In re 9.6 Shares of Stock

In Re: 9.6 Shares of Stock of Shelburne Supermarket, Inc., No. 1172-04
CnC (Norton, J., May 25, 2005)
[The text of this Vermont trial court opinion is unofficial. It has been
reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is
not guaranteed.]
STATE OF VERMONT SUPERIOR COURT
Chittenden County, ss.: Docket No. 1172-04 CnC
IN RE 9.6 SHARES OF STOCK OF
SHELBURNE SUPERMARKET, INC.
ENTRY
This case is the latest in a series of corporate disputes that have
arisen over the organization and control of Shelburne Supermarket. It
arises from the Supermarket’s consolidation of stock shares and forced
buyout of fractional shares. Defendants, all shareholders whose shares
would become fractional after consolidation, contend: 1) that they properly
asserted their dissenter’s rights under Chapter 13 of the Vermont Business
Corporation Act; 2) that even if they didn’t, the corporation improperly
proceeded with its consolidation plan without first amending the articles of
incorporation; and 3) that the corporation undervalued their shares for
buyout. With the exception of this final question of valuation, the parties
have motioned for summary judgment on all issues.
As a preliminary matter, shareholders seek to block, through collateral
estoppel, the corporation’s claim that several of the shareholders
improperly asserted their dissenter’s rights. This is an important issue to the
shareholders claims of undervaluation because a dissenting shareholder
cannot contest a valuation unless she properly gives written notice prior to a
shareholder’s meeting that she intends to demand payment for her shares.
11A V.S.A. § 13.21(a)(1). To this argument, shareholders make much of
the corporation’s answer to a parallel suit filed by shareholders. In that
answer the corporation “Admitted that Plaintiffs [defendant shareholders in
this case] have dissented timely to Supermarket’s valuation of its shares.”
Clayton v. Shelburne Supermarket, Verified Answer, at ¶ 35, No. S0876-
04 CnC (Aug. 31, 2004). They argue that this admission bars the
corporation from now denying this admission, and therefore, it cannot deny
the shareholders’s right to challenge the corporation’s valuation.1
This argument has two flaws. First, the doctrine of collateral
estoppel requires, among other things, that there be a final judgment on the
merits of the issue that the party seeks to preclude. Scott v. City of
Newport, 2004 VT 64, at ¶ 8 (mem.). This limits what courts may preclude
to those issues that have been resolved to some semblance of finality. 18 C.
Wright, et al., Federal Practice and Procedure § 4420 (2002). As the
1
The shareholders further argue that because collateral estoppel applies, the
claims against Kevin Clayton, Alan Clayton, and Catherine Clayton-Richardson were
filed out of time under 11A V.S.A. § 13.26 (a) (requiring a corporation to take action to a
valuation challenge within 60 days). This argument does not follow logically from the
facts. Even if collateral estoppel prevented the corporation from challenging the
Claytons’ assertion of dissenters’ rights, its second claim requesting a determination of
fair value for the shares would satisfy § 13.26.
Clayton case is currently pending there is no final judgment against the
corporation on this issue. It would hardly be fair to preclude the
corporation from litigating an issue that has not yet been adjudicated.
Characterizing this issue as one of collateral estoppel is also
misleading. Instead, this statement should be seen for what it is, an
admission by a party against its interest. V.R.E. 801(d)(2). At best, the
corporation’s answer is an admission that, in its opinion, the shareholders
dissented in a timely manner. Shareholders are free to use that statement, as
they have, in arguing that even the corporation has on some level
acknowledged the timeliness and merit of their dissent, but it is hardly
preclusive. While it is up to the parties to explain the import of this
statement, its ultimate character is one of evidence rather than binding
precedent.
This leads to the second problem with using the corporation’s
answer to “prove” whether shareholder’s dissent was effective. As neither
party disputes what the shareholders did before the stock consolidation
meeting, the real disagreement is whether their actions were sufficient to
provide notice under § 13.21. This is a legal conclusion for the court, not
the parties, to make. While the corporation’s admission may provide
evidence of what it understood the situation to be, the ultimate question
here is whether shareholders met the legal requirements of § 13.21. One
party simply saying so does not settle the issue. To draw an analogy, a
party to a car accident may “admit” in a deposition that she filed a
document too late for the statutes of fraud, but such an admission does not
mean her claim is barred for being out of time. What bars her claim is
whether she actually filed her document after a date that the court
determines. Certainly, this is evidence that would inform a legal
determination but is not in and of itself a legal conclusion. So too, the
corporation’s admission is evidence of their beliefs but is far from
determinative. As shareholders cite to no authority to the contrary, the
court is unpersuaded by their line of reasoning.
