In Re: 9.6 Shares of Stock of Shelburne Supermarke t, Inc., No. 1172-04

CnC (Norton, J., May 25, 2005)

[The text of this Vermont trial court opinion is un official. It has been reformatted from the original. The accuracy of the text and the accompanying data included in the Vermont trial cou rt opinion database is not guaranteed.]

STATE OF VERMONT SUPERIOR COURT Chittenden County, ss.: Docket No. 1172-04 CnC

IN RE 9.6 SHARES OF STOCK OF

SHELBURNE SUPERMARKET, INC.

ENTRY

This case is the latest in a series of corporate d isputes that have arisen over the organization and control of Shelbur ne Supermarket. It arises from the Supermarket’s consolidation of stoc k shares and forced buyout of fractional shares. Defendants, all share holders whose shares

would become fractional after consolidation, conten d: 1) that they properly asserted their dissenter’s rights under Chapter 13 of the Vermont Business Corporation Act; 2) that even if they didn’t, the c orporation improperly proceeded with its consolidation plan without first amending the articles of incorporation; and 3) that the corporation underval ued their shares for buyout. With the exception of this final question of valuation, the partieshave motioned for summary judgment on all issues.

As a preliminary matter, shareholders seek to block, through collateral estoppel, the corporation’s claim that several of t he shareholders improperly asserted their dissenter’s rights. This is an important issue to the

shareholders claims of undervaluation because a dis senting shareholder cannot contest a valuation unless she properly give s written notice prior to a shareholder’s meeting that she intends to demand pa yment for her shares. 11A V.S.A. § 13.21(a)(1). To this argument, shareh olders make much of the corporation’s answer to a parallel suit filed b y shareholders. In that answer the corporation “Admitted that Plaintiffs [d efendant shareholders in this case] have dissented timely to Supermarket’s valuation of its shares.” Clayton v. Shelburne Supermarket , Verified Answer, at ¶ 35, No. S0876- 04 CnC (Aug. 31, 2004). They argue that this admis sion bars the corporation from now denying this admission, and th erefore, it cannot deny the shareholders’s right to challenge the corporati on’s valuation. 1

This argument has two flaws. First, the doctrine of collateral estoppel requires, among other things, that there b e a final judgment on the merits of the issue that the party seeks to preclud e. Scott v. City of Newport , 2004 VT 64, at ¶ 8 (mem.). This limits what cour ts may preclude

to those issues that have been resolved to some sem blance of finality. 18 C. Wright, et al., Federal Practice and Procedure § 4420 (2002). As the

1 The shareholders further argue that because collat eral estoppel applies, the claims against Kevin Clayton, Alan Clayton, and Cat herine Clayton-Richardson were filed out of time under 11A V.S.A. § 13.26 (a) (req uiring a corporation to take action to a valuation challenge within 60 days). This argument does not follow logically from the facts. Even if collateral estoppel prevented the c orporation from challenging the Claytons’ assertion of dissenters’ rights, its seco nd claim requesting a determination of fair value for the shares would satisfy § 13.26.Clayton case is currently pending there is no final judgme nt against the

corporation on this issue. It would hardly be fair to preclude the corporation from litigating an issue that has not y et been adjudicated.

Characterizing this issue as one of collateral est oppel is also misleading. Instead, this statement should be seen for what it is, an admission by a party against its interest. V.R.E. 801(d)(2). At best, the corporation’s answer is an admission that, in its o pinion, the shareholders dissented in a timely manner. Shareholders are free to use that statement, as they have, in arguing that even the corporation has on some level acknowledged the timeliness and merit of their diss ent, but it is hardly preclusive. While it is up to the parties to expla in the import of this

statement, its ultimate character is one of evidenc e rather than binding precedent.

This leads to the second problem with using the co rporation’s answer to “prove” whether shareholder’s dissent was effective. As neither party disputes what the shareholders did before the stock consolidation meeting, the real disagreement is whether their act ions were sufficient to provide notice under § 13.21. This is a legal conc lusion for the court, not the parties, to make. While the corporation’s admi ssion may provide

evidence of what it understood the situation to be, the ultimate question here is whether shareholders met the legal requirem ents of § 13.21. One party simply saying so does not settle the issue. To draw an analogy, a party to a car accident may “admit” in a deposition that she filed a

document too late for the statutes of fraud, but su ch an admission does not mean her claim is barred for being out of time. Wh at bars her claim is whether she actually filed her document after a dat e that the court determines. Certainly, this is evidence that would inform a legal determination but is not in and of itself a legal c onclusion. So too, thecorporation’s admission is evidence of their belief s but is far from

determinative. As shareholders cite to no authorit y to the contrary, the court is unpersuaded by their line of reasoning.

