Dissenting Shareholder Appraisal

The East River and roughly five miles as the pigeon flies separate the equally beautiful courthouses of the Appellate Division, Second Department in Brooklyn and the Appellate Division, First Department in Manhattan. Because of the limited jurisdiction and very selective docket of New York’s highest court known as the Court of Appeals, in the vast majority of cases these two intermediate appellate courts effectively are the courts of last resort for their respective geographic slices of downstate New York.

Over many years, a different sort of divide has separated the two appellate courts when it comes to statutory fair value proceedings and, in particular, their treatment of the controversial discount for lack of marketability (DLOM).

The earliest version of the DLOM divide concerned whether it should apply to good-will value only, that is, not to the value of realty, cash, and other net tangible assets. For over two decades, prevailing Second Department case law limited application of DLOM in that fashion; the First Department did not. The decisions of one court didn’t acknowledge the other’s. Then, in 2010, without discussion or even acknowledging a change, the Second Department in the Murphy case seemingly healed the rift by dropping the good will limitation.

I say seemingly because, in recent years, the DLOM divide between the two appellate courts quietly has resurfaced in the context of fair value contests involving real estate holding companies where, on the Manhattan side of the river, First Department cases have accepted the appropriateness of a marketability discount on account of the realty’s “corporate wrapper.” Meanwhile, on the Brooklyn side of the river, Second Department cases have rejected DLOM on the theory that the value of a realty holding entity is the value of the realty or, alternatively, that a marketability discount already is incorporated in the underlying realty appraisal by way of an assumed market-exposure period. Continue Reading A River’s Divide: Time for the Manhattan and Brooklyn Appellate Courts to Agree on Marketability Discount in Fair Value Proceedings

P'shipIn the early 1990’s New York enacted its version of the Revised Uniform Limited Partnership Act (NYRULPA), codified in Article 8-A of the New York Partnership Law §§ 121-101 et seq. The law’s modernized features include in §§ 121-1101 through 1105 provisions for the merger and consolidation of limited partnerships along with the right of dissenting limited partners to be paid “fair value” for their partnership interests as determined in an appraisal proceeding.

You can count on one hand the number of published New York court decisions over the last 25 years dealing with dissenting limited partners. In fact, until this year, it’s possible you could count the number on one finger, that being the Court of Appeals’ 2008 ruling in the Appleton Acquisition case which I wrote about here. Appleton held that a limited partner may not bring an action seeking damages or rescission based on allegations of fraud by the general partner in connection with a merger transaction, and that the statutory appraisal proceeding is the exclusive remedy for such claims. Appleton never reached the issue of appraisal.

It therefore appears that last month’s decision by Manhattan Supreme Court Justice Geoffrey D. Wright in Levine v Seven Pines Associates L.P., 2015 NY Slip Op 30138(U) [Sup Ct NY County Jan. 28, 2015], may be the first published ruling that addresses issues attendant to a fair value determination in a dissenting limited partner case under NYRULPA.

Now, if you’re hoping for a meaty decision that delves into the fine points of appraisal methodology, Levine is not your case. Rather, Levine was decided on pre-trial motions to fix a date for an appraisal hearing and to compel the respondent limited partnership to provide certain pre-trial disclosure. In addition, the procedural aspects of the dissenting limited partner provisions in § 121-1105 expressly piggyback on the well-established procedures set forth in § 623 of the Business Corporation Law dealing with dissenting shareholders. Still, the issues decided in Levine serve up some useful pointers for practitioners. Continue Reading Decision in Dissenting Limited Partner Case Directs Fair Value Hearing, Grants Discovery

I’m pleased to present my seventh annual list of the past year’s ten most significant business divorce cases. This year’s crop includes noteworthy rulings on a variety of issues in dissolution, appraisal, books-and-records, and other cases involving closely held corporations and limited liability companies. All ten were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