As final preliminary matter, it is important to briefly discuss the
purpose and function of the Vermont Business Corporation Act. As one
commentator phrased it:
Business corporation law also must be flexible. It must be
adaptable to the particular needs of the individuals forming and
operating corporations and to changes in the business environment.
In good times and bad, corporations change their structure, sell and
repurchase shares of stock, and combine with other companies. . . .
The need for flexibility is constant. Rigid rules quickly become
outdated, increase the costs of doing business, and cause corporate
flight to other states. . . . [C]orporate law must further state policies
and also permit corporations to operate without undue restraint.
L.Smiddy, Vermont’s Business Corporation Law: A Call for Much Needed
Reform, 17 Vt. L.Rev. 3, 11 (1992). In the context of dissenter’s rights,
this balance between state policies and corporate freedom is embodied in
the remedial rights given to dissenters as a way of redress “when
fundamental corporate changes are involuntarily imposed on them.” Id. at
44. As that statement suggests, dissenter’s rights are not intended to limit
or proscribe corporate action, but rather to give dissenting shareholders a
way out that preserves their investment interest in the company when they
disagree with a significant action that a corporation is taking. Id. at 45.
Dissenter’s rights are not a new idea to corporate governance and
were embodied in the predecessor to 11A V.S.A.’s chapter 13. Id. at 46
(citing 11 V.S.A. §§ 2003, 2004 (1984)). The difference between that
system and the present one is that chapter 13 was adopted to expand the
availability of dissenter’s rights and streamline the procedures for
exercising them. Id. at 47–48. Thus, the byzantine and rigorous procedure
of 11 V.S.A. §§ 2003, 2004 was supplanted by the more straightforward
and expansive regime of chapter 13. Similarly as a remedial statute,
chapter 13 “must be liberally construed in order to ‘suppress the evil and
advance the remedy’ intended by the Legislature.” Human Rights Comm’n
v. Benevolent & Protective Order of Elks, 2004 VT 104, at ¶ 13 (quoting 3
N. Singer, Statutes and Statutory Construction § 60:1, at 183 (6th ed.
2001)).
At the same time, dissenter’s rights are not meant to give
shareholders an extraordinary ability to delay or stifle the will of the
majority either to raise the “nuisance value” of their shares or to thwart the
majority’s intentions. 3 Am. Bar Assoc., Model Business Corporation Act
Annotated 13-5 (3d ed. Supp. 1998–99) [hereinafter MBCA Annotated].2
The intent of chapter 13 is to motivate parties “to settle their differences in
private negotiations” without resort to judicial proceedings. Id. This is,
after all, a remedial statute meant to give dissenters a way to protect their
investment but little to nothing more. While it has been suggested that
these rights provide an important check on improper management
decisions, they are not inherent tools to neutralize corporate activity. Cf.
Smiddy, supra, at 45 (“If enough dissenting shareholders exercise appraisal
rights for a transaction approved by the majority, then the cost of
purchasing the dissenting shares may cause management to rethink its
course of action.”). With these principles in mind, the court will address
2
The Vermont Business Corporation Act was adopted from the 1984 version of
the Model Business Corporation Act. Towle v. Robinson Springs Corp., 168 Vt. 226,
228 (1998); Smiddy, supra, at 5 n.1. This discussion will reference the MBCA and its
commentary where it is applicable or insightful to the language and function of the
VBCA. See also MBCA Annotated, at 13-12 (marking differences between the 1984 and
1999 versions of the MBCA).
the substantive parties claims.
The facts of this case are not disputed. On June 17, 2004, Shelburne
Supermarket’s Board of Directors approved a stock consolidation plan.
