New York law provides dissenting minority stockholders with the right to have their shares appraised at “fair value” and purchased by the corporation upon its merger into another company or upon the sale of all or substantially all of its assets. The appraisal statute, §623 of the Business Corporation Law (BCL), in tandem with the provisions of BCL Article 9 requiring shareholder approval for certain mergers, share exchanges and disposition of assets, serves to prevent minority stockholders “from being forced to sell at unfair values imposed by those dominating the corporation” (Matter of Cawley v. SCM Corp., 72 NY2d 465, 471 ).
It’s clear that appraisal rights are triggered when a merger or asset sale terminates the corporation’s existence or operation. It’s equally clear that shareholders of a surviving corporation in a merger, or of a corporation that merely transfers some of its assets to subsidiaries, are not entitled to dissent and seek an appraisal. But in between those two ends of the spectrum is a gray area of appraisal rights where corporate restructurings defy easy categorization, such as where the “old” corporation continues its existence as an indirect owner of the assets it formerly owned directly, through one or more newly formed, affiliated business entities.
Barasch v. Williams Real Estate Co., 2011 NY Slip Op 51979(U) (Sup Ct NY County Nov. 3, 2011), decided earlier this month by Manhattan Commercial Division Justice Bernard Fried, is one of those gray-area cases. Justice Fried’s ruling in favor of appraisal rights on the facts presented in Barasch offers a useful guidepost to transactional lawyers involved in complex corporate reorganizations when it comes to advising clients about minority stockholder rights.
According to the petition filed by shareholder Candace Carmel Barasch (read here), she inherited from her father, Robert Carmel, a 10.33% interest in Williams Real Estate Co. (“Williams Oldco”). Prior to the transactions at issue in the lawsuit, Williams Oldco was a full-service real estate company that conducted its business directly, through a number of subsidiaries, and through six affiliates (the “Satellite Companies”). Robert Carmel was a principal of Williams Oldco and also held a 10.33% stock interest in the Satellite Companies that Ms. Barasch likewise inherited upon her father’s death in 1996. Ms. Barasch was a member of the board of directors but had no other management role.
The remaining shares in Williams Oldco and the Satellite Companies were held in percentages ranging from 1% to 50.54% by five individuals who remained active in the business.
In 2008, Williams Oldco entered into negotiations with a major Canadian real estate brokerage firm, FirstService Corporation, for the acquisition by FirstService of a 65% interest in Williams Oldco. In September 2008, they entered into a Purchase Agreement outlining a complex series of transactions leading to the acquisition.
First, the Purchase Agreement required Williams Oldco to undergo a multi-step, pre-closing reorganization involving:
- forming a new Delaware company, Williams Real Estate Operations Co. LLC (“Williams Opco”) with a total of 1,000 membership units;
- Williams Oldco contributes substantially all of the assets comprising its commercial real estate brokerage and management business, including two partially owned subsidiaries, to Williams Opco in exchange for all 1,000 membership interests in Williams Opco;
- Williams Oldco then contributes 999 of the units to a newly formed company called Williams Real Estate Management Co. LLC (“Williams Holdco”) in exchange for 75% of the membership units in Williams Holdco;
- The remaining units in Williams Holdco are issued to the other owners of the partially owned subsidiaries in exchange for their ownership interests in those entities; and
- Williams Holdco then contributes the interests in the subsidiaries to Williams Opco, which thereby would acquire 100% membership interests in them.
Head spinning yet? There’s more. Williams Oldco next acquired, by merger into six new wholly-owned LLC subsidiaries, all of the shares of the Satellite Companies, making them wholly-owned subsidiaries of Williams Oldco. In exchange for their shares in the Satellite Companies, the prior shareholders of the Satellite Companies received, pro rata, additional shares of Williams Oldco.
So much for the pre-closing reorganization, upon the conclusion of which the Purchase Agreement called for FirstService to purchase 650 (65%) of Williams Opco’s membership interests from Williams Holdco, and also to purchase from Williams Oldco 100% of the shares of five of the six former Satellite Companies that had been merged and acquired by Williams Oldco. At the last stage of the transaction, Williams Oldco contributed its entire 75% ownership interest in Williams Holdco to WREM Holdco LLC (“Taxco”), a new Delaware company formed by Williams Oldco as the sole Class A voting member of Taxco and two of Williams Oldco’s principals as the Class B non-voting members. All of the Williams Oldco principals also got employment agreements with Williams Opco.
