The first and last time I wrote about the AriZona Iced Tea dissolution case — likely the biggest ever of its kind in New York — was four years ago, when 50% owner and co-founder John Ferolito filed his petition under Section 1104-a of the Business Corporation Law for judicial dissolution of the collection of companies that produce beverages and food products under the popular AriZona Iced Tea brand.

Since then, there’s been a multitude of trial and appellate decisions in that and several related lawsuits between Ferolito and the other co-founder and 50% shareholder, Domenick Vultaggio, all of which eventually were consolidated for trial starting last May before Nassau County Commercial Division Justice Timothy S. Driscoll, to whom the task fell of determining the fair value of the Ferolito shares pursuant to AriZona’s BCL Section 1118 buyout.

As you might expect, this was no ordinary valuation trial. Ferolito valued AriZona at $3.2 billion versus Vultaggio’s $426 million. For over a month, Justice Driscoll heard the testimony of 34 lay and expert witnesses, many of whom supplemented their in-court testimony with affidavits totaling about 1,000 pages, in addition to tens of thousands of pages of exhibits introduced into evidence. The parties filed post-trial memoranda last August, followed by oral summations in September, followed by more post-trial memoranda.

The wait is over. In a 42-page decision dated October 14, 2014 (2014 NY Slip Op 32830(U)), relying solely on the Discounted Cash Flow method, Justice Driscoll valued the entire enterprise somewhere around $1.4 to $1.5 billion after applying a 25% marketability discount. The number’s fuzziness reflects post-decision adjustments that will have to be calculated based on certain findings made by Justice Driscoll that departed from some of the assumptions made by the parties’ experts. According to Justice Driscoll’s self-described “back-of-the-envelope” calculations, the value of Ferolito’s 50% stock interest currently “approaches” $1 billion when pre-judgment interest is added at the rate of 9%. Justice Driscoll also left to future proceedings the critical question of AriZona’s ability to pay the fair value award, and its impact on the terms and conditions of any payout. Continue Reading Court Rejects Potential Acquirers’ Expressions of Interest, Relies Solely on DCF Method to Determine Fair Value of 50% Interest in AriZona Iced Tea

I don’t know if it’s the largest potential involuntary dissolution ever of a highly successful, privately-held U.S. company, but it surely must rank up there.  The two 50% owners of the companies that make AriZona Iced Tea and a host of other beverages have been at odds for years, including multiple lawsuits brought and defended by top-flight law firms.  Now, one of them has filed a petition in Nassau County Supreme Court asking a judge to order the dissolution of the two main operating companies — both incorporated in New York — on the ground of shareholder oppression.

According to the petition filed by John Ferolito (read it here), he and the other 50% shareholder, Domenick Vultaggio, launched the AriZona Iced Tea brand of beverages in 1992.  Initially, Vultaggio managed the warehouse operations and Ferolito managed the corporate office.  In 1994, Vultaggio joined Ferolito in the newly relocated corporate office in Lake Success which, according to Ferolito, is when their relationship began to unravel due to “differences in their approaches to management and decision-making.”

Around 1997, by which time the situation had become “unbearable” for Ferolito, they agreed there could “only be one captain of the ship.”  Ferolito therefore relinquished day-to-day management to Vultaggio in order to prevent “the inevitable deadlock” that would have ensued.  As part of this arrangement, according to the petition, it also was agreed that the company CFO would “keep Ferolito informed as to the operations of the business” and that Ferolito as co-owner would participate in all “big picture” business decisions.

Continue Reading 50% Owner of AriZona Iced Tea, Claiming Shareholder Oppression, Files for Involuntary Dissolution of Multi-Billion Dollar Enterprise

In Congel v Malfitano, New York’s highest court wrote that business partners are free to include in partnership contracts practically “any agreement they wish,” including about “the means by which a partnership will dissolve, or other aspects of partnership dissolution.” This broad freedom of contract, the Court explained, is circumscribed only by “prohibitory provisions of the statutes,” countervailing “rules of the common law,” or “considerations of public policy.”

