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This year the Virginia Supreme Court made it clear that minority shareholders will lose their protections under Virginia’s Stock Corporation Act—including their appraisal rights—when a Virginia business changes its state of incorporation from Virginia to another state. Additionally, the Court also determined that once a Virginia business is domiciled in another state, the Step Transaction Doctrine will not apply to protect the rights of minority shareholders guaranteed by Virginia law.

Appraisal rights give “corporate shareholders who oppose [certain] extraordinary corporate action[s]” the right “to have their shares judicially appraised and to demand that the corporation buy back their shares at the appraised value.” Black’s Law Dictionary 122 (10th ed. 2014). Under the Virginia Supreme Court’s holding in Fisher v. Tails, Inc., 289 Va. 69 (Va. 2015), once a Virginia corporation is domiciled in another state, Virginia corporate law no longer applies and the rights of minority shareholders are governed by the laws of the other state. As a result, minority shareholders can be left without recourse if the company in which they own stock incorporates in a jurisdiction like Delaware that does not offer the same minority shareholders rights that Virginia does.

Fisher v. Tails involved minority shareholders who sought—under Virginia law—to enforce their right to an appraisal after an asset sale when their company, Tails, Inc., decided to change its corporate domicile from Virginia to Delaware. Tails’ majority shareholders had just authorized the sale of Tails to a Delaware company over the objections of the minority shareholders. This sale transaction involved four distinct steps: (1) a change of incorporation from Virginia to Delaware; (2) a merger with and into a Delaware LLC; (3) the amendment of that Delaware LLC’s operating agreement; and (4) a sale of assets. Virginia law gives minority shareholders appraisal rights in the event of a sale of assets and certain other corporate transactions. See Virginia Code § 13.0-722.2. In contrast, Delaware only makes appraisal rights available under its merger statutes. See Del. Code Ann. tit. 8, § 262(b).

Tail’s minority shareholders argued that Virginia law on appraisal rights should apply because the 4-steps listed above were actually part of the same sale-of-assets transaction under the Step Transaction Doctrine or the equitable doctrine of “substance over form.” The Step Transaction Doctrine allows a court to treat the steps in a series of separate but closely related transactions involving the transfer of property as if they were a single transaction. See Bank of N.Y. Mellon Trust Co., N.A. v. Liberty Media Corp., 29 A.3d 225, 239-50 (Del. 2011). Similarly, the equitable doctrine of “substance over form” permits courts to look beyond the form of a transaction to its substance to achieve equitable goals. See Gatz v. Ponsoldt, 925 A.2d 1265, 1280 (Del. 2006). The minority shareholders of Tails argued that because the 4-step sale of assets transaction started out with a Virginia corporation, Virginia law should apply and the minority shareholders should get appraisal rights.

The Virginia Supreme Court disagreed. Stating unequivocally that “Virginia statutory law settles this matter….,” the Virginia Supreme Court rejected the arguments of the minority shareholders. Fisher, 289 Va. at 73. The Court noted that Virginia’s Business Corporation Act is based on the Model Business Corporation Act. Id. at 75. But unlike the MBCA, Virginia did not include appraisal rights upon “consummation of a domestication” in its Business Corporation Act. Compare Va. Code § 13.1-730 with MBCA § 13.02(a)(6). The Court applied the statutory canon of expressio unius est exlusio alterius (“the express mention of one thing excludes all others”) to hold that “the General Assembly intended to exclude the change in corporate domicile from [Virginia’s list of triggers for appraisal rights].” Fisher, 289 Va. at 73.

This case is potentially significant for companies doing business in Virginia. Under this precedent, majority shareholders may be able to structure transactions in such a way that they can eliminate the appraisal rights of minority shareholders by changing a corporation’s state of incorporation from Virginia to another state like Delaware that does not recognize the same appraisal rights. For this reason, minority shareholders in Virginia should carefully scrutinize any transaction involving a change in corporate domicile.­