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Judge Will Order Dissolution Of Kyanite Mining Business

BUCKINGHAM – In an August 30 court document to counsel, Judge Jane Marum Roush, judge designate for Colgate, et al. v. The Disthene Group, Incorporated, advised that the court will enter an order granting the plaintiffs' request that The Disthene Group, Incorporated, which includes Kyanite Mining Corporation, Blue Rock Resources, LLC, and the Cavalier Hotel Corporation, be dissolved.

She added that the court would appoint a receiver “to wind up and liquidate the business and affairs of the corporation.”

Continuing, Judge Roush wrote that the court would hold a hearing before selecting the receiver. “Counsel should confer and advise the court of a proposed date for that hearing without delay,” she stated in the 41-page document.

“In the meantime, counsel for the Plaintiffs are directed to prepare an order reflecting the rulings contained in this letter, forward it to counsel for the Defendant to note their objections, and present the order to the court for entry within 30 days,” she concluded.

Roush's ruling offers a detailed overview of the case, which began when plaintiffs Curtis Dixon Colgate, Sharon Marie Newcomb, Marion J. “Boyd” Colgate, Sr., and Peaceful Valley Limited Partnership filed a complaint in 2011 seeking the judicial dissolution of the defendant, The Disthene Group, Incorporated.

During the bench trial, which opened on May 21 and concluded on June 8, over 30 witnesses testified and approximately 1,420 exhibits were introduced into evidence. Moreover, according to Roush, the parties submitted over 500 pages of post-trail briefs.

Although the listed defendant is The Disthene Group, Incorporated, the case focuses on Gene Dixon, Jr., CEO of Disthene, and his son Guy, a director of Disthene and the president of Kyanite Mining.

The prominent Buckingham family literally built the multi-million dollar Kyanite Mining Corporation on rock when Gene Dixon, Sr. and his father, Guy A. Dixon purchased the original Baker mine at a bankruptcy auction in the 1940s. Today, Kyanite Mining Corporation is the world's largest producer of kyanite and mullite.

In 2005, Kyanite Mining Corporation was reorganized with the formation of Disthene as a holding company for the three subsidiaries.

According to court documents, Curtis Dixon Colgate and Sharon Marie Newcomb are the children of the late Jeanne Dixon Colgate, the sister of Gene Dixon, Jr., and the daughter of the late Gene Dixon, Sr. and Mallie M. Dixon. Marion J. “Boyd” Colgate, Sr. is the widower of Jeanne.

In the initial complaint, the plaintiffs allege mismanagement of the company and its properties, and efforts by the defendant “to squeeze Curtis and Sharon out of their 42 percent interest in the Company.”

Much of the trial pivoted on minority shareholder oppression and the business judgment rule, with both sides substantiating their respective arguments for or against the dissolution.

Providing background on the case, Judge Roush offered, “The Plaintiffs allege that Disthene should be dissolved because Gene and Guy have engaged in a pattern of oppressive and fraudulent conduct designed to disadvantage the minority shareholders and consolidate all of Disthene's outstanding shares on Gene's side of the family. Further, according to the Plaintiffs, Gene and Guy have misapplied and wasted corporate assets.”

Roush wrote, “Disthene generally denies the Plaintiff's claims and asserts that the claims are barred by the business judgement rule.”

While reviewing the business judgement rule, Roush offered, “There is nothing improper about Gene's desire to maintain the voting shares with himself and Guy. In Glass v. Glass, 228 Va.39, 53-54 (1984), the Supreme Court held that majority stockholders have the right to retain their stock, to control management of the corporation, and to act together to accomplish their legitimate aims.

“Where Gene visibly departs from the standards of fair dealing, however, is in the steps he has taken to effectuate his desires to consolidate the ownership of the Class B shares on his side of the family and to keep the per share value of the stock as low as possible.”

Along with citing suppression of dividends and unfairness to shareholders in share redemptions, Roush also addressed excessive executive compensation.

Although each side relied on expert witnesses to reinforce their arguments regarding executive compensation, Roush shared, “In sum, the court agrees with the Plaintiffs that Gene's and Guy's compensation is excessive when compared to the compensation of comparable officers at other companies.”

She added, “The court finds that Gene's and Guy's compensation is excessive when compared to the corporation's net income.”

Roush concluded that the executive compensation “is excessive and is evidence of oppression of the minority shareholders.”

The judge also found that “Gene's and his family's use of company assets for personal purposes constitutes a misapplication and waste of corporate assets within the meaning of Code Section 13.1-747.”

Although the plaintiffs contend that Disthene intentionally fails to operate Blue Rock and the Cavalier Hotel as profitable businesses, Roush concluded, “Gene and Guy have breached no duty to the shareholders by making the business decision primarily to hold Blue Rock and the Cavalier Hotel for future uses.”

Addressing the plaintiffs' complaint that they have been disadvantaged by Disthene's refusal to provide them with meaningful corporate records when requested, Roush offered, “Although the Plaintiffs are not satisfied with Disthene's level of responsiveness to their requests for corporate records, the Plaintiffs have failed to identify any governing corporate document or applicable Virginia law that Disthene has violated.

In her conclusion, Judge Roush wrote, “Non-voting shareholders in a closely held corporation are inherently disadvantaged. They have no voice in the management of the company. They have no market for their shares should they desire to sell. But 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. They have the right to inspect the corporate books and records.

“The non-voting shareholders in Disthene have the right to 'share and share alike' with the voting shareholders in any dividends or distributions upon liquidation. If these limited rights are denied them, they have the right to seek legal recourse.”

Roush continued, “The Plaintiffs have not been treated fairly by Disthene and its management.” She added, “There is no reason to believe that the management of Disthene will ever treat the Plaintiffs fairly. The court concludes that dissolution, although a drastic remedy, is the appropriate remedy in this case for the longstanding oppression of shareholders as well as waste and misapplication of corporate assets.”

Responding to the court's ruling, LeClairRyan, the law firm representing the plaintiffs, issued a press release stating that trial attorneys Michele K. Burke, John H. Craddock, Thomas M. Wolf, Gretchen C. Byrd and their team achieved “a landmark victory.”

The release shared, “The ruling represents a victory for the rights of minority shareholders of closely held Virginia corporations. The Court struck down the defendant's argument that it is common practice in Virginia, and thus permissible under Virginia law, for controlling shareholders to reap virtually all of the benefits of ownership of a Virginia closely held corporation while deliberately insuring there would be little or no return on investment for the minority shareholders.”

Alan D. Wingfield, who along with Michael E. Lacy, of Troutman Sanders LLP, serves as counsel to the defendant, offered, “We are still considering our next steps in this lengthy litigation.”

For this community, Kyanite Mining Corporation is more than a corporation embattled in a lawsuit about shareholders and corporate assets; it is one of the county's major employers. It is a place where generations of families have and continue to work together, much like Gene and Guy Dixon and their ancestors.

Responding to the ruling via email, KMC President Guy Dixon stated, “Kyanite Mining Corporation (and its parent the Disthene Group) is two years into an on-going legal dispute between its controlling and minority shareholders.”

He shared, “This dispute is unfortunate, but, as it has done for the last seven decades, KMC will continue to meet the needs of its global customer base, look after the interests of its employees, and meet its environmental and community obligations well into the future.”