Title: Fisher v. Tails, Inc.

State: virginia

Issuer: Virginia Supreme Court

Document:

PRESENT:  Lemons, C.J., Goodwyn, Millette, Mims, McClanahan and 
Powell, JJ., and Lacy, S.J. 
 
ROBERT B. FISHER, ET AL. 
 
 
 
 
 
 
 
 
     OPINION BY 
v.     Record No. 140444  
 
  JUSTICE S. BERNARD GOODWYN 
 
 
 
 
 
 
 
 
  January 8, 2015 
TAILS, INC. 
 
FROM THE CIRCUIT COURT OF HENRICO COUNTY 
Catherine C. Hammond, Judge 
 
In this appeal, we consider whether a shareholder in a 
Virginia corporation is entitled to appraisal rights under 
Virginia law when a Virginia corporation changes its state of 
incorporation prior to a sale of its assets. 
Background 
 
On August 29, 2013, Robert B. Fisher, Carla L. Fisher, 
Bradley G. Rhodes and James D. Schwartz (Minority Shareholders) 
filed a complaint in the Circuit Court of Henrico County to 
demand shareholder appraisal rights concerning the sale of 
Tails, Inc. (Tails).  The Minority Shareholders sought a 
declaratory judgment regarding whether the transaction by which 
Tails sold all of its assets, after changing its state of 
incorporation from Virginia to Delaware, gave rise to appraisal 
rights for the Minority Shareholders.  The Minority Shareholders 
also requested monetary damages for various violations 
predicated upon the existence of the alleged appraisal rights.  
Tails filed a demurrer to the complaint. 
 
2 
The circuit court entered a final order sustaining the 
demurrer without leave to amend.  The circuit court noted that 
changing the Tails corporate domicile from Virginia to Delaware 
did not trigger appraisal rights, and that “[t]he complaint 
fail[ed] to state facts sufficient to support the asserted 
causes of action.”  The Minority Shareholders appeal. 
Facts 
Tails was organized as a Virginia corporation to operate as 
a regional franchisee of RE/MAX LLC, a Delaware limited 
liability company (RE/MAX).  Tails held franchise rights for the 
District of Columbia, Maryland, Virginia and West Virginia.  
Officers, directors or employees of RE/MAX or its affiliates 
owned a majority of the outstanding shares of Tails.  The 
Minority Shareholders held approximately 21% of the outstanding 
shares. 
 
On August 9, 2013, Buena Suerte Holdings, Inc. (Buena 
Suerte), another affiliate of RE/MAX, and Tails signed a “Plan 
of Reorganization and Purchase Agreement” in which Tails would 
be sold to Buena Suerte in four steps.  First, Tails would 
become a Delaware corporation, changing its state of 
incorporation from Virginia to Delaware pursuant to Virginia 
Code § 13.1-722.2 and title 8, § 265 of the Delaware Code 
(reincorporation step).  Second, Tails would merge with and  
 
3 
into a newly-formed Delaware limited liability company, Tails, 
LLC (merger step).  Tails, LLC would be a subsidiary of a newly-
formed holding company, Tails Holdco, Inc. (Holdco), and Holdco 
would hold all of Tails, LLC’s membership interests.  Third, 
Holdco would cause Tails, LLC to amend and restate its LLC 
agreement to remove certain limited liability company provisions 
(amendment step).  Finally, Holdco would sell Buena Suerte all 
of its membership interests in Tails, LLC (the sale). 
 
On August 12, 2013, each of the Minority Shareholders 
received a “Notice and Proxy/Information Statement” stating that 
there was a proposal for a cash sale of all of the business 
assets held by Tails to Buena Suerte.  A shareholder meeting was 
scheduled to take place on September 4, 2013.  Before the 
September 4, 2013 shareholder meeting, each of the Minority 
Shareholders served Tails with a “Notice of Intention to Demand 
Payment for Shares.” 
 
On September 4, 2013, Tails held a special shareholders’ 
meeting where the shareholders voted on several proposals 
including the four steps addressed above.  The Minority 
Shareholders voted against each of the proposals, but the 
proposals were passed by a majority vote.  Tails undertook each 
of the four steps discussed above between October 7 and October 
9, 2013. 
 
