Sarrouf v. New England Patriots Football Club, Inc.

• Decision Date: 14 May 1986
• Citation: 397 Mass. 542,492 N.E.2d 1122
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: , 55 USLW 2011 Camille F. SARROUF & others 1 v. NEW ENGLAND PATRIOTS FOOTBALL CLUB, INC.

Page 1122

492 N.E.2d 1122

397 Mass. 542, 55 USLW 2011

Camille F. SARROUF & others ¹ v. NEW ENGLAND PATRIOTS FOOTBALL CLUB, INC.

Supreme Judicial Court of Massachusetts,

Norfolk.

Argued Jan. 8, 1986.

Decided May 14, 1986.

Edward B. Hanify (George T. Finnegan and John D. Donovan, Jr., Boston, with him), for defendant.

Camille F. Sarrouf and Anthony Tarricone, Boston, for plaintiffs.

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

LIACOS, Justice.

The defendant, New England Patriots Football Club, Inc. (Old Patriots), was merged with the New Patriots Football Club, Inc. (New Patriots), in a transaction culminating on January 31, 1977. The plaintiffs in this case sought the statutory remedy of appraisal, G.L. c. 156B, §§ 86-98, ² rather than accept the offering price of $15 a share. The merger also spawned litigation by dissenting stockholders seeking to overturn the merger. Coggins v. New England Patriots Football Club, Inc., 397 Mass. 525, 492 N.E.2d 1112 (1986). The factual circumstances and background of the merger are set forth in Coggins, supra, and need not be repeated here.

The Legislature has provided a means by which stockholders who disagree with certain proposed actions of a corporation may recover the value of their shares and dissociate from the corporation. G.L. c. 156B, § 86. A stockholder who (1) files a written objection with the corporation before a vote is taken on the action, (2) does not vote in favor of the action, and (3) demands in writing payment for his stock within twenty days of the mailing of the notice that the action has become effective, G.L. c. 156B, § 89, has the right to receive from the corporation payment of the fair value of his stock within thirty days after expiration of the statutory demand period. If, at the end of that thirty-day period, he has been unable to reach an agreement with the corporation on the fair value of the stock, he may, within four months, file a bill in equity seeking to have the court determine the fair value of the stock and order payment by the corporation. G.L. c. 156B, §§ 90, 92. See Piemonte v. New Boston Garden Corp., 377 Mass. 719, 721-722 n. 2, 387 N.E.2d 1145 (1979). ³

The issues in this case are three claims of error in the decision of the trial judge. Those claims are demonstrated by the following questions: (1) Was the method employed by the judge to determine the value of the plaintiffs' stock permissible under the statute? (2) Did the judge err in awarding the plaintiffs 9% interest compounded annually? (3) Did the judge correctly deny appraisal to certain stockholders who allegedly did not meet the statutory requirements?

A. The decision of the trial judge. The judge stated that the current Massachusetts approach to valuation of stock is not determined solely by the market value, but "that it is for the fact-finder in the particular case to determine the weight of the relevant factors, among which, in instances where the corporation involved is solvent or has significant earnings prospects, the earnings and worth of the corporation as a going concern are important. Martignette v. Sagamore Mfg., 340 Mass. 136, 142-143 (1959) (Whittemore, J.). Piemonte v. New Boston Garden Corp., 377 Mass. 719, 724 (1979)."

In the circumstances of this case, the judge found that earnings are of little or no consequence, while worth as a going concern is paramount. As a going concern, the value of an enterprise such as the Old Patriots is the price a knowledgeable buyer would pay for the entire corporation, including the National Football League (NFL) franchise, the stadium lease, various contracts, goodwill, and other assets and liabilities. He concluded that earnings or prospective earnings play little part in the valuation because "there exists a class of extremely wealthy individuals willing to purchase National Football League franchises at prices not directly related to the earnings or prospective earnings of the football team [in order to become] a member of an exclusive club--NFL Franchise-owners."

There were two classes of stock issued by the Old Patriots. One class was made up of voting shares, of which 100,000 had been issued; all 100,000 were held by William H. Sullivan, Jr. (Sullivan), see Coggins, supra 397 Mass. at 527 n. 3, 492 N.E.2d 1112. The other class was made up of 139,800 nonvoting shares. It is the value of some of those nonvoting shares that is the subject of this case. ⁴ The judge noted that, except for the right to vote, voting and nonvoting stockholders of the Old Patriots had identical rights. Therefore, the judge stated that "it is appropriate to determine the 'fair value' of the plaintiffs' stock by valuing the net assets of the Old Patriots as a going concern and dividing the results by the total number of shares of stock outstanding--both voting and nonvoting--to determine the 'fair value' of each individual share of stock involved."

