Stroh v. Blackhawk Holding Corporation

Supreme Court of Illinois · 1971 · Corporations

CorporationsCorporate stock classificationsVoting rightsArticles of incorporationclass B stockvoting-only sharessection 14section 2.6

Facts

Blackhawk Holding Corporation's articles of incorporation authorized Class A stock and 500,000 shares of Class B stock. The articles provided that Class B shares were not entitled to dividends or to participate upon voluntary or involuntary liquidation, but each Class B share had one vote on general matters and cumulative voting rights in director elections. The promoters purchased all 500,000 Class B shares at one-fourth cent per share, while Class A shares were sold to promoters and later to the public at substantially higher prices. Plaintiffs challenged the validity of the Class B shares on the ground that shares lacking economic rights were not valid corporate stock.

Issue

Whether shares that carry voting rights but, under the articles of incorporation, are denied rights to dividends and rights in corporate assets on liquidation are valid shares of 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 create classes of shares with whatever designations, preferences, qualifications, limitations, restrictions, and special or relative rights it chooses, except that the articles may not limit or deny the voting power of any share. Read together, the Illinois Constitution and sections 14, 2.6, and 41 of the Business Corporation Act allow the economic rights to earnings and assets to be removed from shares, but do not allow removal of the management or voting incident of ownership.

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Granite Prairie Foods, Inc., an Illinois corporation based in Peoria, amends its articles to create Class M shares. The articles state that Class M shares receive no dividends and no distribution on voluntary or involuntary liquidation, but each Class M share carries one vote on all shareholder matters.

A Class A shareholder sues, arguing that Class M is void because a valid share must include some right to profits or assets. How should a court rule under Illinois law as stated by the majority opinion?

Explanation. The majority held that, read together, the Illinois Constitution and the Business Corporation Act allow a corporation to create shares whose rights to earnings and assets are eliminated, so long as voting power is preserved and the restrictions appear in the articles of incorporation. A share is not invalid merely because its principal attribute is voting.