Wolfson v. Avery

• Decision Date: 19 April 1955
• Docket Number: No. 33563,33563
• Citation: 126 N.E.2d 701,6 Ill.2d 78
• Parties: Louis E. WOLFSON, Appellee, v. Sewell AVERY et al., Appellants.
• Court: Illinois Supreme Court

Page 701

126 N.E.2d 701

6 Ill.2d 78

Louis E. WOLFSON, Appellee, v. Sewell AVERY et al., Appellants.

No. 33563.

Supreme Court of Illinois.

April 19, 1955.

Rehearing Denied June 10, 1955.

MacLeish, Spray, Price & Underwood, Chicago (John E. MacLeish, Robert S. Cushman, Joseph W. Townsend, Jess Halsted, Clifford C. Pratt, and John F. Swenson, Chicago, of counsel), for appellants.

Mayer, Friedlich, Spiess, Tierney, Brown & Platt, Chicago (Leo F. Tierney, Edmund A. Stephan, Robert L. Stern, Stuart Bernstein, Dwight W. Fawcett, Chicago, Joseph M. Glickstein, Jacksonville, Fla., and William A. Shea, New York City, of counsel), for appellee.

Herman T. Van Mell, and Finn & Van Mell, Chicago, Edmund M. Cook, Lewis D. Wilson and Harold W. Hawes, Moline (Sollo, Graham & Califf, Moline, and Bell, Boyd, Marshall & Lloyd, Chicago, of counsel), Kirkland, Fleming, Green, Martin & Ellis, Chicago (Weymouth Kirkland, and Thomas M. Thomas, Chicago, of counsel), William N. Strack, Miller, Gorham, Westcott & Adams, James B. Wescott, Albert S. Barney, Gann, Secord, Stead & McIntosh, Frederick Secord, and Thomas W. O'Shaughnessy, Chicago, amici curiae.

KLINGBIEL, Justice.

Louis E. Wolfson filed a complaint in the circuit court of Cook County against Montgomery Ward & Company and its directors, seeking a declaratory judgment that section 35 of the Illinois Business Corporation Act, (Ill.Rev.Stat.1953, chap. 32, par. 157.35,) which purports to authorize the classification of directors into not more than three classes and the election of only one class annually, is unconstitutional and void, and that the company's bylaw adopted pursuant thereto is therefore unlawful. After answer was filed, plaintiff moved for judgment on the pleadings. The court sustained the motion and entered judgment as prayed in the complaint. Defendants appeal directly to this court, on the ground that a construction of the constitution and the validity of a statute are involved. Pursuant to leave heretofore granted, several additional Illinois corporations having classified directors have intervened as amici curiae in support of the appeal.

From the allegations of the pleadings admitted by the answer and the motion for judgment, it appears that the board of directors of Montgomery Ward & Company consists of nine members divided into three classes of three directors each. At each annual meeting of the stockholders one class is elected for a term of three years. On August 18, 1954, appellee became the owner of 20,000 shares of common stock. About two months later he sent a letter to appellants asserting that the provision of the bylaws for the election of only one third of the directors each year was unlawful, and demanding the rescission and repeal of that portion of the bylaws relating to the classification of directors and their election for so-called 'staggered' terms. Appellee further requested in the communication that the individual appellants forthwith announce to shareholders that at the annual meeting to be held on April 22, 1955, the full membership of the board of directors may be elected to office. After receipt of the letter appellants failed to rescind or repeal the allegedly illegal portion of the bylaws, although they had ample opportunity to do so, and appellee instituted the present action on November 1, 1954.

Section 35 of the Illinois Business Corporation Act, pursuant to which the company's bylaw was adopted, provides as follows: 'When the board of directors shall consist of nine or more members, in lieu of electing the whole number of directors annually, the by-laws may provide that the directors be divided into either two or three classes, each class to be as nearly equal in number as possible, the term of office of directors of the first class to expire at the first annual meeting of shareholders after their election, that of the second class to expire at the second annual meeting after their election, and that of the third class, if any, to expire at the third annual meeting after their election. At each annual meeting after such classification the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to hold office until the second succeeding annual meeting, if there be two classes, or until the third succeeding annual meeting, if there be three classes.' The sole issue presented by the appeal is whether the classification of directors permitted by the statute, and their election for staggered terms, violate section 3 of article XI of the Illinois constitution, S.H.A., which guarantees to stockholders the right to cumulate their votes in the election of directors.

