A recent decision by Judge Jane Marum Roush of the Fairfax Circuit Court in Virginia is a must read for shareholders in closely held Virginia corporations. The case, Colgate, et al. v. The Disthere Group, Inc.,(August 30, 2012, Case No. CL-11-117, Buckingham County, Virginia) arose when minority shareholders sued under Section 13.1-747 of the Code of Virginia seeking dissolution of the defendant corporation as a result of oppressive and fraudulent conduct by the majority shareholders. Virginia law allows judicial dissolution where a minority shareholder proves that "the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive or fraudulent; or ... the corporate assets are being misapplied or wasted..." Where a director has a personal interest in the transaction at issue, the burden of proving that the transaction was fair and reasonable to the corporation shifts to the director whose conduct is challenged.
After a lengthy trial, Judge Roush issued a 41 page opinion, Click Here, finding that the corporation should be dissolved based upon the majority shareholders' conduct. Preliminarily, she noted that the business judgment rule does not apply where it is shown that a director "has acted on his or her own account, and contrary to the interests of the corporation." She concluded that, in this case, the directors were motivated by their personal best interests and that "dissolution is the appropriate remedy in that the corporation is controlled by a domineering shareholder who is unlikely ever to treat the minority shareholders fairly."
So what did the majority shareholders/ directors do wrong? Well, they suppressed dividends to retaliate against the minority shareholders who had instituted earlier litigation alleging that a majority shareholder had looted a marital trust. At the same time, the majority shareholders gave themselves pay raises and bonuses nearly equal to the amount by which the dividends had been cut. In addition, they consistently redeemed minority shares based upon "'misrepresentations and half-truths' as to the true value of the company," which the court found violated the standards of fair dealing and fair play.
The court also found that the majority shareholders' compensation was excessive when compared to the company's net income. And the senior majority shareholder provided employment at significant salaries to a number of members of his own immediate family while either terminating or refusing to hire his sister's children, the minority shareholder plaintiffs.
In addition, the defendants used corporate assets for personal purposes prompting a finding that they had misapplied and wasted corporate assets. And, the company paid over $6.5 million in life insurance premiums that the court found was intended to provide liquidity to the estate of the insureds so that the company stock could be kept in the majority shareholders' immediate family. The payments also depleted corporate assets to keep share prices low and to move money to the majority shareholders' families without declaring dividends that would have benefitted the minority shareholders.
At the end, the court held these facts supported findings of oppression, waste and misapplication of corporate resources that merited the dissolution of the company. The opinion should be a cautionary tale to majority shareholders of Virginia corporations. When coupled with Judge Roush's prior opinion in Greenfeld v. Stitley, et al., 2007 Va. Cir. LEXIS 7 (January 5, 2007)(See blog post of March 2, 2009) involving a partnership divorce that resulted in successful claims involving business conspiracy, breach of fiduciary duty, and intentional interference with contract and business expectancy, there are now two lengthy opinions in Virginia that analyze, in detail, the types of conduct that can support oppression type claims in the corporate and partnership settings.
The plaintiffs in the Colgate matter were represented at trial by several of my partners in LeClairRyan. The matter is now on appeal.
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