The Lawletter Vol 39 No 12
Typically, the circumstances under which a minority shareholder in a corporation may compel appraisal and purchase of his shares by the corporation is made explicit by statute. Occasionally, however, a case tests the outer boundaries of a shareholder's appraisal rights. In Fisher v. Tails, Inc., Record No. 140444, 2015 WL 103679 (Va. Jan. 8, 2015), Tails was organized as a Virginia corporation to operate as a regional franchisee of RE/MAX LLC, a Delaware limited liability company ("LLC"). On August 9, 2013, Buena Suerte Holdings, Inc., another affiliate of RE/MAX, and Tails signed a "Plan of Reorganization and Purchase Agreement" in which Tails would be sold to Buena Suerte in four steps. First, Tails would become a Delaware corporation, changing its state of incorporation from Virginia to Delaware pursuant to Virginia Code § 13.1-722.2 and Delaware Code title 8, § 265. Second, Tails would merge with and into a newly formed Delaware LLC, Tails, LLC. Tails, LLC, would be a subsidiary of a newly formed holding company, Tails Holdco, Inc. (Holdco), and Holdco would hold all of Tails, LLC's membership interests. Third, Holdco would cause Tails, LLC, to amend and restate its LLC agreement to remove certain LLC provisions. Finally, Holdco would sell Buena Suerte all of its membership interests in Tails, LLC.
Tails solicited proxies from its shareholders, and the majority approved the proposal. Certain minority shareholders dissented and asserted their right to appraisal of their shares pursuant to Virginia's appraisal statute, Code § 13.1-730. They claimed that the domestication of a Virginia corporation under the law of a foreign state, in this case Delaware, was one of those events entitling the minority to exercise appraisal rights. Virginia has enacted a version of the Model Business Corporation Act ("MBCA"), but unlike the MBCA, Code § 13.1-730 does not include appraisal rights upon "consummation of a domestication." Compare Va. Code Ann. § 13.1-730, with MBCA § 13.02(a)(6). Once a corporation's state of incorporation is transferred to Delaware, it is subject to Delaware corporate law. Del. Code Ann. tit. 8, § 265(d); Va. Code Ann. § 13.1-722.2. Delaware law, unlike Virginia law (and the law of most other states), does not provide appraisal rights for a sale of corporate assets. Del. Code Ann. tit. 8, § 262(b).
The disappointed shareholders in Fisher urged the court to adopt Delaware's step transaction doctrine, which treats the "steps" in a series of formally separate but related transactions involving the transfer of property as a single transaction, if all the steps are substantially linked. In essence, the minority shareholders argued that Tails' change in corporate domicile should be ignored because it was just the first "step" in a series of technically distinct but related transactions that should be viewed together as components of a larger transaction and judged under Virginia, not Delaware, law. The court declined to adopt and incorporate into Virginia law a nonstatutory Delaware doctrine, since the transaction about which the shareholders complained was governed wholly by Virginia statutes. Virginia by statute provides that once a corporation is domesticated elsewhere, it is governed by the foreign state's law. The court declined to reach a result that it considered wholly at odds with the governing law that the Virginia General Assembly had adopted.