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A Decade of the Model Business Corporation Act in Virginia
Author(s): George D. Gibson, George C. Freeman and Jr.

Source: Virginia Law Review, Vol. 53, No. 6 (Oct., 1967), pp. 1396-1423
Published by: Virginia Law Review
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VIRGINIA SECTION
A DECADE OF THE MODEL BUSINESS CORPORATION

ACT IN VIRGINIA
George D. Gibson* & George C. Freeman, Jr.**
INTRODUCTION
On January 1, 1967, current Virginia corporation law marked the tenth

anniversary of its introduction into the Commonwealth. The law consists
on the one hand of the Virginia Stock Corporation Act (Virginia Act)'
and on the other of the Virginia Non-Stock Corporation Act,2 the former
closely reflecting the Model Business Corporation Act of the American Bar
Association (Model Act)3 and the latter the Model Non-Profit Corporation
Act4 of similar origin. The Virginia Stock Corporation Act, as the more
important, is the principal subject of comment here.
The Model Act and the Virginia Act have exercised considerable influence
on one another's development. In 1954, when the Virginia Code Commission
began its task of revising the Virginia corporation law, the Model Act,
as amended in 1953, embodied the results of roughly a dozen years of work
to produce a reasonable, workable, middle-of-the-road statute. The Model
Act was not designed as a radical departure from existing corporate law in
the various states, but rather as a codification of what was then thought
to be the best existing practice. It was recognized that modernizations
* Member, Virginia and District of Columbia Bars. B.A., 1924, University of Vir-
ginia; M.A., 1925, LL.B., 1928, Harvard University.
* *Member, Virginia and Alabama Bars. B.A., 1950, Vanderbilt University; LL.B.,
1956, Yale University.
1 VA. CODE ANN. ?? 13.1-1 to -135 (1964), as amended, (Supp. 1966) (enacted, Va.
Acts of Assembly 1956, ch. 428, at 487).
2 VA. CODE ANN. ?? 13.1-201 to -296 (1964), as amended, (Supp. 1966) (enacted, Va.
Acts of Assembly 1956, ch. 428, at 487).
3 The Model Business Corporation Act was drafted by the Committee on Corporate
Laws of the Section of Corporation, Banking and Business Law of the American Bar
Association. It is reviewed and revised periodically by that Committee. The basic
draft of the act was first published in 1950. MODEL Bus. CORP. ACT iii (rev. ed. 1966).
The 1953 revised edition was the text considered by the Code Commission of Virginia
for Revision of Laws Relating to Corporations. CODE COMM'N OF VIRGINIA FOR REVISION
OF LAWS RELATING TO CORPORATIONS, H. Doc. No. 5, General Assembly of Va., 1956 Sess.
3-4. See generally Gibson, The Virginia Corporation Law of 1956, 42 VA. L. REV. 445,
448 (1956).
4 The Model Non-Profit Corporation Act was drafted by the Committee on Corporate
Laws of the Section of Corporation, Banking and Business Law of the American Bar
Association and was the text considered by the Code Commission. CODE COMM'N OF
VIRGINIA FOR REVISION OF LAWS RELATING TO CORPORATIONS, supra note 3, at 95.
[ 1396]
Model Business Corporation Act 1397
would be necessary from time to time as new business practices and result-
ing needs developed. Thus the Virginia Act made a number of departures
from its model. Some of these, in turn, were subsequently adopted in the
Model Act as improvements of general applicability.5 Additional changes
have been made in the Model Act by the biennial addenda issuing from the
Committee on Corporate Laws. A number of these have been adopted in
Virginia, both as intrinsically meritorious and as approaches toward the
reasonable uniformity which is desirable in corporate law as in matters
governed by the Uniform Commercial Code.
The Commonwealth was one of the leaders in the adoption of the Model
Act. At the time of the passage of the Virginia Act, only four other juris-
dictions, Oregon, Wisconsin, the District of Columbia and Texas, had similar
provisions.7 Since then, however, the Model Act has been the basis for new
corporate laws in twelve other states8 and has been utilized in large part by
new codes in four others.9 More recently New York,10 Massachusetts"1 and
Delaware12 have rejected it for various reasons in favor of their own new acts.
The acts of New York and Massachusetts have not attracted universal admi-
ration. But the expert work on revising the law of Delaware, the most
important corporate domicile, is certain to have wide influence. Some of
its provisions had been anticipated by the Model Act. Some were developed
in joint conference and were accompanied by concurrent changes in the
5 E.g., MODEL Bus. CORP. AcT ? 4(h) (rev. ed. 1960) (confirming the corporate power
to make guarantees) (VA. CODE ANN. ? 13.1-3 (g) (1964) [hereinafter cited as CODE]);
? 4(o) (enlarging the corporate power to indemnify officers and directors) (CODE ?
13.1-3(n)); ?? 4(p), 18A (declaring the corporate power for stock option plans) (CODE
?? 13.1-3(o), -17); ? 14 (permitting special voting rights for shares of any class) (CODE
?? 13.1-12, -13); ? 31 (terminating preferred voting rights on due provision for re-
demption) (CODE ? 13.1-32); ? 38 (enlarging the power of executive committees) (CODE
? 13.1-40); ? 70 (authorizing abandonments of mergers) (CODE ? 13.1-70).
6 E.g., VA. CODE ANN. ? 13.1-41.1 (1964). See text accompanying notes 26-28 infra.
7 D.C. CODE ANN. ?? 29-901 to -956 (Supp. 1956); ORE. REV. STAT. ?? 57.002-.994 (1953);
TEX. Bus. CORP. ACT ANN. arts. 1.01 11.01 (1956); Wis. STAT. ANN. ?? 180.01-.97 (1953).
8These include Alaska (1957), North Dakota (1957), Colorado (1958), Iowa (1959),
Utah (1961), Wyoming (1961), Mississippi (1962), South Carolina (1962), Nebraska
(1963), Arkansas (1965), South Dakota (1965), and Washington (1965). Compare MODEL
Bus. CORP. ACT ANN. ? 1, ??1 4.01-02 (1960 & Supp. 1966).
9 Oregon (1963), Missouri (1965), Pennsylvania (1965), and Wisconsin (1965). Com-
pare MODEL Bus. CORP. ACT ANN. 3 (Supp. 1966). It was used in lesser measure in the
drafting of new corporate codes in Maryland (1951), North Carolina (1955), Alabama
(1959), and Connecticut (1959). Compare MODEL Bus. CORP. ACT ANN. ? 1, ?, 4.02 (1960).
10 N.Y. Bus. CORP. LAW ?? 101-1320 (McKinney 1963) (enacted, ch. 855, [19611 N.Y.
Laws 2356, as amended, ch. 837, ? 1, [1962] N.Y. Laws 3611 (effective Sept. 1, 1963)).
11 MASS. GEN. LAWS ANN. ch. 156B (Supp. 1966) (enacted, Act of July 6, 1964, ch. 723,
? 1, [1964] Mass. Acts & Resolves 665, as amended, Act of Sept. 9, 1965, ch., 685, [19651
Mass. Acts & Resolves 455 (effective Oct. 1, 1965)).
12 DEL. CODE ANN. tit. 8 (Supp. 1967) (effective July 3, 1967).
1398 Virginia Lawr Review [Vol. 53:1396
Model Act. Others are supplementary to it-for example, the extensive pro-
visions for close corporations.'3 Still others differ from the Model Act-for
example, the authorization of charter changes on a majority instead of two-
thirds vote.14 Presumably, careful consideration will be given to all of these
in the intensive reexamination of the Model Act now in progress.
In sum, the 1956 legislation returned Virginia to the mainstream of cor-
porate practice. Limited later changes have kept it reasonably in step with
contemporary developments. Before considering what further changes
might seem desirable in the future, let us first identify the basic purposes
of the 1956 legislation and see to what extent they have been satisfactorily
achieved.
The three most important purposes of the Virginia Act were (1) to
clarify the obscurities that had grown over the earlier law, (2) to provide
workable procedures for corporate readjustments and (3) to proclaim
Virginia's exclusive jurisdiction over certain key events in the history of
her corporations. To those purposes we now turn.
CLARIFICATION AND M\IODERNIZATION
Before 1957 Virginia corporation law was a thicket of confusions. Major

corporate transactions were frequently blocked by uncertainties of mean-
ing, and reasoned opinions were in many cases all that could be obtained.
These uncertainties were eliminated by the Virginia Act. Even its applica-
tion to preexisting corporations, which had been feared as a possible source
of many problems, proved simple and easy.15 Subsequent administration,
under new forms provided by the State Corporation Commission, has been
speedy and efficient. The main practical difficulty met by the Commission
has been the persistent refusal of the Bar to read the act and the forms,
and particularly their failure to file annual reports, with the result that
many corporations are automatically dissolved each year.16
13 DEL. CODE ANN. tit. 8, ?? 341-56 (Supp. 1967). See text accompanying notes 127-
36 infra.
14 DEL. CODE ANN. tit. 8, ? 242 (Supp. 1967).
15 Va. Acts of Assembly 1956, ch. 428, at 602, provided that the old code would
remain in effect until January 1, 1957, when the new act became effective. The service
of process provisions of the old code remained in effect until July 1, 1958, so that there
were two means of service during the interim period. Va. Acts of Assembly 1956, ch.
428, ? 13.1-128(g), at 539. The new act has also been held applicable to suits by
creditors of corporations dissolved prior to its effective date. United States v. Village
Corp., 298 F.2d 816, 817 (4th Cir. 1962).
16The Clerk of the Virginia State Corporation Commission, William C. Young, in
a letter to the authors reports that "in general we have a good law, and from the
administrative point of view a practical law." He states that
our experience in the administration of the law in- the Clerk's Office has been
very good with the exception of the failure to put the information required by
1967] Model Business Corporation Act 1399
With only minor exceptions,17 the Supreme Court of Appeals has been
confronted by no statutory ambiguities in need of resolution, and during
the decade only a few legislative changes have been made to refine expres-
sion. The other changes have been for further modernization. Several of
the refinements and modernizations were significant.
Refinements
Two refinements merit mention, one as to the compensation of employees

