Opinion ID: 2747281
Heading Depth: 2
Heading Rank: 3

Heading: The Shareholders' Agreement

Text: The Shareholders' Agreement was executed by Norma, Lewis, and Nancy as shareholders of Capitol Foundry. Section 3, titled Mandatory Sale and Purchase of Stock, provides in relevant part: (a) Death of an Agreeing Shareholder. Subject to subparagraph (d) hereof, on the death of an Agreeing Shareholder, all of the Shares of Stock owned by such Agreeing Shareholder shall be sold by his personal representative and shall be purchased by the Company or the remaining Shareholders for the purchase price and under the terms set forth in Section 4. Such offer shall be deemed made and accepted on the ninetieth (90th) calendar day following the date of death, whether actually made and accepted or not. . . . . (d) An Agreeing Shareholder shall have the right to convey or bequeath his/her shares to a member of such Agreeing Shareholder's immediate family. Such right shall apply during such Agreeing Shareholder's 13 lifetime and shall also apply subsequent to the demise of such Agreeing Shareholder, and then be applicable to such Agreeing Shareholder's executor or administrator. The term immediate family shall be defined as children, spouses, parents and siblings of such Agreeing Shareholder. In light of the parties' arguments, we address these paragraphs separately.
We first turn to the exemption provision of Section 3, Paragraph (d) of the Shareholders' Agreement. To exempt her shares from the mandatory purchase scheme of Section 3, Paragraph (a), Norma was able to convey or bequeath [her] shares to a member of [her] immediate family. The term immediate family is defined within this paragraph as Norma's children, spouses, parents and siblings.
The parties agree that Paragraph (d) allowed Norma to bypass the mandatory purchase scheme of Paragraph (a) by bequeathing her Capitol Foundry stock to her children. The parties disagree whether Paragraph (d) permitted Norma to do so by way of the pour-over provision in Norma's Will, which, as discussed, would convey Norma's shares of Capitol Foundry stock to Trust A for the benefit of Norma's children. Resolving this dispute requires ascertaining the nature of an inter vivos trust. An inter vivos trust is not like a 14 corporation, which is a legal entity entirely separate and distinct from the shareholders or members who compose it. Cheatle v. Rudd's Swimming Pool Supply Co., 234 Va. 207, 212, 360 S.E.2d 828, 831 (1987). So, for example, because a corporation is a legal person, separate and distinct from the persons who own it, it is the corporation, as the . . . owner and operator of [a] business, [who] is the person entitled to [the business's] profits. Keepe v. Shell Oil Co., 220 Va. 587, 591, 260 S.E.2d 722, 724 (1979). In contrast, an inter vivos trust is inseparable from the parties related to it, and the trust does not have separate legal status. Indeed, the term trust refers not to a separate legal entity but to a fiduciary relationship with respect to property, subjecting the person by whom the title to the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it. Restatement (Second) of Trusts § 2 (1959). When such a trust exists, it is not a separate legal entity being referred to, 15 but a fiduciary relationship between already existing parties, be they real persons or other legal entities. 3 Those parties have specific titles to denote their various roles within the trust relationship. There is the settlor, or the person who creates a trust, the trustee, or the person holding property in trust, and the beneficiary, or the person for whose benefit property is held in trust. Restatement (Second) of Trusts § 3 (1959); see also Code § 64.2-701. Because there is no trust entity which retains title over property held in trust, a settlor who will not also be a trustee must convey title of trust property to another party in order for a trust to be created. Code § 64.2-719(1). In most trusts, 4 the trustee acquires legal title to the trust property, while [t]he beneficiary is the equitable owner of trust property, in whole or in part. Fletcher v. Fletcher, 3 We note that the type of trust we refer to in today's opinion – that is, a fiduciary relationship – is different in kind from a business trust. A business trust under the Virginia Business Trust Act, Code § 13.1-1200 et seq., is a separate legal entity like a corporation. See Code § 13.1-1201 (defining [b]usiness trust); see also Code § 1-231 (Whenever the term 'person' is defined to include both 'corporation' and 'partnership,' such term shall also include 'business trust and limited liability company.'). 