Fisher v. Tails: Supreme Court of Virginia Denies Appraisal Rights to Minority Shareholders, Holds Delaware Corporate Law Trumps Step Transaction Doctrine

In Fisher v. Tails, Inc., 767 S.E.2d 710 (Va. 2015), the Supreme Court of Virginia held that the minority shareholders of a Virginia corporation which re-incorporated in Delaware prior to selling all of its assets were not entitled to Virginia appraisal rights under the “step transaction doctrine.”

Tails, Inc., formerly a Virginia corporation, consummated a four-step transaction pursuant to a purchase agreement with Buena Suerte Holdings, Inc. in which, during a two day period: (1) Tails, Inc. reincorporated from Virginia to Delaware; (2) Tails, Inc. merged with Tails, LLC, a Delaware entity owned by Tails Holdco, Inc.; (3) Tails, LLC amended and restated its LLC agreement “to remove certain limited liability company provisions”; and (4) Tails Holdco, Inc. sold the entirety of its interest in Tails, LLC to Buena Suerte Holdings, Inc.

Shareholders approved the four step transaction at a special meeting. The minority shareholders (holding 21% of the shares) voted against the relevant proposals. The minority shareholders asserted that they were entitled to appraisal rights because the transaction amounted to an asset sale.

In seeking appraisal rights, shareholders argued for application of the “step transaction” doctrine or the “equitable substance over form” doctrine. Under the step transaction doctrine, multiple steps can be construed to be part of a unitary transaction. The equitable substance over form doctrine allows relief to be granted to parties harmed by legal practices that create unfair results.

The Supreme Court of Virginia assumed without deciding that the doctrine applied. The Court recognized that the step transaction and substance over form doctrines were intended to “prevent transactional formalities from blinding the court to what truly occurred” and “allow a court to look beyond form to the substance of a transaction.” The Court found, however, that the doctrine was designed to prevent the use of equitable principles “to recharacterize actions of defined legal significance.” It could not be used, however, to “second guess” the explicit application of a statutory requirement; the statute under which a transaction is effected will govern that transaction.

Virginia law allows corporations to domesticate in other jurisdictions and provides that the laws of the new jurisdiction govern after that point. Virginia Code § 13.1-722.2. Moreover, domestication is not an event that triggers appraisal rights. As a result, the Court declined to find that the properly conducted domestication of a Virginia corporation should be combined with subsequent transactions for purposes of determining the applicability of appraisal rights. The Court also found that, because the subsequent steps took place in Delaware, shareholders were not entitled to appraisal rights under the laws of that state.

The primary materials for this post can be found on the DU Corporate Governance website.