At the time of Rajesh Banani’s death in 2007, he managed and co-owned with his parents, Kishin and Pushpa Banani, a pawn brokerage business in Astoria, Queens, called New Millenium Pawnbrokers, Inc. Rajesh and his parents respectively held 25% and 75% of the company’s shares.
Some months after his son’s death, Kishin sold all of New Millenium’s assets to another pawn brokerage for $1,063,218. Kishin claimed to have made the sale to the highest bidder in an arms-length transaction.
In 2010, Rajesh’s wife, Nicole, who also administered her late husband’s estate, sued for judicial dissolution of New Millenium as an oppressed minority shareholder under § 1104-a of the Business Corporation Law (BCL). She alleged that her in-laws failed to give her prior notice of the asset sale and never held a shareholders meeting to approve the sale. She also claimed that her in-laws failed to pay or account for the estate’s share of the sale proceeds and the business profits, and that they had wasted and looted corporate assets.
Round 1: Judicial Dissolution Denied
In August 2010, Nassau County Commercial Division Justice Stephen A. Bucaria dismissed the dissolution petition without prejudice to filing an amended petition seeking payment for the fair value of the estate’s 25% stock interest as a dissenting shareholder under BCL § 623.
In his decision (read here), Justice Bucaria found that Nicole failed to present evidence of oppression, waste or looting justifying dissolution. The court also found, however, that because there had been no notice to the estate, and no shareholders meeting to approve the sale, the estate had a right to seek a judicial appraisal and payment of fair value for the shares triggered by the sale of substantially all of the corporation’s assets under BCL § 910.
Round 2: Access Granted to Books and Records
Soon after the court’s decision, the estate served a notice of dissent to the sale and an amended petition seeking a fair value appraisal. In November 2010, the estate moved to compel an inspection of New Millenium’s books and records. The Banani in-laws opposed inspection on the ground the estate did not hold any stock interest in New Millenium due to their deceased son’s failure to repay certain loans including a $300,000 promissory note he gave his parents in consideration of his shares. They also opposed inspection on the ground that the corporation’s value was fixed when its assets were sold for the “highest price” in 2007.
In a January 2011 decision (read here), Justice Bucaria found that upon his death Rajesh was a bona fide shareholder of New Millenium regardless of his loan obligations and that Nicole, as his estate’s administrator, had standing to seek an appraisal. Justice Bucaria accordingly granted an inspection of books and records for the years 2004 through the date of the asset sale in late 2007.
Round 3: Other Evidence of Value Precluded
The case proceeded at less than lightning speed over the next two years, featuring at least two more interim decisions in discovery skirmishes seeking to penalize the Banani in-laws allegedly for failing to provide disclosure (read here and here).
Then an odd thing happened, or so it seems given the case’s contentious history. In September 2013, Nicole — not her in-laws, as I would have guessed — filed a motion to preclude any evidence being offered at the appraisal hearing as to New Millenium’s revenues and liabilities. Rather, she argued, the corporation’s value should be based solely on the price received for its assets in the arms-length sale in 2007 that triggered the estate’s appraisal rights.
Nicole’s in-laws filed no opposition to the motion which Justice Bucaria granted in a Short Form Order dated November 8, 2013 (read here), finding that the sale price was the “best evidence” of company value. Here’s the pertinent excerpt from the ruling:
When a corporation elects to buy out a minority shareholder at fair value, the issue is what a willing purchaser in an arm’s length transaction would offer for the shareholder’s interest in the company as an operating business (Murphy v. U.S. Dredging Corp., 74 AD3d 815 [2d Dept 2010]). Modell appears to have purchased New Millenium’s assets in an arm’s length transaction. The assets appear to have been purchased in order to continue operating the pawn broker business as a going concern. The court concludes that respondents should be precluded from challenging the amount received in the sale of New Millenium’s assets to Modell as the best evidence of the value of the company.
Accordingly, petitioner’s motion to preclude respondents from offering evidence as to the liabilities of New Millenium Pawnbrokers, gross and net sales, and the value of the corporation is granted.
The decision does not address any other issues affecting the ultimate determination of the fair value of the estate’s 25% interest or, for that matter, indicate whether there remain any other issues for trial.
Banani caught my eye for a couple of reasons. For one, I can’t remember seeing another fair value case involving a closely held company where there was an actual market transaction involving an arms-length sale of the business to an unrelated third party. For another, it resonated with a recent Delaware Chancery Court decision in a dissenting shareholder case called Huff Fund Investment Partnership v. CKx, Inc., C.A. No. 6844-VCG (Del Ch Nov. 1, 2013), in which the court rejected the appraisal experts’ usual reliance on discounted cash flow, guideline company and guideline transaction analyses, and instead determined fair value based on the actual merger price that resulted from “an arms-length, disinterested transaction after an adequate market canvas and auction.”