STROH v. BLACKHAWK HOLDING CORPORATION
[Blackhawk Holding Corporation was organized under Illinois law in November 1963. The 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. The articles of incorporation provided that Class B stock was not entitled to any dividends.]
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.
A corporation is a creature of statute. (Craig v. Sullivan Machinery Co., 344 Ill. 334, 336, 176 N.E. 353.) 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, 20 N.E.2d 351.) 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. [Citations omitted] 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, S.H.A.) 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.)
To the plaintiffs, “proprietary,” as used in the definition of shares, means a property right, and shares must then represent some economic interest, or interest in the property or assets of the corporation. However, the word “proprietary” does not necessarily denote economic or asset rights, although it has been defined as synonymous with ownership or to denote legal title (Evans v. United States, D.C., 251 F. Supp. 296, 300; Asch v. First National Bank in Dallas, Tex.Civ.App., 304 S.W.2d 179, 183; The American Heritage Dictionary of the English Language (1969)), and “proprietary rights” have been defined as those conferred by virtue of ownership of a thing (Colten v. Jacques Marchais, Inc., Mun.Ct., 61 N.Y.S.2d 269, 271; Black’s Law Dictionary, 4th Ed.Rev., 1968). In Colten, the court defined “proprietary” as meaning ownership, exclusive title or dominion, and implying possession and physical control of a thing.
In Millar v. Mountcastle, 161 Ohio St. 409, 119 N.E.2d 626, 632, the Supreme Court of the State of Ohio discussed the meaning of ownership as represented by holding shares of stock. The court said that by reason of ownership of a share of corporate stock, one becomes the owner of intangible property comprised of various relationships which are determined by the terms of the stock certificate, the articles of incorporation, and the internal regulations of the corporation, and the statutes and common law of the State of incorporation. The court stated that the ownership comprising the relationship might include “one or more” of several specified rights, including the right to vote.
The meaning of ownership may vary depending upon the subject matter of the ownership, the place of the ownership, and any particular restraints placed thereon by contract or law. Both the plaintiffs and the defendants stress that section 2.6 of the Business Corporation Act, in defining shares in terms of a proprietary interest, did not change the prior statutory definition of shares as the “right to participate in the control of the corporation, in its surplus or profits, or in the distribution of its assets.” Both parties find comfort in the grammatical construction of the prior definition.
We agree with the defendants’construction. We interpret this statutory definition to mean that the proprietary rights conferred by the ownership of stock may consist of one or more of the rights to participate “in the control of the corporation, in its surplus or profits, or in the distribution of its assets.” The use of the disjunctive conjunction “or,” indicates that one or more of the three named rights may inure to a stockholder by virtue of his stock ownership. A series of phrases in the disjunctive does not require that each phrase be separated by the word “or,” as the plaintiffs suggest; more commonly and correctly each phrase except the last is preceded only by a comma, and the last is preceded by the word “or.” The absence of the disjunctive “or” preceding the phrase “in its surplus or profit,” is too thin a reed to support the construction urged by the plaintiffs. The phrases in the series represent alternatives (People v. Vraniak, 5 Ill.2d 384, 389, 125 N.E.2d 513; Central Standard Life Insurance Co. v. Davis, 10 Ill.App.2d 245, 254, 255, 134 N.E.2d 653), and we so construe them. This conclusion, however, is not dispositive of this litigation.
We must here decide the extent to which economic attributes of shares of stock may be eliminated. This must be determined from the intent of the legislature which, in no small part, can be gathered from the language and words it chose to express that intent. The statutory definition of “shares” is of particular importance in that it governs the meaning of the word as used throughout the Business Corporation Act and controls in its construction. The legislature has the power to make any reasonable definition of the terms in a statute and such definition for the purposes of the Act, will be sustained. Modern Dairy Co. v. Department of Revenue, 413 Ill.55, 66, 108 N.E.2d 8.
Section 14 of the Act clearly expresses the intent of the legislature to be that parties to a corporate entity may create whatever restrictions and limitations they may want with regard to their corporate stock by expressing such restrictions and limitations in the articles of incorporation. These rights and powers granted by the legislature to the corporation to make the terms of its contract with its shareholders are limited only by the proviso that the articles may not limit or deny the voting power of any share. This section of the Act expressly confers the right to prefer a class of shares over another with regard to dividends and assets. Section 2.6 defines shares as “The units into which the proprietary interests in a corporation are divided.”
In seeking the intent of the legislature, a statute should be construed as a whole and its separate parts considered together. Our present constitution requires only that a shareholder not be deprived of his voice in management. It does not require that a shareholder, in addition to the management aspect of ownership, must also have an economic interest.
Thus, section 14, like the constitution, limits the power of a corporation only as to the voting aspect of ownership. It confers upon the corporation the “power to create and is sue the number of shares stated in its article of incorporation;” it expressly permits the shares to be subject to “such designations, preferences, qualifications, limitations, restrictions, and such special or relative rights as shall be stated in the articles of incorporation;” it also suggests that “Without limiting the authority herein contained, a corporation, when so provided in its articles of incorporation, may issue shares of preferred or special classes,” which classes are delineated therein.
Section 41 of the Act recognizes that while the power to declare dividends with respect to shares is in the board of directors, this power is limited, among other things, by any restrictions in the articles of incorporation. When the relevant sections of the Act are read together with the constitution, it seems apparent that it was the intent of the legislature that the proprietary interests represented by the shares of stock consist of management or control rights, rights to earnings, and rights to assets. There are other rights which are incidental to these. Under our laws, the rights to earnings and the rights to assets—the “economic” rights—may be removed and eliminated from the other attributes of a share of stock. Only the management incident of ownership may not be removed.
[The Class B stock was held to be valid under the statute.]
