A 67-year-old closely held mining business may be broken up and parceled out under a judge’s “drastic” remedy for the company’s oppression of minority shareholders in a family feud that has played out as a courtroom corporate drama.
Fairfax Circuit Judge Jane Marum Roush concluded the Disthene Group Inc. – which owns a profitable kyanite mine in Buckingham County – is controlled by a domineering shareholder who treated disfavored family members and shareholders as “irksome interlopers.”
The family mine is the world’s largest producer of kyanite and mullite, heat-resistant materials used in manufacturing processes. The company also owns thousands of acres of timberland in Central Virginia.
Roush’s decision to split up the business is a victory for descendants of the company founder who claimed – in two separate lawsuits – that they were wrongly deprived of shares and profits by company president Gene Dixon Jr.
“They feel vindicated,” said the plaintiffs’ lawyers.
Roush heard evidence in the case over three weeks in rural Buckingham and delivered a 41-page letter opinion Aug. 30 representing an almost complete victory for the minority shareholders and a repudiation of Dixon’s practices.
The opinion in Colgate v. The Disthene Group Inc. (VLW 012-8-136) recites a litany of oppressive behavior by Dixon justifying the dissolution of his company.
The latest suit was filed in 2011, but the history of conflict in the Dixon family goes back much farther. The players are identified in a Dixon family tree appended to Roush’s opinion. Company co-founder Gene Dixon Sr. died in 1974 survived by son Gene Jr. and daughter Jeanne Dixon Colgate.
In 1988, Jeanne was on her deathbed at age 47. Her brother, Gene Jr., promised her he would take care of her children, Sharon and Curtis, and treat them fairly.
It was a hollow promise, the judge said. Shortly after Jeanne’s death, “for reasons that were never made clear to the court, he reneged on that promise,” Roush wrote.
Gene was stingy with information needed by Jeanne’s estate. The estate was administered by former Virginia Attorney General Mary Sue Terry, but she had to file suit to get basic financial numbers to allow the estate to file a tax return.
Gene also sought to acquire all of his sister’s shares of Disthene. Nevertheless, at the wind-up of the estate, Jeanne’s shares of the company remained with her heirs. The family divide was set in place – “Gene’s side” of the family pitted against the “Colgate side.”
Not long after Jeanne’s death, and despite Gene’s promise to take care of her children, Sharon was fired without explanation from her job at the company-owned Cavalier Hotel in Virginia Beach. When Curtis graduated in 2001 and sought an entry-level job at the Cavalier, Gene “flatly refused,” Roush wrote.
By contrast, family members on Gene’s side of the family found good paying jobs with Disthene-owned companies.
Bad feelings intensified when Sharon and Curtis sued in 2005 claiming Gene was trying to loot a marital trust designed to pay benefits to the two Colgate heirs. The trust litigation was settled, but Gene plotted retaliation against his niece and nephew, Roush concluded.
With the family divided, Gene’s side engaged in what Roush described as a textbook case of a “squeeze-out” – the control group using its position of power to eliminate other owners or participants, usually without fair payment to the “squeezees.”
“It took them a long time to figure out how much they were being oppressed,” said Thomas M. Wolf of Richmond, a member of the plaintiffs’ trial team.
Immediately after the trust litigation, Gene and his son, Guy, slashed company dividends while awarding themselves “enormous pay raises and even larger bonuses,” Roush said. Over a four-year period, dividends dropped by about $1 million while cash compensation for Gene and Guy rose by a similar amount.
Roush cited expert testimony that compensation for the controlling family members reached “excessive” levels.
While the Colgate kin were on the outs with Gene and Guy, Gene’s side of the family reaped the benefits of the corporate properties. There were meals at the Cavalier, a nearby beach house for vacations, a corporate airplane and a private game reserve for Gene, who liked to hunt quail.
Gene and Guy even failed to play fair with other family members who sought to redeem small share holdings, according to Roush’s opinion. They misled the sellers into accepting far less than the true market value of their stock, the judge said.
Lawyers who have handled disputes in closely held corporations say it’s rare for the minority to come out on top. “We commonly tell people if you own 49 percent, it’s a lot like owning nothing,” said Barry J. Dorans of Virginia Beach.
Roush acknowledged the inherent disadvantages for minority shareholders, but said they are “not without rights.
“They have the right to be treated fairly by the corporate officers and directors in accordance with the officers’ and directors’ fiduciary duties,” she wrote.
Listing the misdeeds attributed to Gene and Guy, she concluded, “There is no reason to believe that the management of Disthene will ever treat the Plaintiffs fairly.”
Breaking up the company was justified by the “longstanding oppression of shareholders, as well as waste and misapplication of corporate assets,” Roush wrote. Roush announced she would appoint a receiver to wind up and liquidate the corporation.
Roush’s opinion ‘shows there are protections for minority shareholders,” Wolf said.
The Colgate case is a rare situation where so many elements combine to support a finding of oppression of shareholders, said Dorans, who was not involved in the litigation.
But many of the actions by the majority interest could be viewed in a different light, said Richmond lawyer Thomas F. Coates III, who also was not involved in the lawsuit. Minimizing value and reducing profits are legitimate tax avoidance techniques “if all the shareholders are pulling the oars in the same direction,” he said.
Some of Roush’s findings of oppression could have gone the other way, Coates said. “They’re all judgment calls.”
But Coates said Roush’s careful documentation of her decision seemed designed to bulletproof her judgment on appeal. “It would be very hard to overturn her decision,” he said.
Coates said he was surprised the case did not get resolved before trial. “These things are just horrendously expensive.”
Wolf said the defendants offered less than 10 percent of the fair market value of his clients’ stock. “They never made a reasonable offer to settle,” he said.
The plaintiffs’ lawyers suggested Gene Dixon never took the challenge seriously. “I think he thought no one had the wherewithal to challenge him. He would grind anyone into the ground,” said John H. Craddock Jr., another member of the plaintiffs’ team.
Alan D. Wingfield of Richmond, one of the lawyers for the defendants, did not respond to requests for comment.
Roush announced she would appoint a receiver to wind up and liquidate the corporation.
Wolf said he thinks Roush’s opinion will be cited for years to come. “It shows there are protections for minority shareholders,” he said.