of subsidiaries, the other as to stockholder inspection rights. Stock options,
profit-sharing plans and pension plans are widely used methods for com-
pensating corporate employees. Where there are subsidiaries, there may
be strong business reasons for making the plan of the parent corporation
equally applicable to the employees of the subsidiaries. While this was, as
a matter of opinion, the effect of the Virginia Act, any doubts were elim-
inated by a 1964 amendment to sections 13.1-3(o) and 13.1-17.1s A con-
13.1-4(h) . . . in the Articles of Incorporation. . . . Many hundreds of articles
are returned each year for failure to show the city or county in which the reg-
istered office is located or to show that the registered agent is a resident of Vir-
ginia and a director of the corporation or a member of the Virginia State Bar.
Mr. Young also reports that "thousands of annual reports have to be returned each year"
for correction of errors or omissions. There are also a number of similar deficiencies in
articles of amendments, mergers or consolidations filed with the Commission. Over
1,000 corporations have been automatically dissolved each year for failure to file annual
reports. On the other hand, there has been a substantial increase in the number of new
corporations formed, and the present annual rate is over 3,000.
17 The application and interpretation of ?? 13.1-77 to -78 were discussed in Lucas v.
Pembroke Water Co., 205 Va. 84, 135 S.E.2d 147 (1964), a rather confusing opinion.
See Gibson & Freeman, Business Associations, 1963-1964 Annual Survey of Virginia Law,
50 VA. L. REV. 1265, 1278-79 (1964). The interpretation of ? 13.1-3(n), relating to re-
imbursement of expenses of officers and directors in a derivative action, was involved
in Meltzer v. Atlantic Research Corp., Civil Nos. 2787 & 3429 (E.D. Va., March 22,
1965); Gibson & Freeman, Business Associations, 1964-1965 Annual Survey of Virginia
Law, 51 VA. L. REV. 1394, 1405 (1965).
18 Section 13.1-3 was amended to provide:
Each corporation shall have power: . . . (o) To pay pensions and establish
pension plans, pension trusts, profit-sharing plans, stock option plans, stock
purchase plans, and other incentive plans for directors, officers and employees of
the corporation or of its subsidiaries.
VA. CODE ANN. ? 13.1-3 (1964) (newly added words italicized).
The last paragraph of ? 13.1-17 was amended to read:
Options for the purchase of shares, whether unissued or treasury shares, may
be granted upon such terms and conditions and for such consideration as may
be approved by the board of directors, but when offered to officers or employees
of the corporation or of its subsidiaries only in accordance with authorization in
the articles of incorporation or by resolution of the stockholders. In the absence
of fraud participated in by both parties the judgment of the board of directors
as to such terms and conditions and the sufficiency of such consideration shall be
conclusive.
VA. CODE ANN. ? 13.1-17 (1964) (newly added words italicized).
1400 Virginia Law Revie'w [Vol. 53:1396
forming change was not made at the same time in section 13.1-23 so as to
ensure that stockholders' preemptive rights would not apply to shares
issued to the employees of a subsidiary pursuant to such plans.19 It would
have been better to do so. But to give effect to the 1964 amendment, this
omission should not be taken as impairing the exemption from preemptive
rights for all shares issued under a stock option plan approved by stock-
holders of the parent corporation for officers or employees, whether of the
parent corporation or of its subsidiaries.20
Under section 13.1-30 stockholders have the right to inspect the list of
stockholders during a stockholders' meeting and for ten days before it.21
As originally enacted,22 there was no express limitation on this right, though
section 13.1-47,23 which confers the general right on stockholders to ex-
amine and copy the books of the corporation, requires that the examination
be for "a proper purpose." Stockholder examination under the general
right was denied on occasion as being for purposes wholly unrelated to the
best interests of the corporation and its stockholders, such as the procuring
of a mailing list for personal reasons, but such examination was thought
undeniable during the ten-day period. The General Assembly accordingly
inserted in section 13.1-30 the same "proper purpose" requirement, though
limiting its application to corporations with shares listed on a national securi-
ties exchange. The proxy rules of the Securities and Exchange Commission
provide a means of communication with other stockholders of these corpora-
tions, xwhile in smaller corporations there is a greater opportunity for abuse
of minority stockholders.24 Section 29 of the Model Act was conformingly
amended by eliminating the right of inspection before the meeting and re-
19 VA. CODE ANN. ? 13.1-23 (1964) provides that preemptive rights do not apply to
shares "to be issued to officers or employees pursuant to a plan approved by stock-
holders ...." As the act originally stood, these were presumably "officers or em-
ployrees" of the issuing corporation, since they were the only ones dealt with in the
stock option provisions. This is not, however, an express limitation, but only one arising
from the context.
20 Gibson & Freeman, Business Associations, 1963-1694 Annual Survey of Virginia Law,
50 VA. L. REV. 1265, 1269 (1964).
21 VA. CODE ANN. ? 13.1-30 (1964).
22Va. Acts of Assembly 1956, ch. 428, at 488, as amended, VA. CODE ANN. 13.1-30
(1964).
23 VA. CODE ANN. ? 13.1-47 (1964).
24 In 1964 the following sentence was added to the first paragraph of VA. CODE ANN.
? 13.1-30 (1964):
The right of the holder of stock of a corporation, any of whose securities are
registered on a national securities exchange as defined under the Securities Ex-
change Act of 1934, as amended, to inspect such lists shall be subject to the
limitations set forth in ? 13.1-47.
See Gibson & Freeman, supra note 20, at 1270.
stricting the right of inspection during the meeting to "the purposes

thereof." 25
Modernizations
In 1956 one of the suggestions most frequently urged on the Code Com-
mission was that directors be allowed to act without a meeting, a course
of action already permitted stockholders. Mindful, however, of the his-
toric importance of consultation and desirous of the act's passage, the Com-
mission was reluctant to take this novel step. But the fact was well known
that regardless of the statute's language, such action by directors frequently
occurred in small corporations. Moreover, a rapidly increasing number of
states adopted provisions expressly permitting directors to act without a
meeting. After more than twenty had done so, the Model Act was amended
to the same effect.7 Virginia followed in 1964 by enacting section
13. 1-41. 1.28
A second modernization was adopted concerning merger with a ninety-

five per cent owned subsidiary. The existence of a small minority can
often be seriously embarrassing, since it imposes a fiduciary obligation for
fair treatment of the minority and thus presents opportunity for challenge
and litigation. If the minority cannot be purchased, a merger may be the
only means of eliminating it. But this may prove costly if the result is to
confer on the holders of the parent corporation a right to dispose of their
stock for cash payment, based on an appraisal of its value.29 A decline in
the market subsequent to the time of appraisal, though wholly unrelated
to the merger itself, would expose the parent to a serious cash drain. Such
exposure serves no legitimate purpose, for where the parent owns ninety-
five per cent of the subsidiary, merger involves no significant economic
change of position for the stockholders of the parent corporation and thus
presents no need for them to have an appraisal right. Virginia, therefore,
quite properly eliminated the right in such circumstances by a 1964 amend-
ment to section 13.1-76.30 Under the "short-form" merger thus available,
25 MODEL Bus. CORP. AcT ANN. ? 29, ? 1 (Supp. 1966).

26 VA. CODE ANN. ? 13.1-28 (1964). Action by written consent in lieu of a meeting
was also authorized originally for nonstock corporations. VA. CODE ANN. ? 13.1-216
(1964).
27 MODEL Bus. CoRP. AcT ? 39A (rev. ed. 1966). See MODE. Bus. CORP. AcTr ANN.
? 39A, ?? 2.01-.02 (Supp. 1966).
28 VA. CODE ANN. ? 13.1-41.1 (1964).
29 As a rule, stockholders dissenting in mergers or consolidations have a right to be
paid the fair value of their shares by the surviving or new corporation. VA. CODE ANN.
'S 13.1-75 (1964).
30 VA. CODE ANN. ? 13 .1-76 (1964). See Gibson & Freeman, supra note 20, at 1267-68.
This section is similar to MODEL Bus. CORP. AcT ? 68A (rev. ed. 1966).
1402 Virginia La'w Review [Vol. 53:1396
no meeting of the stockholders of either corporation is required, and only

stockholders of the subsidiary have any appraisal right.
Shortly after passage of the Virginia Act, the concept of a "pooling of
interests" was adopted by the American Institute of Accountants.3' Under
certain conditions relating to continuity of ownership and management,
'pooling of interests" permits the earned surplus of an acquired corporation
to be carried forward as a matter of sound accounting practice, even though
the acquisition was by purchase of assets. This fluid, functional test was
substituted for the rigid, formal test embodied in the Virginia and Model
Acts. Under the definitions of "stated capital," 32 "earned surplus" 33 and
"capital surplus" 34 and under the limitations on the payment of dividends out
of any source other than "earned surplus," 35 the earned surplus of such an
acquired corporation became capital surplus, regardless of subsequent stock
ownership or management.36 The opposite result obtained, however, in
31 Accounting Research Bulletin No. 48, in 103 J. ACCOUNTANCY 54 (1957). See also
Accounting Research Bulletin No. 51, in 108 J. ACCOUNTANCY 73 (1959).
32 VA. CODE ANN. ? 13.1-2 (g) (1964) provides:
"Stated capital" means, at any particular time, the sum of (1) the amount of the
consideration received by the corporation for all shares of the corporation having
a par value that have been issued, except that any excess of such consideration
over the par value of shares issued otherwise than in conversion or exchange shall
be excluded, (2) the amount of the consideration received by the corporation for
all shares of the corporation without par value that have been issued, except that
such part of the consideration therefor as may have been allocated to capital sur-
plus in a manner permitted by law, and (3) such amounts not included in
clauses (1) and (2) of this paragraph as have been transferred to stated capital
of the corporation, whether upon the issuance of shares as a stock dividend or
otherwise, minus all reductions from such sum that have been effected in a
manner permitted by law.
Compare MODEL Bus. CORP. Acr ? 2(j) (rev. ed. 1966).
33 Va. Acts of Assembly 1956, ch. 428, at 500, as amended, VA. CODE ANN. ? 13.1-2(i)
(1964), as originally enacted provided:
"Earned surplus" means the portion of the surplus of a corporation equal to the
balance of its net profits from the date of incorporation, or from the latest date
when a deficit was eliminated by reduction of its capital surplus or stated
capital or otherwise, after deducting subsequent distributions to stockholders
and transfers to stated capital and capital surplus to the extent such distributions
and transfers are made out of earned surplus.
Compare MODEL Bus. CORP. ACT ? 2(l) (rev. ed. 1B66).
34VA. CODE ANN. ? 13.1-2(h) (1964) provides: "'Surplus' means the excess of the
net assets of a corporation over its stated capital." Compare MODEL Bus. CORP. Acr ? 2(k)
(rev. ed. 1966).
35VA. CODE ANN. ? 13.1-43(a) (1964) (dividends); VA. CODE ANN. ? 13.1-44 (1964)
(liability of directors for declaration of dividend contrary to ? 13.1-43 (a)). Compare
MODEL Bus. CORP. ACr ?? 40, 41 (rev. ed. 1966).
36See generally Baker, Dividends of Combined Corporations: Some Problems Under
Accounting Research Bulletin No. 48, 72 HARV. L. REV. 494 (1959); Gibson, Surplus,
So What? The Model Act Modernized, 17 Bus. LAW. 476 (1962), for a discussion of the
problems involved.
merger or consolidation because of the specific provision that in such

