The Marketability Discount in Fair Value Proceedings: An Emperor Without Clothes?
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The discount for lack of marketability, or DLOM, has reigned supreme in New York fair value proceedings since 1985 when the Appellate Division, Second Department, decided Matter of Blake, 107 AD2d 139. DLOM's basic premise accepted in Blake is that "shares of a closely held corporation cannot be readily sold on a public market" (id. at 149) and therefore should be discounted to reflect the additional risk factors associated with the time and difficulty of finding buyers for non-publicly traded shares.
Equally vital to the Blake doctrine is the assumption that DLOM "bears no relation to the fact that the petitioner's shares in the corporation represent a minority interest" (id.). For that same reason, Blake ruled out application of a separate minority discount, also known as discount for lack of control or DLOC, as inconsistent with the protections afforded minority shareholders against oppression by the majority under the judicial dissolution statute, BCL §1104-a, and likewise to deny controlling shareholders a "windfall" from exercising their right to elect to purchase the petitioning minority shareholder's stock for fair value under BCL §1118.
In other words, the dichotomy between DLOM and DLOC adopted in Blake views "good" DLOM as applicable at the enterprise level to all shares in determining the selling shareholder's proportionate interest in the going concern, whereas "bad" DLOC applies only at the shareholder level to minority shares. New York's highest court, the Court of Appeals, further cemented this view in its 1995 Beway decision. Since then it has been followed without question in countless trial and appellate court decisions wherein business appraisers have relied primarily on restricted stock and pre-IPO studies to compute DLOM.
The question is, is there any sound appraisal doctrine or empirical evidence supporting Blake's premise that DLOM exists and can be quantified at the enterprise or majority-control level? If not, are Blake, Beway and their progeny predicated on flawed, internally inconsistent assumptions that effectively compute fair value at the non-marketable minority interest level of value rather than proportionate interest in the company's going concern value at a control level?
Some prominent voices in the business valuation field have been raising these questions in critique of New York fair value jurisprudence. One of the voices belongs to Z. Christopher Mercer who, regular readers of this blog may recall, convinced the Special Referee in the Giaimo case that applying DLOM made no theoretical or economic sense and, contrary to the statutory protections acknowledged in Blake, would generate an "illiquid minority interest value" instead of a proportionate share of a financial control level of value. When it came time to confirm the referee's report, however, the presiding judge rejected Mercer's theory as inconsistent with Beway, and instead approved non-applicability of DLOM based on the market exposure period built into the underlying realty appraisals and on evidence of the extremely limited availability on the market of real property portfolios similar to those owned by the subject companies. (Read here my post on Giaimo and here my post on Mercer's recent articles on New York fair value proceedings.)
Mercer is on record since the mid-1990s against application of DLOM to controlling interests. In his post #6 on New York fair value proceedings, Mercer states that the restricted stock and pre-IPO studies routinely used by appraisers to support DLOM compare minority interest values and "ha[ve] no bearing on controlling interests." Rather, he explains, "[t]he marketability discount has meaning because it applies to the marketable minority level of value and reduces value for lower expected cash flows and greater risk normally associated with holding illiquid minority interests." In other words, applying a marketability discount is inconsistent with Beway's definition of fair value as a "proportionate interest in a going concern, that is, the intrinsic value of the shareholder's economic interest in the corporate enterprise" (Beway, 87 NY2d at 167). Yet Beway itself approved a marketability discount in that case!
Another of the critical voices belongs to business appraiser Joel Rakower who, along with attorney Ken Weinstein, authored an article published last week in the New York Law Journal entitled "Marketability Discount and Dissenting Minority Ownership." (Here's a link to the article, but I'm afraid it's only accessible to Law Journal subscribers.) The article's thesis, in line with Mercer's analysis, is that the application of DLOM in fair value proceedings necessarily violates the proscription against minority discount because DLOM only exists at the minority shareholder level.
Over two years ago I reported on a case called Matter of Beattie (read my post here) in which Rakower as the expert for the selling minority shareholder, like Mercer in Giaimo, argued that DLOM should not be applied. The judge in Beattie, which involved a software company rather than a realty holding company as in Giaimo, rejected the position based on Blake and applied a 25% DLOM.
In last week's article Rakower again challenges the theory head-on, stating that
Academics and lecturers within the appraisal community are clearly united on the conclusion, succinctly stated, that discounts for lack of marketability are not applied to majority positions.
