Fisher v. Tails, Inc. ( 2015 )

PRESENT: Lemons, C.J., Goodwyn, Millette, Mims, McClanahan and
Powell, JJ., and Lacy, S.J.
ROBERT B. FISHER, ET AL.
OPINION BY
v. Record No. 140444 JUSTICE S. BERNARD GOODWYN
January 8, 2015
TAILS, INC.
FROM THE CIRCUIT COURT OF HENRICO COUNTY
Catherine C. Hammond, Judge
In this appeal, we consider whether a shareholder in a
Virginia corporation is entitled to appraisal rights under
Virginia law when a Virginia corporation changes its state of
incorporation prior to a sale of its assets.
Background
On August 29, 2013, Robert B. Fisher, Carla L. Fisher,
Bradley G. Rhodes and James D. Schwartz (Minority Shareholders)
filed a complaint in the Circuit Court of Henrico County to
demand shareholder appraisal rights concerning the sale of
Tails, Inc. (Tails). The Minority Shareholders sought a
declaratory judgment regarding whether the transaction by which
Tails sold all of its assets, after changing its state of
incorporation from Virginia to Delaware, gave rise to appraisal
rights for the Minority Shareholders. The Minority Shareholders
also requested monetary damages for various violations
predicated upon the existence of the alleged appraisal rights.
Tails filed a demurrer to the complaint.
The circuit court entered a final order sustaining the
demurrer without leave to amend. The circuit court noted that
changing the Tails corporate domicile from Virginia to Delaware
did not trigger appraisal rights, and that “[t]he complaint
fail[ed] to state facts sufficient to support the asserted
causes of action.” The Minority Shareholders appeal.
Facts
Tails was organized as a Virginia corporation to operate as
a regional franchisee of RE/MAX LLC, a Delaware limited
liability company (RE/MAX). Tails held franchise rights for the
District of Columbia, Maryland, Virginia and West Virginia.
Officers, directors or employees of RE/MAX or its affiliates
owned a majority of the outstanding shares of Tails. The
Minority Shareholders held approximately 21% of the outstanding
shares.
On August 9, 2013, Buena Suerte Holdings, Inc. (Buena
Suerte), another affiliate of RE/MAX, and Tails signed a “Plan
of Reorganization and Purchase Agreement” in which Tails would
be sold to Buena Suerte in four steps. First, Tails would
become a Delaware corporation, changing its state of
incorporation from Virginia to Delaware pursuant to Virginia
Code § 13.1-722.2 and title 8, § 265 of the Delaware Code
(reincorporation step). Second, Tails would merge with and
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into a newly-formed Delaware limited liability company, Tails,
LLC (merger step). Tails, LLC would be a subsidiary of a newly-
formed holding company, Tails Holdco, Inc. (Holdco), and Holdco
would hold all of Tails, LLC’s membership interests. Third,
Holdco would cause Tails, LLC to amend and restate its LLC
agreement to remove certain limited liability company provisions
(amendment step). Finally, Holdco would sell Buena Suerte all
of its membership interests in Tails, LLC (the sale).
On August 12, 2013, each of the Minority Shareholders
received a “Notice and Proxy/Information Statement” stating that
there was a proposal for a cash sale of all of the business
assets held by Tails to Buena Suerte. A shareholder meeting was
scheduled to take place on September 4, 2013. Before the
September 4, 2013 shareholder meeting, each of the Minority
Shareholders served Tails with a “Notice of Intention to Demand
Payment for Shares.”
On September 4, 2013, Tails held a special shareholders’
meeting where the shareholders voted on several proposals
including the four steps addressed above. The Minority
Shareholders voted against each of the proposals, but the
proposals were passed by a majority vote. Tails undertook each
of the four steps discussed above between October 7 and October
9, 2013.