As final preliminary matter, it is important to br iefly discuss the purpose and function of the Vermont Business Corpor ation Act. As one commentator phrased it: Business corporation law also must be flexible. It must be adaptable to the particular needs of the individual s forming and operating corporations and to changes in the busine ss environment. In good times and bad, corporations change their st ructure, sell and repurchase shares of stock, and combine with other companies. . . . The need for flexibility is constant. Rigid rules quickly become outdated, increase the costs of doing business, and cause corporate flight to other states. . . . [C]orporate law must further state policies and also permit corporations to operate without und ue restraint.

L.Smiddy, Vermont’s Business Corporation Law: A Cal l for Much Needed

Reform , 17 Vt. L.Rev. 3, 11 (1992). In the context of di ssenter’s rights, this balance between state policies and corporate f reedom is embodied in the remedial rights given to dissenters as a way of redress “when fundamental corporate changes are involuntarily imp osed on them.” Id . at 44. As that statement suggests, dissenter’s rights are not intended to limit or proscribe corporate action, but rather to give d issenting shareholders a way out that preserves their investment interest in the company when they disagree with a significant action that a corporati on is taking. Id . at 45.

Dissenter’s rights are not a new idea to corporate governance and were embodied in the predecessor to 11A V.S.A.’s ch apter 13. Id . at 46 (citing 11 V.S.A. §§ 2003, 2004 (1984)). The diffe rence between that system and the present one is that chapter 13 was a dopted to expand the availability of dissenter’s rights and streamline t he procedures forexercising them. Id . at 47–48. Thus, the byzantine and rigorous proce dure

of 11 V.S.A. §§ 2003, 2004 was supplanted by the mo re straightforward and expansive regime of chapter 13. Similarly as a remedial statute, chapter 13 “must be liberally construed in order to ‘suppress the evil and advance the remedy’ intended by the Legislature.” Human Rights Comm’n

v. Benevolent & Protective Order of Elks , 2004 VT 104, at ¶ 13 (quoting 3 N. Singer, Statutes and Statutory Construction § 60:1, at 183 (6th ed. 2001)). At the same time, dissenter’s rights are not meant to give shareholders an extraordinary ability to delay or s tifle the will of the majority either to raise the “nuisance value” of th eir shares or to thwart the majority’s intentions. 3 Am. Bar Assoc., Model Bus iness Corporation Act

Annotated 13-5 (3d ed. Supp. 1998–99) [hereinafter MBCA Anno tated ]. 2

The intent of chapter 13 is to motivate parties “to settle their differences in private negotiations” without resort to judicial pr oceedings. Id . This is, after all, a remedial statute meant to give dissent ers a way to protect their investment but little to nothing more. While it ha s been suggested that these rights provide an important check on improper management decisions, they are not inherent tools to neutraliz e corporate activity. Cf. Smiddy, supra, at 45 (“If enough dissenting shareho lders exercise appraisal rights for a transaction approved by the majority, then the cost of purchasing the dissenting shares may cause manageme nt to rethink its course of action.”). With these principles in mind , the court will address

2 The Vermont Business Corporation Act was adopted f rom the 1984 version of the Model Business Corporation Act. Towle v. Robin son Springs Corp. , 168 Vt. 226, 228 (1998); Smiddy, supra, at 5 n.1. This discuss ion will reference the MBCA and its commentary where it is applicable or insightful to the language and function of the

VBCA. See also MBCA Annotated , at 13-12 (marking differences between the 1984 an d 1999 versions of the MBCA).the substantive parties claims.

