Donahue v. Rodd Electrotype Co. of New England, Inc.

• Citation: 367 Mass. 578,328 N.E.2d 505
• Parties: Euphemia DONAHUE v. RODD ELECTROTYPE COMPANY OF NEW ENGLAND, INC., et al. 1
• Decision Date: 02 May 1975
• Court: United States State Supreme Judicial Court of Massachusetts

Page 505

328 N.E.2d 505

367 Mass. 578

Euphemia DONAHUE v. RODD ELECTROTYPE COMPANY OF NEW ENGLAND, INC., et al.¹

Supreme Judicial Court of Massachusetts, Middlesex.

Argued Oct. 8, 1974.

Decided May 2, 1975.

William M. O'Brien, Cambridge, for plaintiff.

Harold E. Magnuson, Boston, for defendants.

Before TAURO, C.J., and REARDON, QUIRICO, BRAUCHER, KAPLAN and WILKINS, JJ.

TAURO, Chief Justice.

The plaintiff, Euphemia Donahue, a minority stockholder in the Rodd Electrotype Company of New England, Inc. (Rodd Electrotype), a Massachusetts corporation, brings this suit against the directors of Rodd Electrotype, Charles H. Rodd, Frederick I. Rodd and Mr. Harold E. Magnuson, against Harry C. Rodd, a former director, officer, and controlling stockholder of Rodd Electrotype and against Rodd Electrotype (hereinafter called defendants). The plaintiff seeks to rescind Rodd Electrotype's purchase of Harry Rodd's shares in Rodd Electrotype ² and to compel Harry Rodd 'to repay to the corporation the purchase price of said shares, $36,000, together with interest from the date of purchase.' ³ The plaintiff alleges that the defendants caused the corporation to purchase the shares in violation of their fiduciary duty to her, a minority stockholder of Rodd Electrotype. ⁴

The trial judge, after hearing oral testimony, dismissed the plaintiff's bill on the merits. He found that the purchase was without prejudice to the plaintiff and implicitly ⁵ found that the transaction had been carried out in good faith and with inherent fairness. The Appeals Court affirmed with costs. DONAHUE V. RODD ELECTROTYPE CO. OF NEW ENGLAND, INC., --- MASS.APP. ---, , 307 N.E.2D 8 (1974)^A.

The case is before us on the plaintiff's application for further appellate review.

The trial judge entered voluntary findings of fact which do not appear to state the complete ground for his decision. The evidence is reported. Accordingly, it is the duty of this court to examine the evidence and to form an independent judgment on the facts in the case. Due weight must be given to the fidings of the trial judge, who has heard the witnesses and has had an opportunity to gauge their credibility and reliability. His findings of fact based on oral testimony will not be reversed unless they are plainly wrong. Spiegel v. Beacon Participations, Inc., 297 Mass. 398, 407, 8 N.E.2d 895 (1937); Seder v. Gibbs, 333 Mass. 445, 446, 131 N.E.2d 376 (1956). However, all inferences to be drawn from the facts are open on this appeal. Malone v. Walsh, 315 Mass. 484, 490, 53 N.E.2d 126 (1944); Seder v. Gibbs, supra, 333 Mass. at 447, 131 N.E.2d 376.

The evidence may be summarized as follows: In 1935, the defendant, Harry C. Rodd, began his employment with Rodd Electrotype, then styled the Royal Electrotype Company of New England, Inc. (Royal of New England). At that time, the company was a wholly-owned subsidiary of a Pennsylvania corporation, the Royal Electrotype Company (Royal Electrotype). Mr. Rodd's advancement within the company was rapid. The following year he was elected a director, and, in 1946, he succeded to the position of general manager and treasurer.

In 1936, the plaintiff's husband, Joseph Donahue (now deceased), was hired by Royal of New England as a 'finisher' of electrotype plates. His duties were confined to operational matters within the plant. Although he ultimately achieved the positions of plant superintendent (1946) and corporate vice president (1955), Donahue never participated in the 'management' aspect of the business.

In the years preceding 1955, the parent company, Royal Electrotype, made available to Harry Rodd and Joseph Donahue shares of the common stock in its subsidiary, Royal of New England. Harry Rodd took advantage of the opportunities offered to him and acquired 200 shares for $20 a share. Joseph Donahue, at the suggestion of Harry Rodd, who hoped to interest Donahue in the business, eventually obtained fifty shares in two twenty-five share lots priced at $20 a share. The parent company at all times retained 725 of the 1,000 outstanding shares. One Lawrence W. Kelley owned the remaining twenty-five shares.

