Kern v. Chicago & E. I. R. Co., Gen. No. 48099
| Decision Date | 01 March 1961 |
| Docket Number | Gen. No. 48099 |
| Citation | 175 N.E.2d 408,31 Ill.App.2d 300 |
| Court | United States Appellate Court of Illinois |
| Parties | Paul J. KERN and Irving M. Lesch, Plaintiffs-Appellants, v. CHICAGO & EASTERN ILLINOIS RAILROAD CO., an Indiana corporation, Alfred MacArthur, David O. Mathews and F. S. Yantis, Defendants-Appellees. |
Goldberg & Levin, Chicago, Mayer Goldberg and Marvin Sacks, Chicago, of counsel, for appellants.
P. C. Mullen and Gerald J. O'Rourke, Jr., Chicago, for appellees.
This is an appeal from an order sustaining defendants' motion for summary decree and dismissing for want of equity a suit brought by preferred shareholders seeking a declaratory decree holding that defendant company had illegally amended its bylaws in order to create a system of staggered elections of directors, and for injunctive and other relief. The principal issue is whether that amendment is in violation of a provision for cumulative voting and annual election of all directors, as contained in a reorganization plan, a decree of court and the articles of incorporation.
Defendant Chicago and Eastern Illinois Railroad Company was an Illinois corporation until 1940 when, after reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, it was incorporated as an Indiana corporation. It is licensed to do business in the State of Illinois, where it maintains general offices and transacts business. It has offices and does business in Indiana as well. A plan of reorganization approved by the Interstate Commerce Commission in 1939, 230 I.C.C.Rep. 571, included a provision for the issuance of Class A preferred stock with the right of cumulative voting in the election of directors and for a board of thirteen members, each director to serve one year. That plan was subsequently approved and confirmed by the United States District Court for the Northern District of Illinois, Eastern Division. In the Matter of Chicago & E. I. R. R., Debtor, No. 52871.
Defendant company was duly organized according to plan. Its certificate of incorporation provided for the right of cumulative voting for all stockholders. As to holders of Class A stock (preferred), it was provided that so long as any such stock should remain outstanding, the consent of at least two-thirds thereof should be given to amend, alter or repeal any provisions of the certificate of incorporation or bylaws which have reference to preferences, voting rights, and other incidents of the Class A stock. The certificate also provided for thirteen directors and stated that they should serve for a period not exceeding one year. Bylaws were adopted which conformed to the plan and the certificate of incorporation, and the company operated thereunder until 1953. These will be examined in greater detail later in this opinion.
On July 10, 1953, the railroad's board of directors approved an amendment to the bylaws which provided for thirteen directors, four of whom were to hold office for one year, four to hold office for two years, and five to hold office for three years, and that as each director's term of office expired, he or his successor was to be elected to office for three years. Thus, the maximum number of directors to be elected in any one year was to have been five and the minimum, four, thereby creating a system of classified directors and staggered elections and sharply qualifying or completely defeating the cumulative voting provisions of the plan.
On November 12, 1958, plaintiff Kern filed suit as a Class A preferred shareholder in behalf of himself and others similarly situated, naming the railroad and individual members of the board of directors as defendants, seeking the relief hereinbefore referred to. On November 14, 1958 the defendant directors met at a regularly scheduled meeting and adopted a resolution repealing the July 10, 1953 amendment and providing for non-staggered, one year terms of office for the company's directors, as originally fixed in the plan of reorganization. At the same meeting, four directors whose remaining terms exceeded one year and expired after May 1959 resigned and were then re-elected by the remaining nine directors, to serve until May 1959. Thereafter, five more directors whose remaining terms exceeded one year and expired after May 1959 resigned and were also re-elected to new terms until May 1959.
On April 6, 1959 plaintiff Lesch, also a Class A preferred shareholder, petitioned and was granted leave to become a party plaintiff and to adopt the allegations and prayers of Kern's complaint, including the prayer for relief. On July 31, 1959, defendants moved for summary decree, supporting their motion by affidavits and suggestions. On October 14, 1959, plaintiffs filed their motion for summary decree, also supported by an affidavit and suggestions. An order was entered March 8, 1960, denying plaintiffs' motion and granting defendants' motion for summary decree and dismissing the suit for want of equity at plaintiffs' costs. It is from that order that plaintiffs appeal.
Defendants contend that inasmuch as the directors' resolution in November 1958 repealed the classes of directors and the staggered election system provided for in the 1953 resolution and provided for a new board as requested in plaintiffs' complaint, there was nothing for the court to declare or enjoin, the 1958 resolution having eliminated whatever justiciable controversy may have existed, thus making the case moot. This suit seeks a declaration of the rights of stockholders. As it stands now, the board of directors may at any time revert to staggered elections, and again Class A stockholders may feel their preferential position prejudiced by their inability to elect directors by cumulative voting. Plaintiffs, if they are right, are entitled to a more stable disposition of the litigation than one which gives them their rights, but reserves to their opponents the power at any time of restore the former status.
Even if this case were considered moot, it is within the exception to the rule governing moot decisions because there is a substantial public interest involved. People ex rel. Wallace v. Labrenz, 411 Ill. 618, 104 N.E.2d 769, 30 A.L.R.2d 1132; Kunin v. Forman Realty Corp., 21 Ill.App.2d 221, 224, 157 N.E.2d 785, 787. The railroad company is a large public service corporation. Its stock is widely held and available for purchase by the public. Its stock is listed on the New York Stock Exchange. There is a wide general interest in the stability of preferred stock, and efforts to eliminate preferences thereof have been the subject of much litigation. The question is whether the power of minority shareholders to cumulate sufficient votes to elect representatives on the board of directors should be diminished or extinguished in contravention of the provisions of a plan of reorganization, a decree of court, and articles of incorporation. For that is the natural end result of classified directorships and staggered elections. See Wolfson v. Avery, 6 Ill.2d 78, 81-82, 126 N.E.2d 701, 704. We conclude that we should consider the merits of the case.
The plan of reorganization relative to rights of Class A preferred stockholders made the following provisions, among others, approved by the Interstate Commerce Commission and the United States District Court:
Article IV of the railroad's certificate of incorporation reads in part as follows:
'* * * each stockholder, without distinction as to class, shall be entitled to one vote for each share of stock standing in his name on the books of the Company, and in all elections for directors each stockholder shall have the right of cumulative voting * * *.
'So long as any Class A stock shall remain outstanding the consent of the holders of at least two-thirds of the Class A stock then outstanding * * * shall be necessary to amend, alter or repeal any of the provisions of this Certificate of Incorporation, or of the by-laws enacted thereunder, which have reference to, or which are protective of, the designation, rights, preferences, qualifications, limitations, restrictions, voting rights, values and interests of the Class A stock.'
Article VII of the document reads in part as follows:
Defendants contend that the plan of reorganization, as approved by the Interstate Commerce Commission and the court, with respect to the provision for a board of thirteen directors to serve for one year, was not intended as a restriction extending into infinity. They place great emphasis upon Paragraph X of the plan, before quoted, which provides that upon consummation of the plan the company shall have a board of thirteen members, the term of office of each director to be one year, and upon the court's decree of June 16, 1941, finding that the reorganization plan has been fully carried out and approving the consummation thereof by the railroad and its officers. In other words, by that interpretation the protection afforded Class A preferred stockholders was only for that fleeting moment in which the plan was consummated and perhaps for the term of one year thereafter. This is indeed conjuring up a shadow for what was offered as a hope of substance to those security...
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