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Analysis
The Minority Shareholders argue they were entitled to
appraisal rights because a series of transactions starting with
a change in corporate domicile ultimately resulted in an asset
sale, and an asset sale triggers appraisal rights for
shareholders in a Virginia corporation. The Minority
Shareholders assert that the circuit court erred in sustaining
the demurrer because it failed to recognize the “step
transaction” doctrine or the “equitable substance over form”
doctrine in determining that their appraisal rights were not
triggered under Virginia law. We disagree with the Minority
Shareholders. Virginia statutory law settles this matter, and
the circuit court did not err.
This Court reviews a trial court’s ruling to grant a
demurrer de novo. See Yuzefovsky v. St. John’s Wood Apts., 261
Va. 97, 102, 540 S.E.2d 134, 137 (2001). A trial court will
grant a demurrer when the pleading fails to state a cause of
action upon which relief can be granted. Code § 8.01-273. For
the purposes of the proceedings on the demurrer, the movant
admits the truth of all material facts properly pleaded.
CaterCorp, Inc. v. Catering Concepts, Inc., 246 Va. 22, 24, 431
S.E.2d 277, 279 (1993).
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Virginia Code § 13.1-722.2 concerns domestication of
corporations and in regards to a Virginia corporation becoming a
corporation in a foreign jurisdiction, states as follows:
B. A domestic corporation not required by law
to be a domestic corporation may become a foreign
corporation if the jurisdiction in which the
corporation intends to domesticate allows for the
domestication. Regardless of whether the laws of the
foreign jurisdiction require the adoption of a plan of
domestication, the domestication shall be approved in
the manner provided in this article. The laws of the
jurisdiction in which the corporation domesticates
shall govern the effect of domesticating in that
jurisdiction.
A Virginia corporation can “domesticate” by changing the
state where it is incorporated. Va. Code § 13.1-722.2.
Virginia corporations that decide to domesticate in another
state are governed by the laws of that other state once the
domestication is completed. Id.; see also Stockbridge v. Gemini
Air Cargo, Inc., 269 Va. 609, 613, 611 S.E.2d 600, 602 (2005).
Virginia law allowed Tails to become a Delaware corporation, and
it is undisputed that Tails properly changed its domicile to
Delaware.
Virginia Code § 13.1-730 states that minority shareholders
are entitled to “appraisal rights” in the event of certain
corporate transactions. Appraisal rights give “corporate
shareholders who oppose [certain] extraordinary corporate
action[s]” the right “to have their shares judicially appraised
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and to demand that the corporation buy back their shares at the
appraised value.” Black’s Law Dictionary 122 (10th ed. 2014).
Virginia Code § 13.1-730(A) provides:
A shareholder is entitled to appraisal rights,
and to obtain payment of the fair value of that
shareholder’s shares, in the event of any of the
following corporate actions:
1. Consummation of a merger to which the
corporation is a party (i) if shareholder approval is
required for the merger by § 13.1-718, except that
appraisal rights shall not be available to any
shareholder of the corporation with respect to shares
of any class or series that remain outstanding after
consummation of the merger, or (ii) if the corporation
is a subsidiary and the merger is governed by § 13.1-
719;
2. Consummation of a share exchange to which the
corporation is a party as the corporation whose shares
will be acquired, except that appraisal rights shall
not be available to any shareholder of the corporation
with respect to any class or series of shares of the
corporation that is not exchanged;
3. Consummation of a disposition of assets
pursuant to § 13.1-724 if the shareholder is entitled
to vote on the disposition;
4. An amendment of the articles of incorporation
with respect to a class or series of shares that
reduces the number of shares of a class or series
owned by the shareholder to a fraction of a share if
the corporation has the obligation or right to
repurchase the fractional share so created; or
5. Any other amendment to the articles of
incorporation, or any other merger, share exchange or
disposition of assets to the extent provided by the
articles of incorporation, bylaws or a resolution of
the board of directors.
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Virginia Code § 13.1-730 tracks closely with the Model
Business Corporation Act (MBCA). Compare Va. Code § 13.1-730
with MBCA § 13.02 (2014); see also Allen C. Goolsby & Steven M.
Haas, Goolsby & Haas on Virginia Corporations § 15.1 (5th ed.