4 Nancy invokes the legal principle that, to create a land trust, the settlor must convey both equitable and legal title in the [trust] property to the trustee. Austin v. City of Alexandria, 265 Va. 89, 95, 574 S.E.2d 289, 292 (2003). Trust A is not a land trust, and therefore this principle does not apply to the facts of this case. 16 253 Va. 30, 35, 480 S.E.2d 488, 491 (1997); see also Curtis v. Lee Land Trust, 235 Va. 491, 494, 369 S.E.2d 853, 854 (1988). Thus, legal and equitable ownership of property entered into Trust A in this case is split between the trustees and beneficiaries. It would be incorrect, then, to adopt Nancy's argument that because a trust is not defined in Paragraph (d) as a type of immediate family, Paragraph (d) prevented Norma from bequeathing her shares of Capitol Foundry stock by way of Trust A. Trust A, like all inter vivos trusts, is simply a method to transfer property to another party including, potentially, members of Norma's immediate family. The question is thus whether Trust A constitutes a mechanism by which Norma bequeathed her Capitol Foundry stock to persons who qualify as members of Norma's immediate family. If so, disposition of Norma's shares of Capitol Foundry stock by way of Trust A was permitted by Paragraph (d) as an alternative to the mandatory purchase scheme of Paragraph (a). In undertaking this inquiry, we must determine whether both the trustees and the beneficiaries of Trust A qualified as members of Norma's immediate family. This is because both a trustee and a beneficiary have a substantial ownership interest in trust property. 17 On the one hand, a beneficiary's equitable title permits the beneficiary to enforce the terms of the trust and to seek judicial remedy in the event of a breach. See Code § 64.2- 792(B) (setting forth methods for a court to remedy a breach of trust that has occurred or may occur); Miller v. Trevilian, 41 Va. (1 Rob.) 1, 24 (1843) (holding that, when a trustee, as the legal owner, has failed to perform his duty, the party retaining equitable ownership has the power to seek redress in a court of equity). On the other hand, a trustee's legal interest is more than nominal. A trustee, though a mere representative, must attend to the safety of the trust property and . . . obtain its avails for the beneficiary in the manner provided by the trust instrument. Fletcher, 253 Va. at 35, 480 S.E.2d at 491. A trustee's legal title in trust property allows him to utilize and, if appropriate, dispose of trust property so as to effectuate his duty to administer the trust. See Code § 64.2- 763. In fact, unless limited by the terms of the trust, a trustee may exercise [a]ll powers over the trust property that an unmarried competent owner has over individually owned property. Code § 64.2-777(A)(2)(a). And, specifically, [w]ith respect to stocks such as Norma's shares, a trustee has the power to exercise the rights of an absolute owner. Code § 64.2-778(A)(7). 18 In light of the substantial nature of both a beneficiary's and trustee's ownership interest in trust property, disposing of property by trust is a method of conveying such property to both the trustee and beneficiary. As such, although the Shareholders' Agreement did not outright prevent Norma from bequeathing her Capitol Foundry stock by way of Trust A, the Shareholders' Agreement prevented Norma from bequeathing her Capitol Foundry stock by way of Trust A if both the trustees and beneficiaries do not qualify as Norma's immediate family. In this case, at the time Norma's shares of Capitol Foundry stock were to pour over into Trust A, all the beneficiaries of Trust A qualified as members of Norma's immediate family because each beneficiary – Lewis, Nancy, and Patricia – is either Norma's son or daughter, and therefore qualify as Norma's children. However, at the time Norma's shares of Capitol Foundry stock were to pour over into Trust A, all the trustees of Trust A did not qualify as members of Norma's immediate family. Lewis and Thomas were co-trustees of Trust A at the time of Norma's death. Thomas, being Patricia's husband, is Norma's son-in-law. Because a son-in-law is not one of Norma's children, spouses, parents [or] siblings, Thomas is not a member of Norma's immediate family as that term is defined in Paragraph (d). We therefore hold that, because Norma's method 19 of bequeathing her shares by way of Trust A did not satisfy the terms of Paragraph (d), Paragraph (d) did not exempt those shares from the mandatory purchase scheme of Paragraph (a).