Under this plan, the corporation would issue one new share of stock for
every five shares of old stock. Any resulting fractional shares would be
purchased by the corporation at a price set by an accounting valuation made
the previous year. Shelburne Supermarket is a predominately family
owned affair. Prior to the consolidation action, all of the shares were
owned by Clayton siblings but for one non-familial shareholder.3 For the
purposes 11A V.S.A. §§ 6.01, 6.02, Shelburne Supermarket had only one
class of stock with equal voting and shareholder rights. After the
consolidation, there was still only one class of stock. As this consolidation
required shareholder approval, a meeting was scheduled June 30. All
shareholders were given proper notice of the meeting and their dissenter’s
rights, should they disagree with the consolidation. This was done in
conformance with 11A V.S.A. § 13.20.
The minority Clayton shareholders, Kevin, Lisa, Alan, and Catherine
sent notice to the corporation on June 28 that they intended to dissent. In
the same letter, the dissenting siblings notified the corporation that they had
given all their shares to Lisa who demanded appraisal rights under §13.21
for her and her sibling’s shares, which she claimed to hold as beneficial
owner. This transfer was further noticed by papers filed at the June 30
meeting memorializing the sibling’s intent to vest Lisa with control and
3
Kevin Clayton, Lisa Clayton, Alan Clayton, and Catherine Clayton-Richardson
each owned 2.4 shares respectively. Their brother Steven Clayton owned 27.9 shares,
and Bradley Miller, the only non-Clayton shareholder owned 12.5 shares.
ownership of all 9.6 dissenting shares. At the June 30 meeting, however,
each sibling voted their own shares. Steven Clayton and Bradley Miller
voted their 40.4 collective shares in favor of the consolidation. The siblings
voted their 9.6 shares against it.
Following the meeting, the corporation sent notice to the dissenting
shareholders that the consolidation had been approved and that their
resulting fractional shares would be sold to the corporation. The
corporation included a check with each these letter reimbursing the siblings
for their fractional shares based on the previously announced valuation. All
four dissenting siblings returned their checks on August 4 and made written
demands for a higher valuation of their shares.4 They also filed suit
challenging the legitimacy of the corporation’s actions under previous
shareholder agreements. Clayton v. Shelburne Supermarket, No. S0876-04
CnC (Jul. 23, 2004). The corporation subsequently commenced this action
on October 1 in accordance with § 13.30 to settle the issue of valuation. In
the complaint, the corporation disputes that the shareholders’ June 28 letter
gave proper written notice of their intent to demand appraisal rights under §
13.21, in so far as Lisa Clayton was the only one who asserted any
appraisal rights.
The corporation’s claim is that Kevin, Alan, and Catherine failed to
give proper written notice of their intent to assert appraisal rights, that is the
right to demand that the corporation buy back their shares at a fair market
value. This argument is based entirely on what the corporation
4
Under § 13.28, the dissenting shareholders could have kept the payment and
still preserved their right to demand a higher valuation. 11A V.S.A. § 13.28; Smiddy,
supra, at 48–49.
characterizes as shortcomings in the siblings’s June 28 letter. In that letter,
all four siblings notified the corporation that they intended to dissent from
the consolidation proposal but only Lisa, on behalf of herself and as
beneficial owner of other shares, notified the corporation that she intended
to assert her appraisal rights. As previously noted, § 13.21 establishes that
a dissenting shareholder must give the corporation written notice of her
intent in order to properly establish appraisal rights. This notice may
appear in this case to be somewhat superfluous since the corporation
intended to compensate all four of the dissenting shareholders with what it
asserts is a fair market value price, but properly asserted appraisal rights
give dissenting shareholders the opportunity to demand a higher payment
for their shares. This is what the corporation seeks to block through its
claim against Kevin, Alan, and Catherine.
