Coggins v. New England Patriots Football Club, Inc.
492 N.E.2d 1112 (Mass. 1986)


Facts:Sullivan (D) bought an AFL franchise for $25,000, formed the American League Professional Football Team of Boston, Inc., and contributed the franchise to the corporation in exchange for 10,000 shares of its common stock. Nine other investors bought 10,000 shares each, and the corporation offered 120,000 shares of nonvoting stock for sale at $5 per share. Although Sullivan (D) held 23,718 common shares and 5,499 nonvoting shares, he was voted out as president. He decided he would do whatever it took to regain control, and he purchased all of the company's voting shares, renamed the corporation the "New England Patriots Football Club, Inc." (Old Patriots) (D), elected a board favorable to his interests, and reclaimed his position as president. In order to finance his return to power, Sullivan (D) needed to borrow money secured by the company's assets and to eliminate the nonvoting shareholders. To accomplish these objectives, Sullivan (D) set up a new company, New Patriots Football Club, Inc. (New Patriots), intending to merge it with the Old Patriots (D). Pursuant to the merger, Old Patriots' (D) nonvoting stock would be extinguished and its holders would be required to exchange their shares for cash. When Coggins (P), a minority shareholder, learned of the plan, he was upset and voted against the merger. He then brought a class action to avoid the merger. The trial judge approved Coggins' (P) class status but refused to undo the merger, finding that Coggins (P) and others in his class were entitled only to rescission damages.

Issue: Must a court look to both the business purpose test and the fairness test to determine when controlling shareholders are violating their fiduciary duties in a cash out merger that affects a minority shareholder?

Rule: When a controlling stockholder who is also a director on both sides of a freeze-out merger must show that the merger is for the advancement of a legitimate corporate purpose and is fair based on the totality of the circumstances.

Holding and Analysis: Plaintiff representing minority shareholders brought a class action on behalf of himself and certain other stockholders of defendant corporation, following a freeze-out merger by the majority stockholder. The freeze-out was designed for the majority shareholder's own personal benefit to eliminate the interests of the minority stockholders and did not further the interests of the corporation. The merger was a violation of fiduciary duty to minority stockholders, and therefore impermissible. Although rescission is the normal remedy, the court determined it would be inequitable and remanded for a determination of the present value of the nonvoting stock, as though the merger were rescinded. Those plaintiffs who did not turn in their shares and did not perfect their appraisal rights were entitled to receive damages in the amount their stock would be currently worth, plus interest at the statutory rate. Plaintiffs from a related federal court action were not permitted to intervene.