Was it “an unfortunate attempt to second-guess or even force a ‘do over’ of the appraisal,” as the one side would have it? Or was it a “rigged” and “corrupted” appraisal process that took place behind closed doors and severely undervalued the subject interest “by tens of millions of dollars” by relying on “false and misleading” financial information, as the other side would have it?
That was the question posed in Yakuel v Gluck, 2020 NY Slip Op 31251(U) [Sup Ct NY County May 7, 2020], in which Manhattan Commercial Division Justice Joel M. Cohen considered whether to enforce a single-appraiser buy-sell agreement styled as a repurchase option included in an amendment to an LLC operating agreement.
The case involves a “performance branding” and digital marketing agency called Agency Within LLC (“Within”) co-founded by Joseph Yakuel and Andrew Gluck in 2015. Yakuel held directly or indirectly 65% of Within’s membership interests and served as managing member and CEO. Gluck held the remaining 35% and served as COO. Currently, Within boasts 125 employees and a roster of major clients including Nike, Facebook, and Shake Shack.
The Repurchase Option
In 2018, Yakuel and Gluck adopted an amendment to Within’s operating agreement granting Gluck anti-dilution rights. The amendment also included the Repurchase Option, “exercisable at any time,” allowing the company or Yakuel to purchase all of Gluck’s interest for an amount equal to “fair market value . . . reduced by appropriate valuation discounts to account for the minority interest represented by [Gluck’s] Units, the lack of marketability of such Units, and such other applicable valuation discounts.”
The Repurchase Option provided that “The Company shall obtain an appraisal of the Fair Market Value by engaging a third party appraisal firm, whose appraisal will be final and binding on all parties and the cost of which shall be borne by Gluck and the Company on a 50-50 basis.” It also named five prestigious accounting firms to perform the appraisal, gave each of Yakuel and Gluck the right to veto one of the five, and provided that, from among the non-vetoed firms, “the Company shall engage the firm which has offered to perform the appraisal at the lowest price.”
The Repurchase Option included the parties’ agreement to add back for purposes of the appraisal almost $900,000 of company expenses for the 2015 through 2017 fiscal years, plus an amount to be agreed upon in subsequent years — presumably reflecting non-business related expenses. It also included the following provision effectively ousting Gluck from the company immediately upon notice of exercise of the Repurchase Option:
Immediately upon exercising the Repurchase Option (as evidenced by delivering the Repurchase Notice), the Company or the Member(s), as applicable, shall have the right to exclude Gluck from (i) participating in the affairs of the Company, including without limitation the business operations conducted by the Company, and (ii) entering the business offices of the Company. Immediately upon such exercise, Gluck’ s sole right with respect to the Company and its business operations shall be to receive the Purchase Price for the Units.
Yakuel Exercises the Repurchase Option
According to Gluck, Yakuel lured him into signing the amendment by assuring him that he had no intention of invoking the Repurchase Option and that he only intended to use it if the two had a “major disagreement” in the future and could no longer work together. Nonetheless, the amendment expressly allowed the Repurchase Option to be exercised “at any time.”
And that is exactly what Yakuel did. Two days after they signed the amendment, Yakuel exercised the option, fired Gluck from his position as company COO, and barred his access to the office.
At the start of the appraisal process, Yakuel and Gluck each vetoed one of the five accounting firms. Yakuel, acting on Within’s behalf, then hired PricewaterhouseCoopers (“PwC”) to be the third-party appraiser. Depending which side you ask, from that point forward the appraisal process either fell off the rails or arrived at its contractually dictated destination.
Gluck accused Yakuel of freezing him out of a “rigged” appraisal process, providing PwC with “false financial projections” showing that “Within’s business would suffer a catastrophic decline in profitability . . . within two years” while also falsely projecting “a significant increase in expenses,” all of which was designed to ensure PwC would conclude a drastically reduced valuation of Gluck’s 35% interest in the “tens of millions of dollars.” Yakuel accused Gluck of trying to co-opt and sabotage the appraisal process. Here’s how Justice Cohen’s decision described the parties’ polar-opposite positions:
An intense dispute ensued. In July 2018, Gluck brought an action in this Court to rescind the Amendment on the grounds of fraud, want of consideration, and mutual mistake, and alleged breach of contract and fiduciary duty in connection with the appraisal process. As the appraisal drew near, Gluck moved for an injunction on the ground that he was being improperly excluded from participating in the process. The Court (Sherwood, J.) denied Gluck’s motion for a temporary restraining order. With assistance from the Court, the parties entered into a So-Ordered stipulation under which Yakuel “agreed in good faith to allow [Gluck] to participate in the Appraisal without waiver of his rights,” and Gluck “agreed to participate in the Appraisal in good faith, without delay or obstruction.”
The Peace Treaty did not last. Yakuel contends that he held up his end of the bargain and permitted Gluck to participate in the appraisal process, including by providing information and arguments to PwC with respect to valuation. . . . According to Yakuel, Gluck’s “bad faith and litigious approach to the appraisal process eventually caused PwC to halt its work and threaten to quit,” and Gluck’s obstructionist behavior “forced [the Company] to exercise its right under Section 3 of the Amendment to exclude him from the appraisal process.” . . .
Gluck has a very different take on the facts. He contends that Yakuel blocked him from participating meaningfully in the appraisal process. He points, particularly, to the engagement letter between the Company (i.e., the client) and PwC, which provided that PwC would “perform Services on the basis that the information provided is accurate and complete,” and that PwC “will not audit or verify any information provided to it.” . . . He contends that the appraisal was “rigged” because “he never had an opportunity to participate, present evidence, or object to false and inaccurate evidence provided by Mr. Yakuel.”
