Virginia Fiduciary Law Blog

SUPERMAJORITY SHAREHOLDER VOTING REQUIREMENTS: A TECHNICALITY OR A SAFEGUARD FOR THE MINORITY?

    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).

SEVEN DEADLY SINS IN ESTATE PLANNING: A LITIGATION RISK ASSESSMENT

    The "Seven Deadly Sins" in estate planning appear in no particular order and are intended to be illustrative only.  These sins do not involve drafting or scrivener’s errors.  Rather, each shares an underlying root cause:  collateral client objectives. 

Collateral client objectives refers to client wishes unrelated to the orderly disposition of property after death. Such client objectives, however, may reflect a client’s deeper, more personal, and sometimes hidden motivations or wishes.  Although such collateral client objectives can be understandable, they may also increase the risk of costly discord:

• Naming two or more adult children together as joint fiduciaries to encourage them to reestablish or repair a compromised sibling relationship

• Selecting an executor of a last will and testament or a trustee of a trust on the basis of not hurting someone's feelings (e.g., selecting one's eldest child as trustee because he or she is the oldest)

• Naming a stepparent as long-term trustee for an adult stepchild (or an adult stepchild as long-term trustee of a stepparent)

• Treating children differently because one of them has "already succeeded" in life

• Forcing children to own real estate together

• Naming one sibling as a long-term trustee for another sibling absent a disability

• Mandating or effectively requiring the long-term retention and running of a family business despite a lack of demonstrated harmony, aligned interests, or management aptitude by a junior generation of intended primary beneficiaries

    The nature of these variables, tethered to family dynamics of perceived position or desired control, may help explain their recurrence.  Considering the full range of possibilities in estate and trust litigation, estate planning counsel, financial advisors and longtime family CPAs should carefully evaluate the dangers of what is famously known as a client's "Dead Hand": a client's after-death dictates governing the continued control over assets and the terms of their eventual disposition. Seen in this context, the Dead Hand is a common thread that runs through the fabric of the Seven Deadly Sins in estate planning and a strong indicator in assessing the risks of estate and trust litigation.