It is now necessary to construe the exemption in Section VII of Norma's Will. As previously stated, that exemption permits property that would otherwise pass into Trust A to instead pass directly to the trust beneficiaries if such property would be distributed immediately to any beneficiary under the terms of the Trust Document. Appellees argue that this exemption applies to Norma's shares of Capitol Foundry stock because the beneficiaries of Trust A will immediately receive all of Norma's shares. Consequently, the argument goes, because Section VII of Norma's Will permits Norma's shares to bypass Trust A and be distributed directly to the beneficiaries, and because all the beneficiaries are members of Norma's immediate family, the disposition of Norma's shares in accordance with the terms of Norma's Will actually falls within the scope of Paragraph (d). We find this argument unconvincing because it stretches the term immediate beyond its ordinary meaning. The language of the will itself must be relied on as the chief guide [to understanding how the will operates]. If that language be ordinary and popular, its meaning is to be 20 construed according to its usual acceptation. Senger v. Senger, 81 Va. 687, 696 (1886). Immediate means [o]ccuring without delay and instant. Black's Law Dictionary 866 (10th ed. 2014). We thus disagree with the appellees because Norma's shares of Capitol Foundry stock could not be instantly distributed to any beneficiary under the terms of the Trust Document. Unlike most other property poured over into Trust A, which automatically underwent a per stirpes division under Article IV, Section (B)(3) of the Trust Document, Norma's shares were first subject to Lewis's exclusive purchase option under Article IV, Section (B)(6) of the Trust Document. Lewis's exclusive purchase option thus prevented every beneficiary from immediately having their per stripes division of Norma's shares distributed to them. And Lewis himself could not immediately have Norma's shares distributed to him pursuant to that exclusive option because he was required to first determine how many of the shares he wanted to acquire, purchase such shares, arrange or make payment under a specified payment plan, and act within a set schedule as established by the terms of Section (B)(6). This is not the type of automatic and instant distribution contemplated by the term immediate as that term would apply to most property poured over into Trust A. 21 In sum, Lewis's exclusive purchase option prevented Norma's shares of Capitol Foundry stock from simply passing through Trust A and being distributed immediately to any beneficiary. The exemption provision of Section VII of Norma's Will does not apply to Norma's shares, and those shares were required to pass through Trust A by the terms of Norma's Will and the Trust Document. This argument therefore does not alter our conclusion that Norma's estate documents failed to bequeath Norma's shares in a manner consistent with Section 3, Paragraph (d) of the Shareholders' Agreement.
