Court Determines Fair Value in Dissenting Shareholder Case Triggered by REIT Conversion
The opening lines of Nassau County Commercial Division Justice Ira B. Warshawsky's 41-page opinion in Matter of Jamaica Acquisition, Inc., 2009 NY Slip Op 32320(U) (Sup Ct Nassau County Sept. 29, 2009), wax nostalgic about several privately operated bus lines that primarily served New York City's Queens County from the 1920's until the 1990's, when the routes were taken over by the Metropolitan Transportation Authority. These included the Green Bus Lines, Triboro Coach and Jamaica Buses. The rest of the opinion in this dissenting shareholder appraisal case is anything but nostalgic, as it referees a classic "battle of the experts" in which the two sides clashed over numerous issues including capitalization rates, deductions for built-in capital gains and income tax liabilities, marketability and minority discounts, and the award of attorney's fees and interest.
Shares in the three bus companies were widely dispersed among approximately 200 descendants of the original shareholders, many of whom owned shares in two or all three companies. While each shareholder technically was a minority shareholder, for decades there were voting trust agreements that ensured a stable, common management of the bus companies under the control of Jerome Cooper, the son of the founder of the Green Bus Lines.
In 2005, the City paid the companies $25 million to acquire their routes, tangible personal property and good will. The companies retained eight real estate parcels consisting mainly of bus depots and maintenance facilities which were then leased to the City and private interests, in most instances under long-term triple net leases generating aggregate annual revenues of about $9.5 million.
Continue Reading...In Unusual Case, Illinois Appellate Court Reduces Fair Value Award to Dissenting Shareholder
Dissenting shareholder statutes give shareholders the right to opt out of fundamental corporate transformations -- typically by way of merger or consolidation with another corporation -- by redeeming their shares for "fair value". Case law in New York and many if not most other states defines fair value as the shareholder's proportionate share of the value of the enterprise as a going concern, as opposed to liquidation value, determined as of the date immediately prior to the objected-to transaction.
In some states, including New York, another transformative corporate transaction giving rise to an appraisal remedy is the sale of all or substantially all of the assets of the corporation, other than in the usual course of the corporation's business. However, under the New York statute (Section 910 of the Business Corporation Law), if the sale of assets (a) is wholly for cash, (b) the shareholders' approval is conditioned upon the dissolution of the corporation and (c) the proceeds are distributed within one year, the opt-out/appraisal remedy is not available.
The majority shareholders in the recently decided case, Brynwood Co. v. Schweisberger, No. 02-CH-1297 (Ill. App. Ct. 2d Dist. July 23, 2009), could have saved themselves a lot of trouble had they incorporated in New York rather than Illinois. That's because Section 11.65 of the Illinois Business Corporation Act gives dissenting shareholders an appraisal remedy upon the proposed sale or other disposition of all the corporation's assets with no exception for sales linked to a proposed dissolution and distribution plan, which is what happened in Brynwood.
Making matters even stickier, the corporation in Brynwood owned as its sole asset a highly appreciated parcel of commercial real estate, the sale of which triggered a large gains tax at the corporate level because the corporation was organized as a "C" corporation rather than an "S" corporation. The dissenting shareholder, Mr. Schweisberger, argued with some theoretical justification that his shares in the corporation should be valued based on the going-concern value of the company as of the date prior to the property sale, without regard to the gains taxes and other costs of the actual sale. Schweisberger won at the trial court level but lost on appeal. What exactly happened, and how could the problem have been avoided?
Continue Reading...Dissenting Shareholder Loses Right to Receive Dividends Upon Merger Consummation
Like most states, New York's Business Corporation Law (BCL) permits a shareholder to opt out of mergers and certain other corporate restructurings by electing to be cashed out for the "fair value" of his or her shares. The so-called dissenting shareholder statute, BCL Section 623, sets forth procedures and deadlines for submission of the shareholder's written objection to the proposed transaction, for the corporation's making of a price offer, and for the filing of a judicial appraisal proceeding in the event the shareholder rejects the corporation's offer. A statutory appraisal proceeding also may result from a "freeze-out merger" in which the controlling shareholders compel minority shareholders to redeem their shares for cash. The dissenting shareholder statute typically comes into play with merger transactions involving corporations with relatively large capitalization and whose minority shareholders include passive investors. Section 1005 of the New York Limited Liability Company Law likewise permits members to dissent and cash out from mergers or consolidations involving LLC's.
A recent court decision, in a case called McCully v. Jersey Partners, Inc., 18 Misc 3d 1138(A) (Sup Ct NY Co 2008), raises a caution flag for dissenting shareholders and their counsel when it comes to asserting claims for dividends that accrue prior to merger consummation but are not payable until afterward.
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