Kill the Goose that Lays the Golden Eggs? Is There an Alternative Remedy to Dissolution in Oppression Cases?

A New Path for Appellate Lawyers

Last year, the jurisdiction of the Court of Appeals of Virginia was expanded to offer aggrieved litigants in civil cases an automatic right of appeal. Va. Code § 17.1-405(A)(3).^[1] That change offers opportunities for the Court to provide guidance to circuit courts and litigants in many areas of law that are unsettled, under-developed, or otherwise unclear. This is particularly true of corporate law under the Virginia Stock Corporation Act, an area in which decisions by the Supreme Court of Virginia have been few and far between over the past few decades, despite significant statutory changes over the years. This article discusses one of those open issues – the scope of relief available in a shareholder oppression case brought under the judicial dissolution statute of the Act, Virginia Code § 13.1-747. With oppression cases on the rise, the Court of Appeals should have the occasion to decide the question.

An Undeveloped Issue in Virginia Corporate Law

In an oppression case, a minority owner typically alleges that the majority owner(s) have attempted to “freeze” or “squeeze” him out of the business or suppress his rights.^[2] Code § 13.1-747 provides at least one potential remedy in such circumstances. The circuit court, in the exercise of its equitable authority, “may dissolve a corporation” when a shareholder establishes that “the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent[.]” Va. Code § 13.1-747(A)(1)(b) (emphasis added). The Supreme Court of Virginia has held that the statute is remedial and intended to protect the rights of corporate stockholders – particularly minority owners. Baylor v. Beverly Book Co., 216 Va. 22, 24, 216 S.E.2d 18, 19 (1975).

Code § 13.1-747 is the successor statute to Virginia Code § 13.1-94, which stated, in relevant part, that “[a]ny court of record, with general equity jurisdiction . . . shall have full power to liquidate the assets and business of the corporation” in an action by a stockholder where oppression is established. Va. Code § 13.1-94(a)(2) (repealed) (emphasis added). The statute also provided a limited alternative to dissolution in an oppression case: to place the corporation into receivership until the management authority of the corporation has either been restored to the original board of directors or a new board is elected.

In the cases of Giannotti v. Hamway and White v. Perkins, the Supreme Court of Virginia interpreted Virginia Code § 13.1-94 as providing the exclusive remedies to an oppressed minority shareholder, and did “not permit the trial court to fashion other, apparently equitable remedies.” Giannotti, 239 Va. at 28, 387 S.E.2d at 733; White, 213 Va. at 135, 189 S.E.2d at 320. However, the Supreme Court also described the circuit court’s authority to order dissolution as “discretionary” – presumably because the court could choose the alternative remedy of receivership. 239 Va. at 28, 387 S.E.2d at 733. Also seemingly key to the Supreme Court’s analysis was the strong language in the Code § 13.1-94, which vested the circuit court with “full power” to liquidate a corporation where oppressive conduct was established.

In 1985, the General Assembly rewrote the Virginia Stock Corporation Act. Jordon v. Bowman Apple Prods. Co., 728 F. Supp. 409, 414 n.7 (W.D. Va. 1990) (noting the overhaul of the statute).^[3] The phrase “full power to liquidate” in Code § 13.1-94 was changed to “may dissolve” in § 13.1-747(A) today.^[4] Meanwhile, the “full power” language was incorporated into a new subsection (B) of § 13.1-747 – a provision that does not relate to oppressive conduct.^[5]

Additionally, the General Assembly omitted the alternative remedy of temporary receivership from § 13.1-747. Virginia Code § 13.1-747(F) now provides only a single alternative to dissolution in an oppression/dissolution case: the other shareholders may elect to purchase the shares of the dissenting minority.^[6] See Va. Code § 13.1-749.1.

The Supreme Court of Virginia has not interpreted and applied § 13.1-747(A) since the comprehensive changes in 1985. In the absence of additional guidance, at least two lower courts in Virginia have followed the holdings in White and Giannotti under the prior Code section. See Jordon, 728 F. Supp. at 415 (applying White to a § 13.1-747(A) claim); Colgate v. Disthene Group, Inc., 85 Va. Cir. 286, 292 (Buckingham County, 2012) (same).