transactions the earned surplus of all participating corporations remained
undiminished.37 Since the indefinite criteria applied by the accounting pro-
fession were unsuitable for statutory provisions, the Model Act was amended
to authorize the board of directors to allocate to earned surplus any amount
that would otherwise become capital surplus under the cited provisions,
whatever the formal method of acquisition of ownership or control.38
Virginia was the first state to adopt the amendment. It did so by changing
section 1 3.1-1839 to accord with the Model Act provision and by conform-
ing the definition of "earned surplus" in section 13.1-2.4?
The last modernization worthy of note was the addition of section
13.1-24.1.41 Here again Virginia was the first state to adopt the new pro-
vision of the Model Act providing for the succession of corporate man-
agement in the event of a nuclear or atomic disaster. The provision had
been developed in consultation with representatives of the Office of Civilian
Defense and was rapidly enacted in a number of other states. It permits the
passage of emergency by-laws relaxing the normal requirements as to notice
and quorum, authorizes the adoption of lines of succession for corporate
37 VA. CODE ANN. ? 13.1-74(g) (1956). Paragraph (g) of ? 13.1-74 was eliminated in
the 1962 amendment to prevent any confusion due to redundancy. MODEL Bus. CORP.
ACT ? 69(g) (rev. ed. 1960), was identical.
38 MODEL Bus. CORP. ACr, ? 2 (1) (rev. ed. 1966).
39 With the addition of this new provision, VA. CODE ANN. ? 13.1-18 (1964) now
provides in part:
In cases where shares have been or shall be issued by a corporation in merger
or consolidation or in acquisition of all or substantially all of the outstanding
shares or of the property and assets of another corporation, whether domestic
or foreign, any amount that would otherwise constitute capital surplus under the
foregoing provisions of this section may instead be allocated to earned surplus
by the board of directors of the issuing corporation except that its aggregate
earned surplus shall not exceed the sum of the earned surpluses as defined in this
Act of all corporations, domestic or foreign, that were merged or consolidated
or by or of which the shares or assets were acquired.
40 VA. CODE ANN. ? 13.1-2(i) (1964) was enlarged in 1962 by adding the following
sentence:
Earned surplus shall also include any portion of surplus allocated to earned
surplus in mergers, consolidations or acquisitions of all or substantially all of the
outstanding shares or of the property and assets of another corporation, domestic
or foreign.
For a discussion of questions of interpretation and retroactive applicability of the
amendment, see Gibson & Freeman, Business Associations, 1962-1963 Annual Survey of
Virginia Law, 49 VA. L. REV. 1396, 1400-01 (1963).
41 VA. CODE ANN. ?? 13.1-24.1 (1964) (effective Feb. 23, 1962). See generally Gibson,
Corporate Management During Nuclear Attack, 17 Bus. LAW. 249 (1962); Gibson &
Freeman, Business Associations, 1961-1962 Annual Survey of Virginia Law, 48 VA. L. REV.
1326, 1328-29 (1962).
1404 Virginia Laiw Review [Vol. 53:1396
officers and provides for certain automatic succession when no such action
has been taken.42
READJUSTMENTS AND FINALITY
Provision of Workable Procedures for Corporate Readjustments
Before 1957 the graveyard of Virginia corporation law had been the
inscrutable and impractical provision that no corporation "shall . . . have
the power to change the voting rights and/or the priority as to assets or
dividends of any stockholder." 43 Accordingly, "the most important provi-
sion" of the new act44 was the elimination of this rule in its entirety and
the substitution of a completely new system. Under the new order45 (a)
only a two-thirds vote of all voting shares is needed instead of a nine-
tenths, (b) changes of any nature whatever may be made when so approved,
and (c) a class vote, even if the particular class has no right to vote under
the charter, is required for changes of important rights of the class, whether
accomplished by amendment, to which alone the previous restriction had
been applicable, or by merger or consolidation. The new provision was
in accord with prevailing practice in the larger number of states. Its avowed
purpose was to extinguish any lingering notions of "vested right" in the
sense of a stockholder interest constitutionally immune from change, and
thus to make practical the accomplishment of corporate readjustments nec-
essary in the light of evolving business conditions.46 The design, accord-
ingly, was that in the absence of fraud the stipulated vote of stockholders
would obligate the Commission to issue the certificate of amendment,
merger or consolidation, and that it would then be impermissible for "the
Commission or the courts [to] substitute their judgment for the stockholders'
on questions of fairness ...." 47
42 For an example of a by-law adopted under this new section, see Sebring & Heider,
Developments in Corporate Law, 17 Bus. LAW. 786, 796 n.5 (1962).
43 Va. Acts of Assembly 1928, ch. 456, ? 2, at 1159 (repealed 1956). See generally
Gibson, The Proposed New Corporation Law of Virginia, 65 VA. ST. B. ASs'N REP.
221 (1955).
44 CODE COMM'N OF VIRGINIA FOR REVISION OF LAWS RELATING TO CORPORATIONS, supra
note 3, at 53.
45VA. CODE ANN. ?? 13.1-55 to -60 (1964). Provision three of the new order, the
voting privilege for nonvoting classes, was deleted from the Model Act by an amend-
ment in 1962 on the ground that shareholders who had waived the right to vote
generally should not have a voting right unexpectedly given them in mergers or con-
solidations. Virginia has not followed this change.
46 Gibson, The Virginia Corporation Law of 1956, 42 VA. L. REV. 445, 466-69, 603-22
(1956).
47 CODE COMM'N OF VIRGINIA FOR REVISION OF LAWS RELATING TO CORPORATIONS,
supra note 3, at 92.
It would do little good to make such certificates easy to obtain unless

they are to be final when issued or soon afterward.48 Otherwise basic cor-
porate action involving the issuance of new securities might be subject to
attack at unpredictable times and places, thus destroying the certainty that
the market demands. The third basic purpose of the Virginia Act was there-
fore to proclaim exclusive jurisdiction for the Commonwealth over amend-
ments, mergers and consolidations and to provide that "no court within
or without Virginia (except the Supreme Court of Appeals by way of
appeal as authorized by law) shall have jurisdiction to review . . . any action
of the Commission within the scope of its authority [except in cases of
fraud] .... 49 This established a definite tribunal and a definite time in such
manner as to ensure finality for these important transactions. This pro-
vision does not appear in the Model Act, but was an express legislative
extension of judicial traditions normally leaving the control of internal
affairs of corporations to the domiciliary state.50
O'Brien v. Socony Mobil Oil Co.
Both the corporate readjustment and jurisdictional purposes of the Vir-

ginia Act came before the Supreme Court of Appeals in O'Brien v. Socony
Mobil Oil Co.51 This case, decided on January 16, 1967, is clearly the most
important Virginia decision of the decade or longer. In it the Court: (a)
explicitly held52 that section 13.1-55(k)53 authorizes the cancellation of
dividends accrued at any time, whether before or after the enactment of
the Virginia Act; (b) explicitly held,54 as indicated by the prior decision in
48For a discussion of the procedure for appeal to the Supreme Court of Appeals
of Virginia, see text acompanying notes 78-84 infra.
49 VA. CODE ANN. ? 13.1-125 (1964). This statute is based on VA. CONST. art. 12, ?
156(d), which after providing for appeals in the regulation of rates and other public
service corporation functions states that:
The General Assembly may also, by general laws, provide for appeals from
any other action of the Commission, by the Commonwealth or by any person
interested, irrespective of the amount involved. All appeals from the Commission
shall be to the Supreme Court of Appeals only .
50 Gibson, supra note 46, at 622-26.
51 207 Va. 707, 152 S.E.2d 278 (1967).
52 Id. at 715, 152 S.E.2d at 284 (1967).
53 VA. CODE ANN. ? 13.1-55 (1964) provides in part that:
A corporation may amend its articles of incorporation, from time to time, in
any and as many respects as may be desired, provided that the amendment may
contain only such provisions as might be lawfully contained in original articles
of incorporation at the time of making such amendment.
In particular, and without limitation upon such general power of amendment,
a corporation may amend its articles of incorporation, from time to time, so as:
. . . (k) To cancel or otherwise affect the right of the holders of the shares of
any class to receive dividends which have accrued but have not been declared
(whenever accrued and whether or not earned).
*4 207 Va. at 718-19, 152 S.E.2d at 286-87.
1406 Virginia Law Review [Vol. 53:1396
French v. Cumberland Bank & Trust Co.,55 that there is no "vested right"
of a stockholder in a Virginia corporation in the sense of any interest that
is constitutionally immune from change on the vote stipulated by statute
or charter provision; and (c) inferentially sustained the exclusivity of the
review procedure in the Supreme Court of Appeals, as provided in the act.
At the effective date of the Virginia Act, O'Brien was the holder of
shares of preferred stock of the Virginia-Carolina Chemical Corporation
on which dividends were then accrued and unpaid. In 1962 a charter
amendment reclassifying her stock and cancelling its accrued dividends was
approved by a two-thirds vote of that class and others. O'Brien voted in
the negative. A certificate of amendment was thereupon duly issued bV
the State Corporation Commission. Disregarding the provisions of section
13.1-125 that limited review of Commission action to the Supreme Court
of Appeals,56 O'Brien waited until expiration of the sixty-day period within
which such an appeal could be taken57 and then sued in New Jersey to
recover her back dividends. Ignoring the sovereign act of Virginia through
the order of the State Corporation Commission, the Superior Court of _Newv
Jersey took jurisdiction and sustained her claim.58 On appeal, the Appellate
Division certified the case to the Supreme Court of New Jersey. That
court also refused full faith and credit to the Virginia action but as a
matter of "deference to the Commonwealth of Virginia" determined to
stay its hand in order to permit a relevant adjudication in Virginia.59
55 194 Va. 475, 74 S.E.2d 265 (1953). See note 65 infra.