Much of the confusion surrounding this issue stems from the
siblings’ attempt to transfer their interest in their shares to Lisa. This
transfer violated a 1988 shareholders’ agreement, which required that a
majority of the shareholders must approve of any intra-shareholder stock
transfers, and the Clayton siblings have since withdrawn the attempted
transfer presenting themselves in this case and their other action as the
owners of 2.4 shares of Shelburne Supermarket stock. But in late June
2004, the Claytons were operating under the belief that their transfer was
valid and that Lisa was the beneficial owner of all 9.6 shares. The
corporation urges this court to follow the letter of § 13.21 in this matter and
ignore what the siblings thought they had done. It adopts the position that a
voided transfer flows back to the point at which it was attempted. Thus,
title and control never left the individual siblings, and Lisa’s notice on
behalf of her siblings’ shares was never effective because she was never the
“beneficial owner” of any such share. Since the other three siblings never
gave written notice of their intent to assert appraisal rights, they should not
benefit from a voided transaction.5
This is an overly technical reading § 13.21 for its purpose of
notifying the corporation of a party’s intent to assert dissenter’s rights. As
noted in Professor Smiddy’s commentary, chapter 13 was adopted to
streamline and ease the process for asserting such rights. Smiddy, supra, at
48; see also H. Johnson & P. Bartlett, Jr., Is a Fistful of Dollars the
Answer? A Critical Look at Dissenters' Rights under the Revised Model
Business Corporation Act, 12 J.L. & Comm. 211, 216, 221 (1993). To
properly assert appraisal rights, a dissenting shareholder must make her
intent and demand known to the corporation at two separate times. The
first, embodied in § 13.21, comes before the shareholders’ meeting and has
the stated purpose of giving the corporation notice of a shareholder’s intent
to dissent and demand appraisal rights. The second, embodied in § 13.23,
comes after the shareholders’ meeting and is the formal demand for
payment and valuation. The difference between these two demands is
illuminating. According to the official comment, the first notice “enables
the corporation to determine how much of a cash payment may be
required” and “to limit the number of persons to whom the corporation
must give further notice.” M.B.C.A. Annotated, at 13-59. This is
essentially an opportunity for a company to get a head count and figure out
what if any money it may have to lose if its action is passed. This may
provide pause for a company, but it is by no means a formal ceremony.
5
This argument seems to rely on a void/voidable distinction that is not apparent
in § 13.21. See Klein v. Wolf Run Resort, 162 Vt. 506, 513 (1995) (Dooley, J.,
dissenting) (discussing the distinction between void and voidable contracts). The
important question here is not about the validity of the transaction but whether the letter
provided adequate notice to the corporation at the time.
Courts in other jurisdictions have looked quite liberally at attempts to
satisfy this notice requirement. See, e.g., Raab v. Villager Indus. Inc., 355
A.2d 888, 891 (Del. 1976); Jaquith & Co. v Island Creek Coal Co., 219
A.2d 514, 516 (N.J. 1966) (shareholder’s modified proxy form satisfied
pre-meeting notice requirements for dissenter’s rights). This may be in part
because the initial notice can be informal and the satisfying its purpose is
much more important than satisfying any punctiliousness.
In contrast, the post-meeting demand for payment is considered a
much more formal transaction between the dissenting shareholder and the
corporation. As one court noted:
A demand for payment under § 262(b), on the other hand, requires
the formality and legal technicality befitting a last step in the final
transaction between the corporation and its dissenting stockholder.
A demand for payment must be properly and formally signed by or
for all stockholders of record.
Raab, 355 A.2d at 892. Many of Shelburne Supermarket’s arguments about
the shortcomings of the June 28 letter mirror this elevated concern toward
the post-meeting demand for payment communication. Yet, the Claytons’
later communication is not at issue here as it appears to have satisfied the
requirements of § 13.23.
In this case, the corporation hangs its argument around the botched
stock transfer to Lisa Clayton. This line of reasoning, however, is
ultimately irrelevant to analyzing the § 13.21 merit of the letter. As the
siblings shareholders note, the letter adequately states that all four of them
intended to dissent from the consolidation plan. The letter, in its own way,
is also unambiguous about the identity of the owners for whom Lisa is
acting as the beneficial owner. The third sentence of the June 28 letter
states that Kevin, Alan, and Catherine had transferred their interest in their
stock to Lisa to hold as beneficial owner.6 Thus, there is no serious
question of identity when in the same letter Lisa gives § 13.21 notice for
herself and “those for whom she is the beneficial owner.” While this
transfer would later be voided under the corporation’s rules, at the time the
siblings were fairly clear that they intended to dissent and to assert their
dissenter’s rights through Lisa. The corporation admits as much in its brief
when it explains that it sent individual notices on July 2 to the Claytons,
notwithstanding the alleged failure of three of them to properly serve notice
under § 13.21, “in an abundance of caution.” That is the corporation knew
that the siblings had dissented and intended to assert their appraisal rights.