The facts of this case are not disputed. On June 17, 2004, Shelburne Supermarket’s Board of Directors approved a stock c onsolidation plan. Under this plan, the corporation would issue one ne w share of stock for every five shares of old stock. Any resulting frac tional shares would be purchased by the corporation at a price set by an a ccounting valuation made the previous year. Shelburne Supermarket is a pred ominately family owned affair. Prior to the consolidation action, a ll of the shares were owned by Clayton siblings but for one non-familial shareholder. 3 For the purposes 11A V.S.A. §§ 6.01, 6.02, Shelburne Superm arket had only one class of stock with equal voting and shareholder ri ghts. After the consolidation, there was still only one class of st ock. As this consolidation required shareholder approval, a meeting was schedu led June 30. All shareholders were given proper notice of the meetin g and their dissenter’s rights, should they disagree with the consolidation . This was done in conformance with 11A V.S.A. § 13.20.

The minority Clayton shareholders, Kevin, Lisa, Al an, and Catherine sent notice to the corporation on June 28 that they intended to dissent. In the same letter, the dissenting siblings notified t he corporation that they had given all their shares to Lisa who demanded apprais al rights under §13.21 for her and her sibling’s shares, which she claimed to hold as beneficial owner. This transfer was further noticed by papers filed at the June 30 meeting memorializing the sibling’s intent to vest Lisa with control and

3 Kevin Clayton, Lisa Clayton, Alan Clayton, and Cat herine Clayton-Richardson each owned 2.4 shares respectively. Their brother Steven Clayton owned 27.9 shares, and Bradley Miller, the only non-Clayton shareholde r owned 12.5 shares.ownership of all 9.6 dissenting shares. At the Jun e 30 meeting, however,

each sibling voted their own shares. Steven Clayto n and Bradley Miller

voted their 40.4 collective shares in favor of the consolidation. The siblings voted their 9.6 shares against it.

Following the meeting, the corporation sent notice to the dissenting shareholders that the consolidation had been approv ed and that their resulting fractional shares would be sold to the co rporation. The corporation included a check with each these letter reimbursing the siblings for their fractional shares based on the previously announced valuation. All four dissenting siblings returned their checks on A ugust 4 and made written demands for a higher valuation of their shares. 4 They also filed suit challenging the legitimacy of the corporation’s act ions under previous shareholder agreements. Clayton v. Shelburne Super market , No. S0876-04 CnC (Jul. 23, 2004). The corporation subsequently commenced this action on October 1 in accordance with § 13.30 to settle t he issue of valuation. In the complaint, the corporation disputes that the sh areholders’ June 28 letter gave proper written notice of their intent to deman d appraisal rights under § 13.21, in so far as Lisa Clayton was the only one w ho asserted any appraisal rights.

The corporation’s claim is that Kevin, Alan, and C atherine failed to give proper written notice of their intent to asser t appraisal rights, that is the right to demand that the corporation buy back their shares at a fair market value. This argument is based entirely on what the corporation

4 Under § 13.28, the dissenting shareholders could h ave kept the payment and still preserved their right to demand a higher valu ation. 11A V.S.A. § 13.28; Smiddy, supra, at 48–49.characterizes as shortcomings in the siblings’s Jun e 28 letter. In that letter,

all four siblings notified the corporation that the y intended to dissent from the consolidation proposal but only Lisa, on behalf of herself and as beneficial owner of other shares, notified the corp oration that she intended to assert her appraisal rights. As previously note d, § 13.21 establishes that a dissenting shareholder must give the corporation written notice of her intent in order to properly establish appraisal rig hts. This notice may appear in this case to be somewhat superfluous sinc e the corporation intended to compensate all four of the dissenting s hareholders with what it asserts is a fair market value price, but properly asserted appraisal rights give dissenting shareholders the opportunity to dem and a higher payment for their shares. This is what the corporation see ks to block through its claim against Kevin, Alan, and Catherine.

Much of the confusion surrounding this issue stems from the siblings’ attempt to transfer their interest in the ir shares to Lisa. This transfer violated a 1988 shareholders’ agreement, w hich required that a majority of the shareholders must approve of any in tra-shareholder stock transfers, and the Clayton siblings have since with drawn the attempted transfer presenting themselves in this case and the ir other action as the owners of 2.4 shares of Shelburne Supermarket stock . But in late June 2004, the Claytons were operating under the belief that their transfer was

valid and that Lisa was the beneficial owner of all 9.6 shares. The corporation urges this court to follow the letter o f § 13.21 in this matter and ignore what the siblings thought they had done. It adopts the position that a voided transfer flows back to the point at which it was attempted. Thus, title and control never left the individual sibling s, and Lisa’s notice on behalf of her siblings’ shares was never effective because she was never the “beneficial owner” of any such share. Since the ot her three siblings nevergave written notice of their intent to assert appra isal rights, they should not

benefit from a voided transaction. 5

This is an overly technical reading § 13.21 for it s purpose of notifying the corporation of a party’s intent to as sert dissenter’s rights. As noted in Professor Smiddy’s commentary, chapter 13 was adopted to streamline and ease the process for asserting such rights. Smiddy, supra, at