In June of 1955, Royal of New England purchased all 725 of its shares owned by its parent company. The total price amounted to $135,000. Royal of New England remitted $75,000 of this total in cash and executed five promissory notes of $12,000 each, due in each of the succeeding five years. Lawrence W. Kelley's twenty-five shares were also purchased at this time for $1,000. A substantial portion of Royal of New England's cash expenditures was loaned to the company by Harry Rodd, who mortgaged his house to obtain some of the necessary funds.

The stock purchases left Harry Rodd in control of Royal of New England. Early in 1955, before the purchases, he had assumed the presidency of the company. His 200 shares gave him a dominant eighty per cent interest. Joseph Donahue, at this time, was the only minority stockholder.

Subsequent events reflected Harry Rodd's dominant influence. In June, 1960, more than a year after the last obligation to Royal Electrotype had been discharged, the company was renamed the Rodd Electrotype Company of New England, Inc. In 1962, Charles H. Rodd, Harry Rodd's son (a defendant here), who had long been a company employee working in the plant, became corporate vice president. In 1963, he joined his father on the board of directors. In 1964, another son, Frederick I. Rodd (also a defendant), replaced Joseph Donahue as plant superintendent. By 1965, Harry Rodd had evidently decided to reduce his participation in corporate management. That year Charles Rodd succeeded him as president and general manager of Rodd Electrotype.

From 1959 to 1967, Harry Rodd pursued what may fairly be termed a gift program by which he distributed the majority of his shares equally among his two sons and his daughter, Phyllis E. Mason. Each child received thirty-nine shares. ⁶ Two shares were returned to the corporate treasury in 1966.

We come now to the events of 1970 which form the grounds for the plaintiff's complaint. In May of 1970, Harry Rodd was seventy-seven years old. The record indicates that for some time he had not enjoyed the best of health and that he had undergone a number of operations. His sons wished him to retire. Mr. Rodd was not averse to this suggestion. However, he insisted that some financial arrangements be made with respect to his remaining eighty-one shares of stock. A number of conferences ensued. Harry Rodd and Charles Rodd (representing the company) negotiated terms of purchase for forty-five shares which, Charles Rodd testified, would reflect the book value and liquidating value of the shares.

A special board meeting convened on July 13, 1970. As the first order of business, Harry Rodd resigned his directorship of Rodd Electrotype. The remaining incumbent directors, Charles Rodd and Mr. Harold E. Magnuson (clerk of the company and a defendant and defense attorney in the instant suit), elected Frederick Rodd to replace his father. The three directors then authorized Rodd Electrotype's president (Charles Rodd) to execute an agreement between Harry Rodd and the company in which the company would purchase forty-five shares for $800 a share ($36,000).

The stock purchase agreement was formalized between the parties on July 13, 1970. Two days later, a sale pursuant to the July 13 agreement was consummated. At approximately the same time, Harry Rodd resigned his last corporate office, that of treasurer.

Harry Rodd completed divestiture of his Rodd Electrotype stock in the following year. As was true of his previous gifts, his later divestments gave equal representation to his children. Two shares were sold to each child on July 15, 1970, for $800 a share. Each was given ten shares in March, 1971. ⁷ Thus, in March, 1971, the shareholdings in Rodd Electrotype were apportioned as follows: Charles Rodd, Frederick Rodd and Phyllis Mason each held fifty-one shares; the Donahues ⁸ held fifty shares.

A special meeting of the stockholders of the company was held on March 30, 1971. At the meeting, Charles Rodd, company president and general manager, reported the tenative results of an audit conducted by the company auditors and reported generally on the company events of the year. For the first time, the Donahues learned that the corporation had purchased Harry Rodd's shares. According to the minutes of the meeting, following Charles Rodd's report, the Donahues raised questions about the purchase. They then voted against a resolution, ultimately adopted by the remaining stockholders, to approve Charles Rodd's report. Although the minutes of the meeting show that the stockholders unanimously voted to accept a second resolution ratifying all acts of the company president (he executed the stock purchase agreement) in the preceding year, the trial judge found, and there was evidence to support his finding, ⁹ that the Donahues did not ratify the purchase of Harry Rodd's shares. Cf. Braunstein v. Devine, 337 Mass. 408, 413, 149 N.E.2d 628 (1958).

A few weeks after the meeting, the Donahues, acting through their attorney, offered their shares to the corporation on the same terms given to Harry Rodd. Mr. Harold E. Magnuson replied by letter that the corporation would not purchase the shares and was not in a financial position to do so. ¹⁰ This suit followed.

In her argument before this court, the plaintiff has characterized the corporate purchase of Harry Rodd's shares as an unlawful distribution of corporate assets to controlling stockholders. She urges that the distribution constitutes a breach of the fiduciary duty owed by the Rodds, as controlling stockholders, to her, a minority stockholder in the enterprise, because the Rodds failed to accord her an equal opportunity to sell her shares to the corporation. The defendants reply that the stock purchase was within the powers of the corporation and met the...