In 1935 Harry C. Rodd began employment with Royal Electrotype Company of New England, Inc., then a wholly-owned subsidiary of a Pennsylvania corporation. The following year Joseph Donahue was hired as a finisher of electrotype plates. In the years preceding 1955, the parent company made shares of the subsidiary available to both men. Rodd acquired 200 shares at twenty dollars each and Donahue obtained fifty shares in two twenty-five-share lots at the same price, while the parent retained 725 shares and Lawrence W. Kelley owned the remaining twenty-five.
In June 1955 the subsidiary purchased the parent's 725 shares for $135,000, paying $75,000 in cash and issuing five $12,000 promissory notes, and also bought Kelley's twenty-five shares for $1,000. Harry Rodd, who had assumed the presidency earlier that year, thereby gained an eighty-percent controlling interest, leaving Joseph Donahue as the sole minority stockholder.
The company was renamed Rodd Electrotype Company of New England, Inc. in 1960. Between 1959 and 1967 Harry Rodd distributed most of his shares equally to his two sons and daughter. By May 1970, when Harry Rodd was seventy-seven years old, his sons wished him to retire and he insisted on financial arrangements for his remaining eighty-one shares. At a special board meeting on July 13, 1970, the directors authorized the president to execute an agreement for the corporation to purchase forty-five of those shares at $800 each.
The purchase was completed on July 15, 1970, after which Harry Rodd resigned as treasurer. In March 1971 the remaining thirty-six shares were transferred to his children, resulting in each child holding fifty-one shares while the Donahues held fifty. At a March 30, 1971 stockholders' meeting the Donahues first learned of the corporate purchase. Shortly afterward they offered their shares to the corporation on the same terms, but the corporation refused.
Euphemia Donahue, who had become outright owner of the shares after her husband's death, brought suit against the directors, Harry C. Rodd, and the corporation seeking rescission of the purchase and repayment of the $36,000 purchase price with interest. After a trial at which oral testimony was heard, the Superior Court judge dismissed the bill on the merits. The Appeals Court affirmed, and the Supreme Judicial Court granted the plaintiff's application for further appellate review.