On November 18, 1959, William H. Sullivan, Jr. (Sullivan), purchased an American Football League (AFL) franchise for a professional football team. The team was to be the last of the eight original teams set up to form the AFL (now the American Football Conference of the National Football League). For the franchise, Sullivan paid $25,000. Four
Sullivan had effective control of the corporation from its inception until 1974. By April, 1974, Sullivan had increased his ownership of shares from 10,000 shares of voting stock to 23,718 shares, and also had acquired 5,499 shares of nonvoting stock. Nevertheless, in 1974 the other voting stockholders ousted him from the presidency and from operating control of the corporation. He then began the effort to regain control of the corporation — an effort which culminated in this and other lawsuits.
In November, 1975, Sullivan succeeded in obtaining ownership or control of all 100,000 of the voting shares, at a price of approximately $102 a share (adjusted cash value), of the corporation, by that time renamed the New England Patriots Football Club, Inc. (Old Patriots).
On October 20, 1976, Sullivan organized a new corporation called the New Patriots Football Club, Inc. (New Patriots). The board of directors of the Old Patriots and the board of directors of the New Patriots
General Laws c. 156B, § 78 (c) (1) (iii), as amended through St. 1976, c. 327, required approval of the merger agreement by a majority vote of each class of affected stock. Approval by
David A. Coggins (Coggins) was the owner of ten shares of nonvoting stock in the Old Patriots. Coggins, a fan of the Patriots from the time of their formation, was serving in Vietnam in 1967 when he purchased the shares through his brother. Over the years, he followed the fortunes of the team, taking special pride in his status as an owner.
The trial judge found in favor of the Coggins class but determined that the merger should not be undone. Instead, he ruled that the plaintiffs are entitled to rescissory damages, and he ordered that further hearings be held to determine the amount of damages. After the judge rendered his decision, motions were made to permit intervention by plaintiffs in two related cases, Pavlidis v. New England Patriots Football Club, Inc., 737 F.2d 1227 (1st Cir.1984), and Sarrouf v. New England
We conclude that the trial judge was correct in ruling that the merger was illegal and that the plaintiffs have been wronged. Ordinarily, rescission of the merger would be the appropriate remedy. This merger, however, is now nearly ten years old, and, because an effective and orderly rescission of the merger now is not feasible, we remand the case for proceedings to determine the appropriate monetary damages to compensate the plaintiffs. We conclude further that intervention by the Pavlidis plaintiffs should not have been allowed, and that no stockholders in the Sarrouf class should be allowed to intervene as plaintiffs in the Coggins case.
Scope of judicial review. In deciding this case, we address an important corporate law question: What approach will a Massachusetts court reviewing a cash freeze-out merger employ? This question has been considered by courts in a number of other States. See A.M. Borden, Going Private § 4.09, and cases cited (rev. 1986); 1 M. Lipton & E.H. Steinberger, Takeovers and Freezeouts § 9.05, and cases cited (rev. 1986).
The parties have urged us to consider the views of a court with great experience in such matters, the Supreme Court of Delaware. We note that the Delaware court announced one test
The defendants argue that judicial review of a merger cannot be invoked by disgruntled stockholders, absent illegal or fraudulent conduct. They rely on G.L.c. 156B, § 98 (1984 ed.).
We have held in regard to so called "close corporations" that the statute does not divest the courts of their equitable jurisdiction to assure that the conduct of controlling stockholders does not violate the fiduciary principles governing the relationship between majority and minority stockholders. Pupecki v. James Madison Corp., 376 Mass. 212, 216-217 (1978) (when controlling stockholder fails to assure that corporation receives adequate consideration for its assets, transaction is illegal or fraudulent, and G.L.c. 156B, § 98, does not foreclose review).
The dangers of self-dealing and abuse of fiduciary duty are greatest in freeze-out situations like the Patriots merger, where
A controlling stockholder who is also a director standing on both sides of the transaction bears the burden of showing that the transaction does not violate fiduciary obligations. "As was said in Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 599 : `The relation of directors to corporations is of such a fiduciary nature that transactions between boards having common members are regarded as jealously by the law as are personal dealings between a director and his corporation, and where the fairness of such transactions is challenged the burden is upon those who would maintain them to show their entire fairness and where a sale is involved the full adequacy of the consideration. Especially is this true where a common director is dominating in influence or in character.' This rule is applicable even though no corruption or dishonesty is shown...." Lazenby v. Henderson, 241 Mass. 177, 180 (1922). Cf. Weinberger v. UOP, Inc., supra (similar standard of review). Judicial inquiry into a freeze-out merger in technical compliance with the statute may be appropriate, and the dissenting stockholders are not limited to the statutory remedy of judicial appraisal where violations of fiduciary duties are found.
