400 Mass. 230 (1987), Dynan v. Fritz

Citation:400 Mass. 230, 508 N.E.2d 1371
Party Name:Robert G. DYNAN et al. [ 1] v. Edward A. FRITZ, Jr. et al. [ 2]
Case Date:June 10, 1987
Court:Supreme Judicial Court of Massachusetts

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400 Mass. 230 (1987)

508 N.E.2d 1371

Robert G. DYNAN et al. 1


Edward A. FRITZ, Jr. et al. 2

Supreme Judicial Court of Massachusetts, Middlesex.

June 10, 1987

Argued Feb. 5, 1987.

[508 N.E.2d 1372] Kenneth H. Tatarian (Kenneth Ira Spigle, Boston, with him), for plaintiffs.

Gael Mahony, Boston, for Edward A. Fritz, Jr.

Richard L. Neumeier (Jacqueline Y. Parker, Boston, with him), for Robert F. Driscoll & another.

Joseph P. Donahue, Jr., Lowell, for Hugo Bloomquist, Jr.

John S. Leonard, George A. McLaughlin, Jr., and Michael J. Keefe, Boston, for F.S. Payne Co., submitted a brief.


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WILKINS, Justice.

This stockholders' derivative action involves claims that the defendants, who own a majority of the outstanding stock of the defendant F.S. Payne Co. (company), unfairly manipulated stock ownership to gain control of the company and unlawfully approved the company's purchase of the stock of the defendant Fritz on terms unfair to the company. Following many days of trial, the judge made findings and rulings and

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entered a judgment from which both sides have appealed. We granted the defendants' applications for direct appellate review.

We first describe the principal actors in this proceeding. The plaintiff Dynan, who owns 170 shares of stock in the company, was first employed by it in 1945, was elected a director in 1974, and served from 1974 to March, 1984, as a vice president and director. Dynan as director approved of the defendants' conduct of which he now complains in this action. The other seven plaintiffs, employees of the company, each own ten shares of its stock, except for Bishop, treasurer since November, 1982, and King, vice president for manufacturing since November, 1982, each of whom owns twenty-five shares. The defendant Fritz first became a company employee in 1960, is one of the company's three directors, owns 240 shares of stock in the company, and is a former president (from 1977 to 1982) and treasurer (from 1961 to 1982). Fritz purchased ten shares of company stock in 1961 and by various subsequent purchases had acquired 360 shares by July, 1973. He retired in January, 1983, and in 1983 sold 120 shares of stock back to the [508 N.E.2d 1373] company in circumstances which, among other things, the plaintiffs challenge. The defendant Driscoll, an employee since 1952, is president of the company, one of its three directors, and the owner of 105 shares of company stock. The defendant Bloomquist, an employee since 1946, is the third director of the company, a vice president, and the owner of forty shares of its stock. The defendant O'Brien, an employee since 1953, has been the company's clerk since 1982, owns twenty-five shares of company stock, and has never been a director of the company. 3

We next summarize the significant facts which appear in the judge's detailed findings. The company is a Massachusetts corporation which, since 1906, has been in the business of manufacturing and selling elevators and elevator supplies. The

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greatest number of stockholders in the company at any time has been forty. The company's stock is not traded on any stock exchange. For many years, all company stock has been subject to a restriction on its transfer, requiring, in details not material to this case, that it must be offered to the company before it may be sold to anyone else. The company's policy, largely adhered to, has been to sell stock only to its employees and current stockholders. Commencing in 1954 as to certain shareholders and continuing generally to date, the company's sales of stock have been made subject to so-called buy-back agreements, pursuant to which the company may elect, within stated time limits, to repurchase stock upon either the death or the termination of employment of the employee-stockholder. All outstanding company stock is now subject to buy-back agreements. The formula in each buy-back agreement states the price at which the company may repurchase each share as "the higher of (1) 56% of the net book value thereof, ascertained as of the close of the calendar year last preceding the day on which the event occurs from which the right of election to purchase the shares arises; or (2) six times the average annual earnings per share for the five years ended at the close of said calendar year."

