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May v. R.A. Yancey Lumber Corp.

Supreme Court of Virginia

January 10, 2019

SARAH YANCEY MAY
v.
R.A. YANCEY LUMBER CORPORATION

          FROM THE CIRCUIT COURT OF ALBEMARLE COUNTY Cheryl V. Higgins, Judge.

          OPINION

          S. BERNARD GOODWYN, JUSTICE

         In this appeal, we consider whether the circuit court erred when it sustained a special plea in bar and entered judgment in favor of a corporation based on the circuit court's interpretation of Code § 13.1-724.

         Background

         R.A. Yancey Lumber Corporation (Corporation) has been a Virginia corporation since 1959. The Corporation has two principal businesses: its mill business (Mill Business) and its timber property (Timber Business).

         Through the Mill Business, the Corporation owns and operates a saw mill and lumber yard in Yancey Mills, Virginia, and "purchases loblolly and short leaf pine logs from third parties, and saws the logs into lumber, dries it in dry kilns and planes it for a finished product." Through the Timber Business, the Corporation owns about 2, 500 acres of land in Albemarle, Nelson, Louisa, and Greene Counties, from which the Corporation periodically sells timber to third parties. None of the Corporation's employees or machinery are solely dedicated to the Timber Business.

         As of August 2017, the Mill Business had a total assessed fair market value of $2, 738, 400, and assessed land use value of $3, 694, 500. The Mill Business is not profitable every year, and uses the Timber Business to secure its credit line to help support its operation during those unprofitable years.

         The Timber Business had a fair market value of $7, 639, 500 and land-use value of $1, 631, 600 as of August 2017. In 2016, the Timber Business generated $286, 535 in revenue, which represents 1.5% of the Corporation's $18, 545, 666 total revenue-the Timber Business's highest percentage of the Corporation's total revenue since 2012.

         Dick Yancey (Dick), Dan Yancey (Dan), and Sarah Yancey May (Sarah) are siblings and the Corporation's only directors (Board). The siblings, Dick and Dan's spouses, and Sarah's ex-spouse are the Corporation's only six shareholders. Each couple owns about one-third of the Corporation's shares, but Dick, Dan, and their spouses do not collectively own "more than two-thirds" of the total shares. Sarah and her ex-husband Bill May (Bill) own a fraction more than one-third of the total shares.

         In 2015, Dick and Dan knew that Sarah did not want to sell the Mill Business, so they discussed how to structure something so that they could sell the Mill Business without Sarah's approval. Dick and Dan decided to use Article X of the Corporation's bylaws, which permits amendment to the bylaws by majority vote of the Board or shareholders.

         On November 11, 2015, the Board approved an amendment (Amendment 1) to Article XII of the Corporation's bylaws by a vote of two to one, with Sarah being the director in opposition. Amendment 1 revised Article XII of the Corporation's bylaws to state:

Notwithstanding anything herein or any non-mandatory provisions of the [Virginia Stock Corporation Act] to the contrary, either the Mill Business or the Timber Business alone, without the other or any other business activity, shall constitute a significant continuing business activity in the event such business is retained by the Corporation following the sale, lease, exchange or other disposition of the Corporation's other assets if the fair market value of the retained business assets constitutes at least twenty-five percent (25%) of the fair market value of all of the Corporation's assets in the aggregate prior to such sale, lease, exchange or other disposition, excluding for all purposes hereunder cash and cash equivalents. For purposes hereunder, the most recent assessed value for local tax purposes of real property owned by the Corporation shall be considered its fair market value, absent the existence of a fair market value determination by a qualified real estate appraiser made within one year prior to the relevant determination date, in which case the most recent of such determinations shall be used to establish fair market value. This Article XII is intended to operate in lieu of the definition of "significant continuing business activity" set forth in Section 13.1-724(A) of the Code of Virginia (which statutory definition is provided for use in the absence of a defined term in the applicable articles of incorporation or bylaws).

         On December 16, 2015, the shareholders approved Amendment 1 by majority vote, with Bill and Sarah as the only shareholders in opposition.

         By letter dated January 29, 2016, Sarah informed the Corporation that she was "opposed to the amendment to Article XII" because it represented "a misconstruction of Virginia Code § 13.1-724 and an obvious attempt to circumvent the protection afforded to minority shareholders" by that statute.

         At a January 29, 2016 Board meeting, Dick's attorney "raised concerns about the phrasing of the third sentence of Article XII . . . due to the phraseology used on county real estate tax bills," and proposed another amendment to Article XII to resolve that issue (Amendment 2). Amendment 2 only changed "the third sentence of Article XII" as noted here:

For purposes hereunder, the most recent assessed value gross land and improvement values determined by local tax authority for local tax purposes taxation of real property owned by the Corporation, irrespective of any land use deferral, shall be considered its such real estate's fair market value, absent the existence of a fair market value determination by a qualified real estate appraiser made within one year prior to the relevant determination date, in which case the most recent of such determinations shall be used to establish fair market value.

         The Board, with the exception of Sarah, approved Amendment 2. On March 25, 2016, all of the shareholders except Sarah, who abstained, voted to approve Amendment 2.

         On May 3, 2017, the Corporation-pursuant to the direction of a majority of the Board- executed a letter of intent (LOI) to sell the assets of the Mill Business to a third party buyer for $10 million (Proposed Sale). Sarah called the buyer and told it that she objected to the sale. The buyer then asked for a $250, 000 break-up fee if the Proposed Sale did not close. "Over [Sarah's] objection, the LOI was amended [by the Board] on June 21, 2017 to include a 'breakup fee' of up to $250, 000."

         On July 18, 2017, Sarah, through counsel, notified the Corporation of her objections to the LOI and Proposed Sale, warning that she would "challenge legally if necessary." On August 7, 2017, Sarah, through counsel, notified the Corporation of her intent to bring a legal action to enjoin the Proposed Sale.

         On August 11, 2017, Sarah filed a complaint in the Circuit Court of Albemarle County seeking a declaratory judgment that Amendments 1 and 2, the approval of the Proposed Sale, and the execution and amendment of the LOI "are null and void." She asserted that these actions violate Code § 13.1-724, which requires more than two-thirds shareholder approval for a disposition of corporate assets that leaves a corporation without a significant continuing business. She also sought a "preliminary injunction" to "preserve the status quo" pending the outcome of the action, and a permanent injunction enjoining the Proposed Sale. On the same day as the complaint's filing, Sarah filed an emergency motion for temporary injunctive relief "to stop the [Proposed Sale] until the [circuit court] can address the merits of the Complaint."

         After Sarah filed the complaint, the Board approved the Proposed Sale on August 24, 2017 by majority vote, with Sarah objecting. The shareholders subsequently considered the Proposed Sale. On September 11, 2017, Dick and Dan and their spouses voted to approve the Proposed Sale, while Sarah and Bill voted against it.

         The Corporation responded to Sarah's circuit court complaint by filing an answer, demurrer, and special plea in bar on September 5, 2017. In the Corporation's plea in bar, it argued that Sarah's case should be dismissed because the Proposed Sale left the Corporation with the Timber Business, which is a "significant continuing business activity" under Code § 13.1-724 because of the terms of the Corporation's amended bylaws, so Sarah's "consent is not required" for the sale of the ...


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