Factors in judicial review. The defendants concentrate their arguments on the finding of the Superior Court judge that the offered price for nonvoting shares was inadequate. They claim that his conclusion that rescissory damages are due these plaintiffs
Judicial scrutiny should begin with recognition of the basic principle that the duty of a corporate director must be to further the legitimate goals of the corporation. The result of a freeze-out merger is the elimination of public ownership in the corporation. The controlling faction increases its equity from a majority to 100%, using corporate processes and corporate assets. The corporate directors who benefit from this transfer of ownership must demonstrate how the legitimate goals of the corporation are furthered. A director of a corporation violates his fiduciary duty when he uses the corporation for his or his family's personal benefit in a manner detrimental to the corporation. Widett & Widett v. Snyder, 392 Mass. 778, 785-786 (1984). See Buckman v. Elm Hill Realty Co., 312 Mass. 10, 15 (1942). Because the danger of abuse of fiduciary duty is especially great in a freeze-out merger, the court must be satisfied that the freeze-out was for the advancement of a legitimate corporate purpose. If satisfied that elimination of public ownership is in furtherance of a business purpose, the court should then proceed to determine if the transaction was fair by examining the totality of the circumstances.
The plaintiffs here adequately alleged that the merger of the Old Patriots and New Patriots was a freeze-out merger undertaken for no legitimate business purpose, but merely for the personal benefit of Sullivan. While we have recognized the right to "selfish ownership" in a corporation, such a right must be balanced against the concept of the majority stockholder's fiduciary obligation to the minority stockholders. Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 851 (1976). Consequently, the defendants bear the burden of proving, first, that the merger was for a legitimate business purpose, and,
The decision of the Superior Court judge includes a finding that "the defendants have failed to demonstrate that the merger served any valid corporate objective unrelated to the personal interests of the majority shareholders. It thus appears that the sole reason for the merger was to effectuate a restructuring of the Patriots that would enable the repayment of the [personal] indebtedness incurred by Sullivan...." The trial judge considered the defendants' claims that the policy of the National Football League (NFL) requiring majority ownership by a single individual or family made it necessary to eliminate public ownership. He found that "the stock ownership of the Patriots as it existed just prior to the merger fully satisfied the rationale underlying the policy as expressed by NFL Commissioner Pete Rozelle. Having acquired 100% control of the voting common stock of the Patriots, Sullivan possessed unquestionable authority to act on behalf of the franchise at League meetings and effectively foreclosed the possible recurrence of the internal management disputes that had existed in 1974. Moreover, as the proxy statement itself notes, the Old Patriots were under no legal compulsion to eliminate public ownership." Likewise, the defendants did not succeed in showing a conflict between the interests of the league owners and the Old Patriots' stockholders. We perceive no error in these findings. They are fully supported by the evidence. Under the approach we set forth above, there is no need to consider further the elements of fairness of a transaction that is not related to a valid corporate purpose.
Remedy. The plaintiffs are entitled to relief. They argue that the appropriate relief is rescission of the merger and restoration of the parties to their positions of 1976. We agree that the normally appropriate remedy for an impermissible freeze-out merger is rescission. Because Massachusetts statutes do not bar a cash freeze-out, however, numerous third parties relied in good faith on the outcome of the merger. The trial judge concluded that the expectations of those parties should not be upset, and so chose to award damages rather than rescission.
We do not think it appropriate, however, to award damages based on a 1976 appraisal value. To do so would make this suit a nullity, leaving the plaintiffs with no effective remedy except appraisal, a position we have already rejected. Rescissory damages must be determined based on the present value of the Patriots, that is, what the stockholders would have if the merger were rescinded. Determination of the value of a unique property like the Patriots requires specialized expertise, cf. Correia v. New Bedford Redevelopment Auth., 375 Mass. 360, 367 (1978) (valuation of unusual property may require unusual approach), and, while the trial judge is entitled to reach his own conclusion as to value, Piemonte v. New Boston Garden Corp., 377 Mass. 719, 731 (1979), the credibility of testimony on value will depend in part on the familiarity of the witness with property of this kind. On remand, the judge is to take further evidence on the present value of the Old Patriots on the theory that the merger had not taken place.
