## Facts

- C-T of Virginia, Inc. (formerly Craddock-Terry Shoe Corp.) was a publicly owned Virginia shoe company.
- A buyer formed an acquisition vehicle to purchase C-T through a reverse triangular cash-out merger.
- The merger canceled C-T’s outstanding shares and required payment of $20 per share to former shareholders.
- The transaction was approved by C-T’s board and shareholders.
- The acquisition was financed largely with bank debt secured by C-T’s assets.
- After the merger, C-T struggled financially and later filed for Chapter 11 bankruptcy.
- The unsecured creditors’ committee, acting for the debtor, sued former directors, alleging the merger consideration constituted an illegal “distribution” to shareholders under the Virginia Stock Corporation Act and sought personal liability.

## Issues

1. Whether an arm’s-length leveraged acquisition structured as a cash-out merger constitutes a “distribution” to shareholders under the Virginia Stock Corporation Act.
2. If so, whether the directors could be held personally liable for authorizing an unlawful distribution when the transaction allegedly rendered the corporation insolvent.

## Decision

- The Fourth Circuit affirmed summary judgment for the former directors.
- The court held the leveraged cash-out merger was not a statutory “distribution” under Virginia law.
- Because the transaction was not a “distribution,” the statute’s distribution restrictions and director-liability provisions did not apply.

## Legal Principles

- A cash-out merger, even when funded substantially by debt secured by the target’s assets, is not necessarily a “distribution” within the meaning of state corporate distribution statutes.
- Statutory limits on “distributions” are directed at traditional shareholder payouts (e.g., dividends and similar transfers), not at arm’s-length merger consideration paid in a change-of-control transaction.
- Federal courts interpreting state corporate statutes generally avoid extending statutory concepts in novel ways absent supporting state authority, particularly where doing so would create unexpected director liability and disrupt settled transactions.

## Conclusion

The court rejected an attempt to recast a leveraged, arm’s-length cash-out merger as an unlawful shareholder “distribution” under Virginia corporate law, thereby shielding directors from personal liability under the distribution provisions and preserving the statutory distinction between merger transactions and conventional distributions.


In re C-T of Va., Inc., 958 F.2d 606 (4th Cir. 1992)