ANALYSIS OF JANUARY 10, 2019 SUPREME COURT OPINION
(Posted January 10, 2019) The Supreme Court of Virginia kicks off the new year today with a single published opinion, in an appeal argued in the October session. Today’s ruling in May v. R.A. Yancey Lumber Corp. addresses statutory provisions for the protections of minority shareholders in stock corporations.
This small family-owned company is, as you would deduce from the name, in the timber and lumber businesses. The overwhelming majority of its revenues – 98.5% – comes from its operation of a mill, where it processes logs into lumber. The remaining 1.5% comes from the timber business, through which it sells logs to other buyers.
Today’s opinion reports that the mill business, despite bringing in almost all of the company’s revenue, wasn’t always profitable. The owners of the stock were three siblings and their spouses (including one ex-spouse, but I’ll ignore that here for simplicity’s sake), and four of those six wanted to sell the mill business, especially when a $10 million offer came in for it. The other two wanted to keep the entire company intact.
And that brings us to the statute I mentioned in the beginning of today’s post. That act requires the approval of more than 2/3 of a company’s shareholders for any sale not in the usual and regular course of business, if that sale “would leave the corporation without a significant continuing business activity.” The objecting sibling and her spouse – the ones who didn’t want to sell – owned a tad more than one-third of the stock. That seems to scotch that idea.
But the statute also contains something of a safe harbor. If the company retains at least 20% of its prior assets and 20% of its prior revenue stream, “the corporation will conclusively be deemed to have retained a significant continuing business activity.” The statute also says that the company’s articles of incorporation may provide for a greater or lesser vote than the 2/3 requirement in the Code.
The majority owners read these provisions and realized that they could amend the bylaws by simple majority vote. Accordingly, by a 2-to-1 margin, the company amended those bylaws to specifically provide that the lumber business was a significant continuing business activity, so selling the mill business wouldn’t require a 2/3 vote. With the deck thus reshuffled in their favor the majority signed the purchaser’s offer. That led the dissenter to circuit court.
The court construed the statute to permit the amendment of the bylaws as happened here, so the judge refused the dissenter’s request for a temporary injunction to halt the sale. It also granted a plea in bar and entered judgment for the company.
Thus endeth the good news for the company; today the justices unanimously reverse. Justice Goodwyn’s opinion for the court cites the plain meaning of the statute, noting that it exists to provide protection for minority shareholders. The court rejects the idea that the company can redefine “significant continuing business activity” to mean anything it wants; that interpretation would gut the protections of the statute. In addition, the company didn’t actually amend its articles of incorporation, as the statute allows; it amended its bylaws.
The Supreme Court today finds that the trial court incorrectly applied the statute and therefore used the wrong standard in considering and denying the injunction request. The justices remand the case for trial on whether the sale left the company without a significant continuing business activity.