One major issue in this case is whether formula valuations per share should be based on the number of shares outstanding or on the number of shares issued (the total of the outstanding shares and treasury shares [that is, shares of stock, once outstanding, that the company has reacquired] ). The defendant Fritz arranged to sell his stock to the company on his retirement at prices based on the number of shares outstanding. He argues that the buy-back agreement clearly so provides. The plaintiffs claim that under the agreement Fritz was obliged to sell his shares at a price using the number of shares issued and that the conduct of the company and others in dealing with the buy-back agreement since 1954 compels that interpretation.

Although generally accepted accounting principles would normally point to the use of the number of shares outstanding in determining the per share net book value of stock and although the company followed that practice in the years immediately

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after 1954, the company came to use the number of shares issued rather than the number of shares outstanding in determining buy-back prices. From 1954 to 1965, whenever the company repurchased shares it rather promptly sold them to employees and thus the difference between the number of issued and the number of outstanding shares was not significant. 4 With one exception, the company has sold its stock to employees at the average cost to the company of its treasury stock (the cost of all stock held in the treasury divided by the number of shares of treasury stock). 5 In 1965, the company repurchased [508 N.E.2d 1374] 610 shares which it did not immediately resell. Concerned that the repurchase price under the buy-back agreement would fluctuate if the company continued to use the number of outstanding shares to determine the per share value under the buy-back formula, in late 1965 the directors voted that all treasury stock would be held as an investment, with the result that treasury stock was treated as an asset and the number of shares issued was to be used in the buy-back formula. The company made various stock repurchases from 1966 through 1970 using this method in each instance, although one retiring employee selling 120 shares contended that the appropriate calculation called for the use of the number of shares outstanding. During this time, offers of treasury stock to employees were not fully subscribed. At the end of 1969, for example, 1,883 shares were outstanding and 939 shares were held in the treasury. Under pressure from its accountants, who questioned whether in the circumstances the treasury stock was really being held as an investment, the company reclassified its treasury stock, effective December 31, 1970, from an investment to a deduction from capital and surplus on the liability side of the balance sheet.

We need not recite the details of the numerous stock transactions during the 1970's. The company's position continued

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to be that the number of shares issued was the appropriate number to use in computing the price to be paid per share under the buy-back formula. The company received some resistance on this point. In one instance, it was obliged to bring a lawsuit against a former president, Roland Marr, who claimed that outstanding shares should be used in valuing his stock on repurchase pursuant to the buy-back agreement. In the settlement reached in the Marr action in 1975 and otherwise, the use of the number of shares issued prevailed. There were, however, several repurchases after 1970 negotiated at prices not based, at least directly, on the formula in the buy-back agreement.

In 1982, the company agreed, after long negotiations and litigation, to repurchase the 226 shares of Milton Hickox, who had been president of the company. Hickox had suffered a stroke in early 1977, but arguably had been kept on as a company employee for many months. At the time of the repurchase of the Hickox stock, the plaintiff Dynan and the defendants Fritz and Driscoll were the members of the company's board of directors. After efforts to acquire the Hickox stock at lower prices had failed and Hickox had sued the company for a declaration that his stock was not subject to the buy-back agreement at all, all three directors had voted in December, 1981, to offer to purchase Hickox's stock at a per share price ($1,234.58), based on the number of shares outstanding. The Hickox lawsuit against the company was settled early in November, 1982, using the number of shares outstanding to arrive at the price the company paid for Hickox's stock. The judge was warranted in finding that the Hickox settlement was made at the higher price because it would set a precedent beneficial to each of the directors, particularly in establishing the price to be paid to Fritz on his upcoming retirement.

By this time, the defendant Fritz, the company's president, had attained the age of sixty-five, the company's normal retirement age. In August, 1982, Fritz, who then owned 360 shares of the 624 shares of stock outstanding, or about 58% of the stock, announced that he would retire on January 1, 1983. In November, 1982, the directors offered to sell 306 shares of

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treasury stock to employees. Of these shares, all of which were purchased, ninety went to the defendant Driscoll (increasing his holdings to 105 shares), ten went to the defendant Bloomquist (increasing his holdings...

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