Leader v. Hycor, Inc.

In 1967, five individuals (majority shareholders) (defendants) formed Hycor, Inc. (defendant). In 1969, Hycor offered shares of stock to the public. By 1980, the five individuals owned 81 percent of Hycor’s stock and the remaining shares were owned by 331 different minority shareholders (plaintiffs). At that time, however, the majority shareholders discussed returning to a 100 percent ownership because they were disappointed by the stock’s performance on the public market. A meeting was held to vote on recapitalizing Hycor. The recapitalization plan involved reducing the amount of authorized stock from two million to five hundred and no longer recognizing fractional shares. The effect of the reduction would result in each old share amounting to one-four-thousandth of a new share. Then, because fractional shares were not recognized, each of the minority shareholders would receive a buyout. The majority shareholders determined that each minority shareholder would receive $5 for each share. Because the majority shareholders voted in favor of amending the articles of organization to carry out the recapitalization, the motion passed. The minority shareholders then filed an action against Hycor and the majority shareholders. The minority shareholders claimed that the majority shareholders had fraudulently misrepresented the reason behind the recapitalization, that the majority shareholders had breached their fiduciary duty, and that less-drastic alternatives were available to achieve the purpose of the recapitalization. The minority shareholders also claimed that the business purpose was that Hycor’s president wanted to avoid telephone calls about stock sales. The trial court entered a judgment in favor of Hycor on the ground that a legitimate business purpose for the recapitalization existed and that the minority shareholders did not show evidence of less-drastic alternatives. The trial court also held that the $5 amount per share was reasonable. The minority shareholders appealed.