56 See note 49 supra.
57 VA. SUP. CT. APP. R. 5:1, ? 13, governing appeals from the State Corporation Corn-
mission, states that:
No appeal shall be allowed unless, within sixty days after final order or judg-
ment, counsel files with the clerk of the Commission a notice of appeal, a copy
of which has been mailed or delivered to opposing counsel, to counsel for the
Commission and to the Attorney General ....
After the expiration of the sixty days if the requisite notice has not been filed, the order
becomes final. See Seaboard Air Line R.R. v. Board of Supervisors, 197 Va. 130, 87
S.E.2d 799 (1955), where the Court followed VA. CODE ANN. ? 8-1.2 (1964), which
states that the Court's rules as from time to time amended shall supersede all statutory
provisions in conflict therewith. Thus while ? 12-63 of the Code provided plaintiff
in Socony four months in which to present the appeal to the Supreme Court of Ap-
peals, notice of appeal had to be filed within sixty days. 207 Va. at 709, 152 SE.2d at
280.
58 The Superior Court of New Jersey, Chancery Division, Essex County, to avoid
holding ? 13.1-55(k) unconstitutional under the theory of "vested rights" which it still
thought valid, construed the section as applicable only to dividends after January 1,
1957, the effective date of the new Virginia Stock Corporation Act. It held that
O'Brien's dividends which had accrued prior to that date were "vested" and she was still
entitled to them. See O'Brien v. Virginia-Carolina Chem. Corp., 44 N.J. 25, 32-33, 206
A.2d 878, 882-83 (1965).
590'Brien v. Virginia-Carolina Chem. Corp., 44 N.J. 25, 206 A.2d 878 (1965). For a
O'Brien then went to the Virginia Commission, as she could have done
years before.60 The Commission held that its order issuing the certificate
was now final.61 It went on, obiter, to say that O'Brien had no "vested
right" and that her dividends had been cancelled by the certificate of
amendment. From this order O'Brien appealed to the Supreme Court of
Appeals of Virginia. The Court would have been barred by the time limi-
tation of sixty days for notice of appeal from the Commission, admittedly
jurisdictional in nature, except for her assertion of a constitutional right
which, as in habeas corpus cases, presented "overriding constitutional re-
quirements that operated to suspend the time requirements for appeal." 62
The Court was thus squarely faced with the constitutional issue since its
resolution was necessary in order to determine whether appellate jurisdic-
tion existed.63
The unanimous Court then held, in a comprehensive and wvell-reasoned
opinion, that under the state's reserve power to amend64 and under the
previous decision in French v. Cumberland Bank & Trust Co.,65 O'Brien
"had no vested property right." 66 Equating the right to vote at issue in
French with the right to dividends presented here, the Court held that:
"Neither right is a vested property right, and each is subject to change by
proper corporate action under existing corporate law." 67
more detailed discussion of this decision, see Gibson & Freeman, Business Associations,
1964-1965 Annual Survey of Virginia Law, 51 VA. L. REV. 1394-99 (1965).
60 See text accompanying note 78 infra.
61 O'Brien, No. 17551, 63 ANNUAL REPORT OF THE STATE CORP. COMM'N OF VA. 137
(1965). For a more detailed discussion of this opinion by Commissioner Catterall, see
Gibson & Freeman, Business Association, 1964-1965 Annual Survey of Virginia Law,
note 59 supra, at 1403.
62 O'Brien v. Socony Mobil Oil Co., 207 Va. 707, 715, 152 S.E.2d 278, 284 (1967).
The habeas corpus cases discussed by the Court were Stokes v. Peyton, 207 Va. 1, 147
S.E.2d 773 (1966); Thacker v. Peyton, 206 Va. 771, 146 S.E.2d 176 (1966); Cabaniss v.
Cunningham, 206 Va. 330, 143 S.E.2d 911 (1965).
63 The Court stated: "[W]e hold that Miss O'Brien has been denied no constitutional
right. The question whether the precedent of the Cabaniss, Thacker and Stokes cases
should be followed in cases involving denial of constitutional property rights can
therefore be deferred, and should be deferred, for decision when that issue is pre-
sented." 207 Va. at 715, 152 S.E.2d at 284.
64 VA. CONST. art. 12, ?? 154, 158.
65 194 Va. 475, 74 S.E.2d 265 (1953). French acquired stock at a time when the
corporation's charter provided for cumulative voting and when the governing Virginia
statute required a 90% vote for charter amendment. French's ownership of more than
10% of the shares guaranteed him control of one director and retention of the cumu-
lative voting system. After the new act provided for charter amendment by a two-
thirds vote, the corporation eliminated cumulative voting. French unsuccessfully
claimed unconstitutional deprivation of a "vested right."
66 207 Va. at 717, 152 S.E.2d at 286.
67 Id. at 719, 152 S.E.2d at 287.
Plainly, therefore, the Virginia Commission had full power and authority
to issue the certificate of amendment reclassifying the shares and cancelling
the accrued dividends. Plainly also an appeal of right was permissible from
that action to the Supreme Court of Appeals of Virginia within the period
prescribed by law.68 But since no constitutional issue was presented, the
sixty-day limit for filing notice of appeal was controlling, and the case was
dismissed for lack of jurisdiction. Inferentially, the sufficiency of "proper
corporate action under existing corporate law" to make a binding change
of right means also that no review of Commission action is permissible
except in accordance with the provisions of the Virginia Act.
O'Brien attempted unsuccessfully to reopen the New Jersery proceed-
ings"9 and, failing to do so, applied for certiorari from both the Virginia
and the New Jersey proceedings.70
Socony has decisively eliminated any lingering suspicions that the "vested
rights" theory might still be alive in Virginia. Mergers, consolidations and
reorganizations can now go forward with assurance of speed and certainty.
They can no longer be blocked by an arbitrary dissenter. The test of
legality is acceptance by two-thirds of the shares rather than any judicial
view of economic acceptability or fair treatment. This recognizes that the
persons most directly involved in these economic decisions are usually the
best judges of what is in their own best interest, provided that they are
given the facts. The widening application of the Securities Act71 and the
Securities Exchange Act72 as well as the provisions of state corporate law
permitting fraudulent transactions to be set aside73 help to ensure that dis-
68 Notice of appeal must be filed within sixty days of the date of the order. See note
57 supra. If notice is filed, a petition for appeal must be filed within four months of
the date of entry of the order. VA. CODE ANN. ? 12-63 (1964).
69 O'Brien applied to the New Jersey Supreme Court for an order vacating the order
of dismissal entered after its reversal of the lower New Jersey court. The New Jersey
Supreme Court denied the motion on March 21, 1967.
70 35 U.S.L.W. 3451 (U.S. June 14, 1967) (No. 248) (single petition for review of
New Jersey and Virginia decisions).
71 15 U.S.C. ? 77a (1964).
72 15 U.S.C. ? 78a (1964).
73 VA. CoDE ANN. ? 13.1-125 (1964) provides in part:
No court within or without Virginia shall have jurisdiction to enjoin or delay
the holding of any meeting of directors or stockholders for the purpose of
authorizing or consummating any such amendment, merger or consolidation, or the
execution or delivery to the Commission of any papers for such purpose, except
for fraud, and no court within or without Virginia (except the Supreme Court
of Appeals by way of appeal as authorized by law) shall have jurisdiction to
review, reverse, correct or annul any action of the Commission within the scope
of its authority, with regard to any articles, certificate, order, objection or peti-
tion, or to suspend or delay the execution or operation thereof, or to enjoin,
restrain or interfere with the Commission in the performance of its official duties.
(emphasis added). "Fraud" would, of course, include deliberate failure to disclose ma-
closures will be adequate. Finally, the continuing expansion of the common

law on the fiduciary obligation of controlling stockholders gives minority
stockholders additional protection from abuse where the controlling stock-
holders have any ulterior motive.74
The Virginia Act does not foreclose judicial review of constitutionality
or legality. Indeed, the Virginia Act gives stockholders procedures for
obtaining such review promptly. But since the New Jersey court appar-
ently misunderstood them and since the Virginia Court subsequently clari-
fied them, they may well be summarized.
Although O'Brien did not assert that she had been denied procedural
due process by Virginia, she did assert in argument before the New Jersey
and Virginia courts that she had no notice of the Commission's action in
issuing the certificate of amendment, that she was not a party to the pro-
ceeding and, consequently, that she was not bound by it. These arguments
obviously troubled the New Jersey court and were perhaps a major factor
in its refusal to give full faith and credit to Section 13.1-12575 of the Vir-
ginia Code. The New Jersey court said:
Plaintiff was unaware of . . . [the action of the State Corporation

Commission on the certificate of amendment] and had no opportunity
to be heard in opposition prior to the making of the order directing
issuance of the certificate of amendment.76
Later it characterized the Commission's order as "ex parte." 77

While not mentioning this aspect of the New Jersey opinion, the Vir-
ginia Court made clear that O'Brien had actual notice and full opportunity
to challenge the issuance of the certificate of amendment both before the
Supreme Court of Appeals and before the State Corporation Commission.
The Court said:
Miss O'Brien had actual notice, however, that an amendment to the

certificate of incorporation would be considered and voted on by the
stockholders at the September 28, 1962, meeting. VC mailed the notice
to her on August 24, 1962, and the notice was accompanied by a proxy
terial facts to stockholders as well as deliberate misrepresentations to them. For a

general discussion of "fraud" in these contexts, see Gibson, How Fixed Are Class
Shareholder Rights? 23 LAW & CONTEMP. PROB. 283, 297-304 (1958).
74See, e.g., Meltzer v. Atlantic Research Corp., 330 F.2d 946 (4th Cir.), cert. denied,
379 U.S. 841 (1964); Mardel Sec., Inc. v. Alexandria Gazette Corp., 183 F. Supp. 7
(E.D. Va. 1960), aff'd, 320 F.2d 890 (4th Cir. 1963), discussed in Gibson & Freeman,
Business Associations, 1962-1963 Annual Survey of Virginia Law, 49 VA. L. REV. 1396,
1397-99 (1963).
75 See notes 49 & 73 supra.
76 O'Brien v. Virginia-Carolina Chem. Corp., 44 N.J. 25, 29, 206 A.2d 878, 880 (1965).
77 Id. at 30, 206 A.2d at 881.
statement and the full text of the proposed amendment. Moreover,

