McCormick v. Statler Hotels Delaware Corp.

• Decision Date: 29 December 1964
• Docket Number: Gen. No. 49463
• Citation: 203 N.E.2d 697,55 Ill.App.2d 21
• Parties: , 19 A.L.R.3d 858 Harold J. McCORMICK, Petitioner-Appellee and Cross-Appellant, v. STATLER HOTELS DELAWARE CORPORATION, a Delaware corporation, and William J. Friedman, Defendants-Appellants and Cross-Appellees.
• Court: United States Appellate Court of Illinois

Page 697

203 N.E.2d 697

55 Ill.App.2d 21, 19 A.L.R.3d 858

Harold J. McCORMICK, Petitioner-Appellee and Cross-Appellant, v. STATLER HOTELS DELAWARE CORPORATION, a Delaware corporation and William J. Friedman, Defendants-Appellants and Cross-Appellees.

Gen. No. 49463.

Appellate Court of Illinois, First District, Second Division.

Dec. 29, 1964.

White, shaheen & Lundberg, Chicago, Roger Q. White, John M. Kaveny, Chicago, of counsel, for petitioner-appellee and cross-appellant.

Friedman, Koven, Salzman, Koenigsberg, Specks & Homer, Chicago, John W. Day, Stanley R. Zax, Chicago, of counsel, for defendants-appellants and cros-appellees.

BRYANT, Justice.

This is an appeal and cross-appeal from a judgment entered October 2, 1962, in the Circuit Court of Cook County, Illinois. The matter was transferred here from the Supreme Court of Illinois, 30 Ill.2d 86, 195 N.E.2d 172, after it determined there was no reasonable constitutional issue presented.

The case arose when the petitioner-appellee and cross-appellant, hereinafter referred to as McCormick, a resident of California, sought a writ of mandamus against the Statler Hotels Delaware Corporation, hereinafter called Statler, and its secretary, William J. Friedman, a resident of Illinois. McCormick asked the Court below to order that Statler and Friedman make the list of Statler stockholders available for inspection, and also asked for the imposition of a penalty under Ill.Rev.Stat. 1959, ch. 32, § 157.45, in the amount of $4,425.00, that being ten per cent of the value of his stock.

The Court below heard the case without a jury and entered a judgment for McCormick in the sum of $2,000.00, but it did not grant the writ of mandamus. Statler appeals from the judgment ordering it to pay $2,000.00 while McCormick has filed this cross-appeal asking that the penalty be raised to $4,425.00 and that a writ of mandamus be issued.

The following stipulation was made by the parties at the time of the trial:

'1, that petitioner has been a record stockholder of six thousand shares of the defendant corporation for more than six months prior to the request to examine the stock records.

'2, that at all pertinent times, Statler has been duly registered in Illinois as a foreign corporation and duly licensed and authorized by the State of Illinois to transact business in Illinois.

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'4, on October 21, 1959, Roy R. Ziv, attorney and agent for the petitioner herein, delivered to the defendant, Friedman, a Power of Attorney, authorizing the said Roy R. Ziv to examine the stock transfer records of Statler;

'That said Ziv at said time requested said defendant, Friedman, to permit him to examine said stock transfer records and said request was refused by defendant, Friedman, on October 21, 1959;

'5, that Petitioner was the owner of six thousand shares at the time of said request and that the market value of said six thousand shares at that time was $7.373 per share.'

An official financial statement of Statler states that all the hotels belonging to Statler are leased to the Hilton Hotels Corporation. The lease between Statler and Hilton was entered into on October 27, 1954. The lease is to run for 17 years from that date, beginning with a yearly rental of $7,500,000.00 and declining yearly until the ninth year, when the rent would be $5,000,000.00, which rental would remain constant until the expiration of the lease in 1979.

When Statler was formed in 1954, it was set up to be a corporation that would do nothing more than hold title to property and lease the property to Hilton. The terms of the lease were described in detail in the Statler prospectus. McCormick admits that he only glanced at the prospectus when he received it, and that he bought the shares without reading the prospectus carefully. It was anticipated when Statler was formed that there would be considerable tax savings, and the success of the venture depended on a favorable ruling by the Internal Revenue Service. As the matter turned out, the Service did not hand down a favorable ruling, and the investment proved to be a bad one.