  1. Zacharius v Kensington Publishing Corp., 42 Misc 3d 1208, 2014 NY Slip Op 50011(U) [Sup Ct, NY County Jan. 6, 2014], a lawsuit involving a family-owned publishing business in which Justice Eileen Bransten upheld a stock voting agreement that gave board control to the minority shareholders/step-children of the majority shareholder, although she allowed the majority owner’s suit to proceed on a claim challenging the authenticity of her late husband’s signature on the voting agreement.
  2. Pokoik v Pokoik, 115 AD3d 428, 2014 NY Slip Op 01502 [1st Dept Mar. 6, 2014], a first impression ruling in which the Appellate Division, First Department, in granting summary judgment against an LLC manager for breach of fiduciary duty, rejected the manager’s reliance on the safe-harbor provisions of LLC Law § 409.
  3. Mintz v Pazer, Decision and Order, Index No. 502127/13 [Sup Ct, Kings County Mar. 12, 2014], in which Justice David Schmidt enforced an unusual, “quick draw” buy-sell provision in the shareholders’ agreement of a real estate holding company owned 50/50 by two families, compelling a sale to the family that gave the first notice of purchase following unsuccessful mediation of a deadlock.
  4. JPS Partners v Binn, 2014 NY Slip Op 31204 [Sup Ct, NY County May 6, 2014], in which Justice Melvin Schweitzer held that the restructuring of an LLC, in which substantially all of its assets were transferred to a subsidiary, unintentionally triggered the LLC’s dissolution under a provision in the operating agreement.
  5. Budis v Skoutelas, Short Form Order, Index No. 702060/13 [Sup Ct, Queens County July 16, 2014], in which Justice Orin Kitzes held that the estate of a deceased LLC member had no standing to assert derivative claims on the LLC’s behalf.
  6. Retirement Plan for General Employees v McGraw-Hill Cos., 120 AD3d 1052, 2014 NY Slip Op 06154 [1st Dept Sept. 11, 2014], in which the Appellate Division, First Department, reversed the trial court’s ruling dismissing a books-and-records proceeding brought against McGraw-Hill, and held that the petitioning pension fund’s stated purpose of the requested inspection, to investigate the board’s oversight of McGraw-Hill’s subsidiary, Standard & Poor’s, was a proper purpose even if the inspection ultimately establishes that the board engaged in no wrongdoing.
  7. Zelouf International Corp. v Zelouf, 45 Misc 3d 1205(A), 2014 NY Slip Op 51462(U) [Sup Ct, NY County Oct. 6, 2014] [click here for Part 2], a post-trial ruling in a dissenting shareholder appraisal case in which, among other significant rulings, Justice Shirley Kornreich rejected a discount for lack of marketability and granted the petitioner a separate award on her quasi-derivative claims against the controlling shareholders.
  8. Ferolito v AriZona Beverages USA, LLC, 2014 NY Slip Op 32830(U) [Sup Ct, Nassau County Oct. 14, 2014], in which Justice Timothy Driscoll awarded close to $1 billion (that’s not a typo) to the 50% owner of the AriZona Iced Tea business in a fair value buy-out proceeding under BCL § 1118. The court’s many significant rulings included its sole reliance on the DCF method and its rejection of potential acquirers’ expressions of interest.
  9. Cortes v 3A N. Park Ave. Rest Corp., 2014 NY Slip Op 24329 [Sup Ct, Kings County Oct. 28, 2014], in which Justice Carolyn Demarest conditionally ordered the dissolution of a restaurant business from which the controlling shareholders were found to have skimmed about $3.7 million cash, unless they purchased the minority owner’s shares for about $1.2 million.
  10. Slayton v Highline Stages, LLC, 2014 NY Slip Op 24333 [Sup Ct, NY County Oct. 30, 2014], in which Justice Shirley Kornreich ruled that LLC Law § 407’s default rule, permitting members to act by written consents without a meeting, trumped the meeting requirement in LLC Law § 1002(c) governing member approval of mergers.

Two of the above cases — Ferolito and Zelouf — also made it onto the nationwide top-ten list published in the January 2015 issue of Business Valuation Update, the business valuation profession’s leading monthly newsletter.

There’s a wrinkle in New York’s LLC Law still being ironed out by the courts when it comes to the necessity for member meetings to approve certain actions such as mergers.

On the one hand, under LLC Law § 407(a)’s default rule, whenever LLC members “are required or permitted to take any action by vote,” such action may be taken “without a meeting, without prior notice, and without a vote” so long as signed written consents are obtained from members holding the number of votes required to approve the action had there been “a meeting at which all of the members entitled to vote therein were present and voted.” When consents in lieu of meeting are used, § 407(c) requires “prompt notice” thereafter be given to any members who did not execute consents. In other words, any excluded, non-consenting member is presented with a fait accompli.

On the other hand, LLC Law § 1002(c) provides that any proposed agreement of merger or consolidation “shall be submitted” to the members for a vote “at a meeting called on twenty days’ notice or such greater notice as the operating agreement may provide.” In addition, § 1002(e) echoes the meeting requirement by providing that any member entitled to vote on the proposed transaction “may, prior to that time of the meeting at which such merger or consolidation is to be voted on, file . . . written notice of dissent from the proposed merger or consolidation.”