The Question for the Court of Appeals

This begs the question: is a circuit court powerless to consider and issue any other equitable remedy in lieu of dissolution in an oppression case? Code § 13.1-747(A) provides that the circuit court “may” dissolve a corporation when shareholder oppression is established, and the Supreme Court has further stated that the issuance of such relief is “discretionary.” Giannotti, 239 Va. at 28, 387 S.E.2d at 733. In this regard, the Supreme Court of Virginia has instructed circuit courts to “be reluctant to order the liquidation of a functioning corporation at the instance of minority stockholders.” Id. Indeed, often “[t]o liquidate the corporation is to kill the goose that laid the golden egg.” Giannotti, 239 Va. at 30, 387 S.E.2d at 734 (Gordon, Ret. J., dissenting). Accordingly, it is conceivable under the current statute for a circuit court to find oppression but decline to order dissolution, thus leaving an oppressed minority shareholder essentially without recourse.^[7] Conversely, a circuit court may feel compelled to dissolve a going concern to ensure that an oppressed plaintiff is provide some remedy.

These scenarios, along with the substantial rewriting of the Act in 1985, would seem to suggest that the circuit court’s power is not as curtailed as it was under the prior scheme, but rather allows the court discretion to award some form of equitable relief in lieu of dissolution. These possible remedies might include: (1) appointing a receiver; (2) appointing provisional directors; (3) requiring the issuance of dividends or distributions; and/or (4) requiring the corporation or the majority stockholder(s) to purchase the minority shareholder’s stock at a particular price. See, e.g., Masinter v. WEBCO Co., 164 W. Va. 241, 254 n. 12, 262 S.E.2d 433, 441 (1980) (listing “possible forms of relief against oppressive conduct short of outright dissolution”).

An Opportunity for the Court of Appeals

Historically, the “chancellor” was vested with broad authority to “do equity” in light of the facts and circumstances presented by a particular case. In corporate dissolution/oppression cases, the Supreme Court had previously determined that such power was curtailed by Code § 13.1-94. However, the substantial changes to the Act in 1985, the absence of appellate direction under the present Act, and few lower court decisions in the arena leave open the possibility that a circuit court presiding over an oppression/dissolution case maintains some authority to issue equitable relief that is short of completely dissolving the corporation. The Court of Appeals’ expansion should afford the Court the opportunity to reach this issue and provide critical direction to the circuit courts deciding such cases.

So stay tuned and contact our appellate lawyers for additional guidance on this and other appellate issues as the Court of Appeals of Virginia continues to exercise its expanded jurisdiction and develop existing law.

^[1] There are limited exceptions not material to this article. See Va. Code § 17.1-406.1(B).
^[2] The Supreme Court of Virginia has defined “oppressive” conduct to mean action “by corporate managers toward stockholders which departs from the standards of fair dealing and violates the principles of fair play on which persons who entrust their funds to a corporation are entitled to rely.” Giannotti v. Hamway, 239 Va. 14, 23, 387 S.E.2d 725, 730 (1990); accord White v. Perkins, 213 Va. 129, 134, 189 S.E.2d 315, 320 (1972).
^[3] Code § 13.1-747 took effect in January, 1986. While Giannotti was decided in 1990, the case was initially filed in 1980 when the prior Code § 13.1-94 was still in effect. 239 Va. at 16, 387 S.E.2d at 726. Accordingly, the Supreme Court of Virginia applied Code § 13.1-94 in that case. Id.
^[4] This language was adopted from the judicial dissolution provisions in §§ 14.30 and 14.31 of the Model Business Corporation Act.
^[5] Subsection B provides, in relevant part, that “[t]he circuit court . . . shall have full power to liquidate the assets and business of the corporation at any time after the termination of corporate existence, pursuant to the provisions of this article upon the application of any person, for good cause, with regard to any assets or business that may remain[.]” Virginia Code § 13.1-747(B).
^[6] Subsection F was added to § 13.1-747 in 2019.
^[7] While a shareholder may file suit under the derivative sections of the Stock Corporation Act, see, e.g., Va. Code § 13.1-672.1, a derivative action is brought to vindicate the rights of the corporation, not those of an individual shareholder.