48; see also H. Johnson & P. Bartlett, Jr., Is a Fi stful of Dollars the Answer? A Critical Look at Dissenters' Rights under the Revised Model Business Corporation Act , 12 J.L. & Comm. 211, 216, 221 (1993). To properly assert appraisal rights, a dissenting shar eholder must make her intent and demand known to the corporation at two s eparate times. The first, embodied in § 13.21, comes before the shareh olders’ meeting and has the stated purpose of giving the corporation notice of a shareholder’s intent to dissent and demand appraisal rights. The second , embodied in § 13.23, comes after the shareholders’ meeting and is the fo rmal demand for payment and valuation. The difference between thes e two demands is illuminating. According to the official comment, t he first notice “enables the corporation to determine how much of a cash pay ment may be required” and “to limit the number of persons to wh om the corporation must give further notice.” M.B.C.A. Annotated , at 13-59. This is essentially an opportunity for a company to get a h ead count and figure out what if any money it may have to lose if its action is passed. This may provide pause for a company, but it is by no means a formal ceremony.

5 This argument seems to rely on a void/voidable dis tinction that is not apparent in § 13.21. See Klein v. Wolf Run Resort , 162 Vt. 506, 513 (1995) (Dooley, J., dissenting) (discussing the distinction between voi d and voidable contracts). The important question here is not about the validity o f the transaction but whether the letter provided adequate notice to the corporation at the time.Courts in other jurisdictions have looked quite lib erally at attempts to

satisfy this notice requirement. See, e.g., Raab v . Villager Indus. Inc. , 355 A.2d 888, 891 (Del. 1976); Jaquith & Co. v Island Creek Coal Co. , 219 A.2d 514, 516 (N.J. 1966) (shareholder’s modified p roxy form satisfied pre-meeting notice requirements for dissenter’s rig hts). This may be in part

because the initial notice can be informal and the satisfying its purpose is much more important than satisfying any punctilious ness.

In contrast, the post-meeting demand for payment i s considered a much more formal transaction between the dissenting shareholder and the corporation. As one court noted:

A demand for payment under § 262(b), on the other h and, requires the formality and legal technicality befitting a la st step in the final transaction between the corporation and its dissent ing stockholder. A demand for payment must be properly and formally signed by or for all stockholders of record.

Raab , 355 A.2d at 892. Many of Shelburne Supermarket’s arguments about the shortcomings of the June 28 letter mirror this elevated concern toward the post-meeting demand for payment communication. Yet, the Claytons’ later communication is not at issue here as it appe ars to have satisfied the requirements of § 13.23.

In this case, the corporation hangs its argument a round the botched stock transfer to Lisa Clayton. This line of reaso ning, however, is ultimately irrelevant to analyzing the § 13.21 meri t of the letter. As the siblings shareholders note, the letter adequately s tates that all four of them intended to dissent from the consolidation plan. T he letter, in its own way, is also unambiguous about the identity of the owner s for whom Lisa is acting as the beneficial owner. The third sentence of the June 28 letterstates that Kevin, Alan, and Catherine had transfer red their interest in their

stock to Lisa to hold as beneficial owner. 6 Thus, there is no serious question of identity when in the same letter Lisa g ives § 13.21 notice for

herself and “those for whom she is the beneficial o wner.” While this transfer would later be voided under the corporatio n’s rules, at the time the siblings were fairly clear that they intended to di ssent and to assert their dissenter’s rights through Lisa. The corporation a dmits as much in its brief when it explains that it sent individual notices on July 2 to the Claytons, notwithstanding the alleged failure of three of the m to properly serve notice under § 13.21, “in an abundance of caution.” That is the corporation knew that the siblings had dissented and intended to ass ert their appraisal rights. Their notice, while imperfect, had certainly trigge red some awareness on the part of the corporation.