2014). However, unlike the MBCA, Virginia Code § 13.1-730 does
not include appraisal rights upon “consummation of a
domestication.” Compare Va. Code § 13.1-730 with MBCA §
13.02(a)(6) (2014).
In Virginia Code § 13.1-730(A), the General Assembly chose
to grant appraisal rights to minority shareholders in five
scenarios. While the General Assembly has incorporated most of
the MBCA’s appraisal rights provisions into Virginia Code §
13.1-730, it has not incorporated the MBCA’s provision granting
appraisal rights to shareholders in the event of a change in
corporate domicile. The General Assembly prescribed a limited
list of triggers for appraisal rights and did not include a
change in corporate domicile on that list. Applying the
statutory canon of expressio unius est exclusio alterius (“the
express mention of one thing excludes all others”), we hold that
the General Assembly intended to exclude a change in corporate
domicile from this list. See Smith Mtn. Lake Yacht Club, Inc.
v. Ramaker, 261 Va. 240, 246, 542 S.E.2d 392, 395 (2001).
Therefore, the circuit court did not err in ruling that the
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domestication of Tails as a Delaware corporation did not entitle
the Minority Shareholders to appraisal rights.
Once a corporation’s state of incorporation is transferred
to Delaware, it is subject to Delaware corporate law. Del. Code
Ann. tit. 8, § 265(d); Va. Code § 13.1-722.2. Delaware law does
not provide appraisal rights for a sale of corporate assets.
Del. Code Ann. tit. 8, § 262(b); see also, e.g., Hariton v. Arco
Electronics, Inc., 182 A.2d 22, 25 (Del. Ch. 1962) (noting that
while most state legislatures have “seen fit to grant the
appraisal right to a dissenting stockholder” in both merger and
“sale of assets” situations, the Delaware legislature has made
that right available “only under the merger statutes”), aff'd,
188 A.2d 123 (Del. 1963); Tanzer v. Int'l Gen'l Indus., 402 A.2d
382, 390 (Del. Ch. 1979) ("[A]ppraisal rights are not available
on a sale of assets.").
The Minority Shareholders urged the circuit court to apply
the “step transaction” doctrine or the “equitable substance over
form” doctrine to find they were entitled to appraisal rights
under Virginia law. On appeal they argue that the circuit court
erred by not doing so.
The Minority Shareholders note that while it is a question
of first impression in Virginia, Delaware courts have applied
the equitable step transaction doctrine in interpreting
transactions. See, e.g., Noddings Inv. Grp., Inc. v. Capstar
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Commc’ns, Inc. (Noddings I), No. 16538, 1999 Del. Ch. LEXIS 56,
at *21, *23 (Del. Ch. March 24, 1999), aff’d, 741 A.2d 16 (Del.
1999). The step transaction doctrine “treats the ‘steps’ in a
series of formally separate but related transactions involving
the transfer of property as a single transaction, if all the
steps are substantially linked.” Bank of N.Y. Mellon Trust Co.,
N.A. v. Liberty Media Corp., 29 A.3d 225, 239-40 (Del. 2011)
(citing Noddings I, 1999 Del. Ch. LEXIS 56, at *21 (footnote and
internal quotation marks omitted)). For example, in Noddings I,
the Delaware Court of Chancery applied the step transaction
doctrine when a company “spun off” part of its assets to start a
new company, and that new company immediately merged with
another company in a planned series of transactions. Id. at *1-
2. The plaintiffs in that case had a contractual right to
purchase shares of the company upon merging, but due to the spin
off, they lost that right. Id. The Noddings I court held that
because there was evidence the spin off and the merger were in
actuality one transaction, the court would grant the plaintiffs
the rights they would have had if a traditional merger had taken
place. * Id. at *20.
*
Notably, on rehearing, the court ruled that the doctrine
of independent legal significance did not apply to this suit and
was not rejected because New York law applied, rather than
Delaware law, and because the case involved an issue of contract
interpretation, not corporate law. Noddings Inv. Grp., Inc. v.