 
4 
Analysis 
 
The Minority Shareholders argue they were entitled to 
appraisal rights because a series of transactions starting with 
a change in corporate domicile ultimately resulted in an asset 
sale, and an asset sale triggers appraisal rights for 
shareholders in a Virginia corporation.  The Minority 
Shareholders assert that the circuit court erred in sustaining 
the demurrer because it failed to recognize the “step 
transaction” doctrine or the “equitable substance over form” 
doctrine in determining that their appraisal rights were not 
triggered under Virginia law.  We disagree with the Minority 
Shareholders.  Virginia statutory law settles this matter, and 
the circuit court did not err. 
This Court reviews a trial court’s ruling to grant a 
demurrer de novo.  See Yuzefovsky v. St. John’s Wood Apts., 261 
Va. 97, 102, 540 S.E.2d 134, 137 (2001).  A trial court will 
grant a demurrer when the pleading fails to state a cause of 
action upon which relief can be granted.  Code § 8.01-273.  For 
the purposes of the proceedings on the demurrer, the movant 
admits the truth of all material facts properly pleaded.  
CaterCorp, Inc. v. Catering Concepts, Inc., 246 Va. 22, 24, 431 
S.E.2d 277, 279 (1993). 
 
5 
Virginia Code § 13.1-722.2 concerns domestication of 
corporations and in regards to a Virginia corporation becoming a 
corporation in a foreign jurisdiction, states as follows: 
     B.  A domestic corporation not required by law  
to be a domestic corporation may become a foreign 
corporation if the jurisdiction in which the 
corporation intends to domesticate allows for the 
domestication.  Regardless of whether the laws of the 
foreign jurisdiction require the adoption of a plan of 
domestication, the domestication shall be approved in 
the manner provided in this article.  The laws of the 
jurisdiction in which the corporation domesticates 
shall govern the effect of domesticating in that 
jurisdiction. 
 
A Virginia corporation can “domesticate” by changing the 
state where it is incorporated.  Va. Code § 13.1-722.2.  
Virginia corporations that decide to domesticate in another 
state are governed by the laws of that other state once the 
domestication is completed.  Id.; see also Stockbridge v. Gemini 
Air Cargo, Inc., 269 Va. 609, 613, 611 S.E.2d 600, 602 (2005).  
Virginia law allowed Tails to become a Delaware corporation, and 
it is undisputed that Tails properly changed its domicile to 
Delaware. 
Virginia Code § 13.1-730 states that minority shareholders 
are entitled to “appraisal rights” in the event of certain 
corporate transactions.  Appraisal rights give “corporate 
shareholders who oppose [certain] extraordinary corporate 
action[s]” the right “to have their shares judicially appraised 
 
6 
and to demand that the corporation buy back their shares at the 
appraised value.”  Black’s Law Dictionary 122 (10th ed. 2014). 
Virginia Code § 13.1-730(A) provides: 
A shareholder is entitled to appraisal rights, 
and to obtain payment of the fair value of that 
shareholder’s shares, in the event of any of the 
following corporate actions: 
 
1.  Consummation of a merger to which the 
corporation is a party (i) if shareholder approval is 
required for the merger by § 13.1-718, except that 
appraisal rights shall not be available to any 
shareholder of the corporation with respect to shares 
of any class or series that remain outstanding after 
consummation of the merger, or (ii) if the corporation 
is a subsidiary and the merger is governed by § 13.1-
719; 
 
2.  Consummation of a share exchange to which the 
corporation is a party as the corporation whose shares 
will be acquired, except that appraisal rights shall 
not be available to any shareholder of the corporation 
with respect to any class or series of shares of the 
corporation that is not exchanged; 
 
3.  Consummation of a disposition of assets 
pursuant to § 13.1-724 if the shareholder is entitled 
to vote on the disposition; 
 
4.  An amendment of the articles of incorporation 
with respect to a class or series of shares that 
reduces the number of shares of a class or series 
owned by the shareholder to a fraction of a share if 
the corporation has the obligation or right to 
repurchase the fractional share so created; or 
 
5.  Any other amendment to the articles of 
incorporation, or any other merger, share exchange or 
disposition of assets to the extent provided by the 
articles of incorporation, bylaws or a resolution of 
the board of directors. 
 
