## Facts

- Hycor, Inc., a Massachusetts corporation formed in 1967, conducted military-related scientific research and development.
- Five founders controlled Hycor, served as its entire board, and by 1980 held roughly 81–85% of the outstanding shares; hundreds of minority shareholders held the remainder following a 1969 public offering.
- The majority shareholders became dissatisfied with the public market for Hycor stock and pursued a recapitalization intended to return the company to 100% majority ownership.
- The recapitalization reduced authorized and outstanding shares by converting each old share into one-four-thousandth of a new share.
- The plan eliminated fractional shares by cashing out any fractional interests rather than issuing fractional new shares.
- As a practical effect, the majority’s holdings converted into whole shares and remained outstanding, while the minority’s smaller holdings converted into fractional interests and were compulsorily redeemed.
- The board set the cash-out price at $5 per old share, above the then-current market price; the minority asserted this was below the shares’ fair value using asset- and earnings-based approaches.
- Minority shareholders sued alleging, among other claims, breach of fiduciary duty, fraud/misrepresentation, and defective notice under Massachusetts corporate law.
- After a bench trial, the trial court found a legitimate business purpose for the recapitalization and concluded the $5 price was reasonable; judgment entered for defendants.

## Issues

1. Whether the controlling shareholders/directors breached fiduciary duties to minority shareholders by implementing a recapitalization that forced redemption of minority shares.
2. Whether the trial court applied the correct standard in concluding the $5 per share cash-out price was fair.
3. Whether approval and notice complied with applicable Massachusetts corporate law requirements.

## Decision

- The Supreme Judicial Court affirmed the determination that the recapitalization served a legitimate business purpose and, on that ground, did not itself violate fiduciary duties.
- The court held the minority failed to prove the same objectives could have been achieved through a less harmful alternative.
- The court reversed as to valuation, ruling the trial court used an incorrect legal standard by treating “reasonableness” and consistency with selected indicators as sufficient.
- The case was remanded for further proceedings to determine whether the $5 price represented the shares’ fair value under the proper standard.

## Legal Principles

- In close corporations, controlling shareholders owe minority shareholders a strict duty of utmost good faith and loyalty, particularly in transactions that eliminate or coerce minority ownership.
- Under the legitimate-business-purpose framework, the majority must show a legitimate business purpose for action that harms minority interests; if shown, the minority may prevail by proving a practicable, less harmful alternative that would accomplish the same objective.
- In a forced redemption or freeze-out recapitalization, minority shareholders are entitled to fair value, not merely market price or a premium above a thin or depressed market.
- Fair value requires consideration of multiple measures of corporate worth (including assets, earning capacity, and future prospects) and must be supported by findings demonstrating application of that standard.

## Conclusion

The court upheld the controlling shareholders’ authority to implement a freeze-out recapitalization when supported by a legitimate business purpose and no less harmful alternative was shown, but required a remand because minority shareholders in a compelled cash-out must receive fair value determined under a proper valuation framework.


Leader v. Hycor, Inc., 395 Mass. 215, 479 N.E.2d 173 (Mass. 1985)