Coggins v. New England Patriots Football Club, Inc.

• Decision Date: 14 May 1986
• Citation: 397 Mass. 525,492 N.E.2d 1112
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: , 55 USLW 2011 David A. COGGINS et al. 1 v. NEW ENGLAND PATRIOTS FOOTBALL CLUB, INC. et al. 2

Page 1112

492 N.E.2d 1112

397 Mass. 525, 55 USLW 2011

David A. COGGINS et al. ¹ v. NEW ENGLAND PATRIOTS FOOTBALL CLUB, INC. et al. ²

Supreme Judicial Court of Massachusetts Middlesex.

Argued Jan. 8, 1986.

Decided May 14, 1986.

Edward B. Hanify for New England Patriots Football Club, Inc. (with him George T. Finnegan & John D. Donovan, Jr., and, for Charles W. Sullivan & others, Richard E. Bachman).

Edward P. Leibensperger & Irving J. Helman (David R. Schmahmann with them), for plaintiffs.

Anthony Tarricone & Nathaniel S. Weiner (Gerard J. Clark & Camille F. Sarrouf with them), for interveners.

Before HENNESSEY, C.J., and LIACOS, ABRAMS, LYNCH and O'CONNOR, JJ.

LIACOS, Justice.

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 months later, Sullivan organized a corporation, the American League Professional Football Team of Boston, Inc. Sullivan contributed his AFL franchise; nine other persons each contributed $25,000. In return, each of the ten investors received 10,000 shares of voting common stock in the corporation. Another four months later, in July, 1960, the corporation sold 120,000 shares of nonvoting common stock to the public at $5 a share.

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 law suits.

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). ³ "Upon completion of the purchase, he immediately used his 100% control to vote out the hostile directors, elect a friendly board and arrange his resumption of the presidency and the complete control of the Patriots. In order to finance this coup, Sullivan borrowed approximately $5,348,000 from the Rhode Island Hospital National Bank and the Lasalle National Bank of Chicago. As a condition of these loans, Sullivan was to use his best efforts to reorganize the Patriots so that the income of the corporation could be devoted to the payment of these personal loans and the assets of the corporation pledged to secure them. At this point they were secured by all of the voting shares held by Sullivan. In order to accomplish in effect the assumption by the corporation of Sullivan's personal obligations, it was necessary, as a matter of corporate law, to eliminate the interest of the nonvoting shares." ⁴

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 ⁵ executed an agreement of merger of the two corporations providing that, after the merger, the voting stock of the Old Patriots would be extinguished, the nonvoting stock would be exchanged for cash at the rate of $15 a share, and the name of the New Patriots would be changed to the name formerly used by the Old Patriots. ⁶ As part of this plan, Sullivan gave the New Patriots his 100,000 voting shares of the Old Patriots in return for 100% of the New Patriots stock.

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 the voting class, entirely controlled by Sullivan, was assured. The merger was approved by the class of nonvoting stockholders at a special meeting on December 8, 1976. ⁷ On January 31, 1977, the merger of the New Patriots and the Old Patriots was consummated.

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. ⁸ When he heard of the proposed merger, Coggins was upset that he could be forced to sell. Coggins voted against the merger and commenced this suit on behalf of those stockholders, who, like himself, believed the transaction to be unfair and illegal. A judge of the Superior Court certified the class as "stockholders of New England Patriots Football Club, Inc. who have voted against the merger ... but who have neither turned in their shares nor perfected their appraisal rights ... [and who] desire only to void the merger."

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 Patriots Football Club, Inc., 397 Mass. 542, 492 N.E.2d 1122 (1986). ⁹ The trial judge allowed the motion of the Pavlidis plaintiffs, and allowed the motion of the Sarrouf plaintiffs, but only as to those plaintiffs in the Sarrouf action who were not granted relief in that case. On motion of the defendants in this case, the trial judge reported the case to the Appeals Court. Mass.R.Civ.P. 64, 365 Mass. 831 (1974). We granted applications by both parties for direct appellate review.

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); I.M. Lipton and 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 in 1977, but recently has changed to another. ¹⁰ In Singer v. Magnavox Co., 380 A.2d 969, 980 (Del.1977), the Delaware court established the so-called "business-purpose" test, holding that controlling stockholders violate their fiduciary duties when they "cause a merger to be made for the sole purpose of eliminating a minority on a cash-out basis." Id. at 978. In 1983, Delaware jettisoned the business-purpose test, satisfied that the "fairness" test "long ... applicable to parent-subsidiary mergers, Sterling v. Mayflower Hotel Corp., 33 Del.Ch. 293, 93 A.2d 107, 109-10 (1952), the expanded appraisal remedy now available to stockholders, and the broad discretion of the Chancellor to fashion such relief as the facts of a given case may dictate" provided sufficient protection to the frozen-out minority. Weinberger v. UOP, Inc., 457 A.2d 701, 715 (Del.1983). ¹¹ "The requirement of fairness is unflinching in its demand that where one stands on both sides of a transaction, he has the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts." Id. at 710. "The concept of fairness has two basic aspects: fair dealing and fair price." Id. at 711. We note that the "fairness" test to which the Delaware court now has adhered is, as we later show, closely related to the views expressed in our decisions. Unlike the Delaware court, however, we believe that the "business-purpose" test is an additional useful means under our statutes and case law for examining a transaction in which a controlling stockholder eliminates the minority interest in a corporation. Cf. Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 851, 353 N.E.2d 657 (1976). This concept of fair dealing is not limited to close corporations but applies to judicial review of cash freeze-out mergers. See Horizon House-Microwave, Inc. v. Bazzy, 21 Mass.App.Ct. 190, 198 n. 11, 486 N.E.2d 70 (1985).

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.). ¹² In the defendants' view, "the Superior Court's finding of liability was premised solely on the claimed inadequacy of the offering price." Any dispute over offering price, they urge, must be resolved solely through the statutory remedy of appraisal.

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...