SSTMy late grandfather, Samuel S. Tripp, had a remarkable career in the law spanning almost 70 years. He was admitted to the bar in 1928 after graduating from NYU School of Law. As a second year lawyer in private practice he argued his first appeal in the New York Court of Appeals when Benjamin Cardozo was its Chief Judge. In 1937 he became Chief Law Assistant of the Queens County Supreme Court, a position he held until retirement in 1973 after which he joined Farrell Fritz where he served as counsel to the firm and mentor to many for more than 20 years. He was President of the Queens County Bar Association, Vice President of the New York State Bar Association, and author of a leading treatise on New York practice. He was fastidious about everything he did. He had an amazing memory. He was the ultimate lawyer’s lawyer.

During his years at Farrell Fritz, from time to time Sam served as court-appointed Referee to hear and report in litigated matters. In 1982, he was appointed Referee in a corporate dissolution case involving a family-owned insurance agency to hear and report on the “fair value” of the petitioner’s 25% stock interest following the majority owner’s election to purchase in lieu of dissolution. The buy-out statute, § 1118 of the Business Corporation Law, had been enacted only three years before and there was virtually no case precedent construing the statute’s undefined “fair value” standard.

Sam conducted a three-day trial following which he issued a 50-page Report recommending that the petitioner be awarded about $65,000 for his shares after applying a 40% combined marketability and minority discount to the agency’s goodwill value. The appointing judge entered an order adopting Sam’s recommended valuation. The petitioner appealed to the Appellate Division, Second Department, which in 1985 handed down a lengthy opinion in Matter of Blake [Blake Agency, Inc.], 107 AD2d 139, which also adopted Sam’s basic legal analysis, valuation rationale, and findings, including his application of a discount for lack of marketability (DLOM) to the corporation’s goodwill value (i.e., excluding net tangible assets), stating:

A discount for lack of marketability is properly factored into the equation because the shares of a closely held corporation cannot be readily sold on a public market. Such a discount bears no relation to the fact that the petitioner’s shares in the corporation represent a minority interest.

As intimated, the appellate court disagreed with Sam’s application of a minority discount a/k/a discount for lack of control (DLOC), finding it to be inconsistent with the statutory scheme’s purpose to protect minority shareholders and calling it a “windfall” for the purchasing majority shareholder. The court accordingly reduced Sam’s combined 40% DLOM/DLOC to 25% for DLOM alone (without explanation of how it arrived at that percentage or any reference to the record evidence).

Thirty years later, Blake remains the seminal case authority in New York fair value proceedings. Innumerable appellate and trial court decisions, including the Court of Appeals’ Seagroatt, Pace, and Beway rulings, have cited Blake for its flexible approach to use of the three basic valuation methods (market value, investment value, and net asset value), for its approval of DLOM, and for its disapproval of DLOC.

After he passed, I was lucky to find in Sam’s papers a copy of his unpublished Report in the Blake case. I came across it last week in the course of cleaning out my files in anticipation of our move to new offices later this month. It dawned on me that, with all the recent debate and controversy about New York’s singular treatment of DLOM, stoked by the Giaimo, Zelouf, AriZona Iced TeaChiu, and Verghatta decisions, I ought to revisit my grandfather’s Report to see what he wrote about DLOM at the moment of its birth in New York fair-value jurisprudence. You, too, can read it here.

What I rediscovered is that, amidst an exquisitely detailed, erudite and lengthy discussion of the relevant facts and law, including careful recitation of the testimony as it related to the opposing experts’ widely disparate appraisals of the small insurance agency, the Report says precious little in support of its recommended DLOM. It contains no indication that either side’s expert even addressed DLOM in their testimony or appraisal reports. All my grandfather’s Report said specific to DLOM is the following at page 41, in which he quoted from a 1982 article by Professor Harry J. Haynsworth IV entitled “Valuation of Business Interests” published in the Mercer Law Review:

I am of the opinion that a discount for “lack of marketability” is here warranted since petitioner’s interest, in the language of Professor Haynsworth (p. 489), is in “a closely held business . . . (which) interest cannot readily be sold . . ., (is) less marketable and, therefore, less valuable than equivalent interests in companies whose securities are regularly traded in a recognized market . . ..

In a footnote on page 42, in support of his recommended 40% combined DLOM/DLOC, my grandfather cited an article contained in a 1981 ALI-ABA Course Materials Journal which states DLOM percentages “in the range of 10%, 15%, 17.7%, 20%, 25%, 30%, 33 2/3%, and 35%.” Quoting from the article, he then added:

The author states (p. 85) that, “separate discounts should be allowed for lack of marketability and for a minority interest, since a majority interest may suffer from lack of marketability. But the cases usually merge these discounts and do not distinguish between them.” Such are in the range of a “50% combined discount”.

It thus appears that my grandfather thought his 40% combined discount was on the low end. But how did he get there? Neither he nor the secondary sources he relies on mention any empirical data in support of DLOM, much less whether the data relate to minority or control interests.

It also bears noting that the above-quoted excerpt from Professor Haynsworth’s article ambiguously speaks in terms of a marketability discount for “interests” in companies, also leaving unclear if he’s speaking about minority or control interests — which is important if the policy at issue demands avoidance of a minority discount creating a “windfall” for the purchasing majority shareholder.

Nonetheless, when the case got to the Appellate Division, that court disallowed DLOC and decreed a 25% DLOM specifically disavowing that it “bears [any] relation to the fact that the petitioner’s shares in the corporation represent a minority interest.”

My grandfather handled the Blake case shortly after I graduated law school and years before my first exposure to business divorce and valuation proceedings. I don’t recall discussing the Blake case with him at the time or afterward. If he were around today, I’m sure he’d enjoy immensely the attention garnered by the case and would jump into the ongoing debate with irrepressible curiosity and gusto.

  • Chris Mercer

    Peter, that was a fascinating walk down memory lane. Documents like your grandfather’s referee decision in Blake are fascinating for what they say about valuation and what they don’t say. There was no relationship involved, but I read the court file on the Beway case with great interest as well.

    Your grandfather can’t carry on the New York fair value DLOM debate now, but others will have to do so. It will be interesting to see where the debate leads.

  • Greg Barber

    I concur Chris. For a student of NY dissolution cases that
    is very interesting material. Peter, I wish however your grandfather would have
    quoted the 2nd paragraph above his quoted Haynsworth material from page 489
    which reads:

    “In some situations, however, no discount is proper. For example, it would be
    inappropriate to impose a discount in a dissenters’ rights case or in a case
    where a minority interest has been improperly squeezed out of the business.
    Allowing discounts in these situations would undercut the purpose of
    dissenters’ rights statutes to give minority shareholders the fair value of
    their shares, and it could also encourage squeeze outs.”

    Although written over 30 years ago and somewhat dated with respect to the
    valuation methods applied today, Haynsworth’s article is a very good summary of
    entity and minority interest valuation in different contexts, and the issues
    confronted by appraisers.