As the exemption of Section 3, Paragraph (d) of the Shareholders' Agreement does not apply, we must construe the mandatory purchase scheme of Section 3, Paragraph (a) of that agreement. We find the language of Paragraph (a) to be clear and unambiguous, and therefore the intention of the parties must be determined from what they actually say [in the contract] and not from what it may be supposed they intended to say. McCarthy Holdings LLC v. Burgher, 282 Va. 267, 274, 716 S.E.2d 461, 465 (2011) (internal quotation marks omitted). That is, we give effect to Paragraph (a), being the intended expression of the parties' agreement, the meaning derived from the plain language of that contract provision. White v. Boundary Ass'n, Inc., 271 Va. 50, 55, 624 S.E.2d 5, 8 (2006). 22 Paragraph (a) applies to Norma, Lewis, and Nancy because, in executing the Shareholders' Agreement, they each are an Agreeing Shareholder. As an Agreeing Shareholder, Norma bound her personal representative[s] to have all of Norma's shares of Capitol Foundry stock sold. Moreover, Norma's shares are required to be purchased by the Company or the remaining [Agreeing] Shareholders for the purchase price and under the terms set forth in Section 4 [of the Shareholders' Agreement]. Thus, Paragraph (a) requires Norma's personal representatives to sell all of her Capitol Foundry shares to either the Company or the remaining shareholders upon Norma's death. 5 Appellees argue that this provision of the Shareholders' Agreement is unenforceable because it contains an uncertain material term. It is well settled that a contract must be complete and certain[,] and that the essential elements . . . must have been agreed upon[,] before a court . . . will 5 Norma is deceased, and Lewis and Thomas are Norma's personal representatives as executors of her estate. See Bartee v. Vitocruz, __ Va. __, __, 758 S.E.2d 549, 552 (2014). In administering Norma's estate, Lewis and Thomas must dispose of Norma's shares consistent with the Shareholders' Agreement, as such contractual obligations do not involve any special skills or training and therefore Norma's death does not discharge [those] obligation[s]. Firebaugh v. Whitehead, 263 Va. 398, 405-06, 559 S.E.2d 611, 616 (2002); see also Code § 64.2-514 (Every personal representative shall administer, well and truly, the whole personal estate of his decedent.). 23 specifically enforce the contract. Roles v. Mason, 202 Va. 690, 692, 119 S.E.2d 238, 240 (1961). Appellees argue that Paragraph (a) is uncertain when, as in this case, disagreement exists about which parties will purchase Norma's stock, as well as the quantities of stock each party would purchase. We reject this argument. The law does not favor declaring contracts void for indefiniteness and uncertainty, and leans against a construction which has that tendency. Reid v. Boyle, 259 Va. 356, 367, 527 S.E.2d 137, 143 (2000) (internal quotation marks omitted). We do not permit parties to be released from the obligations which they have assumed if this can be ascertained with reasonable certainty from language used, in light of all the surrounding circumstances. Id. Such surrounding circumstances include other provisions of the contract, as we construe [a] contract as a whole. Schuiling v. Harris, 286 Va. 187, 193, 747 S.E.2d 833, 836 (2013). Thus, we review the entire Shareholders' Agreement to determine whether the contracting parties established a mechanism to provide certainty to this potentially indefinite term. Section 14 of the Shareholders' Agreement, titled Survival of Benefits, establishes such a mechanism. Section 14 provides, in pertinent part: 24 Any covenant or agreement made by the Company herein shall also constitute a covenant and agreement by the Agreeing Shareholders to vote the Shares of the Company held by them to cause the Company to perform any such covenant or agreement. The Company, through its shareholders, agreed to purchase Norma's shares of Capitol Foundry stock upon her death in Section 3, Paragraph (a) of the Shareholder's Agreement. By way of Section 14 of that agreement, Lewis, Nancy, and Norma, as Agreeing Shareholders, have an overriding obligation to ensure that the Company performs that agreement. Thus, in the event that the Company, Lewis, Nancy, and Norma's executors cannot agree as to who will purchase Norma's stock, and in what quantities, Section 14 obligates Lewis, Nancy, and Norma's executors to vote their respective shares of the Company so that the Company will perform its agreement by purchasing all of Norma's stock. In this manner, Section 3, Paragraph (a) of the Shareholders' Agreement is not uncertain as to who will ultimately purchase Norma's shares, and in what quantity. Paragraph (a) certainly allows for an array of options as to what might happen: either the Company, Lewis, or Nancy, or any combination thereof, may make such a purchase, and in whatever quantity they determine. But Section 14 provides definiteness to this term in the event of disagreement by requiring the 25 Agreeing Shareholders to vote their shares to have the Company purchase all of Norma's stock.