The article then addresses the lack of evidentiary basis for applying DLOM at the control level. It quotes Alina Niculita, co-author with Shannon Pratt of Valuing a Business (5th ed. 2007), as saying, "There is no empirical transaction database from which to draw guidance for quantifying DLOM for controlling interests." The article then adds:
While some appraisers contend a discount for lack of marketability may exist for a controlling interest, they proffer no empirical data supporting such claim, nor any studies currently available substantiating a discount for lack of marketability for majority positions. Moreover, no information or guidance is provided as to its quantification.
In Chapter 1 of Shannon Pratt's book, Business Valuation Discounts and Premiums (2d ed. 2009), he distinguishes between "entity level" discounts applied to a control level of value affecting all shareholders, such as a "key person" discount, and "shareholder level" discounts affecting one or a specified group of shareholders such as minority shareholders. Pratt places both DLOM and DLOC in the latter category. In a Levels of Value chart shown as Exhibit 1.2, footnote "a" states that "[c]ontrol shares in a privately held company may also be subject to some discount for lack of marketability, but usually not nearly as much as minority shares." It's not clear -- at least to me -- how that statement jibes with his co-author Niculita's above-quoted statement concerning the absence of empirical data supporting DLOM for controlling interests.
My above musings only scratch the surface of this highly complex and technical issue which, I hasten to add, has tremendous financial impact in contested fair value proceedings given the DLOM percentages applied by New York courts usually hovering in the 25% range. In many states outside New York, either by statute or case law, DLOM and DLOC both have been banished from fair value determinations based on a policy decision that to apply either works an injustice against oppressed or dissenting minority shareholders and represents a windfall to the controlling shareholders.
I imagine we will continue to see both theoretical and empirically based attacks on DLOM in fair value proceedings by New York lawyers and their appraisal experts representing selling shareholders. Certainly on the theoretical side, as we saw in Giaimo, it will be a formidable task to overcome almost 30 years of appellate precedent uniformly supporting DLOM. Possibly, rather than challenging Blake and Beway directly, courts will find that a marketability discount is built into the hypothetical, arm's-length transaction pricing as of the valuation date, which essentially was the rationale ultimately adopted by the court in Giaimo.
Court Rejects Marketability Discount, Applies "Murphy Discount" for Built-In Gains, in Determining Fair Value of Shares in Real Estate Holding Corporations
An epic corporate governance and stock valuation battle between rival siblings, fighting over a Manhattan real estate portfolio worth upwards of $100 million, generated an important ruling last week by New York County Supreme Court Justice Marcy S. Friedman. Justice Friedman's decision in Matter of Giaimo (EGA Associates, Inc.), 2011 NY Slip Op 50714(U) (Sup Ct NY County Apr. 25, 2011), and the underlying, 184-page Report & Recommendation by Special Referee Louis Crespo dated June 30, 2010, are must reading for business appraisers, attorneys and owners of closely held real estate holding corporations who are involved in, or who are contemplating bringing or defending against, a "fair value" proceeding under New York's minority shareholder oppression or dissenting shareholder statutes.
In the end, after both sides essentially accepted Referee Crespo's net asset valuation of the 19 real properties owned by two Subchapter "C" corporations, the valuation controversy boiled down to two issues presented to Justice Friedman. First, did Referee Crespo properly adopt what he dubbed the "Murphy Discount" (I'll explain below) in requiring the deduction of the present value of taxes on built-in capital gains (BIG)? Justice Friedman answered "yes." Second, did Referee Crespo properly exclude a separate discount of the companies' shares for lack of marketability (DLOM)? Although she disagreed with Referee Crespo's reasoning, Justice Friedman again answered "yes."
Giaimo involves two corporations, abbreviated as EGA and FAV, owned more or less in equal one-third shares by siblings Edward, Robert and Janet. Together the corporations owned 18 residential apartment buildings (mostly walk-up tenements) and one undeveloped land parcel located mostly in Manhattan's Upper East Side. Edward died in March 2007. His will provided for division of his shares equally between Robert and Janet, however Janet produced an assignment to her of one EGA share made by Edward two weeks before his death, giving her majority control of that company. Robert brought a lawsuit challenging the assignment as a violation of the corporation's right of first refusal endorsed on the back of the stock certificates.
