The chorus to one of Neil Young’s most sublime songs is “Helpless, helpless, helpless.”

If composed in song, the chorus to a recent valuation decision by Manhattan Commercial Division Justice Andrea J. Masley would be “Worthless, worthless, worthless.”

Justice Masley’s valuation decision in Quattro Parent LLC v Rakib, 2022 NY Slip Op 30190(U) [Sup Ct, NY County Jan. 14, 2022] is noteworthy for two reasons.

First, it is an extraordinarily rare example of a business valuation performed by a court solely on paper submissions without a trial.

Second, it is a rare example of a valuation case pitting a veteran appraisal expert on one side against a fact witness with no expert on the other. Sound lopsided? Let’s see who prevailed in this unorthodox battle of valuation expert versus layperson. Continue Reading Valuation Decision Finds LLC “Worthless, Worthless, Worthless”

I’ve written before (see herehere and here) about the handful of New York court decisions that either apply or refuse to apply the discount for built-in capital gains taxes (“BIG”) in determining the fair value of corporate stock in dissenting and oppressed shareholder appraisal proceedings.

In two of them — the La Sala and Jamaica Acquisition cases — the courts rejected BIG discounts entirely.  In the Murphy case, the court deducted the present value of future gains taxes assuming a 19-year holding period.

A case decided last week by a Manhattan appeals court doesn’t come to a final decision on the BIG question, but it nonetheless highlights an interesting BIG-related issue which I’ll pose as follows:

In a dissenting shareholder appraisal proceeding triggered by a freeze-out merger of a Subchapter C corporation that owns assets with built-in capital gains, is the shareholder entitled to pre-trial disclosure of the corporation’s post-merger tax filings showing whether it made a Subchapter S election, thereby permitting a sale of the assets after a 10-year holding period without incurring a corporate tax on the gain?

The case, Matter of Estate of Mandelbaum (Five Ivy Corp.), 2010 NY Slip Op 03373 (1st Dept Apr. 27, 2010), provides a “no” answer based on the sparse record presented in that case, in which the frozen-out shareholder’s allegation of a post-merger S election was speculative at best.  It’s important to note, however, that a portion of the lower court’s order not appealed from left the door open for reconsideration based on possible “substantiation” through “other discovery.”

For readers unfamiliar with freeze-out mergers, they involve a corporate reorganization designed to remove minority shareholders by forcing them to redeem their shares for cash.  When structured as a merger of the old corporation into a newly formed corporation (controlled by the majority shareholders) that holds at least 90% of the old corporation’s shares, under New York’s default statute the transaction does not require a shareholder vote (see Business Corporation Law § 905).  This is known as a short-form merger.

Continue Reading Dissenting Shareholder Stock Appraisal Triggered by Freeze-Out Merger Raises Issue of Post-Merger Tax Consequences for C Corporation with Built-In Gains

Of all the factors considered by business divorce lawyers and appraisers when valuing an owner’s interest in a closely-held company, the calculation and applicability of a discount for lack of marketability (“DLOM”) is among the most fertile grounds for sharp disagreement.

It’s easy to imagine why. For one, in cases where parties offer competing appraisals of an interest in a closely-held company (such as fair value proceedings under New York Business Corporation Law Sections 623 or 1118), the DLOM often is the largest driver of the differences between the two appraisals, and the parties naturally focus their efforts on the issues producing the largest swings in value.  Second, application and calculation of the DLOM involves—perhaps more than anywhere else in the business appraisal process—a considerable amount of judgment.  The appraiser’s judgment calls in applying a DLOM are frequent targets for attorneys seeking to undercut or enhance the final number.

One need not look far to find disputes over DLOMs playing out in courts across the country.  Consider for example, Peter Mahler’s encapsulation of the DLOM debate in New York here, the apparent divergence between the First and Second Departments regarding the DLOM in real estate holding companies under the statutory fair value standard (explained here), or the Indiana Court of Appeals’ refusal just weeks ago to apply any DLOM whatsoever under the fair market value (FMV) standard to a wife’s share of a dental practice because, as that court observed, “dental practices are easily tradeable as they have a ready market of purchasers (new dentists) graduating each year.” (Kakollu v Vadlamudi, 21A-DC-96 [Ind Ct App July 26, 2021]).

Putting hard numbers to the extent of professionals’ disagreement concerning the DLOM, Business Valuation Resources recently released its annual survey regarding calculation and application of the DLOM.  Gathering responses from more than 200 valuation professionals, the BVR Survey on Methods Used for Estimating a Discount for Lack of Marketability demonstrates that, with respect to almost all matters DLOM, a general consensus is rare.  For example, to the question, “Would you apply a DLOM to a 100% interest in a private company?,” 33% of those surveyed indicated that they would, 27% indicated that they would not, and 40% indicated “maybe.”

In the wild west of DLOM calculation and application, I recently came across a novel issue that, in my view, merits serious consideration from business owners, litigators, and appraisers: how should contractual restrictions on a controlling owner’s ability to transfer his or her control factor into the calculation of the DLOM?

Continue Reading Fueling the DLOM Debate: Control Transfer Restrictions and the Discount for Lack of Marketability

I’m pleased to present my fifth annual list of picks for the past year’s ten most significant business divorce cases. This year’s crop, five of which are appellate decisions, includes highly interesting and important rulings on a variety of issues in dissolution, buy-out, appraisal and fiduciary breach cases involving closely held corporations, partnerships and limited liability companies. All ten were featured in this blog previously; click on the case name to read the full treatment. And the winners are:

  1. Kagan v. HMC-New York, Inc., 94 AD3d 67, 2012 NY Slip Op 01514 (1st Dept Feb. 28, 2012), in which a closely divided panel of the Appellate Division, First Department, applied Delaware law to dismiss claims for breach of fiduciary duty against LLC managers based on the operating agreement’s provision limiting manager liability.
  2. Matter of Grande’ Vie, LLC, 93 AD3d 1281, 2012 NY Slip Op 02190 (4th Dept Mar. 23, 2012), another appellate decision, where the court reversed a lower court order and compelled arbitration over a disputed appraisal notwithstanding language in the buy-sell agreement making the appraisal “binding.”
  3. Matter of Clever Innovations, Inc., 94 AD3d 1174, 2012 NY Slip Op 02536 (3d Dept Apr. 5, 2012), a case of dueling dissolution petitions by 50/50 shareholders in which an upstate appellate panel affirmed an order compelling a buy-out of the shareholder who’d filed a BCL 1104-a petition as an oppressed shareholder by the shareholder who’d filed a BCL 1104 petition for deadlock. Continue Reading Top Ten Business Divorce Cases of 2012