Durkee v. People ex rel. Askren
40 N.E. 626, 155 Ill. 354 (1895)
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Rule of Law:
A corporation cannot, through its by-laws or contracts, grant voting rights to non-stockholders (e.g., bondholders) when the state's constitution and statutes explicitly provide that directors shall be elected exclusively by stockholders.
Facts:
- The Toledo, Peoria and Western Railway Company was organized under the laws of the State.
- Moran and Denny transferred an already constructed railroad to the newly formed company in exchange for stock.
- The railway company issued bonds and certificates of stock to finance its operations.
- The bonds and stock certificates contained a provision granting the company's bondholders the right to vote at stockholder meetings.
- Moran and Denny sold these bonds on the open market.
- The relator later purchased stock in the railway company with knowledge of the provision granting voting rights to bondholders.
Procedural Posture:
- A stockholder (the relator) initiated a legal action challenging the validity of a provision granting voting rights to bondholders.
- The trial court rendered a judgment in favor of the relator, invalidating the provision.
- The railway company (appellant) appealed the decision to the Appellate Court.
- The Appellate Court affirmed the judgment of the trial court.
- The appellant then brought the case before the state's highest court for review.
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Issue:
Does a provision in corporate bonds and stock certificates that grants voting rights to bondholders violate state law and public policy when the state constitution and statutes mandate that corporate directors be elected exclusively by stockholders?
Opinions:
Majority - Mr. Justice Baker
Yes, a provision granting voting rights to bondholders is void because it violates state law and public policy. The corporation, as a creature of statute, is bound by the legal framework under which it was created. Both the state constitution and the relevant statute mandate that corporate directors must be elected by stockholders and 'shall not be elected in any other manner.' A contract to perform an act forbidden by statute is not binding. The argument that the relator is estopped because he purchased the stock with knowledge of the provision fails; a corporation cannot abrogate a statute by simply contracting to do the prohibited act. Both the bondholders and the stockholder are charged with knowledge of the law and thus knew the provision was void. Furthermore, such an arrangement is against public policy because the interests of bondholders, which may favor foreclosure and asset depreciation, are contrary to the interests of stockholders and the public, who benefit from the successful and stable management of the railroad.
Analysis:
This decision reinforces the principle that mandatory provisions of corporate law, particularly those concerning shareholder voting rights, cannot be contracted around. It establishes that a corporation's foundational governance structure, as dictated by statute, is not subject to private ordering by the company and its stakeholders. The court's emphasis on public policy highlights that the management of quasi-public corporations like railroads is a matter of public interest, not just private concern. This precedent limits the flexibility of corporate financing structures by prohibiting the use of voting rights as an incentive for creditors where a statute reserves such rights for equity holders.