Eventually Robert won that lawsuit (read here my report on the appellate court's December 2009 decision), but in the interim he filed separate proceedings seeking judicial dissolution of EGA and FAV based on shareholder oppression and deadlock. Janet then elected under Section 1118 of the Business Corporation Law to purchase Robert's shares for "fair value" to be determined by the court. In December 2007, Justice Friedman ordered a referral of the valuation to a court referee to hear and report. Referee Crespo thereafter conducted a hearing consisting of two phases, the first for valuation of the real properties and the second for valuation of the shares of the two corporate entities. The hearing lasted 18 days and featured testimony by eight expert witnesses and over 165 exhibits.
Referee Crespo's Report
No short description possibly can do justice to Referee Crespo's massive, extraordinarily detailed Report which has over 120 pages of findings of fact and almost 60 pages of conclusions of law. Describing his months-long, "exhausting" review of over 2,300 pages of transcript amidst the burden of his other case responsibilities, Referee Crespo remarks with tongue firmly planted in cheek, "But no good deed goes unpunished" (pg. 3).
As noted above, both sides accepted the real estate values ultimately determined by Referee Crespo, so I won't dwell on that aspect of his Report. Essentially, Referee Crespo agreed with the valuations performed by Robert's real estate appraiser as to the 18 residential apartment buildings with one significant exception whereby, in most instances, the referee adjusted downward the appraiser's appreciation projections (and correspondingly increased the capitalization rates) over the hypothetical buyer's assumed 10-year holding period. Janet's real estate appraiser's valuation of the one, undeveloped land parcel prevailed, albeit also subject to some adjustment based on testimony by Robert's rebuttal expert.
Referee Crespo's summary of his property value determinations, listed at pages 150-51 of the Report, totals about $85 million for both corporations' properties, or about $16.8 million more than Janet's appraiser (pg. 22) and about $14.5 million less than Robert's appraiser (pg. 110). I would urge anyone interested in the finer points of real estate appraisal to read carefully pages 3-80 and 131-51 of the Report. If that's too much, at least read page 133 where Referee Crespo gives a laundry list of errors he finds in Janet's expert's real estate appraisals.
The Report at pages 80-117 recites in detail testimony by the parties' respective business appraisal experts as to the fair value of EGA and FAV as going concerns. Janet's experts (Joan Lipton and Jeffrey Baliban) testified in favor of application of a 20% marketability discount of each corporation's net asset value, as well as a 100% BIG discount computed as of the valuation date. The latter discount was calculated to be approximately $24.8 million based on the virtual absence of any tax basis in the properties, using a 45.87% tax rate. Lipton opined that it cannot be presumed that a hypothetical buyer of a "C" corporation with appreciated property would convert it to an "S" corporation after 10 years to avoid the BIG, and that the purchaser would acquire comparable properties outside the corporate wrapper unless offered a 100% BIG discount for the shares. Lipton and Baliban both testified that they see no double counting in their analysis of market exposure of the real properties and DLOM for the shares.
Robert's expert (Z. Christopher Mercer) testified that neither DLOM nor BIG discounts should be applied in a fair value proceeding, but that if BIG is applicable it should be computed at 40% because of the scarcity in the market of similar real estate portfolios and based on his industry research supporting an equivalent 15%-20% "rule of thumb" discount off net asset value for such properties. More specifically, Mercer argued that fair value is the functional equivalent of fair market value at the financial control level, hence the application of a marketability discount makes no economic sense. He also argued that both real estate appraisers had considered exposure to market prior to reaching their opinions of fair market value for the properties, therefore it made no economic sense to apply an additional exposure to market concept, i.e., DLOM, to the corporate wrapper.
Referee Crespo, whose conclusions of law on DLOM are found at pages 151-58 of the Report, adopts Mercer's view that application of DLOM improperly would assign Robert's interest an "illiquid minority interest value" instead of his proportionate share of a financial control level of value. "Mercer makes an excellent point," Referee Crespo writes, "that his valuation of a control level of interest in EGA and FAV captures the risk in the control valuation, rather than apply 'a nebulous unspecified marketability discount that no one can justify'" (pg. 157). (Regular readers of this blog will recognize this concept from my recent post entitled "Chris Mercer Tackles Statutory Fair Value" in which I digested an online series of articles authored by Mercer.) Referee Crespo also bases his rejection of DLOM on case law, including Vick v. Albert, 47 AD3d 482 (1st Dept 2008) (read here my post on Vick), standing for the proposition that the shares of a real estate holding company are least suited to DLOM.