? 59 of Virginia Stock Corporation Act put her on notice that the
Commission would issue a certificate of amendment upon presentation
of articles of amendment evidencing compliance "with the requirements
of law."
Before the certificate of amendment was issued, Miss O'Brien could
have requested the Commission to hold a hearing, as provided for
under the Commission's Rules of Practice and Procedure, to consider
her contention that the articles of amendment did not meet the re-
quirements of law. She did not ask for a hearing.78
While the Court did not indicate when the stockholder could have asked
for the hearing, it is clear from the practice of the Commission that she
could have requested it either before or after the stockholders' meeting.79
Had she done so, the Commission would have set the matter down for
hearing and listened to her complaint. The Commission was authorized to
decide the issues which she raised. No objection being made, however,
and no hearing requested, none was had. While the issuance of charters
and amendments by the Commission has been characterized as a "ministe-
rial" duty,80 section 13.1-59 expressly obligates the Commission to determine
whether "the articles comply with the requirements of law . . .. 81 It
cannot admit them to record unless they do. Certainly, if they offend con-
stitutional limitations, they do not. Thus of necessity the Commission
determined the issue of constitutionality.
After the Commission order had been issued, O'Brien had another oppor-
tunity to obtain review on the questions of statutory construction and
constitutionality. She could have appealed to the Supreme Court of Ap-
peals. Under Section 12-63 of the Virginia Code any "party aggrieved"
by an order of the Commission may appeal to the Supreme Court of Ap-
peals.82 It has long been recognized that a stockholder of a corporation
78 207 Va. at 713-14, 152 S.E.2d at 283.

79STATE CORP. COMM'N R. PRAC. & P. ? 11 has been interpreted as so permitting.
This is recognized implicitly in the observation of the Commission in its opinion in
the Socony case, No. 17551, 63 ANNUAL REPORT OF THE STATE CORP. COMM'N OF VA.
137, 140 (1965), that:
In the administration of the Virginia Stock Corporation Act the State Corpora-
tion Commission has issued numerous certificates of amendment in which this point
could have been but was not raised. O'Brien is the first litigant to raise the
question. She had at least 25 day's [sic] notice of the meeting at which the amend-
ment was adopted by the stockholders ....
SOEx parte Norfolk Ry. & Light Co., 142 Va. 323, 329, 128 S.E. 602, 603 (1925).
81 VA. CODE ANN. ? 13.1-59 (1964).
82 The first paragraph of VA. CODE ANN. ? 12-63 (1964) provides:

The Commonwealth, any party in interest or any party aggrieved by any final
finding, order, or judgment of the Commission shall have, of right, regardless of
the amount involved, an appeal to the Supreme Court of Appeals, which shall
may appeal from an order of the Commission issuing a certificate of

amendment.83 This right exists whether or not a hearing was held on the
issuance of the certificate and whether or not the stockholder was a formal
party before the Commission.84 All O'Brien had to do was to file notice
of appeal within sixty days after the issuance of the certificate and a petition
of appeal within four months after its issuance. The appeal would then
have been granted as of right.
Although the Supreme Court of Appeals of Virginia did not explicitly
hold that O'Brien was bound by the order of the Commission, it did so in
effect by holding that she had no contrary right and by rejecting the argu-
ment of her counsel that the statutory time limitations on appeal were
inapplicable to her because she was not a "party" to the proceeding before
the Commission.85 She was thus bound.
The Court has accordingly clarified Virginia procedural law by empha-
sizing (a) that it provides stockholders of Virginia corporations with ade-
quate notice and opportunity for hearing on articles of merger, consolida-
tion or amendment and (b) that since they have this opportunity, those
who fail to exercise it within the time limits provided by the statutes and
rules of court are nevertheless bound by the orders of the Commission.
Since the earlier opinion of the Supreme Court of New Jersey was based
upon an erroneous view of the first major premise of Virginia procedural
law86 and since the New Jersey court did not know the view of the Vir-
ginia Supreme Court of Appeals on the second, it is believed that New
Jersey's refusal to give full faith and credit to orders of the State Corpora-
tion Commission or to Section 13.1-125 of the Virginia Code is unsound.
It would seem clear that Virginia courts, in the light of Socony, would
refuse to give full faith and credit to any order of a court of another state
be taken and perfected within four months from the date of such final finding,
order, or judgment.
83 O'Brien v. Socony Mobil Oil Co., 207 Va. 707, 714, 152 S.E.2d 278, 283 (1967),
citing French v. Cumberland Bank & Trust Co., 194 Va. 475, 74 S.E.2d 265 (1953), as
an example.
84 This is implicit in the Virginia Supreme Court of Appeals' action in the Socony
case. In addition, in Jones v. Rhea, 130 Va. 345, 358, 107 S.E. 814, 818-19 (1921), the
Court stated:
It is not a matter of necessity . . . that an aggrieved person must be a formal
party of record to a proceeding [before the State Corporation Commission] to
entitle him to appeal from a ruling to his prejudice.
Young v. State Corp. Comm'n, 205 Va. 111, 135 S.E.2d 129 (1964), accordingly, has no
bearing on appeals by stockholders from orders adversely affecting their rights. Be-
cause of their status, the hearing requisite in Young is unnecessary to establish that
the order affects their "pecuniary or property rights." See Virginia Ass'n of Ins. Agents
v. Commonwealth, 201 Va. 249, 254, 110 S.E.2d 223, 227 (1959) (dictum).
85 207 Va. at 713-14; 152 S.E.2d at 283.
86 See text at note 76 supra.
1412 Virginia Law Review [Vol. 53: 1396
that involved a collateral attack on orders of the Corporation Commission.