Any other concerns embodied in § 13.21 are not par ticularly relevant here. As a small corporation, there was no danger or equitable problem in allowing the four siblings to assert their dissente rs’ rights since there were no other dissenting shareholders. The corporation was aware of just how many shareholders were dissenting and given their f amilial connection to the business it was highly likely that they would a ttempt to fully assert their dissenters’ rights. The fact that the corporation was already planning on purchasing the siblings’ shares also mitigates any lingering concerns about allowing the June 28 letter satisfy § 13.21. As thi s plan was already in place prior to the June 30 meeting, it would be somewhat disingenuous for the corporation to argue that any unexpected hardship a ttached to allowing the

6 The briefs are silent as to why this transfer was attempted. It is possible that the dissenting siblings wanted to combine their stock s o that at least one share could survive

the consolidation.siblings to assert their full appraisal rights. Af ter all, this discussion is really just about the ability of the dissenting sha reholders to make a challenge to the corporation’s valuation. Therefor e, the court concludes that the June 28 letter satisfied the sibling’s dut y under § 13.21, in that it put the corporation on notice that the siblings int ended to assert appraisal rights for all 9.6 shares of dissenting stock.

The remaining question, whether the corporation pr operly complied with its articles of incorporation in the consolida tion, is irrelevant to the present case. Dissenters have elected to pursue th eir appraisal rights under chapter 13. That election gives them the sole reme dy of appraisal rights that they have chosen to pursue. As previously not ed, chapter 13 represents a compromise between minority and majority interest s. By electing to dissent and asserting appraisal rights, the sibling s have chosen to leave the corporation and recoup their financial interest. A ny arguments about corporate process, short of unlawful action or frau d, are outside the scope of this review. 11A V.S.A. § 13.02 (b). Therefore , beyond fraud or unlawfulness, scrutiny over the procedure that the corporation chose to use to conduct a consolidation is outside the scope of a dissenters’ rights case.

To the extent that the shareholders’ argument can be understood to

mean that the consolidation was unlawful, a brief d iscussion is warranted. The dissenters argue that the consolidation was inv alid because 1) it did not include a change to the articles of incorporation a nd 2) such a change would require the dissenters’ approval as a voting group under 21 V.S.A. § 10.03(e)(1). To this second point, the dissenters rely on an improper use of the term “voting group.” According to them, they q ualify as a voting group

because the consolidation would result in their dis enfranchisement from the corporation. Thus, they would define the term to m ean any group ofshareholders who are disproportionately affected by a fundamental change.

Presumably, this would mean that almost any dissent ing shareholder in a fundamental corporate change would qualify as a vot ing group. Under such a definition, dissenters seem to be proposing § 10. 04 as a way of reasserting the old common-law principle of unanimity for corpo rate changes. Cf. Johnson & Bartlett, supra, at 212–16 (describing ho w the MBCA and chapter 13 replaced the common-law requirement unan imity). Of course, such an interpretation would violate the limits of chapter 13 and the compromise it represents. Id

.

“Voting group” is actually a term of art that is d efined in 11A V.S.A. § 1.40 (24) as

[A]ll shares of one or more classes or series that under the articles of incorporation or this title are entitled to vote and be counted together collectively on a matter at a meeting of s hareholders. All shares entitled by the articles of incorporation or this title to vote generally on the matter are for that purpose a sing le voting group.

Cf. Black’s Law Dictionary at 1608 (8th ed. 2004) ( classification of shareholders by the type of stock held for voting o n corporate matters). In other words, a corporation has only one voting grou p unless it issues shares with different voting rights. See 11A V.S.A. §§ 6. 01, 6.02 (defining how incorporators can issue different classes and serie s of stock). The evidence here shows that the corporation issued only one cla ss and series of stock. While dissenters as minority shareholders may have been disproportionally affected by the consolidation, they had equal votin g rights with the majority shareholders. Therefore, the requirements they cit e in § 10.03 are inapposite and the second part of their argument mu st fail.