Pages 158-68 of the Report contain Referee Crespo's legal analysis and conclusion that a BIG discount should be applied, not at 100% as contended by Janet's experts, but at present value consistent with both sides' real estate appraisers' assumption, for capitalization purposes, of a 10-year holding period. The key evidence underlying this conclusion, as presented through Mercer's testimony, is the absence of a "ready supply of naked assets available in the marketplace as those held by EGA and FAV" (pg. 164). With no substitute portfolio of properties available outside the "corporate wrapper," the "rational buyer and seller would negotiate the BIG adjustment" (pg. 165). However, Referee Crespo does not agree with Mercer's use of a 40% BIG discount. Instead, he agrees with the logic and methodology approved in Matter of Murphy (United States Dredging Corp.), 74 AD3d 815 (2d Dept 2010) (read here my post on Murphy), requiring a present value computation of the gains taxes to be paid at a projected future date, here, at the end of the assumed 10-year holding period.
Pages 174 and 178 of the Report tabulate the final values for EGA and FAV, including certain non-real estate assets and liabilities, at slightly over $100 million combined, subject to the yet-to-be-computed BIG discount calculated at a 45.87% tax rate assuming a 10-year holding period and then brought to present value at a10% discount rate. At pages 179-81, Referee Crespo recommends that Robert be granted interest on the fair value award at 4% from the July 2007 valuation date (instead of the 9% statutory rate of interest requested by Robert) and that Janet be allowed to pay the award in three installments over a six-month period following entry of judgment.
Justice Friedman's Decision
Robert and Janet each filed motions to confirm in part and reject in part Referee Crespo's Report in regard to DLOM, BIG, the interest award and terms of payment. Justice Friedman's analysis at page 5 of her recent decision begins with a general endorsement of Referee Crespo's Report, as follows:
Here, the Special Referee was confronted with sharp legal disputes and unsettled law as to the appropriate methodologies to be followed in assessing marketability and potential capital gains tax liability. As discussed more fully below, he issued a thoughtful, exhaustive Report on these complex issues. While the court does not agree with the Referee's stated reasons for not applying a DLOM, there is support in the record for his decision not to do so. The court also finds that there is support in the record for the Referee's calculation of the BIG. The award will therefore be confirmed in these respects.
As to DLOM, Justice Friedman states her disagreement with Mercer's position, upon which Referee Crespo relied, that the valuation of a business as a going concern at a financial control level of value is inconsistent with a marketability discount. Justice Friedman finds Mercer's position contrary to applicable precedent, particularly the Court of Appeals' 1995 Beway decision (Matter of Friedman [Beway Realty Corp.], 87 NY2d 161) likewise involving a real estate holding company in which the court expressly upheld application of DLOM in fair value proceedings. Justice Friedman rejects Referee Crespo's effort in his Report to distinguish Beway on the ground that, unlike in Giaimo, the properties held by the subject realty company in that case had mortgage financing.
Justice Friedman nonetheless finds that Referee Crespo's decision not to apply DLOM "is appropriate on this record." Noting that fair value is a question of fact for which there is no single formula for mechanical application, she essentially finds that the subject corporations' shares are readily marketable, stating as follows:
As discussed more fully below, in determining the built-in gains tax issue, the Referee specifically made a finding of fact, which is amply supported by the record, that the availability of similar properties on the open market is limited and that a buyer would accordingly buy the properties that EGA and FAV own through the corporations. This finding of the marketability of the corporations' shares is as relevant to the determination as to whether to apply a discount for lack of marketability as it is to whether to reduce the value of the corporations by embedded taxes. The court accordingly holds that the Referee's award on the DLOM should be confirmed.
Justice Friedman next turns to Janet's argument that Referee Crespo erred by not calculating the BIG discount at 100% assuming liquidation upon the valuation date. Janet argued that the Manhattan trial court was bound to follow the Manhattan (First Department) appellate court's ruling in Wechsler v. Wechsler, 58 AD3d 62 (1st Dept 2008), a matrimonial "equitable distribution" case in which the court applied a 100% BIG discount, rather than the Brooklyn (Second Department) appellate court's Murphy decision upon which Referee Crespo relied. Justice Friedman notes that the Murphy decision expressly distinguishes Wechsler on grounds equally applicable in Giaimo, namely, there was no issue presented or expert testimony in Wechsler about reducing the BIG taxes to present value. "Given the lack of precedent in this [First] Department on the issue of whether the BIG should be reduced to present value," Justice Friedman writes, "the support for that approach in the Second Department, and the factual support in the record for the 10 year projection, the Court does not find that the Special Referee committed legal error in following the present value approach."
