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Roanoke Agency, Inc. v. Edgar

OPINION FILED MARCH 23, 1984.

ROANOKE AGENCY, INC., ET AL., APPELLEES,

v.

JIM EDGAR, SECRETARY OF STATE, APPELLANT.



Appeal from the Circuit Court of Cook County, the Hon. Arthur L. Dunne, Judge, presiding.

JUSTICE UNDERWOOD DELIVERED THE OPINION OF THE COURT:

Roanoke Agency, Inc. (Roanoke), an Illinois corporation, delivered amendments to its articles of incorporation to Jim Edgar, the Secretary of State of Illinois. Based upon his determination that the issuance of nonvoting shares of corporate stock as provided in the amendments would be contrary to section 8 of the Transition Schedule of our 1970 Constitution relating to cumulative voting rights, the Secretary refused to approve and file the amendments. Roanoke sought leave of this court to file a petition for an original writ of mandamus against the Secretary to compel approval and filing, and simultaneously filed a complaint for judicial review of the Secretary's action in the circuit court of Cook County. (Ill. Rev. Stat. 1981, ch. 32, par. 157.148.) We denied leave to file the original action, but ordered that the administrative review proceeding in the circuit court be expedited.

The Attorney General of Illinois, as amicus curiae, participated in the circuit court proceedings in support of Roanoke's position. That court entered judgment for the corporation and ordered the Secretary to file the articles of amendment as submitted. Because this case presents significant questions concerning Illinois corporations, we granted the Secretary's motion for direct appeal to this court pursuant to Supreme Court Rule 302(b) (87 Ill.2d R. 302(b)). We also granted the Attorney General leave to intervene in the proceedings in this court.

The facts and circumstances surrounding this case are not disputed, and involve constitutional interpretations. As pertinent here, the Illinois Constitution of 1870 provided:

"The General Assembly shall provide, by law, that in all elections for Directors or managers of incorporated companies every stockholder shall have the right to vote, in person or by proxy, for the number of shares of stock owned by him, for as many persons as there are directors or managers to be elected, or to cumulate said shares, and give one candidate as many votes as the number of directors multiplied by the number of his shares of stock, shall equal, or to distribute them on the same principle among as many candidates as he shall think fit; and such directors or managers shall not be elected in any other manner." (Ill. Const. 1870, art. XI, sec. 3.)

By allowing shareholders to cast their respective votes for a single candidate or distribute them among two or more candidates, cumulative voting was designed to enable minority stockholders of a corporation to gain representation on its board of directors in proportion to their voting strength. Wolfson v. Avery (1955), 6 Ill.2d 78.

The constitutional guarantee of cumulative voting rights to every shareholder has also been interpreted by this court to include significant ramifications. For example, it has been held to preclude the issuance of stock depriving the shareholder of the right to vote for directors (People ex rel. Watseka Telephone Co. v. Emmerson (1922), 302 Ill. 300), to prohibit directors from filling vacancies on the board of directors (People ex rel. Weber v. Cohn (1930), 339 Ill. 121), and to forbid the classification and staggered election of directors (Wolfson v. Avery (1955), 6 Ill.2d 78).

The protective benefits afforded by cumulative voting, however, are accompanied by limitations upon Illinois corporations, the most notable of which resulted from the preclusion of nonvoting shares. By prohibiting the issuance of such shares, the 1870 Constitution prevented the issuance and sale of stock without an accompanying dilution of corporate control. That is, a corporation could not sell stock in order to raise capital without at the same time reducing the control of current shareholders as a result of the increased number of voting shares. These restrictions upon corporate control resulting from the constitutional guarantee of cumulative voting came to be perceived by corporate promoters and advisers as impediments to incorporation under the laws of this State. (See generally, 3 Record of Proceedings, Sixth Illinois Constitutional Convention 1817-24 (hereinafter cited as Proceedings).) As a result, corporations frequently chose to incorporate in other States with less restricted corporate climates or took other evasive action. Consequently, Illinois was placed at a competitive disadvantage in its efforts to attract or retain corporations.

It was in this context that the advisability of retaining the cumulative voting requirement was contested during the 1970 Illinois constitutional convention. Following extensive debate, the constitutional mandate of cumulative voting rights in the election of directors was eliminated, and the Illinois Constitutional of 1970 simply provides that "Corporate charters shall be granted, amended, dissolved, or extended only pursuant to general laws." (Ill. Const. 1970, art. XIII, sec. 6.) The net effect is that the present Illinois Constitution no longer requires that, in the election of directors, every share of stock must be a voting share and that each shareholder be entitled to cumulate his votes. Significantly, these matters were not determined by the new constitution but were instead left to the legislature to address. Thus, the statutes which had been enacted under the Illinois Constitution of 1870, which necessarily provided cumulative voting rights for each share, remained in effect even though no longer constitutionally required. See Ill. Const. 1970, Transition Schedule, sec. 9.

In eliminating the constitutional mandate of cumulative voting, however, the drafters of the Illinois Constitution of 1970 included another provision addressed to existing corporations. Section 8 of the Transition Schedule of the 1970 Constitution provides:

"Shareholders of all corporations heretofore organized under any law of this State which requires cumulative voting of shares for corporate directors shall retain their right to vote cumulatively for such directors."

This constitutional provision applies to all corporations in existence on July 1, 1971, the effective date of the new constitution.

The Illinois legislature also chose to retain the statutory cumulative voting requirements until 1981. Effective September 25, 1981, section 28 of the Business Corporation Act ...


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