The Board and Shareholder Approvals
On September 29, 2008, the board of directors of Williams Oldco voted to approve and authorize all stages of the transaction. That same day, the shareholders of Williams Oldco were sent a notice of special meeting stating that the purpose of the meeting was to obtain shareholder “authorization and ratification of the proposed disposition of substantially all of the assets of [Williams Oldco]” pursuant to the various agreements. The notice also stated that shareholder authorization would be sought for the proposed merger of the six Satellite Companies into the new wholly-owned subsidiaries of Williams Oldco. The notice further stated that the merger of the Satellite Companies “gives rise to a shareholder’s right to dissent and to receive payment for his or her shares” pursuant to BCL §623.
At the special meeting on October 8, 2008, Ms. Barasch was the sole dissenter. She also gave notice of her intent to exercise her statutory appraisal rights in the event Williams Oldco proceeded with the transaction.
The transaction closed on October 16, 2008. One week later, Ms. Barasch tendered her original stock certificate to Williams Oldco.
Williams Oldco thereafter failed to make a written offer to pay Ms. Barasch the fair value of her shares, failed to return her shares, failed to advise her what interests, if any, she had in any of the new entities, and failed to commence an appraisal proceeding.
Ms. Barasch filed her petition to compel appraisal and buy-out in early 2009. By decision dated October 27, 2009 (read here), Justice Fried denied the respondents’ motion to dismiss except to the extent of dismissing the claims against FirstService and the individual shareholders.
Following the completion of discovery, Ms. Barasch moved for partial summary judgment granting her an appraisal of the fair value of her shares in Williams Oldco and each of the six Satellite Companies. She also moved to compel Williams Oldco to make an interim payment of about $1.1 million toward the fair value of her shares; directing respondents to produce Williams Oldco’s financial information on an ongoing basis; and awarding her costs and legal fees for respondents’ failure to offer an advance payment for her shares or to commence an appraisal proceeding.
As summarized in Justice Fried’s decision, Ms. Barasch argued that her appraisal rights in Williams Oldco were triggered at three separate points in the transaction: (1) when Williams Oldco transferred substantially all of its assets to Williams Opco in exchange for membership units in that entity; (2) when Williams Oldco transferred almost all its membership units in Williams Opco to Williams Holdco in exchange for a majority of that entity’s membership units; and (3) when Williams Oldco then transferred its entire interest in Williams Holdco to Taxco in exchange for voting membership in that entity. She also argued that her appraisal rights in each of the Satellite Companies were triggered when those companies were merged into Williams Oldco’s new wholly-owned LLCs, and Williams Oldco then acquired all of the shares of those entities from Ms. Barasch and the other prior shareholders.
Ms. Barasch further argued that, as a consequence of the asset transfers and mergers, her ownership interests and rights in each of the companies were fundamentally altered, if not totally extinguished, and that as a result of the purchase by FirstService, Williams Oldco no longer operates as a commercial real estate brokerage business. Ms. Barasch cited deposition testimony and other evidence showing that Williams Oldco has not engaged in any new business and that its only ongoing activity is collecting receivables and paying on liabilities that pre-dated the transaction. She also contended that, post-transaction, the continued operations of Williams Oldco’s former brokerage business were owned and controlled by Williams Opco, which, as a result of the transaction, is now majority owned and controlled by a subsidiary of FirstService. (For more detail, read here Ms. Barasch’s memorandum of law in support of her summary judgment motion.)
In opposition, respondents argued that appraisal rights are triggered only when a transaction results in a disposition of all or substantially all of a company’s assets that effectively results in a dissolution or liquidation of the business. Here, they contended,
Williams Oldco, post-transaction, continues to operate, albeit now through new “subsidiaries,” the exact same business, with the exact same assets, managed by the exact same officers, with the exact same employees, and for the exact same clients.
The only thing that changed, respondents contended, was the name on the company’s door. When Williams Oldco transferred its assets to Williams Opco, it “was the equivalent of simply moving money from one pocket to another in the same pair of pants.” The same held true for the other steps in the transaction, respondents argued, including the transfer of the entire membership interest in Williams Holdco to Taxco as a result of which Williams Oldco became the sole Class A voting member of Taxco.
Respondents also argued that the merger and acquisition of the Satellite Companies by Williams Oldco did not trigger appraisal rights because the law expressly provides that the shareholders of a surviving corporation in a merger may not dissent, citing BCL §910(a)(1). At the time of the mergers, Ms. Barasch was a shareholder of Williams Oldco, the surviving corporation, as well as the Satellite Companies, the dissolving corporations. Respondents contended that, while the BCL does not explicitly deny dissenter’s rights to shareholders in these circumstances, “the underlying rationale for the statute clearly prohibits appraisal rights in such a situation.” More specifically,
[R]espondents argue that it makes no sense to afford petitioner appraisal rights for her shares in the dissolving corporations when, in all practical respects, petitioner would continue to “own” these entities through her status as a shareholder of the surviving corporation, even after receiving fair value for her extinguished ownership interests in the dissolving entities.