Justice Friedman is equally dismissive of Robert's legal argument that Referee Crespo erred by applying any sort of BIG discount. Here's what she says:
[T]his court rejects petitioner's contention that no deduction at all should be made for the BIG. Petitioner's support for this contention rests largely on cases from other states which decline to consider the tax consequences of the sale of any assets unless there is evidence that the corporation was actually undergoing liquidation on the valuation date. (E.g. Brown v Arp & Hammond Hardware Co., 141 P3d 673, 688 [Sup Ct Wyoming 2005]; Paskill Corp. v Alcoma Corp., 747 A2d 549, 554 [Sup Ct Del 2000].) These cases treat an assumed liquidation as inconsistent with valuation of the corporation as an ongoing concern. While the reasoning of the cases has much to recommend it, New York follows the contrary view that it is irrelevant whether the corporation will actually liquidate its assets, and that the court, in valuing a close corporation, should assume that a liquidation will occur. (See Wechsler, 58 AD3d at 73.)
Justice Friedman's decision also addresses Referee Crespo's recommendations with respect to 4% interest on the award and deferred payment. BCL Section 1118 authorizes the court, in its discretion, to award interest on the fair value award from the date the dissolution petition is filed "at an equitable rate," and to impose terms and conditions for payment. Robert argued that the court should award interest at the 9% statutory rate for pre-judgment interest based on Janet's "misconduct," but Justice Friedman rejected the argument based on Robert's failure to present any evidence of misconduct in the proceedings before Referee Crespo. She did, however, modify the recommendation to award 9% interest during the post-judgment 180-day period of the staggered payments, which she also upheld notwithstanding Janet's argument that the entire award should be deferred 180 days.
I would not be the least bit surprised if one or both of the parties file an appeal from the final judgment in this hotly litigated, high stakes, family feud. If it happens, and when a decision is handed down, you can be sure I'll report on it.
Court Invalidates Control-Shifting Stock Transfer Made in Violation of Corporation's Right of First Refusal
The right of first refusal (RFR) is a type of stock transfer restriction found in shareholder agreements of closely held corporations. Under the most common form of RFR, the shareholder seeking to transfer his or her shares to another person is required to submit sequentially to the corporation and, if the corporation declines, to the other shareholders the opportunity to purchase the shares on the same terms as are being offered by the proposed purchaser. The courts routinely enforce RFRs in recognition of the special partnership-like character of close corporations.
A recent decision by the Appellate Division, First Department, in Giaimo v. EGA Associates Inc., 74 AD3d 815, 2009 NY Slip Op 09277 (1st Dept Dec. 15, 2009), illustrates the mischief that can occur when the RFR is not properly spelled out in a shareholders' agreement but, instead, is set forth in abbreviated and incomplete form on the back of the share certificates. Giaimo also illustrates the paramount importance New York courts place on the fiduciary duties owed by majority shareholders and directors of close corporations to minority shareholders, arguably to the point of preempting the statutory scheme governing director's self-interested transactions.
EGA Associates Inc. (EGA) is a closely held New York corporation formed in 1961 to own and operate real estate. According to the complaint filed by Robert Giaimo (read here), the stock of EGA was held one-third each by Robert and his siblings, Edward and Janet. Edward died after a long illness in March 2007. Edward's will bequeathed his EGA shares in equal parts to Robert and Janet, which would have left them as equal 50% shareholders. Two weeks before his death, however, Edward sold one of his shares to Janet for $80,000, thereby giving her majority ownership upon Edward's death. Some months later, Janet gave notice of meetings of the shareholders and directors at which she obtained voting control of the board by electing herself and her lawyer as two of the three directors.
Robert's lawsuit sought declaratory and injunctive relief setting aside the sale of stock by Edward to Janet on the ground it violated the crude RFR printed on the back of the stock certificates issued to each of the three siblings, providing as follows:
Shares are not transferable without granting the corporation thirty (30) days written notice of sale of terms, involved parties and a first option to purchase said shares before transfer to other existing shareholders or to third parties, except in the case of transfers to immediate family (spouse and children only). Such restrictions shall not apply [sic]. Corporate first option preserved for all subsequent transfers.
Janet defended the stock sale by alleging that, before he died, Edward told her that, in his capacity as EGA's president, he had waived EGA's right of first refusal prior to the sale, although apparently the waiver was never separately documented. Janet also contended that Edward believed that Robert would sell his shares in EGA, and that he decided to sell one of his shares to Janet to ensure that EGA remained within the family and to prevent shareholder gridlock.
