Knop v. Knop

Facts

The Knop family business, Ticonderoga Farms, was incorporated in 1982 with the father having 80% ownership and the remainder being split between his wife and their three children. After the couple separated in 1987, and additional transfers by the now adult children, the Knop children each owned 9.08% of the business, collectively owning 27.24%. In 2004, the father contacted the company’s tax accountant and informed him of his intent to make an inter vivos gift of additional stock in the company to his three children. The father instructed the accountant that he wanted to give to his children gifts of stock equivalent to the maximum gift tax exclusion, which would have brought each child’s ownership interest in the company to 14.687%, or 44.061% collectively.

Later, the father would decide he wanted to sell or give away part of the company’s land to create a scenic easement. While the company’s bylaws prevented the transfer of land without approval of 90% of the ownership interest, the father was able to take advantage of a Virginia law that allowed corporations to convert to another form of governance if done so by a shareholder owning more than two-thirds interest in the company. The father used this law to convert the business into an LLC and change the bylaws to give himself complete control over the business and transfer the land. The Knop children sued, arguing that the father did not have two-thirds interest because they collectively owned 44.061%. The father contended that the gifts of stock were never actually or constructively delivered to his children, so they still owned only 27.24% of the company, leaving him with 72.76%. The Knop children sued the father seeking a declaratory judgment as to their ownership interests.