Opinion ID: 1058500
Heading Depth: 2
Heading Rank: 4

Heading: Application of the Stock Characterization Test

Text: If an instrument bears the label `stock' and possesses all of the characteristics typically associated with stock, it is a security within the meaning of the Virginia Securities Act. Gould, 471 U.S. at 704, 105 S.Ct. 2308. As stated above, the characteristics typically associated with stock are: (1) the right to receive dividends contingent upon an apportionment of profits; (2) negotiability; (3) ability to be pledged or hypothecated; (4) conferring of voting rights in proportion to the number of shares owned; and (5) ability to appreciate in value. Forman, 421 U.S. at 851, 95 S.Ct. 2051. The trial court erred in holding that the MHCI stock did not have the indicia of traditional stock. First, there is no dispute that Andrews had a right to receive dividends contingent upon an apportionment of profits. As the owner of the shares of MHCI stock, Andrews was entitled to receive dividends payable on that stock if any were ever paid. Second, the MHCI stock is negotiable. Although the Purchasers agreed not to sell, transfer, assign, or gift their shares without the Sellers' permission until the Note was satisfied, this was a limitation on the parties by agreement, not a limitation on the instruments themselves. As previously noted, Andrews purchased Pownall's shares of stock in MHCI. For the same reason, the MHCI stock has the ability to be pledged or hypothecated. The parties' agreement to hold the instruments in escrow until the Note was satisfied does not change the characteristics of the instruments. Similarly, the MHCI stock conferred voting rights on the Purchasers. The parties placed a limitation in the SPA on the Purchasers' right to vote, such that the Purchasers did not retain the exclusive right to vote the shares if they breached the SPA. Again, this is a limitation on the parties by the agreement, not a limitation on the instruments. Finally, it is not disputed that the MHCI stock had the ability to appreciate in the future if the value of the business increased. Because the MHCI stock has all the characteristics of traditional stock as outlined in Forman and bears the label stock, we hold that it is a security within the meaning of Code § 13.1-501. Therefore, the Virginia Securities Act applies to the sale of the MHCI stock in this case.