The Virginia Supreme Court recently reversed a trial court’s ruling in favor of a corporation and its majority shareholders on a question of statutory interpretation. At issue was whether a simple majority of the corporation’s shareholders could redefine the statutory meaning of “significant continuing business activity.” If a simple majority of the closely-held corporation’s shareholders could redefine that statutory term’s meaning in its bylaws, then the majority could escape the statutory requirement that a sale of the corporation’s assets outside of its ordinary business operations be approved by a supermajority, or two-thirds, of its shareholders.
The Court drew on a plain meaning test to determine that the statute in question, Virginia Code Section 13.1-724, required a two-thirds supermajority vote to approve the sale of a substantial line of the corporation’s business. The Court rejected the majority’s argument that amendments to the corporation’s bylaws could effectively redefine the meaning of “significant continuing business activity” to escape the supermajority voting requirement. The Court held that the statutory scheme did not contemplate a private redefinition of the statutory term.
In a parting assessment, the Court noted, however, that a corporation could reject, or opt out of, the supermajority voting requirement altogether. The corporation could have adopted a lower voting threshold. That, the Court observed, was clearly contemplated by the statutory scheme.
To eliminate the supermajority voting requirement to sell the corporation’s assets outside of its ordinary business activities, the corporation could have amended its articles of incorporation—an amendment that, the Court emphasized, itself required two-thirds, or supermajority, shareholder approval. The outcome of the case is noteworthy in a variety of contexts, including the importance of carefully considering the terms of the original articles of incorporation and any amendments made before new or minority owners are admitted as shareholders. The case is May v. R.A. Yancey Lumber Corporation, No. 171708 (2019).