Under cumulative voting, a method designed to enable minority stockholders to gain representation on the board of directors, each shareholder is entitled to votes equal to the number of his shares multiplied by the number of directors to be elected. He may cast all his votes for a single candidate or distribute them among two or more as he sees fit. It is not disputed that in an election of only three members of a nine-member board, approximately 250 per cent as many votes are required to elect a single director as would be necessary if all nine members were to be elected at the same time. In an election of the full board of nine directors, the owners of 10 per cent of the stock voted, plus one share, could elect one out of the nine directors to be elected. On the other hand, if the board of directors is classified so that only three members are elected each year, it would require 25 per cent of the stock voted, plus one share, to gain a single seat on the board. Where all nine members are elected at once, a minority holding 49 per cent of the stock could elect four; and the majority holding 51 per cent of the shares, by cumulating their votes in the most advantageous manner possible, could elect no more than five out of the nine directors. If only three members of the board are elected each year, however, the holders of 49 per cent would be able to elect only one director at each election, and could never have more than three directors on the board at one time. Similarly, an owner of 25 per cent of the stock could elect two directors if all nine were chosen at once, whereas under the present bylaw such a shareholder would be unable to elect even one director. It is evident, therefore, that as the number of directors up for election decreases the number of share votes necessary to elect one director increases. See Williams, Cumulative Voting for Directors, pp. 48-49, Harvard Business School, 1951; Ballantine, A. Critical Survey of the Illinois Business Corporation Act, 1 Univ. Chicago L.Rev. 357, 385-386; The Corporate Directorship, National Industrial Conference Board Study No. 63 (1953) p. 12; Note, 66 Harv.L.Rev. 531, 532; Note, 56 Dickinson L.Rev. 330; 27 St. Johns L.Rev. 357, 358-359. Classification of directors in fact impairs even majority representation by requiring the majority to wait for two or three years before it can secure representation proportional to its strength.

Appellee's position is that since the degree of a minority's representation on the board varies directly with the number of directors to be elected, representation in proportion to its holdings is defeated if the entire board is not elected at one time; and that the purpose of the constitutional provision for cumulative voting in corporate elections is to give minority shareholders the right to proportional representation on corporate boards. The appellants, on the other hand, insist that the purpose of cumulative voting is not to guarantee proportional representation but simply to enable minorities to secure some representation or voice on corporate boards of directors. It is pointed out that a corporation may reduce the number of its directors to three without violating any constitutional or statutory restriction; that in such event the number of shares required to elect a single director would likewise be increased; that the constitution does not require any particular number of directors except that by use of the plural it contemplates at least two; that the percentage of shares which a minority group must have in order to secure any representation on the board of directors is therefore left to the discretion of the General Assembly; and that since the General Assembly may lawfully provide for corporations with three directors it may also provide for corporations with classified boards of directors with three in each class.

The determination of the issue presented in this case depends upon a proper construction of section 3 of article XI of the constitution, which reads as follows: 'The general assembly shall provide, by law, that in all elections for directors or managers of incorporated companies, every stockholder shall have the right to vote, in person or by proxy, for the number of shares of stock owned by him, for as many persons as there are directors or managers to be elected, or to cumulate said shares, and give one candidate as many votes as the number of directors multiplied by the number of his shares of stock shall equal, or to distribute them on the same principle among as many candidates as he shall think fit; and such directors or managers shall not be elected in any other manner.'

Although this State and many others have long had both mandatory cumulative voting and permissive classification of directors, no reported decision has been found in which the precise question presented here has been considered. In Wright v. Central California Colony Water Co., 67 Cal. 532, 8 P. 70, 73, a constitutional provision for cumulative voting was held to be violated where a majority of the shareholders approved a resolution to elect the company's seven directors in seven consecutive elections, electing one director at each election. The court observed: 'We think the power thus conferred upon a corporate to the...