Horizon House-Microwave, Inc. v. Bazzy

• Decision Date: 09 December 1985
• Docket Number: HOUSE-MICROWAV,INC
• Citation: 486 N.E.2d 70,21 Mass.App.Ct. 190
• Court: Appeals Court of Massachusetts
• Parties: HORIZONv. Emil BAZZY; William Bazzy et al., 1 third-party defendants.

Page 70

486 N.E.2d 70

21 Mass.App.Ct. 190

HORIZON HOUSE-MICROWAVE, INC. v. Emil BAZZY William Bazzy et al., ¹ third-party defendants.

Appeals Court of Massachusetts,

Plymouth.

Argued Sept. 18, 1985.

Decided Dec. 9, 1985.

Nicholas A. Abraham (Brigitte M. Gulliver, Boston, with him), for Emil bazzy.

Edward P. Leibensperger (Ellen G. Grant, Boston, with him), for the plaintiff.

Before KASS, KAPLAN and SMITH, JJ.

KASS, Justice.

What we have here is not so much a corporate "freeze out" case as a "squeeze down" case. Emil Bazzy complains that the end product of a triangular corporate merger was a dilution of his common stock holdings in Horizon House-Microwave, Inc. (Microwave), a close corporation in which his brother, William, was the controlling officer and stockholder. The claim, in substance, is that William used his dominant position in a fashion which violated the fiduciary duty of a majority stockholder to Emil, a minority stockholder in a close corporation. See Donahue v. Rodd Electrotype Co., 367 Mass. 578, 585-586, 328 N.E.2d 505 (1975); Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 848-849, 353 N.E.2d 657 (1976).

Although the litigation was initiated by Microwave against Emil, so much of it as survives on appeal arises out of a counterclaim by Emil against Microwave, William, and two related corporations. A judge of the Superior Court, sitting without jury, determined that the merger was lawful and judgment entered for the defendants on Emil's counterclaim. Emil appealed. Many of the salient facts were stipulated. As to others, we rely on the facts found by the trial judge. Mass.R.Civ.P. 52(a), 365 Mass. 816 (1974).

Fraternity had obviously given way to contention between the Bazzy brothers. In 1958, happier days for them, they had organized a corporation, Horizon House, Inc. (Horizon), to pursue a magazine publishing venture. Horizon issued 420 shares to William and 410 shares to Emil. Horizon's immediate purpose was to publish a trade magazine about microwave technology, an area of knowledge with which Theodore S. Saad, an acquaintance of William, was conversant. Should the microwave magazine be successful, the Bazzy brothers agreed with Saad to "place" it in a separate corporation in which Saad would receive stock. Success did smile on the microwave magazine enterprise and in 1962 the Bazzy brothers organized Microwave. Voting stock in Microwave was issued as follows: William, 3,000 shares; Emil, 1,000 shares; Saad, 1,000 shares. ²

After the organization of Microwave, Horizon's functions were reduced to providing space (i.e., as a landlord) and bookkeeping and administrative services to Microwave and two other affiliated corporations. ³ The operating companies paid rent and service fees to Horizon.

By 1974, Emil and William were entangled in multiple law suits. Saad, although not in the line of fire between Emil and William, was stimulated to agitate for the termination of the services rendered by Horizon to Microwave, since that arrangement drained cash from Microwave, in which Saad had an interest, to Horizon, in which he did not. Horizon would then have little, if any, reason for continued existence. In June, 1974, the parties struck a deal: Microwave would buy Emil's shares in Horizon for book value plus $10,000, to be paid for in cash and a note. ⁴ William's shares would be acquired for book value, without a premium, in exchange, solely, for stock of Microwave, the exchange ratio of Microwave stock for Horizon stock to be computed on the basis of the book value of Microwave stock. Microwave would then own Horizon as a wholly-owned subsidiary, thus putting at rest Saad's concern about cash flowing away from Microwave. ⁵