Justice Cohen observed that there was “some support” for Gluck’s position, quoting from PwC’s advice that Gluck “should be made a party to the engagement letter to allow for his participation in the process” in order to avoid the “perception of a conflict.” PwC also expressed “discomfort” about proceeding “without agreement from all parties” and agreement “on the information that we do ultimately select to use in the valuation.” Yakuel nonetheless insisted that the company “must remain the sole party to the engagement letter” and he “refused to change the scope of the engagement.”
Justice Cohen Denies the Dueling Petitions to Confirm and to Vacate the Appraisal Award
In March 2019, PwC issued its written appraisal determining the value of Gluck’s 35% interest as of December 31, 2018. Unfortunately for us, all financial information is redacted from the copy of PwC’s appraisal publicly e-filed with the court, including its conclusion of value.
According to Gluck, Yakuel refused to provide Gluck with a copy of the PwC appraisal for five months even while he tried to force Gluck to close on the repurchase. In August 2019, Yakuel filed a petition to confirm the appraisal award. Gluck responded with a cross-petition to vacate the award.
Justice Cohen’s decision issued last month is one of the relatively few I’ve seen addressing proceedings to confirm or vacate appraisal awards under Section 7601 of the Civil Practice Law and Rules, which provides:
A special proceeding may be commenced to specifically enforce an agreement that a question of valuation, appraisal or other issue or controversy be determined by a person named or to be selected. The court may enforce such an agreement as if it were an arbitration agreement . . ..
I won’t go into the details, but I highly recommend that you read Justice Cohen’s informative discussion of the standard of review for confirming or vacating an appraisal award, the highlights of which include:
- There is not a “higher bar” for challenging a binding appraisal than for challenging an arbitration award.
- The “extremely limited” judicial review of arbitration awards applies equally to appraisal awards.
- An appraisal award may be set aside “in equity” where a party is denied the opportunity to be heard or the “fundamental procedural right” to have the appraiser “receive all pertinent evidence.”
Turning to the PwC appraisal, Justice Cohen found “evidence to suggest that the appraiser/arbitrator (i.e., PwC) wanted to hear Gluck’s side of the story, and repeatedly asked for that opportunity, but may have been hindered by Yakuel” (italics in original). Justice Cohen also found “unpersuasive” Yakuel’s contention that Section 3(f) of the Amendment “gave him the unfettered right to exclude Gluck from presenting evidence during the appraisal process.” That provision, Justice Cohen added, “limits Gluck from being involved in the business or coming to the corporate office. It does not, on its face, suggest any agreed-upon limitation on Gluck’s ability to tell his side of the story on the significant question of the value of his Units.”
“The core question,” Justice Cohen wrote, “is whether the facts support Gluck’s assertion that he did not have a fair opportunity to present his case.” The court’s conclusion: it’s too early to tell. As Justice Cohen explained:
Yakuel argues, with some support, that Gluck was able to present significant evidence to PwC. Gluck argues, with some support, that he was not able to provide evidence that would have been material to PwC’s appraisal. The record is not sufficiently clear at this stage to permit a decision on this question one way or the other. In those circumstances, the Court finds that the pending motions to confirm or vacate the [appraisal award] must be denied.
An Ill-Fated Buy-Sell Agreement
It was almost inevitable that Yakuel and Gluck would end up in court over the Repurchase Option.
There’s nothing in the record I saw indicating, prior to executing the amendment to the LLC agreement, that the two owners had a deteriorating relationship or were discussing a current buy-out of Gluck’s interest in the young and apparently successful company. Gluck claimed that Yakuel “lured” him into signing it by representing he would only exercise the option if they could no longer work together. Yet the agreement plainly provided the Repurchase Option could be exercised “at any time.”
Why anyone would enter into a buy-sell agreement that puts the pricing solely in the hands of a third-party appraiser retained by the counter-party, knowing that the counter-party could exercise the buy-out right the next day for any or no reason, is puzzling to put it mildly. If Gluck had known Yakuel’s intentions, and assuming Gluck had any interest in selling, presumably he would have offered to negotiate the buy-out rather than enter into a binding single-appraiser process. Likewise, had Gluck known what was coming, it’s highly unlikely he would have agreed in advance to the marketability, minority, and other possible discounts permitted by the amendment.
One could reasonably say that Yakuel simply out-foxed Gluck (who, according to Yakuel’s court filing, was assisted by legal counsel) in negotiating the amendment. Gluck made his bed, now lie in it, as the saying goes. If the amendment otherwise had given both sides equal access to company information and resources, equal ability to share information and communicate–not ex parte, but transparently–with the appraiser, and equal opportunity to review and comment on the appraiser’s draft report before finalizing it, perhaps the process could have come to a successful conclusion without the detour to court, or even if it still landed in court, Gluck would have been out of luck.
But the amendment had no such provisions. On the contrary, it put Yakuel in the position of deciding what information to give the appraiser while leaving Gluck on the sidelines. If we accept even a fraction of Gluck’s assertion that the PwC appraisal undervalued his interest in the tens of millions of dollars, then yes, it was inevitable that the controversy would end up in front of a judge.
And that, dear readers, defeats one of the central purposes of a buy-sell agreement.
Update June 3, 2020: Read here business appraiser and buy-sell-agreement expert Chris Mercer’s take on the case.