Their notice, while imperfect, had certainly triggered some awareness on
the part of the corporation.
Any other concerns embodied in § 13.21 are not particularly relevant
here. As a small corporation, there was no danger or equitable problem in
allowing the four siblings to assert their dissenters’ rights since there were
no other dissenting shareholders. The corporation was aware of just how
many shareholders were dissenting and given their familial connection to
the business it was highly likely that they would attempt to fully assert their
dissenters’ rights. The fact that the corporation was already planning on
purchasing the siblings’ shares also mitigates any lingering concerns about
allowing the June 28 letter satisfy § 13.21. As this plan was already in place
prior to the June 30 meeting, it would be somewhat disingenuous for the
corporation to argue that any unexpected hardship attached to allowing the
6
The briefs are silent as to why this transfer was attempted. It is possible that the
dissenting siblings wanted to combine their stock so that at least one share could survive
the consolidation.
siblings to assert their full appraisal rights. After all, this discussion is
really just about the ability of the dissenting shareholders to make a
challenge to the corporation’s valuation. Therefore, the court concludes
that the June 28 letter satisfied the sibling’s duty under § 13.21, in that it
put the corporation on notice that the siblings intended to assert appraisal
rights for all 9.6 shares of dissenting stock.
The remaining question, whether the corporation properly complied
with its articles of incorporation in the consolidation, is irrelevant to the
present case. Dissenters have elected to pursue their appraisal rights under
chapter 13. That election gives them the sole remedy of appraisal rights
that they have chosen to pursue. As previously noted, chapter 13 represents
a compromise between minority and majority interests. By electing to
dissent and asserting appraisal rights, the siblings have chosen to leave the
corporation and recoup their financial interest. Any arguments about
corporate process, short of unlawful action or fraud, are outside the scope
of this review. 11A V.S.A. § 13.02 (b). Therefore, beyond fraud or
unlawfulness, scrutiny over the procedure that the corporation chose to use
to conduct a consolidation is outside the scope of a dissenters’ rights case.
To the extent that the shareholders’ argument can be understood to
mean that the consolidation was unlawful, a brief discussion is warranted.
The dissenters argue that the consolidation was invalid because 1) it did not
include a change to the articles of incorporation and 2) such a change would
require the dissenters’ approval as a voting group under 21 V.S.A. §
10.03(e)(1). To this second point, the dissenters rely on an improper use of
the term “voting group.” According to them, they qualify as a voting group
because the consolidation would result in their disenfranchisement from the
corporation. Thus, they would define the term to mean any group of
shareholders who are disproportionately affected by a fundamental change.
Presumably, this would mean that almost any dissenting shareholder in a
fundamental corporate change would qualify as a voting group. Under such
a definition, dissenters seem to be proposing § 10.04 as a way of reasserting
the old common-law principle of unanimity for corporate changes. Cf.
Johnson & Bartlett, supra, at 212–16 (describing how the MBCA and
chapter 13 replaced the common-law requirement unanimity). Of course,
such an interpretation would violate the limits of chapter 13 and the
compromise it represents. Id.
“Voting group” is actually a term of art that is defined in 11A V.S.A.
§ 1.40 (24) as
[A]ll shares of one or more classes or series that under the articles
of incorporation or this title are entitled to vote and be counted
together collectively on a matter at a meeting of shareholders. All
shares entitled by the articles of incorporation or this title to vote
generally on the matter are for that purpose a single voting group.
Cf. Black’s Law Dictionary at 1608 (8th ed. 2004) (classification of
shareholders by the type of stock held for voting on corporate matters). In
other words, a corporation has only one voting group unless it issues shares
with different voting rights. See 11A V.S.A. §§ 6.01, 6.02 (defining how
incorporators can issue different classes and series of stock). The evidence
here shows that the corporation issued only one class and series of stock.
While dissenters as minority shareholders may have been disproportionally
affected by the consolidation, they had equal voting rights with the majority
shareholders. Therefore, the requirements they cite in § 10.03 are
inapposite and the second part of their argument must fail.
As to the dissenters’ first point, the question is by and large moot.