Statler points out McCormick could and should have known of this dependence on a favorable tax ruling. This was pointed out in the prospectus and it is claimed we should not allow him to say he did not know the true state of affairs. Statler also stresses that McCormick has long been in the hotel business and was a vice-president and general manager of the Pick Hotel Corporation. Being a man of some knowledge in business affairs, McCormick, according to Statler, should be held to a standard of care for his own welfare appropriate to a man of his experience.

McCormick replies that the fact Statler did not even go to court to try to have the tax ruling set aside indicates that the plan was indefensible and that the directors of the corporation should have known of this, and apparently, claims they were remiss in using this tax plan as the basis for setting up Statler.

McCormick first bought Statler shares when he was given a warrant for the purchase of 400 shares at $6.42 per share. He received this warrant because he was a stockholder of Hilton, each holder of shares in the Hilton corporation being given an opportunity to purchase one share of Statler for each share of Hilton he owned. From the time he exercised his option in 1957 until June, 1959, he took no interest in the Statler affairs other than to mail in his proxies in favor of management for each of the annual shareholders' meetings. McCormick did not attend a stockholders' meeting until 1961.

In addition to the original 400 shares he bought with his warrant, McCormick bought an additional 5,000 shares because (according to Statler) of a rumor he heard in a board room of what is now Merrill Lynch, Pierce, Fenner and Smith. McCormick points out that the source of the rumor was Mr. Hilton.

On June 1, 1959, a notice was sent to shareholders of Statler which read in part, 'As a result of the tax consequences to the Corporation described above, the Corporation may be required to substantially reduce or withhold future distributions in order to meet the tax payments which will become payable.' McCormick and Statler then exchanged several letters, finally culminating in this action to see the shareholder lists so that communication might be made with other shareholders to discuss the company's condition. During this period, he purchased several hundred more shares of Statler stock. It is claimed this was done because the stock was so depressed there was very little to lose and quite a bit to gain if the anticipated lawsuit were successful. After this action was begun, McCormick sold all his shares to Hilton as part of a merger of the two corporations.

Statler admits that it would not let McCormick see the shareholder lists. It claims that the case became moot when he sold his shares, that the imposition of a penalty under Ill.Rev.Stat.1959, ch. 32, § 157.45, constitutes the regulation of the internal affairs of a foreign corporation within the meaning of Ill.Rev.Stat.1959, ch. 32, § 157.102, and that the petitioner did not seek the lists for a proper purpose.

On his cross-appeal, McCormick claims that he should have been awarded a sum of money equal to ten per cent of the value of the shares he owned, and that even though he sold his shares, he is entitled to have issued a writ of mandamus ordering Statler to make its shareholder lists available to him.

Ill.Rev.Stat.1959, ch. 32, § 157.45, reads in part as follows:

'Each corporation shall keep correct and complete books and records of account and shall also keep minutes of the proceedings of its shareholders and board of directors; and shall keep at its registered office or principal place of business in this State, or at the office of a transfer agent or registrar in this State, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each. Any person who shall have been a shareholder of record or the holder of a voting trust certificate for at least six months immediately preceding his demand or who shall be the holder of record of at least five per cent of all the outstanding shares of a corporation, shall have the right to examine, in person, or by agent or attorney, at any reasonable time or times, for any proper purpose, its books and records of account, minutes and record of shareholders and to make extracts therefrom. A record of shareholders certified by an officer or transfer agent shall be competent evidence in all courts of this State.

'Any officer, or agent, or a corporation which shall refuse to allow any such shareholder or such holder of a voting trust certificate, or his agent or attorney, so to examine and make extracts from its books and records of account, minutes, and record of shareholders, for any proper purpose, shall be liable to such shareholder or such holder of a voting trust certificate in a penalty of ten per cent of the value of the shares owned by such shareholder or ten per cent of the value of the beneficial interest owned by such voting trust certificate holder, in addition to any other damages or remedy afforded him by law. * * *

'Nothing herein contained shall impair the power of any court of competent jurisdiction, upon proof by a shareholder of proper purpose, orrespective of the period of time during which such shareholder shall have been a shareholder of record, and irrespective of the number of shares held by him, to compel by mandamus or otherwise the production for examination by such shareholder of the books and records of account, minutes, and record of shareholders of a corporation.'

The first point we shall consider is whether the case became moot when McCormick sold his shares to the Hilton corporation. Statler cites Goldberg v. Ball, 305 Ill.App. 273, 27 N.E.2d 575 (1940). That case held that a shareholder cannot sue for malfeasance on the...