Gun4HireThe title of this post notwithstanding, the judge’s decision in the recent, high-stakes stock valuation case I’m about to describe, featuring a clash of business appraiser titans whose conclusions of value differed by almost 400%, did not refer to them as “hired guns.”

But the judge did not mince her words in expressing the view that, while “unquestionably qualified to testify on the issue of valuation,” the two experts, whose “zealous advocacy” for their respective clients “compromised their reliability,” offered “wildly disparate” values that were “tailored to suit the party who is paying for them.” Ouch!

The 54-page decision by a Minnesota state court judge in Lund v Lund, Decision, Order & Judgment, No. 27-CV-14-20058 [Minn. Dist. Ct. Hennepin Cnty. June 2, 2017], rejected both experts’ values — $80 million according to the expert for the selling shareholder and $21 million according to the expert for the purchasing company — in arriving at the court’s own value of $45 million for a 25% interest in a chain of 26 upscale grocery stores in the Twin Cities area known as Lunds & Byerlys together with affiliated management and real estate holding companies. Continue Reading Appraisers’ Valuations Are Light-Years Apart, But Does That Make Them Hired Guns?

jaime-dalmeidaForensics means different things to different people in different contexts. But what does it mean in the context of valuing equity interests in closely held business entities?

You’ll learn the answer – and a lot more – in the latest episode of the Business Divorce Roundtable podcast in which I interview Jaime d’Almeida, a Managing Director at industry leader Duff & Phelps in its Disputes & Investigations practice.

To hear the interview, click on the link at the bottom of this post.

Jaime’s valuation and forensic credentials include Senior Appraiser of the American Society of Appraisers and Certified Fraud Examiner. Based in Boston, Jaime has over 20 years of experience in economic and valuation analysis and consulting, and has provided both deposition and trial testimony on valuation and damages issues. Jaime also is a contributing author of Litigating the Business Divorce, the recently published, must-have treatise that I wrote about here.

My interview of Jaime covers a lot of interesting ground, including:

  • defining forensic analysis in valuation
  • the goal of forensic analysis in a valuation engagement
  • forensics methodology
  • the lawyer’s role in the forensic process
  • when to engage the analyst
  • the interplay of forensics and the different valuation approaches
  • forensics and valuation date
  • the types of company records typically sought by the forensic analyst

If you enjoy the podcast, and if you haven’t done so already, check out prior episodes of the Business Divorce Roundtable featuring interviews with leading experts in the field of business divorce and valuation. Please also consider subscribing to the podcast on iTunes, SoundCloud, or your other favorite podcatcher.

consentThe pick-your-partner principle is universally embedded in the default rules of limited liability company enabling acts, including Sections 601 through 604 of the New York LLC Law which permit free assignment of distributional and other economic rights appurtenant to a membership interest but require the other members’ consent before an assignee is granted full member status with voting and other rights associated with membership in an LLC.

The distinction between a “mere” assignee versus a transferee with member status can become a battle ground when a putative LLC member who received his, her or its interest by assignment brings legal action against the LLC’s managers for dissolution, access to books and records, or asserting derivative claims on behalf of the LLC. That’s because by statute and/or common law, the suing party’s requisite legal standing to assert such claims depends on having member status.

A recent decision by Manhattan Commercial Division Justice Saliann Scarpulla in MFB Realty LLC v Eichner, 2016 NY Slip Op 31242(U) [Sup Ct NY County June 24, 2016], in which she dismissed derivative claims by a mere assignee of LLC interests, starkly illustrates the distinction and the importance of compliance with the LLC agreement’s provisions for bestowing member status on assignees. Continue Reading Operating Agreement’s Two-Step Consent Provision Foils Assignment of LLC Member Interest

PlanetOne of my favorite quotes from the realm of business valuation is found in a Delaware Chancery Court decision about 20 years ago in which, commenting on the vast disparity between the appraisals offered by two opposing experts — that for the seller making wildly optimistic assumptions about the subject firm’s business prospects while that for the buyer predicting doom and gloom — the court quipped, “In sum, one report is submitted by Dr. Pangloss, and the other by Mr. Scrooge.”

Dr. Pangloss and Mr. Scrooge were at it again in a decision handed down last week by Westchester Commercial Division Justice Alan D. Scheinkman, determining the fair value of a minority interest in two limited liability companies that, as franchisees, own and operate almost three dozen Planet Fitness health clubs in the New York City metro area and also own exclusive rights to develop additional clubs in New York and parts of Southern California.