Two weeks ago, Peter Sluka wrote about one example of public policy prohibiting contracts among closely-held business owners: a recent decision ruling unenforceable a buy-sell provision in an LLC agreement because the contract deemed breach of any provision, no matter how minor, to be “forfeiture for a dollar,” which the Court found “grossly disproportionate,” “unreasonable,” and an “unenforceable penalty.”

This week, we’ll look at another example of public policy curtailing enforcement of agreements among closely-held business owners. A strand of a half dozen New York appellate decisions have held that contractual prohibitions on judicial dissolution proceedings – so-called “anti-dissolution” provisions – are potentially unenforceable depending on how broadly and in what manner they prohibit access to courts. We’ll summarize the state of the law at the end of this article. Continue Reading Anti-Dissolution Provisions and Public Policy

Are claims for judicial dissolution of business entities arbitrable?

It’s a question I’m occasionally asked by business owners and, surprisingly, by lawyers. I say surprisingly because here in New York, the courts long ago settled the question in favor of arbitrability. But there are some nuances when it comes to judicial dissolution and arbitration, and the arbitrability of dissolution claims is not a given in all states.

What follows is a very basic explanation of the rules and some issues surrounding arbitration of judicial dissolution claims. Bear in mind, however, that the governing rules, whether statutory or judge-made, can vary significantly from state to state, so whether you’re a business owner or a lawyer representing one, be sure to consult the rules in your jurisdiction.

How Do Business Entities Get Dissolved?

It may not be obvious why I pose this question first. Let me explain.

Corporations, limited liability companies, and limited partnerships — I’m purposely omitting general partnerships — are state-enabled creatures that draw their first breath only upon meeting statutory filing requirements with the Secretary of State. They likewise draw their last breath upon filing the statutorily specified documentation requiring the Secretary of State to dissolve the entity.

Business entity dissolution is governed by statute and comes in two flavors: voluntary (i.e., non-judicial) and involuntary (i.e., judicial). In the case of voluntary dissolution, the statutorily required filing consists of an authorized certificate of dissolution. Involuntary dissolution requires the filing of a court order directing the Secretary of State to dissolve the entity. Continue Reading The Skinny on Arbitrability of Judicial Dissolution Claims

In my business divorce travels occasionally I encounter instances in which shareholder distributions are made in the period between the valuation date for an elective buyout of a minority shareholder who sued for dissolution and the consummation of the buyout following a contested fair value appraisal proceeding.

With that setup, there are two questions you might ask yourself:

  • Why would the controllers of a closely held corporation voluntarily make shareholder distributions benefitting the soon-to-be-removed minority shareholder whose petition accuses them of oppression, looting, or other misdeeds?
  • Since the petitioner’s shares are to be valued based essentially on the risk-adjusted value of future cash flows, do such post-valuation date distributions constitute double dipping and thus should they be credited against the fair value award?

There’s no single answer to the first question. It can happen where the company’s owners for whatever reasons historically have distributed substantially all profits as dividends rather than as salary or bonus, and feel compelled to continue the practice out of economic necessity. It also can happen where a company with a longstanding dividend policy has a number of non-petitioning minority shareholders who likely would object loudly if their dividends were suspended indefinitely by reason of  a dissolution and valuation proceeding brought by another shareholder.

As for the second question, I’ve not seen any appraisal literature that addresses the double-dipping issue. Nor does the sparse case authority provide a clear answer. Continue Reading Post-Valuation Date Distributions: Should They Be Credited Against Fair Value Awards?

This is the final installment of a three-part series about the basics of contested New York business appraisal proceedings. The first post addresses the various ways in which business owners can steer a dispute into an appraisal proceeding. The second post addresses the legal rules and principles that apply in appraisal proceedings. This final post addresses the appraisal methodologies and principles that apply in valuation proceedings. Without further ado, let’s talk accounting.

Valuation Date

The date on which a business interest is appraised – the “valuation date” – can have a huge impact on its worth. For example, for a real estate holding company in a rising market, generally speaking, the later the valuation date the greater the value. If the valuation date is earlier, the seller may receive and the buyer may pay less for an ownership stake. For most kinds of appraisal proceedings, the valuation date is set by statute, so there is little to litigate on the subject.

