at a price of $4 per share. The prospectus for the registration described the Class A and Class B stock, and quoted from the articles of incorporation relative to their respective rights and preferences. The prospectus explained that every share of each class of stock would be entitled to one vote on all general matters submitted to a vote of the shareholders and, that in the election of directors, the votes could be cumulated. The prospectus also explained that no Class B stock was being offered for sale in that all of such stock has been previously issued. Under the heading "Organization and Development," the prospectus also stated: "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 a 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 of 1964, there was a 2 for 1 split of the Class A stock, increasing the shares outstanding from 587,863 to 1,175,736 shares. The corporation sold additional Class A stock to the public in 1965 for $4 a share. As of June 1968, there were 1,237,681 Class A shares and 500,000 Class B shares outstanding, the latter representing 28.78% of the total voting shares of the company.

A corporation is a creature of statute. (Craig v. Sullivan Machinery Co., 344 Ill. 334, 336.) It is a legal entity which owes its existence to the fiat of law. Its being and powers are from the sovereign State as its will is expressed through legislative enactment. (Chicago Title and Trust Co. v. Central Republic Trust Co., 299 Ill. App. 483, 492.) The articles of incorporation of an Illinois corporation constitute a contract, threefold in nature. It is a contract between the corporation and the State and it creates powers and limitations, rights and duties as between the corporation and its shareholders, as well as between the shareholders themselves. The powers and limitations of a corporation are found in its articles of incorporation, the provisions of its stock certificates, its by-laws, and in the constitutional and statutory provisions in force when the articles of incorporation were adopted. (Bowman v. Armour and Co., 17 Ill.2d 43, 47; Western Foundry Co. v. Wicker, 403 Ill. 260, 267, 268; Kreicker v. Naylor Pipe Co., 374 Ill. 364, 371.) The articles of incorporation of Blackhawk purport to create a Class B stock that possesses no rights in the assets or in the earnings of the corporation. Whether this can be done, and whether such shares have the requisite attributes of a valid share of stock, must be determined in accordance with the constitution of the State, the provision of the Business Corporation Act, and the common law of the State.

Under the Illinois constitution of 1870, a stockholder in an Illinois corporation is guaranteed the right to vote based upon the number of shares owned by him. (Ill. Const. art. XI, sec. 3.) Section 14 of the Business Corporation Act (Ill. Rev. Stat. 1969, ch. 32, par. 157.14) provides that shares of stock in an Illinois corporation may be divided into classes,

"with such designations, preferences, qualifications, limitations, restrictions and such special or relative rights as shall be stated in the articles of incorporation. The articles of incorporation shall not limit or deny the voting power of the shares of any class.

Without limiting the authority herein contained, a corporation when so provided in its articles of incorporation, may issue shares of preferred or special classes:

* * *

(c) Having preference over any other class or classes of shares as to the payment of dividends.

(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."

Section 41 of the Act, relating to the power of the board of directors to declare dividends, provides that no dividends may be declared or paid contrary to any restrictions in the articles of incorporation. Ill. Rev. Stat. 1969, ch. 32, par. 157.41(h).

Section 2.6 of the Act, in defining "shares" states, "`Shares' means the units into which the proprietary interests in a corporation are divided." (Ill. Rev. Stat. 1969, ch. 32, par. 157.2-6.) This was formerly section 2(f) of the Act (Ill. Rev. Stat. 1955, ch. 32, par. 157.2(f)) which defined shares as "units into which shareholders' rights to participate in the control of a corporation, in its surplus or profits, or in the distribution of its assets, are divided." Committee Comment, relative to the change in definition by the 1957 amendment, is that it was made to enact the definition of the ...


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