Virginia corporation avoided shareholder appraisal rights in asset sale by changing state of incorporation to Delaware. Fisher v. Tails, Inc., 767 S.E. 2d 710 (Va. 2015).
A Virginia corporation initiated a sale of all of its assets, through a four step process: first, the corporation re-domesticated to Delaware and became a Delaware corporation; second, the corporation merged with and into a newly-formed Delaware LLC, which was wholly-owned by a newly-formed holding company; third, the holding company caused the Delaware LLC to amend and restate its LLC agreement; and fourth, the holding company sold to the buyer all of its membership interests in the Delaware LLC. Although Virginia law provides for shareholders to have appraisal rights in connection with a sale of all corporate assets, Delaware law does not. The corporation’s minority shareholders argued that they were entitled to appraisal rights because the series of transactions beginning with a change in corporate domicile ultimately resulted in an asset sale and the steps should be treated as a step transaction involving a sale of assets by a Virginia corporation triggering appraisal rights under Virginia’s corporate law. The corporation denied appraisal rights because it was a Delaware corporation when the asset sale occurred.
Under a Virginia re-domestication statute, a Virginia corporation is entitled to re-domesticate to another state, and if a Virginia corporation does re-domesticate under the statute, it is governed by the laws of the other state as soon as the re-domestication is complete. Because Delaware law applied upon the completion of domestication in the first step of the transaction, the Supreme Court of Virginia held that the minority shareholders were not entitled to appraisal rights. The court refused to apply the “step transaction” doctrine or the “substance over form” doctrine to re-characterize the entire transaction as an asset sale by a Virginia corporation, reasoning that domestication is regulated by statute and involves the law that applies to the transaction instead of the equitable characterization of the transaction. Accordingly, the re-domestication could not be considered a step in a step transaction or ignored in determining substance over form.