 
7 
Virginia Code § 13.1-730 tracks closely with the Model 
Business Corporation Act (MBCA).  Compare Va. Code § 13.1-730 
with MBCA § 13.02 (2014); see also Allen C. Goolsby & Steven M. 
Haas, Goolsby & Haas on Virginia Corporations § 15.1 (5th ed. 
2014).  However, unlike the MBCA, Virginia Code § 13.1-730 does 
not include appraisal rights upon “consummation of a 
domestication.”  Compare Va. Code § 13.1-730 with MBCA § 
13.02(a)(6) (2014). 
In Virginia Code § 13.1-730(A), the General Assembly chose 
to grant appraisal rights to minority shareholders in five 
scenarios.  While the General Assembly has incorporated most of 
the MBCA’s appraisal rights provisions into Virginia Code § 
13.1-730, it has not incorporated the MBCA’s provision granting 
appraisal rights to shareholders in the event of a change in 
corporate domicile.  The General Assembly prescribed a limited 
list of triggers for appraisal rights and did not include a 
change in corporate domicile on that list.  Applying the 
statutory canon of expressio unius est exclusio alterius (“the 
express mention of one thing excludes all others”), we hold that 
the General Assembly intended to exclude a change in corporate 
domicile from this list.  See Smith Mtn. Lake Yacht Club, Inc. 
v. Ramaker, 261 Va. 240, 246, 542 S.E.2d 392, 395 (2001).  
Therefore, the circuit court did not err in ruling that the 
 
8 
domestication of Tails as a Delaware corporation did not entitle 
the Minority Shareholders to appraisal rights. 
Once a corporation’s state of incorporation is transferred 
to Delaware, it is subject to Delaware corporate law.  Del. Code 
Ann. tit. 8, § 265(d); Va. Code § 13.1-722.2.  Delaware law does 
not provide appraisal rights for a sale of corporate assets.  
Del. Code Ann. tit. 8, § 262(b); see also, e.g., Hariton v. Arco 
Electronics, Inc., 182 A.2d 22, 25 (Del. Ch. 1962) (noting that 
while most state legislatures have “seen fit to grant the 
appraisal right to a dissenting stockholder” in both merger and 
“sale of assets” situations, the Delaware legislature has made 
that right available “only under the merger statutes”), aff'd, 
188 A.2d 123 (Del. 1963); Tanzer v. Int'l Gen'l Indus., 402 A.2d 
382, 390 (Del. Ch. 1979) ("[A]ppraisal rights are not available 
on a sale of assets."). 
 
The Minority Shareholders urged the circuit court to apply 
the “step transaction” doctrine or the “equitable substance over 
form” doctrine to find they were entitled to appraisal rights 
under Virginia law.  On appeal they argue that the circuit court 
erred by not doing so. 
The Minority Shareholders note that while it is a question 
of first impression in Virginia, Delaware courts have applied 
the equitable step transaction doctrine in interpreting 
transactions.  See, e.g., Noddings Inv. Grp., Inc. v. Capstar 
 
9 
Commc’ns, Inc. (Noddings I), No. 16538, 1999 Del. Ch. LEXIS 56, 
at *21, *23 (Del. Ch. March 24, 1999), aff’d, 741 A.2d 16 (Del. 
1999).  The step transaction doctrine “treats the ‘steps’ in a 
series of formally separate but related transactions involving 
the transfer of property as a single transaction, if all the 
steps are substantially linked.”  Bank of N.Y. Mellon Trust Co., 
N.A. v. Liberty Media Corp., 29 A.3d 225, 239-40 (Del. 2011) 
(citing Noddings I, 1999 Del. Ch. LEXIS 56, at *21 (footnote and 
internal quotation marks omitted)).  For example, in Noddings I, 
the Delaware Court of Chancery applied the step transaction 
doctrine when a company “spun off” part of its assets to start a 
new company, and that new company immediately merged with 
another company in a planned series of transactions.  Id. at *1-
2.  The plaintiffs in that case had a contractual right to 
purchase shares of the company upon merging, but due to the spin 
off, they lost that right.  Id.  The Noddings I court held that 
because there was evidence the spin off and the merger were in 
actuality one transaction, the court would grant the plaintiffs 
the rights they would have had if a traditional merger had taken 
place.*  Id. at *20. 
                     
* Notably, on rehearing, the court ruled that the doctrine 
of independent legal significance did not apply to this suit and 
was not rejected because New York law applied, rather than 
Delaware law, and because the case involved an issue of contract 
interpretation, not corporate law.  Noddings Inv. Grp., Inc. v. 
 
