The Supreme Court of Virginia Preserves Statutory Protections Afforded to Minority Shareholders in May v. R.A. Yancey Lumber Corp.
February 28th, 2019 by JBWK
Submitted by Attorney Blair M. Mathias
In its first opinion of 2019, the Supreme Court of Virginia reversed the judgment of the circuit court and remanded the case, May v. R.A. Yancey Lumber Corp., for further proceedings. The Court found that the circuit court had erred in entering judgment in favor of the corporation based on its misinterpretation of Va. Code § 13.1-724, and had abused its discretion in sustaining the corporation’s plea in bar based on “laches,” a legal doctrine which dictates that, out of fairness, if a plaintiff was negligent or unreasonably delayed in asserting a claim, then the plaintiff can be denied relief. In its analysis, the Court highlights the significant roles that legislative intent and context should play when interpreting a statute.
Dispositions under the Virginia Stock Corporation Act
Article 13 of the Virginia Stock Corporation Act regulates the disposition of corporate assets, such as sales or transfers. Dispositions are divided into two groups: (1) those that do not require shareholder approval, and (2) those that do require a specific threshold of shareholder approval.
Dispositions conducted in the regular course of business do not require shareholder approval, unless otherwise provided in the articles of incorporation. Va. Code § 13.1-723.
On the other hand, dispositions that leave the corporation without a “significant continuing business activity” do require shareholder approval. Va. Code § 13.1-724. The language employed in Va. Code § 13.1-724, subsections (A) and (E), became central to the case:
- A sale, lease, exchange or other disposition of the corporation’s assets, other than a disposition described in § 13.1-723, requires approval of the corporation’s shareholders if the disposition would leave the corporation without a significant continuing business activity. Unless the articles of incorporation or a shareholder-approved bylaw otherwise provide, if a corporation retains a business activity that represented at least 20 percent of total assets at the end of the most recently completed fiscal year, and 20 percent of either (i) income from continuing operations before taxes or (ii) revenues from continuing operations for that fiscal year, in each case of the corporation and any of its subsidiaries that are consolidated for purposes of federal income taxes, the corporation will conclusively be deemed to have retained a significant continuing business activity.
. . . .
- Unless the board of directors, acting pursuant to subsection C, requires a greater vote, the disposition to be authorized shall be approved by the holders of more than two-thirds of all the votes entitled to be cast on the disposition … (emphasis added).
First, § 13.1-724 (A) provides a threshold, or starting point, definition for what constitutes a “significant continuing business activity.” There is, also, a “safe harbor” provision, indicating that certain conduct will be deemed not to violate a given rule (“Unless the articles of incorporation or a shareholder-approved bylaw otherwise provide…”). Lastly, § 13.1-724 (E) requires shareholder approval of such a disposition to be by an affirmative vote of more than two-thirds (i.e., by a supermajority).
The Corporate Dispute
R.A. Yancey Lumber Corporation is a family-owned business, operated by three siblings, Dick Yancey, Dan Yancey, and Sarah May Yancey. Dick and Dan, combined, hold slightly less than two-thirds of the corporate shares. Sarah, alone, holds slightly more than one-third. All three are directors.
The corporation has two main assets: (1) the timber business, and (2) the mill business.
In 2015, Dick and Dan decided they wanted to dispose of the mill business by selling it to a third-party. Sarah opposed the sale. If they sold the mill business, the brothers knew that the timber business, which represented about 1.5% of the company’s total revenue, would not meet the threshold definition of a “significant continuing business activity,” and that Sarah’s more than one-third minority vote would stand in the way of the supermajority needed to approve the sale.
In an effort to side-step Sarah, Dick and Dan asserted that the safe harbor provision allowed them to amend the bylaws by a majority vote, and redefine the threshold for a “significant continuing business activity.” In lieu of § 13.1-724, the amended bylaws redefined the threshold. Now, the timber business, on its own, was enough to constitute a “significant continuing business activity,” and Dick and Dan could dispose of the mill business without the need for supermajority shareholder approval.
Or, so they thought.
After Dick and Dan used their majority to execute a letter of intent to sell the mill business to a third party buyer, Sarah filed an action for declaratory judgment and injunctive relief.
Albemarle County Circuit Court
In circuit court, the corporation argued that § 13.1-724 allows a majority to redefine the threshold because the safe harbor provides an exception by using the language “Unless the articles of incorporation or a shareholder-approved bylaw otherwise provide…”
Sarah asserted that this interpretation is contrary to the legislature’s expressed intent to protect minority shareholders, as shown in the plain language of the statute.
Interpreting § 13.1-724, the circuit court acknowledged that the statute contains a threshold, but concluded that it also allows a corporation to define that threshold differently. Noting that the statute does not require “more than two-thirds” vote to amend a bylaw, the court concluded that the amended bylaw was valid and the timber business was a “significant continuing business activity.” Thus, the circuit court decided that selling the mill business did not require additional shareholder approval.
Supreme Court of Virginia
The Supreme Court held that the circuit court had erred in ruling that § 13.1-724 allows a majority of shareholders to remove the need for supermajority approval simply by redefining the threshold. The Court determined that the statute’s context supports a plain meaning interpretation of the statute, and that the apparent purpose of the statute is to protect minority shareholders. Interpreting the statutory language, the Court found that the “safe harbor” provides a default threshold, which allows the corporation to opt-out of the threshold, to accept it or reject it—not to redefine it.
Discussing the detrimental consequences of the lower court’s misinterpretation, the Court held:
Allowing a simple majority of a corporation’s shareholders to redefine “significant continuing business activity” would render Code §§ 13.1-724 (A) and (E) meaningless. Such an interpretation would allow a majority of shareholders to approve any disposition without the “more than two-thirds” shareholder approval required by statute by changing its bylaws with a simple majority vote of its shareholders. If a majority of shareholders could approve of any disposition it desired by merely changing its bylaws to create any whimsical definition of what constitutes a “significant continuing business activity,” subsections (A) and (E) would be rendered unnecessary.
Moreover, the Court found that the circuit court had abused its discretion in ruling that the claim was barred when the evidence did not support a finding of “laches.” The Court concluded that Sarah, as a minority shareholder, with over one-third ownership, never abandoned her claim; she gave repeated notice of her opposition to selling a significant part of the business, and the corporation suffered no undue prejudice by having to defend the claim.
Notably, the Court went on to declare that fiduciary duties owed by directors and officers are not a substitute for the protections afforded minority shareholders under the Virginia Stock Corporation Act.
To further elaborate on the Court’s point: in Virginia, directors of a corporation are subject to two fundamental fiduciary duties: the duty of care and the duty of loyalty. The duty of care generally means staying attentive to the business, and informing oneself of all material facts prior to making decisions. The duty of loyalty means acting in the best interests of the corporation, and not furthering personal gain at the expense of the corporation.
In contrast, the Virginia Stock Corporation Act and Virginia case law provide protections for minority shareholders against oppression and abuse by majority owners or directors. While Virginia law does not exactly specify what constitutes “oppression,” it has, generally, been construed as conduct that departs from the standards of fair dealing, and violates the principles of fair play.
Courts have begun taking a more expansive view as to what oppressive conduct entails, and are showing increasing support for minority shareholders. And this Supreme Court decision highlights the important underlying principle: although Virginia law recognizes the duty of directors and officers to act in the best interests of the corporation, that duty is outweighed by the interest in protecting the rights of minority shareholders.
Full Statute: Va. Code § 13.1-724
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