Nature of the Case
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Facts
Hycor, is a Massachusetts corporation that was organized in 1967 by the five individual defendants (Ds). Each of the majority shareholders has been a member of Hycor's board of directors, and an employee of the corporation, since its organization. Hycor specializes in the design and manufacture of electronic radar and optical countermeasure systems. In 1969 Hycor made a public offering of 75,000 shares of stock, at four dollars a share, in an effort to raise capital. After the public offering, there were 525,000 shares of stock issued and outstanding. The majority shareholders and their families owned approximately 440,000 shares, or eighty-five percent, of the outstanding stock. The stock owned by the majority shareholders was not registered under the Federal Securities Act of 1933, and therefore, the sale of this stock was restricted. A notation to this effect appeared on the stock certificates owned by the majority shareholders. In June of 1979, discussions took place concerning the possibility of Ds acquiring 100 percent ownership of the Hycor stock. Ds, acting as directors of Hycor, mailed a written 'Notice of Special Meeting of Stockholders' to be held at Hycor's offices on February 13, 1980. The notice stated that the purpose of the meeting was to vote on a recapitalization proposal. Hycor's articles of organization would be amended to reduce the authorized capital stock from two million shares with a par value of one cent, to five hundred shares, with a par value of forty dollars. In effect, each 'old' share would be reduced to 1/4,000 of a 'new' share. No fractional shares of Hycor stock would be recognized after the recapitalization. Each holder of a fractional share would receive five dollars upon surrender of each 'old' share certificate. On February 13, 1980, there were 517,000 shares of stock issued and outstanding. Approximately 81 percent of these shares were owned by Ds and their families. The remaining shares were owned by 331 shareholders (the minority shareholders). Each minority shareholder owned less than 4,000 shares of stock. Ps appeared at the meeting and objected to the recapitalization proposal and the offer price of five dollars per share. The change in the articles of organization was approved. On April 24, 1980, Ps commenced this action alleging that Ds had acted fraudulently, and had misrepresented the basis for the proposed amendment to the articles of organization and that Ds’ breach of their fiduciary duty to the corporation's minority shareholders. After the trial, the judge ruled for Ds holding that the procedure used was fair along with its reasons and that $5 was a reasonable price. Ps appealed. Ps claimed that the judge implicitly ruled that, as a matter of law, the recapitalization was fair and not an abuse of corporate power. They claim the ruling constituted judicial approval of patently wrongful conduct by the majority shareholders, who violated their fiduciary duty of loyalty to the minority shareholders. Ps also argues that the ruling implies that the recapitalization was not a 'freezing-out' of minority interests.
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