Whatever merit Emil saw in the settlement agreement which the parties had signed in June, 1974, he no longer recognized, at least as to details of execution, when he came to the closing table on November 14, 1974. He declined a tender of cash and a note for his Horizon stock and the players were locked in their corporate vessels. As the statutory scheme then stood, "The vote of two thirds of each class of stock of each constituent corporation outstanding and entitled to vote on the question" was necessary to approve a merger agreement. G.L. c. 156B, § 78(c )(1)(iii), as appearing in St.1969, c. 392, § 19. William owned only a simple majority in Horizon, and, thus, could not effect the end of Horizon's independent status through a merger agreement. ⁶ A way out of the uneasy deadlock developed in 1976 when the Legislature amended G.L. c. 156B, § 78(c )(1)(iii), to permit authorization of merger agreements by vote of a majority, rather than two thirds, of each class of stock entitled to vote on the question. St.1976, c. 327. A decisive vote was now possible in Horizon. ⁷ So far as the record discloses, Microwave was similarly able to act. William owned a majority of Microwave's voting stock at all times and, moreover, by 1977, Saad had more or less thrown in his lot with William. Saad and Emil each owned 1,000 shares of nonvoting stock and a James Hughes owned 75 shares of nonvoting stock. By reason of an amendment to § 78(c )(1) enacted in 1975, ⁸ there is reason to think that the affirmative vote of a nonvoting class would have been required if the consequence of the merger were a dilution of equity of the nonvoting stock, i.e., this would be an adverse effect. Cf. DuVall v. Moore, 276 F.Supp. 674, 686 (N.D.Iowa 1967), in which the court reasoned that the considerations for permitting nonvoting stock to vote on fundamental affairs are more persuasive when the corporation is closely held. Contrast Booma v. Bigelow-Sanford Carpet Co., 330 Mass. 79, 82, 111 N.E.2d 742 (1953), decided under a superseded corporate statute. So far as the nonvoting stock was concerned, there was a potential bare majority available for a vote in favor of the merger. Emil--and it was his burden--adduced no evidence to the contrary. In any event, as will appear, the stockholders of Microwave were not called upon to take a vote under § 78.

During the period following the breakdown of the 1974 agreement, Saad's grievance about money flowing, to his detriment, from Microwave to Horizon, continued to fester, and he threatened to initiate a stockholder's derivative suit against Microwave. There existed, therefore, a good business reason for Microwave in some fashion to close down Horizon's operations.

Microwave adopted a triangular merger as the means to that end. First, it effected the formation of a wholly owned subsidiary, Horizon House Dedham, Inc. (Dedham). Second, Dedham, by the vote of its sole stockholder, and Horizon, by a vote of a majority of shares issued and outstanding, entered into a merger agreement dated June 27, 1977, pursuant to which Horizon would be merged into Dedham. For Emil's stock in Horizon, the surviving corporation, Dedham, would exchange $29,901.26 in cash and $76,888.97 in a note of Dedham (payable in five equal annual installments with a floating rate of interest on the unpaid balance of two percent above the prime rate). For William's Horizon stock, Dedham would exchange 5,475 shares of voting common stock of Microwave. ⁹ Third, Dedham would change its name to Horizon House, Inc. Articles of merger to this effect were filed June 27, 1977. A fourth step, outside the merger agreement between Horizon and Dedham, occurred on November 25, 1977. The directors of Microwave, acting under G.L. c. 156B, § 82, voted to merge into itself this new wholly owned subsidiary, which had acquired the stock of Horizon. ¹⁰ Thus, only Microwave survived.

1. The nature of Emil's complaint. As the trial judge read them, the claims expressed by Emil in his counterclaim related to Horizon, not Microwave. The judge ruled that "any claim of Emil of mistreatment by Microwave in diluting his shareholder's position is not in the counterclaim and not before the court at this time." We read Emil's pleading more expansively. Cf. Charbonnier v. Amico, 367 Mass. 146, 152-153, 324 N.E.2d 895 (1975); School Comm. of Franklin v. Commissioner of Educ., 17 Mass.App. 683, 692, 462 N.E.2d 338 (1984), rev'd on other grounds, 395 Mass. 800, 482 N.E.2d 796 (1985). At bottom, Emil's grievance is that he was "cashed out" of Horizon, while his brother wound up with a larger equity in the economic unit which survived, Microwave. Emil's complaint is against the end result of the triangular merger and it does not assist analysis to focus on parts, rather than the whole of the transaction.

Moreover, Emil's counterclaim is not without shots aimed at Microwave. It complains that distributing 5,475 shares of Microwave "and not to extend to Emil [the] same or similar offer was to discriminate against Emil." The counterclaim further charged that Microwave had acted in violation of G.L. c. 156B, § 78(c )(2)(ii) and § 78(c )(1)(iii). What Emil hoped to achieve by the latter assertions is unclear. In closing argument Emil's counsel conceded he did not wish to unravel the merger; what he wanted was parity with William in what was exchanged for his Horizon stock, viz., shares of Microwave. Procedurally, we conclude, Microwave is in the case. To the degree that the gravamen of Emil's action was abuse of fiduciary duty by a majority stockholder, he was not required to bring a minority stockholder's derivative suit against Microwave but could move against that corporation and William directly. See Donahue v. Rodd Electrotype Co., 367 Mass. at 579 & n. 4, 328 N.E.2d 505; Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 353 N.E.2d 657 (1976); Leader v. Hycor, Inc., 395 Mass. 215, 479 N.E.2d 173 (1985).

2. Technical legality of the merger. Count III of the counterclaim alleged failure to comply with certain statutory requirements in effecting the merger and requested that the merger be set aside. Although evidence was adduced at trial bearing on the technical compliance issue, a strong case can be...