There are strong reasons that statutes which give the state of incorpora-
tion exclusive jurisdiction over such transactions of domiciliary corporations
should be entitled to full faith and credit.87 In any ultimate resolution of
this issue-whether the "governmental interest" test of Alaska Packers Ass'n
v. Industrial Accident Comrn'n88 or some other method for reconciling the
conflicting interests of the states involved is used-the practical consequences
should be given great weight. In almost every instance the state of incorpora-
tion offers the only forum where the validity of plans of merger, consolida-
tion or reorganization can be definitely determined so as to bind the corpora-
tion and all its stockholders. If every state may consider and rule on the
legality of such transactions, the result might be fifty different determinations
made by as many states. Conflicting decisions would be likely. Stockholders
of the same class could easily find that they were receiving different treat-
ment. Uncertainty and unfairness would result. These are the very circum-
stances that the market cannot tolerate.
The United States Supreme Court has never decided the crucial question
of whether statutes of this nature must be given full faith and credit. The
New Jersey court, in refusing to give full faith and credit to Section
13.1-125 of the Virginia Code, supplied very little reason for its failure to
do so.89 It merely said:
We shall not discuss whether the courts of New Jersey have jurisdic-
tion over the subject matter in controversy, i.e., in terms of power
to hear and decide the case on its merits. We are satisfied that such
power exists.90
The only case cited9' was Tennessee Coal, Iron & R.R. v. George.92 But
that decision held only that the Georgia courts could decide the rights of
an employee under the Alabama workmen's compensation statute even
87 U.S. CONST. art. IV, ? 1 provides that "Full Faith and Credit shall be given in each
State to the public Acts, Records, and judicial Proceedings of every other State."
88 294 U.S. 532 (1935).
89 The New Jersey Supreme Court stated that it expressly reserved the question
"whether the Corporation Commission order holds the status of a judgment which is
res adjudicata as to plaintiff and to which the courts of this State must give full faith
and credit under the Federal Constitution." O'Brien v. Virginia-Carolina Chem. Corp., 44
N.J. 25, 36, 206 A.2d 878, 884 (1965). But despite this disclaimer the practical effect of
the court's imposition of the requirements that (1) the defendant had to waive any
defense of the statute of limitations and (2) that a Virginia court take jurisdiction of
a new suit by plaintiff and decide it on the merits was to treat the order of the
Virginia Commission as not entitled to full faith and credit.
90 Id. at 38-39, 206 A.2d at 885.
91 Id. at 35, 206 A.2d at 883.
92 233 U.S. 354 (1914).
1967 f Model Business Corporation Act 1413
though the Alabama statute expressly limited such suits to Alabama courts.
While other decisions in the field of workmen's compensation support the
same conclusion,93 the decisions of the Supreme Court relating to fraternal
benefit societies support exactly the contrary result.94 In the context of
Socony the interest of New Jersey in the Virginia corporation is readily
distinguishable from the interests of a state in a corporation engaged in
"local" business within its borders. In the latter situation a state may, absent
a supervening federal statute, require that local business be done through
a local corporation.95 Thus if the logic of the fraternal benefits cases is
extended to business corporations, there would still be constitutional means
for states to regulate the internal affairs of those corporations doing purely
"local" business within their borders. This could be done by requiring
local incorporation. Such an approach, however drastic, would still afford
certainty as to the legal results of internal corporate transactions. Moreover,
if the activities of a corporation are centered largely in one state and thus
affect local interests, some greater degree of local regulation of the corpora-
tion's internal affairs might be justified, even though it is incorporated else-
where.96 But such situations are not usual, and clearly that was not the
situation in Socony. In summary, absent extraordinary circumstances, the
interests of all concerned will best be protected by recognizing the exclu-
sive jurisdiction of the state of incorporation over internal matters. Socony
takes us a long way to that just and proper conclusion.
It is, therefore, clear that all three basic purposes of the Virginia Act
have been substantially achieved. XWe mav now turn to a glimpse toward
the future.
FUTURE POSSIBILITIFS
In the last few years there have been several updating amendments to the
Model Act that merit consideration for Virginia. Moreover, the experience
of the Virginia Bar with several provisions of the Virginia Act points the
way to certain further improvements. As no state has yet gone so far,
we do not look now beyond the horizon to inquire, as some have sug-
gested, that earnings and current position should be substituted for value
of assets as a test of dividend payments.97
93 E.g., Crider v. Zurich Ins. Co., 380 U.S. 39 (1965); see Pacific Employers Ins. Co.
v. Industrial Accident Comm'n, 306 U.S. 493 (1939).
94See, e.g., Sovereign Camp of the Woodmen of the World v. Bolin, 305 U.S. 66
(1938); Hartford Life Ins. Co. v. Ibs, 237 U.S. 662 (1915); Supreme Council of the
Royal Arcanum v. Green, 237 U.S. 531 (1915).
95 Railway Express Agency, Inc. v. Virginia, 282 U.S. 440 (1931); cf. Seaboard Air
Line R.R. v. Daniel, 333 U.S. 118 (1948).
96See Latty, Pseudo-Foreign Corporations, 65 YAix L.J. 137 (1955).
97 It appears that this is a subject worthy of further consideration. See Gibson,
Surplus, So What? The Model Act Modernized, 17 Bus. LAW. 476, 483-95 (1962).
Directors' and Officers' Liability
The Texas Gulf Sulphur case98 has had great repercussions in the business
and legal communities.99 It illustrated strikingly that the boundaries of
legally permissible, or indeed ethical, conduct on the part of directors are
often uncertain. Guidelines are frequently unavailable when action must
be taken, and sometimes they become established only through subsequent
litigation.100
However honest a director or officer may be, he cannot fail to be dis-
turbed by the thought that good intentions and careful conduct may not
protect him from becoming personally involved in such a "clarification" or
"extension of existing practice." Such uncertainty is not in the best inter-
est of corporations or their stockholders. While it will rarely deter the
crook, it may result in the unwillingness of competent, qualified men to
serve. Of greater importance, this fear may cause honest directors and
officers to hesitate in making decisions involving new or difficult prob-
lems. In a world where timing is often critical to success, such hesitation
may be harmful to corporations and their stockholders.
In the light of these new pressures there is a growing belief that present
statutes permitting indemnification of officers and directors do not offer
sufficient protection. The corporation may not in fact be financially able
to provide reimbursement when the time for payment comes, or reimburse-
ment may be delayed by litigation, particularly where there has been a
change in management or when the director represents a minority inter-
est.10' Large numbers of directors and officers have accordingly become
interested in insurance against potential liability resulting from their service
in these capacities. Insurance companies have offered "package policies"
to individual companies and to their directors and officers.102 The policy
98 SEC v. Texas Gulf Sulphur Co., 258 F. Supp. 262 (S.D.N.Y. 1966).
99See, e.g., Kennedy & Wander, Texas Gulf Sulphur, A Most Unusual Case, 20 Bus.
LAW. 1057 (1965).
100 See cases cited in note 74 supra; Lawrence v. Decca Records, Inc., 20 Misc. 2d
424, 195 N.Y.S.2d 431 (Sup. Ct. 1959); Rosenfeld v. Fairchild Engine & Airplane Corp.,
309 N.Y. 168, 128 N.E.2d 291 (1955); Black v. Parker Mfg. Co., 329 Mass. 105, 106
N.E.2d 544 (1952).
101 It should be noted that individual directors with counsel different from that of
the corporation in a stockholders' derivative suit may have to pay interim counsel fees
and other litigation costs pending outcome of the litigation. See Meltzer v. Atlantic
Research Corp., 330 F.2d 946 (4th Cir.), cert. denied, 379 U.S. 841 (1964), where the
court enjoined use of corporate funds for such purpose during such period. This case is
discussed in Gibson & Freeman, Business Associations, 1964-1965 Annual Survey of
Virginia Law, 51 VA. L. REV. 1394, 1405-06 (1965).
102 Note, Liability Insurance for Corporate Executives, 80 HARV. L. REV. 648 (1967).
For other general discussions of directors indemnity insurance, see, e.g., Anderson,
Directors and Officers Liability Insurance, 47 Cm. B. REC. 31 (1965); Bishop, New
usually insures both the company against any loss resulting from indemni-
fying any officer or director pursuant to a by-law or other provision be-
cause of his alleged negligence or wrongful conduct and the individual
directors and officers against any liability to the corporation or others aris-
ing out of their service to the corporation. The prevalent practice has
been to prorate the premium, ninety per cent to the company and ten per
cent to the directors and officers. Some companies have paid the ten per
cent as well, either directly or indirectly by increasing compensation in an
equal amount.
Doubts have been voiced as to the legality of such insurance for directors
and officers, as well as to the authority of corporations to pay for it.103
And even where directors and officers pay the premium allocable to them
in order to avoid any difficulties, the allocation remains open to question
since it is virtually impossible, at least currently, to justify any ratio by
industry experience. Indeed, these general doubts have led some cautious
executives to abandon attempts to insure against potential liability out of
fear that taking out the insurance might itself invite strike suits.
To resolve these uncertainties the Delaware Act104 and the Model Act
have been amended in nearly identical terms. It is quite likely that similar
results may be reached in Pennsylvania and New Jersey. New section 4A,105
which is part of a long provision replacing old Section 4(o) of the Model
Act,'06 now specifically provides:
(g) A corporation shall have power to purchase and maintain insur-

ance on behalf of any person who is or was a director, officer, em-
Cure for an Old Ailment: Insurance Against Directors' and Officers' Liability, 22
Bus. LAW. 92 (1966); McIntyre, Directors and Officers Liability Insurance, 42 Los
ANGELES B. BULL. 57 (1966); Insurance Against Liabilities of Directors and Officers-A
Forums, 22 RECORD OF N.Y.C.B.A. 342 (1967); Note, Public Policy and Directors' Lia-
bility Insurance, 67 COLUM. L. REV. 716 (1967).
103See, e.g., Bishop, supra note 102; Bishop, Indemnification for Corporate Insiders:
Problems and Methods-Including Insurance, in PROCEEDINGS OF FOURTH ANNUAL COR-
PORATE COUNSEL INSTITUTE 328 (1965). But see, Note, Liability Insurance for Cor-
porate Executives, 80 HARV. L. REV. 648, 669 (1967):
the suggestion that a corporation may not lawfully purchase liability insurance
for its executives seems to be based upon an unsound identification of insurance
with indemnification. So long as the purchase of insurance can be justified simply
as compensation, as would always be the case, such expenditures would seem
unobjectionable.
104 DEL. CODE ANN. tit. 8, ? 145(g) (Supp. 1967).
105 MODEL Bus. CORP. ACT ? 4A (adopted April 18, 1967). The full text of the new
section and the committee comment will be published in an article by Orvel Sebring in
the forthcoming November 1967 issue of The Business Lawyer.
106 The superseded ? 4(o) of MODEL BUS. CORP. ACT (rev. ed. 1966), authorizing in-
demnification of officers and directors generally, was substantially the same as VA.
CODE ANN. ? 13.1-3(n) (1964). See note 5 supra.
ployee or agent of the corporation, .. . whether or not the corpora-

tion would have the power to indemnify him against such liability
under the provisions of this section.
This conclusively resolves the question of corporate authority to pay the

premiums on liability insurance for corporate directors and employees.
The other new provisions in the Delaware and Model Acts go on to sep-
arate third party actions from derivative actions and to spell out the stand-
ards under which reimbursement may be made in those differing situa-
tions.107 The careful thought that has gone into the preparation of these
107 VA. CODE ANN. ? 13.1-3(n) (1964) presently permits all corporations to indemnify
any director or officer "except in relation to matters as to which he shall be finally
adjudged in such action, suit or proceeding to be liable for negligence or misconduct
in the performance of duty [to the corporation] . . . ." In addition, it authorizes in-
demnification even in such cases if, but only if, the payment is "authorized by the
articles of incorporation or any by-law made by the stockholders or any resolution
adopted, before or after the event, by the stockholders."
The new Model Act provision takes a slightly different approach to indemnification
where special authorization by charter or by-law does not exist. It separates litigation
involving corporate directors and employees into two categories: (1) the traditional
derivative suit and (2) all other types of litigation, both civil and criminal. It then sets
forth different standards governing indemnification for each category. In both cate-
gories the corporation is authorized to indemnify a director or employee if he (a)
"acted in good faith" and (b) "in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation . . . ." If the action involves a criminal
charge, he must also have "had no reasonable cause to believe his conduct unlawful."
With respect to derivative actions, there is the additional requirement that where the
person "shall have been adjudged to be liable for negligence or misconduct in the per-
formance of his duty to the corporation," indemnification may be made "only to the
extent that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such ex-
penses which such court shall deem proper."
The distinction between derivative actions and other actions, including criminal
prosecutions, is a recognition that the interests of the corporation are usually sub-
stantially different in each. The outer limits of legality in the antitrust sphere are no-
toriously obscure, and officers and employees have in the past been convicted of vio-
lating such laws where they were obviously acting solely for the benefit of the corpora-
tion and in a manner that at the time seemed lawful in the light of existing precedent.
For the corporation to relieve them of the financial burden of the ordeal is hardly
likely to encourage crime. In most such cases, particularly where the employee is
convicted, he will already have suffered from adverse publicity and strains of the
proceedings, for which he cannot be reimbursed.
The new Model Act ? 4A also makes reimbursement mandatory where the "director,
officer, employee or agent ... has been successful on merits or otherwise ...." This was
included primarily to protect the "minority" director. Litigation of this type often
results from, or results in, bitter fights among directors or stockholders for control
of the corporation. Often the losers are shown no mercy. Particularly where their
1967 1 Model Business Corporation Act 1417
provisions and the wide influence they will presumably have commend them
for consideration in Virginia.
Permissible Consideration in Mergers and Consolidations
At present both sections 13.1-68(c)'08 and 13.1-69(c)'09 and their old

