Today's Close of Disthene Group Settlement Bolsters Minority Shareholders' Rights, Reinforces Duty-of-Loyalty Standards, Say Attorneys
--LeClairRyan legal team offers insights after resolution of landmark Virginia case
RICHMOND, Va., Aug. 22, 2013 /PRNewswire/ -- Today's resolution of Colgate et al v. the Disthene Group Inc., a landmark Virginia case, has considerably strengthened the rights of minority shareholders in closely held companies across a broad spectrum of industries, according to the national law firm LeClairRyan.
On June 13, Fairfax Circuit Judge Jane Marum Roush, sitting as judge designate in Buckingham County, Va., approved a $70 million settlement on behalf of minority shareholders of The Disthene Group Inc., a Dillwyn, Va.-based holding company. Disthene Group's assets include a mining company that extracts Kyanite, a critical heat-resistant element incorporated in products ranging from spark plugs to space shuttle tiles, extensive landholding interests, and the Cavalier Hotel Corporation. Today's close of the settlement means that the courts will remove the receiver that had been appointed for the Disthene Group but does not vacate the judge's opinion finding oppression and corporate waste.
"Judge Roush's opinion in the Disthene case and today's conclusion of the settlement will shake up the way business has been done at many companies, and it will reverberate for decades to come," said John H. Craddock, Jr., a Richmond-based shareholder who focuses his practice on unfair business practices, corporate governance, fiduciary duties and other matters. He worked alongside LeClairRyan shareholders Michele K. Burke and Thomas M. Wolf, representing the plaintiff minority stakeholders who owned 42 percent of the company. The minority shareholders are relatives of the Dixon family that owns the controlling interest in Disthene Group.
"Until now, majority shareholders at many companies in Virginia and elsewhere have been able to run a company for their own benefit while running roughshod over minority shareholders," added Craddock. "But the resolution of this case is a shot across the bow, and warns controlling shareholders that they can no longer hide behind the so-called business judgment rule. From now on, they can be held accountable for their actions."
The lawsuit was prompted by allegations that Disthene Group's controlling shareholders and the top executives in the company abused their positions by plundering the company and enriching themselves at the expense of minority shareholders.
In a 2012 ruling ordering the dissolution of the company—a remedy subsequently made unnecessary by the settlement—Judge Roush found that the controlling shareholders had engaged for decades in self-dealing activity that violated long-standing business principles and legal duties. In February, the Virginia Supreme Court rejected Disthene Group's petition to appeal the ruling, but in April, the Supreme Court accepted the appeal after a request for a rehearing. With the settlement, however, the court dismissed the appeal and remanded the case to the circuit court, where the receiver was removed and the dissolution of the Disthene Group was vacated in conjunction with the buyout of the minority shareholders.
"The decision by Judge Roush and today's conclusion of the settlement mean that oppressive majority shareholders can no longer say 'everyone does it,'" observed Burke, who focuses on fiduciary litigation and unfair business practices. "Judge Roush's decision represents one of the few comprehensive clarifications of the business judgment rule, which is often invoked to try to prevent courts from weighing in on matters like this. It has national implications because the principles that minority shareholders have enforceable rights and that they must be treated fairly are generally applicable anywhere in the U.S."
The outcome of the case should actually be comforting to honest entrepreneurs and other small business owners who sell a stake in their company to raise funds, said Wolf, who has 35-years' experience in business litigation. "The controlling shareholders will still be able to choose directors and officers and thereby control the company," he noted. "But this case sends a message: if the shareholders calling the shots over-reach, they do so at their own peril and the consequences can be severe."
LeClairRyan provides business counsel and client representation in corporate law and litigation. With offices in California, Connecticut, Massachusetts, Michigan, New Jersey, New York, Pennsylvania, Virginia and Washington, D.C., the firm has approximately 350 attorneys representing a wide variety of clients throughout the nation. For more information about LeClairRyan, visit www.leclairryan.com.
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