Robert moved for summary judgment canceling the sale and voiding the actions taken at the subsequent shareholder and director meetings. He argued that Janet's testimony relating Edward's statement concerning the company's waiver of the RFR was barred by the Dead Person's Statute, codified in Section 4519 of the Civil Practice Law and Rules. Robert alternatively argued that the sale was invalid under Section 713(a) of the Business Corporation Law which authorizes interested-director transactions upon appropriate disclosure and approval vis-a-vis disinterested directors and/or shareholders.
The trial court, in a decision by New York County Supreme Court Justice Marcy S. Friedman reported at 2008 NY Slip Op 32944(U) (Sup Ct NY County Oct. 28, 2008), denied Robert's motion. First, she ruled that the Dead Person's Statute did not bar Janet's testimony concerning her discussions with Edward at the pre-trial phase where there is other admissible, corroborating evidence including a bill of sale for the stock and a new stock certificate, both authenticated by Edward's personal assistant. Second, Justice Friedman ruled that Robert had not eliminated triable issues as to whether, as EGA's president, Edward had authority to waive the RFR without board approval. Third, she ruled that even if BCL Section 713 applied, Robert failed to eliminate triable issues as to whether the stock sale to Janet was fair and reasonable to EGA under subsection (b) of the statute, which would allow an interested-director transaction that otherwise fails to comply with the disclosure and approval requirements. As to the last point, the court cited Janet's contention that Edward's alleged desire to prevent shareholder gridlock constituted a "bona fide purpose" for the stock sale. Justice Friedman also cited testimony by EGA's accountant who suggested that the $80,000 paid by Janet over-valued the share of stock, at least compared to its book value.
Robert appealed the trial court's decision to the Appellate Division, First Department, which unanimously reversed the decision and entered summary judgment in Robert's favor voiding the stock sale and the subsequent actions taken at shareholder and directors meetings. The court's short decision expressly rejects Janet's argument based on Edward's alleged waiver of the RFR, holding that "[a]s the president of a closely held corporation, Edward lacked the power to act unilaterally against Robert's interest" and citing several precedents in which courts recognize the fiduciary duties owed by majority shareholders to the minority in closed corporations. The decision also rejects Janet's argument that the transfer restrictions on the stock certificates were invalid in the absence of other "corporate documents evidencing their approval," adding that "the three shareholders accepted these restrictions without objection and relied on them until after this litigation was commenced."
Notably absent from the appellate decision is any mention of Janet's argument, accepted by the trial court, that the company's alleged waiver of the RFR in an interested-director transaction, notwithstanding non-compliance with the disclosure and approval requirements of BCL 713(a), might be sustainable under BCL 713(b) as "fair and reasonable as to the corporation." I can think of at least two possible reasons for the omission. First, the stock sale apparently was never formally submitted to the board or the shareholders for a vote, so it's not clear by its terms that BCL 713(b) applies. Second, the waiver dispute in this case is linked inextricably to the predominant question of shareholder control of a closely held corporation, i.e., it is not primarily a question of what's fair and reasonable to the corporation which generally has no independent, cognizable interest in deciding who holds the reins of management. This second reason opens the door wide to the appellate court's elevation of fiduciary duty owed to minority shareholders as the deciding principle.
As mentioned above, a fully developed RFR provision in a shareholders' agreement likely would have avoided this dispute. Among other things, it would have required that the share be offered to the other shareholders in the event the company opted not to acquire the share. Such a provision would have enabled Robert to maintain his 50% interest.
One final footnote. In July 2007, Robert filed a separate petition to dissolve EGA pursuant to the deadlock dissolution statute BCL 1104, as well as under the oppressed minority shareholder statute BCL 1104-a (read petition here). Janet thereafter elected to purchase the petitioner's shares in lieu of dissolution. It appears that a valuation hearing was conducted in 2009, before the appellate ruling discussed above, but that there's been no valuation decision much less a consummation of the buyout. It will be interesting to see whether and how the appellate court's invalidation of the stock sale to Janet will affect the pending dissolution/buyout proceeding.
Update May 2, 2011: As it turned out, the impact of the stock allocation on the proceeding was not very significant, but the valuation itself turned out to be a real humdinger. Read here my post highlighting the valuation hearing referee's massive report and the court's decision confirming it, involving complex issues of real estate appraisal and discounts for lack of marketability and taxes on built-in capital gains.