The case is Verghetta v Lawlor, 2016 NY Slip Op 30423(U) [Sup Ct Westchester County Mar. 9, 2016]. The opening paragraph of Justice Scheinkman’s 33-page post-trial decision aptly sets the stage for the fair-value drama that follows, starring dueling appraisals over two thousand percent apart:

This Court is called upon to determine the value of two corporate entities for purposes of permitting the buy-out of a minority shareholder. It is not surprising, and rather in the nature of things, that the parties have a significant disagreement as to the value of the enterprise. The would-be seller relies on a valuation report that places the value of both corporations at over $162 million and the seller’s share at over $53 million. The would-be buyers rely on a valuation report that values one entity at $6.2 million, the other at $208,000, for a total for the two of approximately $6.4 million, and with the buyer’s share of the total being approximately $2.2 million. The Court must resolve the difference.

Continue Reading Threading the Fair-Value Needle: Court Finds Major Flaws in Both Sides’ Appraisals in Arriving at Its Own Value

DiscountOn the heels of last week’s post titled The DLOM Debate Heats Up, a timely new ruling by a New Jersey intermediate appellate court adds yet another interesting twist to the application of the discount for lack of marketability in fair value proceedings involving dissenting shareholder appraisals and oppressed minority shareholder buyouts.

New Jersey courts have a more restrictive approach to DLOM in fair value contests than New York courts, generally reserving it for “extraordinary circumstances” involving inequitable or coercive conduct by the seller. This latest New Jersey ruling doesn’t make new law but, to this observer at least, its application and quantification of DLOM seem equally if not more reliant on legal doctrine and, in particular, free-floating equity considerations than on empirically-based appraisal theory and methodology.

The New Jersey Appellate Division’s unpublished decision in Wisniewski v Walsh, 2015 N.J. Super. Unpub. LEXIS 3001 [App. Div. Dec. 24, 2015], caps an astonishing 20-year litigation saga involving a family-owned trucking business taken over from the founding father by three siblings, one of whom sued the other two under New Jersey’s oppressed shareholder statute. In 2000 the trial judge ruled that the petitioner himself was the oppressor and ordered him to sell his one-third interest to the company or his siblings for fair value to be determined by the court. Continue Reading Court Applies 25% Marketability Discount Despite “Strong Indicators of Liquidity”

LLC Institute

I’m pleased to publicize three upcoming continuing education programs of special interest to business divorce practitioners, business appraisers, and the broader universe of lawyers and other professionals interested in the myriad issues concerning limited liability companies and related unincorporated business entities.

The LLC Institute. The first one, which I’ll be attending but not presenting at as I did last year, is the 4th annual meeting of the LLC Institute, a two-day program being held on November 12 and 13, 2015, at the Le Meridien Arlington and Waterview Conference Center in Arlington, Virginia. The LLC Institute is sponsored by the LLCs, Partnerships and Unincorporated Entities Committee of the American Bar Association under the leadership of Committee Chair Thomas Rutledge who has put together an exciting program for this year’s meeting, with something for everyone who practices in the field.

The LLC Institute’s program reflects the Committee’s mission to be the pre-eminent annual gathering of academic and practicing attorneys for the exchange of ideas and information on what is now the dominant organizational form, the LLC, as well as related developments in the law of related business organizations. The gathering’s aim is to provide practical insight and guidance as to the law of LLCs as well as the place of the LLC in related fields such as securities regulation, the Uniform Commercial  Code, taxation, and bankruptcy. Continue Reading Don’t Miss These Upcoming Programs on LLCs and Business Valuation

ZeroWhen it comes to fair-value jurisprudence, the Brooklyn-based Appellate Division, Second Department, works in mysterious ways.

Take, for instance, its 2010 Murphy decision, in which it noted without elaboration that the application of a discount for lack of marketability (DLOM) is not in all cases limited to the enterprise’s goodwill without so much as acknowledging 25 years of its own contrary precedent.

Then there’s last week’s decision in Chiu v Chiu, 2015 NY Slip Op 01427 [2d Dept Feb. 18, 2015], in which it upheld without comment a lower court’s decision to apply 0% DLOM in valuing a membership interest in a realty-holding LLC co-owned by two brothers. Considering the ongoing, vigorous debate in legal and valuation circles surrounding the existential propriety of DLOM under the statutory fair value standard, as recently played out in the Zelouf and Giaimo cases, it would have been extremely helpful to other litigants had the Second Department explained why it believed DLOM was inappropriate in Chiu. Oh well. Continue Reading Appellate Court Upholds 0% Marketability Discount in LLC Fair Value Case

Despite its pejorative-sounding name, “jerk insurance” — it’s more vulgar name is “schmuck insurance” — can serve a useful purpose in addressing a business owner’s concern about looking, well, like a jerk by selling his or her equity stake to a co-owner who then turns around and sells the company or its assets to an outside buyer at a much higher value. Basically it works by guaranteeing the seller additional monies in the event of a company sale within a defined post-buyout period, usually computed as a percentage of the net sale proceeds above a threshold value specified in the buyout agreement.

