Stroh v. Blackhawk Holding Corp.

Supreme Court of Illinois · 1971 · Corporations

CorporationsCorporate stock classificationVoting rightssharesproprietary interestsclass stockvoting rightsdividends

Facts

Blackhawk Holding Corporation's articles authorized 3,000,000 Class A shares and 500,000 Class B shares. The articles provided that Class B shares were not entitled to dividends or to distributions upon voluntary or involuntary liquidation, but each share of both classes carried one vote on general matters and cumulative voting in director elections. The promoters bought all 500,000 Class B shares for $1,250 and also purchased Class A shares, while the corporation later sold Class A shares to the public. Plaintiffs challenged the validity of the Class B shares on the ground that, lacking economic rights, they were not true shares of stock.

Issue

Whether shares that carry voting rights but, under the articles of incorporation, are denied dividends and liquidation rights are valid shares of corporate stock under Illinois law. More specifically, the question was whether Blackhawk's Class B shares were invalid because their principal attribute consisted solely of the right to vote.

Rule

Illinois law permits a corporation, through its articles of incorporation, to impose broad limitations and restrictions on classes of shares, including elimination of dividend and asset-distribution rights, so long as the shares' voting power is not limited or denied. For purposes of the Illinois Business Corporation Act, the proprietary interests represented by shares may consist of one or more ownership attributes, and only the management or voting incident of ownership may not be removed.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Prairie Lantern Foods, an Illinois corporation based in Peoria, amends its articles to create Class M shares. The articles provide that each Class M share has one vote on all shareholder matters, but Class M holders are entitled to no dividends and no distributions if the corporation liquidates.

If a Class A shareholder challenges the Class M shares as void because they lack any economic return, how should a court applying Illinois law rule?

Explanation. Illinois law allows broad restrictions in the articles of incorporation on classes of shares, including removing rights to earnings and assets. The controlling limit is that the articles may not limit or deny voting power. Because the shares retain voting rights, they are valid even if they have no dividend or liquidation rights. (Derived from Stroh v. Blackhawk Holding Corp. (n.d.).)