The judge did not base his choice of a method of valuation on the actual result of the merger, ⁵ but cited that result as evidence that a purchase by another of the extremely wealthy potential members of the "exclusive club [of] NFL Franchise-owners" was not an unlikely occurrence, and was in fact the best means to measure the true value of the corporation. On all the evidence, the judge found the value of the Old Patriots on December 7, 1976, to be between $19,000,000 and $22,000,000. Adopting the more conservative value, and dividing by the 239,800 shares outstanding (100,000 voting shares and 139,800 nonvoting shares), the judge found the value of each share to be $80. ⁶

The judge also awarded interest from the date of the vote approving the proposed merger "at a rate which fairly compensates the plaintiffs for their inability to use the funds represented by the appraisal award in prudent investments since the date of the merger." See G.L. c. 156B, § 95. Piemonte, supra 377 Mass. at 735, 387 N.E.2d 1145. He determined that rate to be 9% and allowed the plaintiffs' motion for clarification seeking to have the interest compounded annually.

The judge excluded certain plaintiffs from receiving the appraised value of their shares on four grounds: (1) they were not registered stockholders; or (2) they did not file proper written objection to the merger; or (3) their written objections filed with the corporation were filed late or were not "written objections" within the meaning of the statute; or (4) they did not file a demand for payment.

The defendant appealed the decision of the trial judge, claiming that the method of valuation he chose was not permitted by the statute because it gave effect to the results of the corporate merger to which the plaintiffs objected. It claims, as well, that the judge erred by placing exclusive reliance on net asset value in fixing the fair value of the stock, a measure the defendant claims is incompatible with the continuance of an enterprise as a going concern. The defendant also argues that the evidence did not support the judge's conclusions as to the worth of the Old Patriots. Last, it claims that the award of compound interest was contrary to Massachusetts law and practice.

The plaintiffs urge us to uphold the trial judge's decision, except for his denial of recovery to certain plaintiffs. ⁷ The plaintiffs claim that we should overturn that denial because the proper requirement to qualify for the appraisal remedy should be a good faith effort to comply with the statutory procedure and the receipt by the corporation of sufficient notice of possible dissenters.

B. The method of evaluating shares. The statute specifies that the "value of the shares shall be determined as of the day preceding the date of the vote approving the proposed corporate action and shall be exclusive of any element of value arising from the expectation or accomplishment of the proposed corporate action." G.L. c. 156B, § 92. The defendant interprets the decision of the trial judge as giving effect to the ultimate result of the merger, that is, sole ownership of the Patriots by Sullivan. In its view, the judge analytically liquidated the assets of the corporation and distributed the proceeds pro rata. This approach, it argues, is specifically forbidden by the statute.

Piemonte, supra, is instructive, and, to a great extent, controls the outcome here. The corporation undergoing a merger owned franchises for two professional hockey teams: the Boston Bruins of the National Hockey League and the Boston Braves of the American Hockey League. In addition, the corporation owned the Boston Garden. We reviewed the stock valuation, and we approved, but did not require, id. at 723-724, 387 N.E.2d 1145, the "Delaware block" method of valuation ⁸ used by the judge in that case. The Piemonte judge determined the market value, a projected earnings value, and the per share net asset value of the stock. He then weighted the three valuations and, from the weighted value, determined the over-all value to be awarded under the statute.

The trial judge here considered each factor (market, earnings, and net assets) in reaching the value of the Old Patriots stock. Because of the unusual nature of a corporation whose business is the ownership and operation of an NFL team, the judge found that the appropriate measure of value was net asset value. He then considered the evidence indicating a net asset value as high as $28,776,000 and determined that the net asset value of the Old Patriots was between $19,000,000 and $22,000,000. He then chose the more conservative figure of $19,000,000 as the basis of his valuation. ⁹ We hold that the judge did not err.

The market value of stock is a reliable indicator of the actual value only when it reflects all valuable aspects of the corporate property. One indicator that the market is reliable is that a stock is widely held for investment by well informed persons. Martignette v. Sagamore Mfg. Co., 340 Mass. 136,...