It’s a type of deal protection, for example, that would have avoided the seller’s remorse suffered by the unsuccessful plaintiffs in the well-known New York case, Pappas v Tzolis, who sold their majority stake for $1.5 million to the minority owner who, within months, sold the company’s sole asset to a third party for $17.5 million.

I can’t cite statistics, but I’d venture to say the great majority of buyers who are willing to give jerk insurance do so because they have no intention of selling the company within the defined post-buyout period. In that sense it’s giving away ice in winter, but it nonetheless can facilitate the buyout agreement by giving additional comfort to the seller that he or she is not losing out on a better deal the buyer may already have lined up to sell the company.

All of which makes all the more unusual and instructive the recently decided case of Charron v Sallyport Global Holdings, Inc., Opinion and Order, 12-cv-06837 [SDNY Dec. 10, 2014], in which one 50% shareholder bought out the other 50% shareholder for almost $41 million pursuant to a buyout agreement with a jerk insurance provision setting a $65 million threshold and, in the event of a company sale within the following year, giving the seller 20% of the entire proceeds of the sale rather than 20% of the difference between the threshold and the sale price. Continue Reading “Jerk Insurance” Takes on New Meaning in Buyout Dispute

I’ve often said that business owners don’t fight over corpses, meaning that no one in their right mind would incur the trouble and expense of bringing or contesting a judicial dissolution petition over a business that has no value.

Well, like most generalities, there are exceptions. Seven years ago, among this blog’s inaugural posts, I wrote about a Manhattan Supreme Court case called Matter of Giraud in which an allegedly oppressed minority shareholder petitioned under BCL § 1104-a for judicial dissolution of an art consignment business, the majority shareholder elected to buy him out under BCL § 1118, the majority shareholder’s unopposed appraisal expert testified that the indebted, money-losing business with a short remaining term on its lease had no positive value, and the court ordered the majority shareholder to tender a symbolic $1 to acquire the petitioner’s shares.

Now there’s another one. Earlier this month, in Matter of Markowitz, 2014 NY Slip Op 51739(U) [Sup Ct, Kings County Dec. 10, 2014], Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest, citing the Giraud case, ordered the two respondent shareholders, who had elected to purchase the shares of the two petitioning shareholders, to pay the nominal sum of $1 to each of them. Easing the pain somewhat, Justice Demarest also ordered the purchasing shareholders to provide releases and an indemnification and hold harmless personal guarantee against any claims made against the petitioners relating to the business.   Continue Reading Dissolution Battle Over Heavily Indebted Business Yields $1 Buy-Outs

The under-reporting of cash receipts a/k/a skimming by restaurant owners and other cash-intensive businesses costs many billions of dollars in lost tax revenues each year and, when detected by audit, can lead to stiff penalties and even criminal prosecution. When the business has multiple owners, not all of whom are in on the skimming, it also can constitute grounds for judicial dissolution, as illustrated in a fascinating post-trial decision last week by Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest in Cortes v 3A N. Park Ave. Rest Corp., 2014 NY Slip Op 24329 [Sup Ct, Kings County Oct. 28, 2014].

Any publicly aired business divorce involving allegations of looting can be a nasty affair. Throw into the litigation mix the specter of under-reported taxes and it becomes positively toxic, which is the flavor I got from reading Justice Demarest’s detailed findings of fact and conclusions of law in her 24-page ruling which, ultimately, found that the controlling shareholders skimmed about $3.7 million and conditionally ordered dissolution of the corporation, contingent upon the controllers’ buy-out of the plaintiff’s shares for over $1.2 million.

Background

The Cortes case involves a 150-table Mexican restaurant, bar, and nightclub called Cabo, located in Rockville Center on Long Island. In 2003, the plaintiff, Porfirio Cortes, acquired for $50,000 a 16.67% stock interest in the restaurant’s operating company, in which the remaining shares were owned equally by defendants Angelo Ramunni and Domenick DeSimone. The purchase agreement gave the corporation the right to repurchase Cortes’s shares in the event he resigned his designated position as managing partner though, oddly, it did not specify a price or a pricing mechanism. Continue Reading Restaurant’s Cash-Skimming Majority Owners Forced to Buy Out Minority Shareholder or Face Dissolution