Virginia Court Dissolution of $200 Million Dollar Business is Landmark Victory for Minority Shareholders

There is usually little or no secondary securities market on which to sell or buy close corporation stock, making investments in close corporations difficult to liquidate. Consequently, minority shareholders can find themselves in a vulnerable position. Many jurisdictions, including Virginia, have developed standards by which to identify minority shareholder oppression and afford mistreated shareholders a remedy. The Virginia Stock Corporation Act, however, allows for frequent deference to the business judgment rule, which protects directors from individual liability for decisions made on behalf of the corporation, and courts frequently rely on it in corporate litigation. Nonetheless, the recent decision in Colgate, et al v. The Disthene Group, Inc. demonstrates that at least in cases of extreme minority shareholder oppression, Virginia courts might be willing to limit the application of the business judgment rule and even order the “drastic” remedy of dissolution.

In Colgate, the Circuit Court held for plaintiff minority shareholders and ordered the dissolution of the Disthene Group, Inc., a $200 million dollar closely-held Virginia corporation which includes the Kyanite Mining Corporation, Blue Rock Resources LLC, and the Cavalier Hotel. Plaintiffs own 42% of the outstanding shares, Class B non-voting shares. Gene Dixon, Jr. and his son Guy Dixon (“Defendants”), own all of the Class A voting shares, and over 45% of the Class B non-voting shares, amounting to slightly fewer than 51% of the outstanding shares. The Court found that Defendants engaged in dividend suppression and unfair share redemptions, meanwhile paying themselves excessive compensation, favoring the interests of their immediate family members, and misusing corporate funds for non-business purposes. The Court rejected Defendants’ argument that their actions are protected by the business judgment rule, and found instead that the Board of Directors was rarely involved in decision making and that it “merely bent to Gene’s ironhanded will and rubberstamped his decisions.” It  reasoned that Defendants did not exercise their good faith business judgments in their dealings with the Plaintiffs and other minority shareholders, and were motivated by their personal best interests rather than those of the corporation.

While the Court recognized that dissolution is a “drastic” remedy, it found that it was necessary given that “the corporation is controlled by a domineering shareholder who is unlikely ever to treat the minority shareholders fairly" and the fact that the minority shareholders “are inherently disadvantaged” by their nonvoting, minority status in the company and have "no market for their shares should they decide to sell.” Pending the outcome of the appeal, this decision could mark a shift in the way Virginia courts approach the rights and protections of minority shareholders, and perhaps even encourage minority shareholder investment in Virginia companies.

The author, Sara Dajani is an Associate Attorney with the DC region business law firm of Berenzweig Leonard, LLP. She can be reached at SDajani@BerenzweigLaw.com.