On October 31, 2014, the Virginia Supreme Court ruled that the transfer of shares of closely held stock from a decedent’s estate to the decedent’s revocable trust agreement pursuant to her pour-over will triggered the company’s obligation to purchase the shares under the shareholders’ agreement, despite the terms of decedent’s revocable trust that provided for the shares to be distributed to permissible transferees as allowed under the shareholders’ agreement.
In 2012, Norma Corr (“Mrs. Corr”) died owning 95 shares of Capitol Foundry of Virginia (the “Company”), a closely held Virginia corporation. Mrs. Corr’s shares were subject to a shareholders’ agreement that required the Company to purchase a deceased shareholder’s stock, unless such shares were conveyed or bequeathed to the decedent’s children, spouse, parents or siblings (the decedent’s “immediate family”). Mrs. Corr’s shares passed pursuant to the residuary clause of her will and “poured over” into her revocable trust. Mrs. Corr’s daughter sued to compel the Company to purchase the shares from Mrs. Corr’s estate in order to prevent the shares from being distributed to the revocable trust, under which Mrs. Corr’s son had a right to purchase the shares for a cash downpayment and a 10-year promissory note.
Circuit Court Decision
The Circuit Court of the City of Virginia Beach held that the shareholders’ agreement did not control and the shares were to pass to the revocable trust free of the mandatory purchase terms of the shareholders’ agreement.
Supreme Court of Virginia Decision
The Supreme Court of Virginia reversed the Circuit Court and held that the shareholders’ agreement governs the disposition of the Company stock.
The Court concluded that because not all of the trustees and beneficiaries under the revocable trust agreement were immediate family, the disposition of the stock under the will did not qualify for the exception from the mandatory purchase terms of the shareholders’ agreement. Mrs. Corr’s son-in-law was serving as a co-trustee under the revocable trust, and because he was not an immediate family member, the distribution to the revocable trust was subject to the mandatory purchase scheme.
In its analysis, the Court reasoned that a trustee has legal title to the trust assets and a beneficiary has equitable title, both of which are substantial ownership interests. Therefore, in order for the disposition to the trust to qualify as a disposition to immediate family members, the court concluded that the beneficiaries and trustees must all constitute permissible transferees.
Because the shareholders’ agreement allows the parties the opportunity to come to an agreement regarding the purchase of the shares, the Court remanded the case to the Circuit Court. If the parties cannot come to an agreement, the Court ruled that Mrs. Corr’s executors were required to sell her shares to the Company.
In a lone dissent, Justice McClanahan criticized the majority opinion for elevating form over substance and thereby reaching an irrational result. Justice McClanahan argued that the fact that one trustee was not an immediate family member should not compel the Company to purchase the stock. The dissenting opinion further notes that all parties agree Mrs. Corr could have achieved her desired disposition of the Company stock had she done so in the body of her will. Simply because Mrs. Corr employed a pour-over will and revocable trust agreement, a common estate planning technique, her testamentary intent should not be thwarted by the terms of the shareholders’ agreement.
The Court’s application of the shareholders’ agreement to the decedent’s estate plan is a reminder of the importance of coordinating an estate plan with all other applicable agreements, particularly for the owner of an interest in a closely held business. Whether it is a limited liability company, partnership or corporation, the governing agreement will have an effect on the owner’s estate plan. Jimenez should also serve as a reminder that close attention must be given to technical requirements because, as argued by the dissent, the form of the transfer may trump the substance.