The trial judge dismissed the plaintiffs' claims against the individual defendants based on waste of corporate assets. The remedy we order is intended to give the plaintiffs what they would have if the merger were undone and the corporation were put back together again. The trial judge's finding that the sole purpose of the merger was the personal financial benefit of William H. Sullivan, Jr., and tle use of corporate assets to accomplish this impermissible purpose, leads inescapably to the conclusion that part of what the plaintiffs otherwise would have benefitted by, was removed from the corporation by the individual defendants. We reverse the dismissal of the claim for waste of corporate assets and remand this question to the trial court. The present value of the Patriots, as determined on remand, should include the amount wrongfully removed or diverted from the corporate coffers by the individual defendants.
Class certification. This action was certified as a class action by order of a Superior Court judge. The defendants maintain that no class should have been certified. They argue that "instigation of the action by a lawyer, the plaintiff's ignorance of the facts, his disclaimer of financial responsibility for the case, and his delegation of unfettered discretion to the lawyer render him a constitutionally inadequate representative of any class." The decision to certify a class under Mass. R. Civ. P. 23, 365 Mass. 767 (1974), is within the judge's broad discretion. Brophy v. School Comm. of Worcester, 6 Mass.App.Ct. 731, 735 (1978). Our review of the class certification order is, therefore, aimed at determining whether the judge abused his discretion.
The judge found that the class could be certified because "(1) the class is so numerous that joinder of all members is impractical, (2) there are questions of law and fact common to the class, (3) the claims of the Plaintiff are typical of the class he is certified to represent, and (4) he will fairly and
Intervention by the Sarrouf and the Pavlidis plaintiffs. The trial judge allowed the permissive intervention, under Mass. R. Civ. P. 24 (b), 365 Mass. 769 (1974), of stockholders who were not initially part of the plaintiff class. A judge has broad discretion in considering permissive intervention. Corcoran v. Wigglesworth Mach. Co., 389 Mass. 1002, 1003 (1983). A
Intervention by these plaintiffs is discomforting for the reason that they rejected an invitation to intervene and join the Coggins plaintiffs in this battle early in the action. Having elected to pursue a claim based on inadequate disclosure seeking monetary damages, they had chosen their remedy and should not be permitted now to undo that choice. See Prudential Ins. Co. v. Mason, 301 Mass. 82, 85 (1938) ("A party seeking relief may either affirm a transaction or avoid it. He cannot do both"); Roche v. Gryzmish, 277 Mass. 575, 579 (1931) (plaintiff may seek damages or rescission, but not both); Kimball v. Cunningham, 4 Mass. 502, 506 (1808) (same); Hewitt v. Hayes, 205 Mass. 356, 364 (1910) (knowledgeable choice of one of two inconsistent remedies bars choosing other). Additionally, intervention at this late date is not timely. In Delaware Valley Citizens' Council for Clean Air v. Pennsylvania, 674 F.2d 970, 974 (3d Cir.1982), the United States Court of Appeals said, "a motion to intervene after entry of a decree should be denied except in extraordinary circumstances." The trial judge erred in permitting intervention by the Pavlidis plaintiffs.
The Sarrouf plaintiffs who were allowed to intervene are those denied relief by the trial judge in Sarrouf. In light of our holding in Sarrouf, supra at 554, there are no interveners remaining from that action who have any rights to intervene in this action.
Summary. The freeze-out merger accomplished by William H. Sullivan, Jr., was designed for his own personal benefit to
The class action was certified properly. The good-faith pro bono representation by Coggins's counsel is not a basis to overturn class certification.
Plaintiffs from the related Federal action, Pavlidis v. New England Patriots Football Club, Inc., 737 F.2d 1227 (1st Cir.1984), are not to be permitted to intervene at this late stage. Plaintiffs from the Sarrouf class are left to the judicial remedy they selected and cannot intervene in this case.
The case is remanded to the Superior Court for further proceedings consistent with this opinion.
Prior to the 1976 amendment of G.L.c. 156B, § 78 (c) (1) (iii), that section required a two-thirds vote of approval for a merger from each class of stock. The two-thirds requirement was reinstated in 1981 by St. 1981, c. 298, § 4.
By motion after the publication of this decision, the interveners claim that only 71,000 of the 121,000 shares represented in the Pavlidis litigation were voted for the merger. This claim apparently was not made before the United States Court of Appeals. The interveners also failed to make this claim in this court at the proper time and in the proper manner, and we decline to take notice of it now.