Model Act counterparts"0 recognize only that in mergers and consolida-
tions, stock "or other securities or obligations" of the "surviving" or "con-
solidated" corporation can be issued to stockholders of the nonsurviving
corporations. In practice, these sections have been read in connection with
section 13.1-2111" to permit the payment of cash in lieu of partial shares.
A complete cash settlement or the distribution of the shares of a corporation
not involved in the merger or consolidation is not expressly contemplated.
In many instances, however, they are in the best interest of all concerned. An
obvious example would be a merger of a third corporation into a wholly-
owned subsidiary of a major corporation. There distribution of shares of
stock of the parent permits the exchanging stockholders to obtain more
marketable shares and at the same time permits the combined enterprise to
avoid the problems often resulting from existence of a minority interest in
conduct has been vindicated in court, they are entitled to indemnification even if their
opponents who control the corporation would not otherwise permit this.
108 VA. CODE ANN. ? 13.1-68 (1964) provides:
Any two or more domestic corporations may merge into one of such corpora-
tions pursuant to a plan of merger approved in the manner provided in this Act,
if the articles of incorporation of each of them could lawfully contain all the
corporate powers and purposes of all of them.
The board of directors of each corporation shall, by resolution adopted by
each such board, approve a plan of merger setting forth: . . . (c) The manner
and basis of converting the shares of each corporation into shares or other se-
curities or obligations of the surviving corporation.
109 VA. CODE ANN. ? 13.1-69 (1964) provides:
Any two or more domestic corporations may consolidate into a new corpora-
tion pursuant to a plan of consolidation approved in the manner provided in this
Act, if the articles of incorporation of each of them could lawfully contain all the
corporate powers and purposes of all of them.
The board of directors of each corporation shall, by a resolution adopted by
each such board, approve a plan of consolidation setting forth: . . . (c) The man-
ner and basis of converting the shares of each corporation into shares or other
securities or obligations of the new corporation.
110 MODEL Bus. CORP. ACT ?? 65, 66 (rev. ed. 1966) (prior to November 16, 1966,
amendment).
111 VA. CODE ANN. ? 13.1-21 (Supp. 1966), which forbids the issuance of fractional
shares, also provides that:
When a shareholder would otherwise be entitled to a fractional share upon a
conversion of shares or a dividend payable in shares, the board of directors may,
in lieu of issuing scrip, authorize payments in cash based on the fair value of
the shares as determined by the board of directors and their determination, in the
absence of fraud, shall be final.
This provision is similar to MODEL Bus. CoRP. Acr ? 22 (rev. ed. 1966).
a subsidiary.112 These results have been accomplished in a number of recent

Virginia mergers, by having the surviving subsidiary issue its "obligation"
to pay cash or to deliver stock of the parent corporation. While this is now
the established practice of the Virginia Commission, it would be helpful if
it could be confirmed in express statutory language. The Model Act
equivalent of subsection (c) of both sections 13.1-68 and 13.1-69 has been
amended to do this.113 It now eliminates all doubt by the desirable provision
that the articles of merger or consolidation shall specify:
(c) The manner and basis of converting the shares of each merging
corporation into shares or obligations or other securities of the surviv-
ing corporation or, in whole or in part, into cash, property or shares,
obligations or other securities of any other corporation.
Resolving De Facto Merger Doubts
The Virginia and Model Acts distinguish between mergers or consolida-

tions on the one hand and sales of assets on the other.114 In mergers and
consolidations, except with a ninety-five per cent owned subsidiary,11-5
more than two-thirds of the shares in each of the corporations involved must
be voted for the transaction.11 And dissenting stockholders of all such
corporations are entitled to appraisal and cash payment.117 In a sale of
"all, or substantially all, the property and assets of a corporation," on the
other hand, only the shareholders of the corporation whose assets are being
sold are required to vote on the transaction,118 and only thev are entitled
to appraisal and dissent.119 The usual explanation for not giving stockholders
of the acquiring corporation the right to vote and the right to appraisal
is that the corporate existence of this company continues, and in most
instances so does the basic business in which it was engaged.120
But in some cases where the transaction has resulted in the stockholders
112 See text accompanying notes 29 & 30 supra.

113 MODEL Bus. CORP. ACT ?? 65(c), 66(c) (amended November 19, 1966).
114 VA. CODE ANN. ?? 13.1-68 to -76 (1964) (governing mergers and consolidations);
? ? 13.1-77 to -78 (governing disposition of assets). Comparable provisions are MODEL
Bus. CORP. ACT ?? 65-70, 71-73 (rev. ed. 1966).
115 VA. CODE ANN. ? 13.1-76 (1964); MODEL Bus. CORP. ACT ? 68A (rev. ed. 1966).
116 VA. CO-DE ANN. ? 13.1-70 (1964); MODEL BUS. CORP. ACT ? 67 (rev. ed. 1966).
117 VA. CODE ANN. ? 13.1-75 (1964); MODEL BUs. CORP. ACT ?? 73, 74 (rev. ed. 1966).
118 VA. CODE ANN. ? 13.1-77 (1964); MODEL BUS. CORP. ACT ?? 71, 72 (rev. ed. 1966).
119 VA. CODE ANN. ? 13.1-78 (1964); MODEL Bus. CORP. ACT ?? 73, 74 (rev. ed. 1966).
120 The rules of the New York Stock Exchange require an approval by a majority
vote of stockholders, however, where (1) the issuance of shares by the acquiring
corporation(s) will result in a change of control or (2) the shares to be issued in
the exchange are 20% or more of the shares outstanding prior to issuance of the addi-
tional shares. NEW YORK STOCK EXCH4NGE, COMPANY MANUAL A-284, A-285 (1961).
of the selling corporation obtaining control of the corporation acquiring

the assets, the courts have ignored the statutes and have held that the trans-
action is a "de facto merger," and thus subject to the code provisions
applicable to mergers.'12
The recent decision of the Iowa Supreme Court in Rath v. Rath Packing
Co.122 is particularly disturbing since Iowa is one of the states that have
adopted the Model Act. However fair the results may seem in the context
of particular facts, the emergence of this concept threatens to undermine
one of the very goals of all recent corporation acts-reliability of result.
The Model Act and the Virginia Act intended that the forms of the trans-
actions were to govern the legal consequences flowing from them. This
was the only way to guard against the uncertainties of judicial exploration.
In the rare instances of abuse, traditional remedies are sufficient. Where
directors of one corporation surrender control to the stockholders of an-
other through a purchase of assets, and where harm results to their own
stockholders, the directors may be sued for breach of their fiduciary duty
if the facts justify suit. And injunctive relief will be available in advance
in appropriate cases. There is no need to cloud the transactions of all cor-
porations to adjust for the freak case.
In the light of these recent cases, it would be reassuring, even though
unnecessary, for Virginia to say again that the original words mean what
they said. This could be done simply by adding the following sentence to
section 13.1-77: 123
Any transaction authorized and consummated pursuant to this sec-

tion shall not be considered to be a merger or a consolidation within
the terms of any other section of this Act, and the rights of stock-
holders of all corporations involved in the transaction shall be gov-
erned by Section 13.1-78 and in no event by Section 13.1-75.
Elimination of Option in Appraisal Right
The Virginia Act's appraisal rights provisions differ from those in the
121 See, e.g., Marks v. Autocar Co., 153 F. Supp. 768 (E.D. Pa. 1954 [sic]); Troupiansky
v. Henry Disston & Sons, 151 F. Supp. 609 (E.D. Pa. 1957); Applestein v. United Bd. &
Carton Corp., 60 N.J. Super. 333, 159 A.2d 146 (Ch. Div.), aff'd, 33 N.J. 72, 161 A.2d
474 (1960); Farris v. Glen Alden Corp., 393 Pa. 427, 143 A.2d 25 (1958), noted in 59
COLUM. L. REV. 366 (1959), 72 HARV. L. REV. 1132 (1959), 107 U. PA. L. REV. 420 (1959).
Contra, Hariton v. Arco Electronics, Inc., 41 Del. Ch. 74, 188 A.2d 123 (1963), discussed
in Folk, De Facto Mergers in Delaware: Hariton v. Arco Electronics, Inc., 49 VA.
L. REV. 1261 (1963); Heilbrunn v. Sun Chem. Corp., 37 Del. Ch. 552, 146 A.2d 757 (1958),
aff'd, 38 Del. Ch. 321, 150 A.2d 755 (1959); Manning, The Shareholder's Appraisal
Remedy: An Essay for Frank Coker, 72 YALE L.J. 223, 254-262 (1962).
122 257 Iowa 1277, 136 N.W.2d 410 (1965), noted in 79 HARV. L. REV. 672 (1966).
123 VA. CODE ANN. ? 13.1-77 (1964).
Model Act by giving the dissenting stockholder in a merger, consolidation