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The Minority Shareholders also provide authority to support
their contention that Delaware courts have also used the
equitable doctrine of substance over form when there are unfair
but legal applications of a particular statute or breaches of
fiduciary duties while the transaction was technically compliant
with the law. See, e.g., Gatz v. Ponsoldt, 925 A.2d 1265, 1280
(Del. 2006); Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437,
439 (Del. 1971); Louisiana Mun. Police Emples. Ret. Sys. v.
Crawford (LAMPERS), 918 A.2d 1172, 1191-92 (Del. Ch. 2007). For
example, in LAMPERS, the Delaware Court of Chancery ruled that
cash consideration characterized as a special cash dividend
would trigger dissenting shareholders’ appraisal rights because
the transaction, in substance, actually involved consideration
for a merger and not payment of a dividend. 918 A.2d at 1191-
92.
The Minority Shareholders argue that applying the step
transaction doctrine or the substance over form doctrine, the
four transactions that took place on October 7 to 9, 2013 should
be viewed as one transaction, and the substance of that
transaction was the sale of all of Tails’ assets. They conclude
that Tails’ change in corporate domicile should have been
disregarded under the step transaction or the substance over
Capstar Commc’ns, Inc., No. 16538, 1999 Del. Ch. LEXIS 89, at
*1, *3 (Del. Ch. Apr. 16, 1999).
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form doctrine, and that application of those equitable doctrines
thus entitles them to appraisal rights, because the Code of
Virginia provides for appraisal rights in the event of a
disposition of all or substantially all of a corporation’s
assets. See Code § 13.1-730(A)(3). In essence, the Minority
Shareholders argue that Tails’ change in corporate domicile may
be ignored because it was just the first “step” in a series of
technically distinct but related transactions that should be
viewed together as components of a larger transaction and judged
under Virginia law. We disagree.
Assuming, arguendo, that Virginia corporation law allows
consideration of the step transaction doctrine and the substance
over form doctrine as articulated by Delaware courts, the
circuit court did not err in granting the demurrer filed in this
case because the purpose of the substance over form and the step
transaction doctrines is to prevent transactional formalities
from blinding the court to what truly occurred. They allow a
court to look beyond form to the substance of a transaction to
equitably define what occurred in a transaction. See Gatz, 925
A.2d at 1280; Noddings I, 1999 Del. Ch. LEXIS 56, at *21-24
(quoting Orr v. Kinderhill Corp., 991 F.2d 31 (2d Cir. 1993)).
However, Delaware courts have applied the doctrine of
“independent legal significance” as a rationale for not applying
equitable principles to recharacterize actions of defined legal
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significance. Under this doctrine, a transaction effected
pursuant to a statute will be subject to the requirements and
consequences of that statute alone. See Orzeck v. Englehart,
195 A.2d 375, 378 (Del. 1963). It is not within a court’s
purview to second-guess the legislature’s decision evidenced by
statute. Hariton, 182 A.2d at 25; see also generally Ferguson
v. Board of Supervisors, 133 Va. 561, 569, 113 S.E. 860, 862
(1922) (“Equity . . . is not so inconsistent as to attempt the
revision or supervision of governmental action lawfully
exercised through the legislative department.”).
There is no authority cited by the Minority Shareholders
that supports their assertion that a statutorily-sanctioned
domestication of a corporation may be considered a step in a
step transaction analysis or ignored in determining substance
over form. Domestication of the corporation is not properly
considered a step in the step transaction or substance over form
analysis because domestication concerns the law that is
applicable to the transaction rather than an equitable
characterization of the transaction that took place.
Domestication is regulated by statute.
Thus, recognition of the substance over form doctrine or
the step transaction doctrine would in no way change the legal
significance of the domestication of Tails as a Delaware
corporation. Considering the various other transactions as one,
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and characterizing that transaction as a sale of all Tails’
assets, does not change the statutes which dictate that Delaware
law properly applied in determining whether the Minority
Shareholders were entitled to appraisal rights. Under Delaware
law, they were not. The circuit court did not err in granting
the demurrer.
Conclusion
Accordingly, for the reasons stated, we will affirm the
judgment of the circuit court.
Affirmed.
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