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Virginia Supreme Court finds that an act of corporate domestication does not give rise to shareholders’ statutory rights of appraisal
Fisher v. Tails, Inc.
In Fisher v. Tails, Inc., the Virginia Supreme Court held, as a matter of first impression, that shareholders in a corporation originally incorporated in Virginia were not entitled to appraisal rights when that corporation transferred its state of incorporation to Delaware. Under Virginia law — specifically, Virginia Code § 13.1-730 — shareholders of a Virginia corporation are entitled to appraisal rights when certain conditions arise. Pursuant to these rights, shareholders can have their shares judicially appraised and bought back by the corporation at the appraised value. Section § 13.1-730 includes the sale of a corporation’s assets as a condition that gives rise to shareholders’ appraisal rights, but does not include “domestication,” the process by which a corporation changes its state of incorporation. The Virginia Supreme Court held that the act of domestication cannot give rise to statutory appraisal rights under Virginia law, even when that domestication is a precursor to a sale of a corporation’s assets.
Tails, Inc. (“Defendant”) was a regional franchisee of RE/MAX LLC, a Delaware limited liability corporation (“LLC”). Defendant was incorporated as a Virginia corporation. Defendant entered into an agreement with another RE/MAX affiliate, under which Defendant would domesticate to Delaware, merge with the affiliate into a Delaware LLC, and act as a subsidiary of the new LLC. After domestication, Defendant was to sell all of its assets in the merger, and the new LLC was to hold Defendant’s membership interests. When minority shareholders (“Plaintiffs”) in Defendant were each provided a “Notice and Proxy/Information Statement,” stating that there was a proposal for a sale of all the business assets held by Defendant, Plaintiffs served Defendant with a “Notice of Intention to Demand Payment for Shares.” At a shareholder meeting, a majority of Defendant’s shareholders voted in favor of the domestication to Delaware and asset sale; Plaintiffs voted against the proposal. Defendant changed its state of incorporation to Delaware in accordance with the shareholders’ vote, and underwent the asset sale and formation of the new LLC. Plaintiffs filed a lawsuit against Defendant seeking a declaratory judgment as to whether Defendant’s actions invoked Plaintiff’s appraisal rights under Virginia Code § 13.1-730.
The Virginia Supreme Court held that Plaintiffs were not entitled to appraisal rights under Virginia law. The Court held that Defendant became subject to Delaware law when it transferred its state of incorporation from Virginia to Delaware. Under Delaware law, there are no appraisal rights for a sale of corporate assets. The Virginia Court rejected Plaintiffs’ argument that domestication, alone, triggered shareholders’ appraisal rights under Virginia law. Importantly, Virginia Code § 13.1-730 did not provide for appraisal rights upon the consummation of domestication, unlike the Model Business Corporation Act (MBCA) upon which it was based. Further, the Court rejected Plaintiffs’ argument that the Delaware “step transaction” doctrine, under which “steps” in a series of formally separate but related transactions involving the transfer of property are treated as a single transaction, required the Court to consider Defendant’s domestication as part of the Defendant’s asset transfer. The Court held that, even assuming it recognized the “step transaction” doctrine, the Court was unwilling to find Defendant’s domestication as a “step” in the subsequent asset transfer. The Court held, therefore, that Plaintiffs were not entitled to appraisal rights under Virginia law.
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