Under Partnership Law 69 and 73, a wrongfully withdrawn, retired, or deceased partner is entitled to have the “value” of his or her interest determined as of the date of “dissolution,” meaning the event of withdrawal, retirement, or death. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 3

Business valuation contests in court, including those arising out of shareholder and partnership disputes, inevitably boil down to a battle of the appraisal experts, among whom Chris Mercer of Memphis-based Mercer Capital is one of the best known and most accomplished.

A listing of Chris’s professional accreditations, publications, speaking engagements, and expert witness engagements could fill a small book. To those who follow statutory fair value appraisal cases in New York, you know that Chris has played an outsized role as testifying expert in some of the most important and precedent-setting cases, including the Ferolito (AriZona Iced Tea) case, the Giaimo case, the Chiu case, and the recent Kassab case. Chris and some of his many publications also have been featured on this blog (here and here) and as the first guest on my Business Divorce Roundtable podcast doing a deep dive into the divisive discount for lack of marketability.

I recently invited Chris back onto the podcast to talk about a blog post of his entitled “A Reluctant Expert Witness Confesses” which in turn is based on a talk he gave last Fall at a business valuation conference. I assure you Chris’s “confessions” are not of a criminal nature although, as you’ll hear Chris describe, when he testified as an expert for the very first time in an imposing courtroom setting, as he was given the oath the thought involuntarily flashed through his mind, “I’m guilty!”

Rather, in our conversation Chris shares a series of interesting and often colorful insights he’s gained over many years of testifying as an expert business appraiser about the do’s and don’ts of testifying, his likes and dislikes about being an expert witness, what engagements he’ll take and which ones he won’t, and a number of other observations about his experiences as an expert on and off the witness stand.

It’s up close. It’s personal. It’s fun. I invite you to listen by clicking on the link at the bottom of this post.

By the way, if you’re a business divorce lawyer or business appraisal expert who’d like to share with podcast listeners a real-life experience from one of your cases for a Business Divorce Stories episode (no need to use real client, company or case names), please get in touch with me by phone or email and I’ll be happy to set up a recording session in person or via Skype.

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?

door“Marriage is tough, business relationships may be tougher.”

Wise words from someone who should know — Nassau County Supreme Court Justice Timothy S. Driscoll, who presided over matrimonial cases before joining the Commercial Division where he has adjudicated some of the thorniest business divorce cases such as the AriZona Iced Tea donnybrook.

The quoted words appear in an oral argument transcript in a case called Cardino v Feldman pending before Justice Driscoll involving a fight between 50-50 owners of a construction company operated by the defendant Feldman. It’s a factually and procedurally complex matter, the details of which I’ll spare readers in favor of focusing on the main takeaway from Justice Driscoll’s recent decision in the case, namely, that once a business owner asserts a claim for judicial dissolution under Section 1104-a of the Business Corporation Law — even if not pleaded in strict accordance with the statute — it’s very difficult to reverse course after the other shareholder timely elects to purchase the petitioner’s shares for fair value under BCL Section 1118. Continue Reading Once Opened, The Door to Judicial Dissolution and Buy-Out Is Hard to Close

BDR

If you liked Part One of my Business Divorce Roundtable podcast interview of Chris Mercer on the subject of the marketability discount in statutory fair value appraisal proceedings, you’ll definitely enjoy Part Two which is now available on a bunch of podcast directories including iTunes, Stitcher, Soundcloud, or your favorite RSS reader. Better yet, you can listen to it by clicking here. And if you haven’t yet listened to Part One, click here.

The marketability discount has played an outsized role in New York fair value proceedings under Sections 623 and 1118 of the Business Corporation Law, and has taken on new shades of controversy in recent years as some judges and business appraisers have questioned its theoretical, empirical, and equitable foundations when valuing the shares of dissenting or oppressed minority stockholders in closely held companies.

It also has its defenders, but Chris Mercer is not one them. Chris has taken a very public and vocal stand against application of the marketability discount in fair value cases. In Part Two of my interview, Chris talks about cases in which he has served as expert witness at trial advocating a zero percent marketability discount, including the Giaimo, Chiu, and AriZona Iced Tea cases.

If you like the podcast, please don’t forget to subscribe on iTunes or your other podcast manager.