10 
The Minority Shareholders also provide authority to support 
their contention that Delaware courts have also used the 
equitable doctrine of substance over form when there are unfair 
but legal applications of a particular statute or breaches of 
fiduciary duties while the transaction was technically compliant 
with the law.  See, e.g., Gatz v. Ponsoldt, 925 A.2d 1265, 1280 
(Del. 2006); Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 
439 (Del. 1971); Louisiana Mun. Police Emples. Ret. Sys. v. 
Crawford (LAMPERS), 918 A.2d 1172, 1191-92 (Del. Ch. 2007).  For 
example, in LAMPERS, the Delaware Court of Chancery ruled that 
cash consideration characterized as a special cash dividend 
would trigger dissenting shareholders’ appraisal rights because 
the transaction, in substance, actually involved consideration 
for a merger and not payment of a dividend.  918 A.2d at 1191-
92. 
The Minority Shareholders argue that applying the step 
transaction doctrine or the substance over form doctrine, the 
four transactions that took place on October 7 to 9, 2013 should 
be viewed as one transaction, and the substance of that 
transaction was the sale of all of Tails’ assets.  They conclude 
that Tails’ change in corporate domicile should have been 
disregarded under the step transaction or the substance over 
                                                                 
 
Capstar Commc’ns, Inc., No. 16538, 1999 Del. Ch. LEXIS 89, at 
*1, *3 (Del. Ch. Apr. 16, 1999). 
 
11 
form doctrine, and that application of those equitable doctrines 
thus entitles them to appraisal rights, because the Code of 
Virginia provides for appraisal rights in the event of a 
disposition of all or substantially all of a corporation’s 
assets.  See Code § 13.1-730(A)(3).  In essence, the Minority 
Shareholders argue that Tails’ change in corporate domicile may 
be ignored because it was just the first “step” in a series of 
technically distinct but related transactions that should be 
viewed together as components of a larger transaction and judged 
under Virginia law.  We disagree. 
Assuming, arguendo, that Virginia corporation law allows 
consideration of the step transaction doctrine and the substance 
over form doctrine as articulated by Delaware courts, the 
circuit court did not err in granting the demurrer filed in this 
case because the purpose of the substance over form and the step 
transaction doctrines is to prevent transactional formalities 
from blinding the court to what truly occurred.  They allow a 
court to look beyond form to the substance of a transaction to 
equitably define what occurred in a transaction.  See Gatz, 925 
A.2d at 1280; Noddings I, 1999 Del. Ch. LEXIS 56, at *21-24 
(quoting Orr v. Kinderhill Corp., 991 F.2d 31 (2d Cir. 1993)).  
However, Delaware courts have applied the doctrine of 
“independent legal significance” as a rationale for not applying 
equitable principles to recharacterize actions of defined legal 
 
12 
significance.  Under this doctrine, a transaction effected 
pursuant to a statute will be subject to the requirements and 
consequences of that statute alone.  See Orzeck v. Englehart, 
195 A.2d 375, 378 (Del. 1963).  It is not within a court’s 
purview to second-guess the legislature’s decision evidenced by 
statute.  Hariton, 182 A.2d at 25; see also generally Ferguson 
v. Board of Supervisors, 133 Va. 561, 569, 113 S.E. 860, 862 
(1922) (“Equity . . . is not so inconsistent as to attempt the 
revision or supervision of governmental action lawfully 
exercised through the legislative department.”). 
There is no authority cited by the Minority Shareholders 
that supports their assertion that a statutorily-sanctioned 
domestication of a corporation may be considered a step in a 
step transaction analysis or ignored in determining substance 
over form.  Domestication of the corporation is not properly 
considered a step in the step transaction or substance over form 
analysis because domestication concerns the law that is 
applicable to the transaction rather than an equitable 
characterization of the transaction that took place.  
Domestication is regulated by statute. 
Thus, recognition of the substance over form doctrine or 
the step transaction doctrine would in no way change the legal 
significance of the domestication of Tails as a Delaware 
corporation.  Considering the various other transactions as one, 
 
13 
and characterizing that transaction as a sale of all Tails’ 
assets, does not change the statutes which dictate that Delaware 
law properly applied in determining whether the Minority 
Shareholders were entitled to appraisal rights.  Under Delaware 
law, they were not.  The circuit court did not err in granting 
the demurrer. 
Conclusion 
 
Accordingly, for the reasons stated, we will affirm the 
judgment of the circuit court. 
Affirmed.