At this point, any technical flaws that the consolidation has will not affect
the purpose for which the court is involved with this case, namely the
judicial appraisal of shares. 11A V.S.A. § 13.30. The corporation argues
that it did not need to amend its articles of association to consolidate its
shares. To support this, the corporation cites the permissive language in §
10.03 governing amendments. There is also additional language in §
6.04(1)(2) that empowers a corporation to “arrange for the disposition of
fractional shares by the shareholders.” Other jurisdictions working with the
Model Business Corporation Act have either affirmed the power of the
corporation to make such consolidations without amendment or have
allowed the corporation to amend its articles afterwards. Goldman v.
Union Bank & Trust, 765 P.2d 638, 640–41 (Colo. App. 1988) (affirming
the corporation’s power); Seed Products Intern., Inc. v. Owen, 768 P.2d
973, 975 (Utah App. 1989) (allowing for later amendment). Such
flexibility fits with the general purpose of the Vermont Business
Corporation Act to give corporations flexibility within the rules to allow
them to adopt procedures to their individual needs. Smiddy, supra, at 11.
In this case, either option would leave the dissenters in the same position: in
the minority with their dissenting rights. Whether the corporation violated
its corporate structure, however, is irrelevant as it does not void the
consolidation.
Dissenters also challenge Steven Clayton’s ownership of a majority
of the shares in the corporation. This challenge refers to a dispute between
Steven and his parents that is pending in Chittenden Superior Court. In re
Shelburne Supermarket, No. S0065-03 CnC (Jan. 17, 2003). That case is
an appeal from an arbitration giving Steven control over a majority of
Shelburne Supermarket shares. The dissenters in this case argue that
because the Shelburne Supermarket case is about the ownership of the
shares and is still pending Steven cannot prove that he controls a majority
of Shelburne Supermarket stock. This argument mis-characterizes the
case’s present disposition. On September 11, 2003, this court issued a
decision on the issue of ownership. In re Shelburne Supermarket, Findings
of Fact, Conclusions of Law, and Notice of Decision, No. S0065-03 CnC
(Katz, J., Jan. 17, 2003). There, this court affirmed the arbitration
agreement and ordered that Steven be vested with title to and control over
the stock shares. To the extent that this case remains open, it is only about
tangential issues that do not affect the question of ownership for this case.
The conclusion is that there is no evidence to support the claim that Steven
Clayton lacks or lacked ownership and control over the majority stock
shares that he voted in the consolidation plan.
Finally, dissenters have made an unsupported motion for fees and
costs under § 13.31. Dissenters have not included any evidence or
affidavits to support this motion. V.R.C.P. 7(b)(1). Briefly, § 13.31 does
not appear to support a motion for expenses mid-trial. As discussed before,
the provisions of § 13.23 allow dissenters to accept the corporation’s
payment and still retain the right to dissent. Smiddy, supra, at 48–49.
Dissenters chose not to accept this payment. It is somewhat disingenuous
for them to argue hardship now. Finally, there has been no evidence that
the corporation failed to comply with its obligations under chapter 13. Nor
does merely challenging dissenters’ compliance equate to vexatious
behavior. Dissenters’ motion is dismissed.
In conclusion, the court finds that the dissenting shareholders
properly asserted their appraisal rights prior to the June 30 shareholders
meeting, and the corporation had enough notice to satisfy the requirements
of § 13.21. The corporation’s actions were legitimate within the context of
its corporate structure. To the extent such actions may or may not have
completely conformed to the corporation’s articles of incorporation, they do
not affect the validity of the consolidation. Moreover, as dissenters have
invoked chapter 13, they are limited from further challenging the fairness or
sensibility of the consolidation. They have chosen to leave the corporation.
11A V.S.A. § 13.02(b). This raises a point that neither party has briefed.
As § 13.02(b) makes appraisal rights the exclusive remedy for shareholders,
the question is whether the other case, Clayton v. Shelburne Supermarket,
No. S0876-04 CnC, has been mooted and should be consolidated with this
one to as to avoid any further costs and unnecessary delay. V.R.C.P. 42.
Apart from this, the sole remaining issue is whether the corporation
properly valuated the payment that it made to the dissenting shareholders.
Based on the foregoing, plaintiff’s motion for summary judgment is
denied in part and granted in part. Defendants’ motion for summary
judgment is denied in part and granted in part. Defendants’ motion for fees
is dismissed.
Dated at Burlington, Vermont________________, 2005.
________________________
Judge