As to the dissenters’ first point, the question is by and large moot.At this point, any technical flaws that the consoli dation has will not affect

the purpose for which the court is involved with th is case, namely the judicial appraisal of shares. 11A V.S.A. § 13.30. The corporation argues

that it did not need to amend its articles of assoc iation to consolidate its shares. To support this, the corporation cites the permissive language in § 10.03 governing amendments. There is also addition al language in § 6.04(1)(2) that empowers a corporation to “arrange for the disposition of fractional shares by the shareholders.” Other juri sdictions working with the Model Business Corporation Act have either affirmed the power of the corporation to make such consolidations without ame ndment or have allowed the corporation to amend its articles after wards. Goldman v.

Union Bank & Trust , 765 P.2d 638, 640–41 (Colo. App. 1988) (affirming the corporation’s power); Seed Products Intern., In c. v. Owen , 768 P.2d 973, 975 (Utah App. 1989) (allowing for later amend ment). Such flexibility fits with the general purpose of the Ve rmont Business Corporation Act to give corporations flexibility wi thin the rules to allow them to adopt procedures to their individual needs. Smiddy, supra, at 11. In this case, either option would leave the dissent ers in the same position: in the minority with their dissenting rights. Whether the corporation violated its corporate structure, however, is irrelevant as it does not void the

consolidation.

Dissenters also challenge Steven Clayton’s ownersh ip of a majority of the shares in the corporation. This challenge r efers to a dispute between Steven and his parents that is pending in Chittende n Superior Court. In re Shelburne Supermarket , No. S0065-03 CnC (Jan. 17, 2003). That case is an appeal from an arbitration giving Steven control over a majority of Shelburne Supermarket shares. The dissenters in th is case argue that because the Shelburne Supermarket case is about the ownership of theshares and is still pending Steven cannot prove tha t he controls a majority

of Shelburne Supermarket stock. This argument mis- characterizes the case’s present disposition. On September 11, 2003, this court issued a decision on the issue of ownership. In re Shelburn e Supermarket , Findings

of Fact, Conclusions of Law, and Notice of Decision , No. S0065-03 CnC (Katz, J., Jan. 17, 2003). There, this court affir med the arbitration agreement and ordered that Steven be vested with ti tle to and control over

the stock shares. To the extent that this case rem ains open, it is only about tangential issues that do not affect the question o f ownership for this case. The conclusion is that there is no evidence to supp ort the claim that Steven Clayton lacks or lacked ownership and control over the majority stock shares that he voted in the consolidation plan.

Finally, dissenters have made an unsupported motio n for fees and costs under § 13.31. Dissenters have not included any evidence or affidavits to support this motion. V.R.C.P. 7(b)(1 ). Briefly, § 13.31 does not appear to support a motion for expenses mid-tri al. As discussed before, the provisions of § 13.23 allow dissenters to accep t the corporation’s payment and still retain the right to dissent. Smi ddy, supra, at 48–49. Dissenters chose not to accept this payment. It is somewhat disingenuous for them to argue hardship now. Finally, there has been no evidence that the corporation failed to comply with its obligatio ns under chapter 13. Nor does merely challenging dissenters’ compliance equa te to vexatious

behavior. Dissenters’ motion is dismissed.

In conclusion, the court finds that the dissenting shareholders properly asserted their appraisal rights prior to t he June 30 shareholders meeting, and the corporation had enough notice to s atisfy the requirementsof § 13.21. The corporation’s actions were legitim ate within the context of

its corporate structure. To the extent such action s may or may not have completely conformed to the corporation’s articles of incorporation, they do not affect the validity of the consolidation. More over, as dissenters have invoked chapter 13, they are limited from further c hallenging the fairness or sensibility of the consolidation. They have chosen to leave the corporation. 11A V.S.A. § 13.02(b). This raises a point that ne ither party has briefed. As § 13.02(b) makes appraisal rights the exclusive remedy for shareholders, the question is whether the other case, Clayton v. Shelburne Supermarket

, No. S0876-04 CnC, has been mooted and should be con solidated with this one to as to avoid any further costs and unnecessar y delay. V.R.C.P. 42. Apart from this, the sole remaining issue is whethe r the corporation properly valuated the payment that it made to the d issenting shareholders.

Based on the foregoing, plaintiff’s motion for sum mary judgment is denied in part and granted in part. Defendants’ mo tion for summary judgment is denied in part and granted in part. De fendants’ motion for fees

is dismissed.

Dated at Burlington, Vermont________________, 2005

.

________________________

Judge