Minority shareholders in corporations are disadvantaged because they have little power to control the decision-making of the corporation. However, minority shareholders are not without rights. There are legal protections in place for minority shareholders and such shareholders should ensure they are aware of their rights so they are able to protect them. In a recent case, the Supreme Court of Virginia found in favor of a minority shareholder in a family business when the majority tried to amend the corporation’s bylaws to circumvent the intentions of the minority shareholders.
May v. R.A. Yancy Lumber Corporation
R.A. Yancey Lumber Corporation (“Corporation”) has two principal businesses: its mill business and its timber property. As of August 2017, the mill business had a total assessed fair market value of $2,738,400 and the timber business had a fair market value of $7,639,500. In 2016, the timber business generated 1.5% of the Corporation’s total revenue. Dick Yancey, Dan Yancey, and Sarah Yancey May are siblings and the Corporation’s only directors (“Board”). The siblings, Dick and Dan’s spouses, and Sarah’s ex-spouse, Bill May, are the Corporation’s only six shareholders. Each couple owns about one-third of the Corporation’s shares, but Dick, Dan, and their spouses do not collectively own “more than two-thirds” of the total shares, since Sarah and Bill own a fraction more than one-third of the total shares.
In 2015, Dick and Dan wanted to sell the mill business, but Sarah did not want to sell. In November 2015, the Board approved an amendment to the Corporation’s bylaws by a vote of two to one, with Sarah opposing it. The amendment was intended to operate in lieu of the definition of “significant continuing business activity” set forth in the Code of Virginia and redefine the term more favorably for Dick and Dan’s plan to sell. The shareholders approved the amendment by majority vote, with Bill and Sarah voting against it. The Corporation executed a letter of intent to sell the assets of the mill business, the Board approved the proposed sale by majority vote, with Sarah objecting, and a shareholder vote was held whereby Dick, Dan, and their spouses voted to approve the sale, while Sarah and Bill voted against it.
Sarah filed a complaint in the Circuit Court of Albemarle County claiming the amendment and proposed sale violated Code § 13.1-724, which requires more than two-thirds shareholder approval for a disposition of corporate assets that leaves a corporation without a significant continuing business. The circuit court entered judgment in favor of the Corporation and Sarah appealed. The Supreme Court of Virginia ultimately reversed the circuit court’s judgment and found in favor of Sarah.
Sarah argued that the circuit court erred because Code § 13.1-724 requires approval of more than two-thirds of the corporation’s shareholders if a disposition would leave the Corporation without a significant continuing business activity. The Corporation argued that the section’s use of the phrase “unless the articles of incorporation or a shareholder-approved bylaw otherwise provide,” offers corporations a way to redefine “significant continuing business activity.”
The Court noted that the issue at hand was a matter of statutory interpretation and that “when the language of a statute is unambiguous, we are bound by the plain meaning of that language.” If a statute does have multiple interpretations, the Court “must apply the interpretation that will carry out the legislative intent behind the statute.” To determine a statute’s plain meaning, the Court evaluates the statute in its entirety.
The Virginia Stock Corporation Act regulates the sale and disposition of corporate assets. Under Code § 13.1-724, shareholder approval is required for the sale, lease, exchange or other disposition of the corporation’s assets, “if the disposition would leave the corporation without a significant continuing business activity.” Such disposition must be approved “by the holders of more than two-thirds of all the votes entitled to be cast on the disposition.” The Act doesn’t define “significant continuing business activity,” but does provide a safe harbor threshold definition. The safe harbor provision states that “unless the articles of incorporation or a shareholder-approved bylaw otherwise provide,” if a corporation retains a business activity that represented at least 20% of the total assets and 20% of income or revenue from continuing operations for that fiscal year, the corporation will be deemed to have retained a significant continuing business activity. If a disposition satisfies the safe harbor requirement, it does not require a “more than two-thirds” shareholder vote.
The Court noted that the purpose of the statute is to protect minority shareholders. Under the statute’s plain meaning, dispositions that leave a corporation without a “significant continuing business activity” require “more than two-thirds” shareholder approval. The safe harbor provision provides an exception to the statutory threshold by use of the language, “unless the articles of incorporation or a shareholder-approved bylaw otherwise provide.” This language allows a corporation to opt out of the statutory safe harbor threshold.
However, the Court found that the plain language of the statute does not support the Corporation’s claim that the exception in the safe harbor provision permits a corporation to adopt a bylaw that redefines the meaning of “significant continuing business activity” to be anything that the majority designates it to be. The Court held that “the language in the safe harbor provision providing for an exception to the statutory threshold does not give a corporation the authority to amend or create a new threshold that will be deemed sufficient as a matter of law to constitute a ‘significant continuing business activity.’” The Court also noted that the statute’s context supports this interpretation, since allowing a simple majority of a corporation’s shareholders to redefine “significant continuing business activity” would render sections of the Act meaningless and unnecessary. Finding that the circuit court erred in its interpretation of Code § 13.1-724, the Court reversed the judgment and remanded the case back to the circuit court.
What Does May v. R.A. Yancy Lumber Corporation Mean for Minority Shareholders?
Minority shareholders lack control of a corporation since they have limited decision making power. However, they do still have rights as shareholders and legal protections to those rights. This case is an example of those legal protections.
The Virginia Stock Corporation Act has regulations in place for procedures that must be followed for certain corporate acts and includes some built in protections for minority shareholders, as evidenced here. These protections aim to defend against oppression and abuse by majority shareholders and directors. Courts have shown increasing support for minority shareholders and this case is an example of Virginia courts protecting the rights of such minority shareholders.
If you need more guidance or information about how to protect your rights as a minority shareholder, contact General Counsel, PC today at 703-556-0411.