or sale of assets the option of turning down the cash to be awarded him by
court appraisal, permitting him instead to take the securities offered origi-
nally.124 This additional right was reluctantly conceded in order to avoid
any opposition to the 1956 enactment. It has not produced good results.
The right has encouraged dissent solely for purposes of speculation, with-
out regard to the merits of the proposed transaction. The dissenter in effect
gets a free stock option for the duration of the unavoidably lengthy ap-
praisal proceeding. Where the market price of the stock goes up, the
dissenter usually elects to take stock after all. The corporation and all its
stockholders thus bear considerable expense for a useless appraisal pro-
ceeding.
The experience of Virginia corporations during the past decade has
revealed an additional defect in providing dissenters with this option in
connection with a sale of assets. Its existence can leave the tax status of
the transaction in doubt for months, or even years, after the stockholders'
vote. Under present federal tax guidelines,125 if more than ten per cent of
the fair market value of the net assets of the selling corporation is reserved
for dissenters and other liabilities, the transaction will be a taxable event
to the selling corporation, and a double capital gains tax may result if the
company has not covered this possibility when adopting its plan of liquida-
tion. Usually, taxation of either the corporation or the stockholders will be
fatal to the deal. If the option were not available and the dissenters were
required to take cash, then the tax status of the transaction could be ascer-
tained almost immediately after the stockholders' vote. If tax-free status
is essential to the deal, all could then know at once whether it is on or off.
The reasons of expediency that once justified the option have long van-
ished. Experience has shown that instead of an aid to the oppressed the
option is in reality only an opportunity for speculation and a serious ob-
struction to beneficial transactions. It should be deleted.126
124 The option results from the inclusion in VA. CODE ANN. ? 13.1-75 (1964), which
applies to mergers and consolidations, and in ? 13.1-78, which applies to sales of assets, of
the following paragraph (language is that of ? 13.1-75 and differs slightly in ? 13.1-78):
The right of a dissenting stockholder to be paid the fair value of his shares as
herein provided shall cease if and when the corporation shall abandon the
merger or consolidation or such dissenting stockholder shall, at any time before
decision of the appraisers or the court, whichever may first occur, withdraw his
dissent and in either such event his rights as a stockholder shall thereupon revive.
Compare MODEL Bus. CoR. Acr ? 74 (rev. ed. 1966).
125 Rev. Proc. 66-34, 1966-2 CUM. BuLL. 1232-33.
126 At the same time it would be helpful to adopt the I'Iodel Act refinement that the
fair value of the shares shall exclude "any appreciation or depreciation in anticipation
of the merger or consolidation." MODEL Bus. CORP. Acr ? 74 (rev. ed. 1966).
Special Provisions for the Close Corporation
As noted earlier, the new Delaware law contains special provisions for
the close corporation. A company can become a "close corporation" only
if its articles of incorporation provide that: (a) it cannot have more than
thirty stockholders; (b) the transferability of all its stock is restricted; and
(c) it is prohibited from making a "public offering" of its stock within the
meaning of the Securities Act of 1933*127 If the company meets these
requirements, it can be formed initially as a "close corporation" 128 or elect to
become one.129 Once a corporation attains this status, it is retained until
either the status is voluntarily terminated by amendment of the company's
articles of incorporation'80 or the company fails to comply with one of the
limitations imposed by its articles of incorporation and subsequently does
not take the steps required by the code to prevent forfeiture of its status.13'
The classification of a corporation as a "close corporation" under the new
Delaware law permits stockholders much greater flexibility in matters relat-
ing to control than is otherwise available. Stockholders are specifically
authorized to enter into written agreements restricting "the discretion or
powers of the board of directors." 132 Indeed, the articles of incorporation
may dispense with directors altogether and may provide for direct man-
agement by the stockholders.133 There are also special statutory provisions
for the appointment of an impartial "provisional" director when the cor-

132 DEL. CODE ANN. tit. 8, ? 350 (Supp. 1967). It should be noted that even absent
such statutory authorization the discretion of officers and directors can be limited by
stockholder agreement in certain instances. E.g., Sternheimer v. Sternheimer, 208 Va.
89, 155 S.E.2d 41 (1967), where the Court held specifically that: "While Sternheimer
Bros. is a corporation, it and all of its officers and directors are bound by the terms
of the [agreement among all stockholders] . . . . They can make no arrangement as
to its corporate officers and no provision as to succession of offices or other matters in
conflict with the terms of said contract." 208 Va. at 98, 155 S.E.2d at 48. Courts in
other jurisdictions appear to be about equally divided over the question of enforce -
ability of such provisions. 6 S. WILLISTON, CONTRACTS ? 1736 (rev. ed. 1936);
O'Neal, Protecting Shareholders' Control Agreements Against Attack, 14 Bus. LAW.
184, 188-90 (1958). Although the Virginia Court did in terms limit its holding to con-
tracts to which all stockholders were parties, that was the fact in the Sternheimer case.
That fact may be crucial to enforceability. 1 F. O'NEAL, CLOSE CORPORATIONS ? 5.17, at
273-74 (1958). There was also no discussion of the removal of officers authorized by
VA. CODE ANN. ? 13.1-46 (1964). Enforcement of a stockholder's agreement to limit the
statutory right is contrary to public policy as embodied in this section. See Kaplan v.
Block, 183 Va. 327, 31 S.E.2d 893 (1944).
1422 Virginia Laiv Review [Vol. 53:1396
poration's board is deadlocked.134 The statute specifically authorizes the

articles of incorporation to give a specified number or percentage of stock-
holders the option to have the corporation dissolved "at will or upon the
occurrence of any specified event or contingency." 135
These innovations of the Delaware law, or provisions to the same general
effect, would seem to meet a real need in Virginia. Consideration might
well be given at the same time to reducing the requirement of a two-thirds
vote for charter amendments to a majority, in accord with the trend of
contemporary opinion, and to eliminating the antiquated appraisal right in
the merger or consolidation of corporations where the shares are listed on
a national securities exchange or otherwise have a substantial market.136
Additional Refinements
There are three other changes in the Virginia Act which, though minor,
might be helpful.
First, simplified restated articles of incorporation could be obtained if the
articles of amendment, merger or consolidation making the restatement
could be separated from the final document. This could be done by revis-
ing the last sentence of section 13.1-2(e)137 to read:
It includes only restated articles of incorporation contained in the

latest articles of amendment, merger or consolidation and any docu-
ments thereafter admitted to record.
Second, the powers of the corporation to guarantee obligations of other

corporations in section 13.1-3(g)138 should be extended to include the obli-
gations of individuals and partnerships.139 Their liability is usually not lim-
ited by law, and their credit may be as good or better than that of corpora-
tions. In determining the likelihood of full payment of the guaranteed
obligations, the earning power of the debtor, and the underlying assets
pledged if any, are far more important than the form of business entity
used. Finally, joint ventures among corporations have become a widely
134 DEL. CODE ANN. tit. 8, ? 353 (Supp. 1967). Section 226 of the new Delaware Code
also reflects the realization that the going enterprise should sometimes be maintained even
though there is a deadlock in management. This section, which is applicable to all corpo-
rations, permits the appointment of a custodian who can, and must, continue the business
of the corporation. This would be a helpful addition to the Virginia Code.
137 VA.CODE ANN. ? 13.1-2 (e) (1964).
138 VA. CODE ANN. ? 13.1-3 (g) (1964).
139 This could be done by inserting the bracketed words in the last phrase of (g): "and
to guarantee the payment of any bonds or other obligations [of any individual or part-
nerships or] of any other domestic or foreign corporation organized for any purpose."
-used business practice. Section 13.1-3's requirement of specific authorization

by articles of incorporation or two-thirds vote of stockholders before a
corporation can enter into "partnership" agreements140 often creates need-
less delay and uncertainty. This hangover from the nineteenth century no
longer serves any real purpose and should be eliminated.
A factor in the Virginia Act's success has been its adaptability in the face
of changing circumstances. The modifications made, however, do not indi-
cate any fundamental unsoundness in the 1956 legislation. To the con-
trary, following the lead of the Model Business Corporation Act, the Gen-
eral Assembly produced at that time a viable corporate law for the Com-
monwealth. At its inception, the Virginia Act worked an abrupt end to
most of the confusion and inadequacy inherent in earlier law. And during
its decade of existence, the statute has provided an unambiguous and ad-
ministrable structure for corporate development within Virginia-a structure
confirmed and strengthened by the recent decision of the Supreme Court
of Appeals in Socony.
140 VA. CODE ANN. ? 13.1-3 (1964) provides in part that:

Each corporation other than a railroad or other public service company, a
banking corporation, an insurance corporation, a building and loan association, a
credit union or an industrial loan association shall have power, but only where
authorized by the articles of incorporation or by the affirmative vote of the
holders of more than two-thirds of the outstanding shares of each class, whether
or not entitled to vote thereon by the provisions of the articles of incorporation,
to enter into partnership agreements with other corporations, whether organized
under the laws of this State or otherwise, or with any individual or individuals.

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A Decade of the Model Business Corporation Act in Virginia

Author(s): George D. Gibson, George C. Freeman and Jr.

A DECADE OF THE MODEL BUSINESS CORPORATION

George D. Gibson* & George C. Freeman, Jr.**

On January 1, 1967, current Virginia corporation law marked the tenth

CLARIFICATION AND M\IODERNIZATION

Before 1957 Virginia corporation law was a thicket of confusions. Major

Two refinements merit mention, one as to the compensation of employees

stricting the right of inspection during the meeting to "the purposes

A second modernization was adopted concerning merger with a ninety-

25 MODEL Bus. CORP. AcT ANN. ? 29, ? 1 (Supp. 1966).

no meeting of the stockholders of either corporation is required, and only

merger or consolidation because of the specific provision that in such

READJUSTMENTS AND FINALITY

Provision of Workable Procedures for Corporate Readjustments

It would do little good to make such certificates easy to obtain unless

O'Brien v. Socony Mobil Oil Co.

Both the corporate readjustment and jurisdictional purposes of the Vir-

55 194 Va. 475, 74 S.E.2d 265 (1953). See note 65 infra.

closures will be adequate. Finally, the continuing expansion of the common

Plaintiff was unaware of . . . [the action of the State Corporation

Later it characterized the Commission's order as "ex parte." 77

Miss O'Brien had actual notice, however, that an amendment to the

terial facts to stockholders as well as deliberate misrepresentations to them. For a

statement and the full text of the proposed amendment. Moreover,

78 207 Va. at 713-14, 152 S.E.2d at 283.

82 The first paragraph of VA. CODE ANN. ? 12-63 (1964) provides:

may appeal from an order of the Commission issuing a certificate of

that involved a collateral attack on orders of the Corporation Commission.

Directors' and Officers' Liability

(g) A corporation shall have power to purchase and maintain insur-

ployee or agent of the corporation, .. . whether or not the corpora-

This conclusively resolves the question of corporate authority to pay the

Permissible Consideration in Mergers and Consolidations

At present both sections 13.1-68(c)'08 and 13.1-69(c)'09 and their old

a subsidiary.112 These results have been accomplished in a number of recent

Resolving De Facto Merger Doubts

The Virginia and Model Acts distinguish between mergers or consolida-

112 See text accompanying notes 29 & 30 supra.

of the selling corporation obtaining control of the corporation acquiring

Any transaction authorized and consummated pursuant to this sec-

Elimination of Option in Appraisal Right

Model Act by giving the dissenting stockholder in a merger, consolidation

Special Provisions for the Close Corporation

127 DEL. CODE ANN. tit. 8, ? 342 (Supp. 1967).

poration's board is deadlocked.134 The statute specifically authorizes the

It includes only restated articles of incorporation contained in the

Second, the powers of the corporation to guarantee obligations of other

-used business practice. Section 13.1-3's requirement of specific authorization

140 VA. CODE ANN. ? 13.1-3 (1964) provides in part that:

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