(For more detail, read here the respondents’ memorandum of law opposing summary judgment.)
Justice Fried’s legal analysis begins by noting the circumstances under which shareholder approval is not required and therefore appraisal rights do not exist:
A transaction does not require shareholder approval, and thus will not trigger a shareholder’s right to an appraisal, where it does not result in a liquidation, in whole or in part, of a company’s business. The test applied by the courts to determine whether a sale or exchange of assets is within the purview of [BCL] §909(a) is not the dollar amount of the assets involved in the transfer. Rather, the test is whether the sale or exchange was made in the regular course of the business actually conducted by the corporation in furtherance of the objects of its existence, or something outside of its normal and regular course of business. Thus, our courts have held that, regardless of the ultimate size of a transaction, where a company retains property and/or assets sufficient to continue the operation of some part of its business, it is not a sale, exchange, or disposition of “all or substantially all” of a company’s asset’s requiring approval under BCL §909. [Citations omitted.]
Under the above-described test, Justice Fried concludes, Ms. Barasch is entitled to appraisal rights for her Williams Oldco shares:
Respondents do not contend that this transaction was made in the usual or regular course of the business. Nor have respondents argued that this transaction never required shareholder approval. Additionally, . . . there is no indication, here, that Williams Oldco retained any property or assets with which it could have continued to operate as a commercial real estate business following the transaction. Rather, the evidence shows that essentially all of the property and assets required for the continued operation of Williams Oldco’s commercial real estate business were transferred to Williams Opco and/or FirstService.
It is not the continuity of the business that matters for appraisal purposes, but the continuity of the ownership and control of the business. Justice Fried further explains:
While, it may be true that the commercial real estate business that Williams Oldco transferred to Williams Opco continued to operate with essentially the same assets and the same personnel, it is also clear that these assets and personnel were no longer owned and or controlled by Williams Oldco, but by Williams Opco, which, in turn, is now majority owned and controlled by FirstService. While the executives who run its day-to-day business may be the same, the record reflects that these executives also are now employed by Williams Opco, now known by the name Colliers International NY LLC, and ultimately answer to a board controlled by Colliers/FirstService in Seattle. Thus, as a result of the transaction at issue, Williams Oldco has changed from a full-service commercial real estate company that conducted its business directly, and through various subsidiaries and affiliates, to a company that, at best, holds an indirect minority interest in Williams Opco, by way of Taxco’s interest in Williams Holdco.
Justice Fried also concludes that Ms. Barasch has appraisal rights for her shares in the Satellite Companies, for two reasons. First, he notes that the notices of special meeting given to the Satellite Companies shareholders advised of the shareholders’ appraisal rights in the event that they elected not to accept additional shares in Williams Oldco upon the merger and extinguishment of their shares in the Satellite Companies. Second, Justice Fried finds an absence of authority for the respondents’ contention “that the shareholders of a corporation that is merged into another, and then dissolved, lose their right to an appraisal merely because they also happen to own separate shares in the surviving company.”
Ms. Barasch comes up short on her request for a $1.1 million interim payment of her fair value award, which Justice Fried denies “given that no approximate value of the shares has yet been determined.” However, he does grant her partial summary judgment on her claim for costs and attorneys’ fees based on the respondents’ failure to make any offer for her shares and their failure to commence an appraisal proceeding within the applicable period under BCL §623. Justice Fried accordingly orders that Ms. Barasch is entitled “to recover her costs in commencing this proceeding and, to the extent that the fair value of her shares is found to materially exceed the prior valuation set by respondents, to an award of her attorneys’ fees, the amounts of each to be determined in the course of the appraisal hearing.”
According to Ms. Barasch’s memorandum of law, the deal with FirstService was valued around $42 million at the time of the transaction. If awarded a pro rata share of that figure, Ms. Barasch’s 10.33% interest would come to around $4.2 million.
Update November 29, 2012: The Apellate Division, First Department, on November 27, 2012, issued an order (read here) affirming Justice Fried’s decision on the ground that Williams Oldco’s September 29, 2008, notice of shareholder meeting estopped it from denying that it disposed of substantially all of its assets.