The question is, does § 407(a)’s written consent trump § 1002(c)’s meeting mandate, or the other way around? Continue Reading No Meeting, No Vote Required for LLC’s Freeze-Out Merger Approved by Majority’s Written Consents

A year ago I wrote about a novel ruling by Manhattan Commercial Division Justice Shirley Werner Kornreich permitting the majority owners of a family-owned textile business to proceed with a cash-out merger on the eve of trial of a 25% shareholder’s derivative lawsuit. The contemplated appraisal proceeding materialized after the dissenting minority shareholder rejected the corporation’s offer of $1.5 million for the statutory “fair value” of her 25% stake. A bench trial was held before Justice Kornreich over 11 days between March and July 2014. Last week, Justice Kornreich released her 32-page decision in Zelouf International Corp. v Zelouf, 2014 NY Slip Op 51462(U) [Sup Ct, NY County Oct. 6, 2014], fixing the fair value of the 25% stock interest at $2.2 million.

Zelouf raises a number of interesting issues surrounding appraisal proceedings, including burden of proof, tax affecting, the discount for lack of marketability (DLOM), and control premiums. In this post, I’ll focus on Justice Kornreich’s rejection of any DLOM. Next week I’ll highlight the remaining issues of interest. Continue Reading Zelouf (Part One): Marketability Discount Rejected in Fair Value Proceeding

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. Continue Reading Arms-Length Sale of Corporation’s Assets Establishes Value in Stock Appraisal Proceeding

Shareholder derivative actions play an important role in monitoring abuses by corporate managers, by giving those with an indirect stake in the corporation’s welfare (the shareholders) an incentive and vehicle to seek judicial redress on the corporation’s behalf for managerial misconduct that the corporation’s board of directors fails to pursue because of conflicted interests or other circumstances impairing the board’s business judgment.

At the same time, statutory and case law impose rigorous standing requirements in derivative actions. In addition to making a pre-suit demand on the board (or alleging demand futility), the derivative plaintiff must own shares at the time of the alleged wrongdoing (the contemporaneous ownership requirement) and throughout the course of the litigation (the continuous ownership requirement).

Particularly in closely held corporations, the contemporaneous and continuous ownership requirements incentivize controlling owners to utilize a cash-out merger (a/k/a freeze-out merger) to defeat shareholder standing to assert derivative claims, leaving the would-be derivative plaintiff with the exclusive remedy of an appraisal proceeding if not satisfied with the board-determined share price, and arguably leaving the corporate managers unaccountable.

Have the courts been able to reconcile the conflicting interests at stake in the two bodies of law governing standing in derivative actions and mergers? Not according to a recently published article by one commentator who, examining Delaware law, concludes that “the existing framework of overlapping rules and exceptions [are] both structurally and doctrinally unsound.” S. Michael Sirkin, Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions (available on SSRN).

Which brings me to a most interesting court decision late last month by a Manhattan judge in a shareholder derivative action in which, almost literally on the eve of trial in a four-year litigation, the defendant controlling shareholders initiated a cash-out merger openly designed to convert the derivative lawsuit into an appraisal proceeding. Continue Reading Court Permits Freeze-Out Merger on Eve of Trial of Shareholder Derivative Action

A corporate director’s right of access to corporate books and records, including legal advice from corporate counsel, has been described by courts as “absolute” and “unqualified,” consistent with the fulfillment of a director’s fiduciary duty to monitor and promote the corporation’s business interests.

In contrast, under statute and common law, a shareholder’s right of access may be limited to basic information concerning corporate finance and ownership. In addition, the shareholder has no attorney-client relationship with corporate counsel that would enable access to privileged communications between counsel and the corporation’s directors and executives.

The distinction between director and shareholder rights of access to communications with corporate counsel gets blurred in closely held corporations — especially smaller ones — where the directors and shareholders often are one and the same. When dissension and litigation erupt between antagonistic shareholder/director factions, courts have the difficult task of deciding whether communications with corporate counsel containing legal advice concerning the dispute must be disclosed to a shareholder/director asserting, for example, appraisal rights following a merger and/or derivative claims for breach of fiduciary duty.

A pair of appellate decisions by courts in New York and Massachusetts recently addressed the issue. In both cases, the appellate courts reversed lower court orders requiring disclosure of otherwise-privileged communications with corporate counsel in suits brought by dissident shareholder/directors. In both cases, the appellate courts determined that the plaintiffs were not entitled to the disclosure sought because their interests were “adverse” to the corporation in regard to the subject communications with counsel. Let’s take a closer look. Continue Reading Can “Adverse” Shareholder/Director Access Privileged Communications With Corporate Counsel?

The picturesque Village of Sag Harbor, New York, located on eastern Long Island, was a major whaling port through the mid 1800s, became a blue collar industrial town for the next 100 or so years, and eventually took on its current character as a summer resort and second-home favorite of the Hamptons crowd. Part of its architectural legacy is the Bulova watchcase factory that was built in 1881, vacated in 1981, and sat crumbling for the next 30 years in large part due to environmental contamination problems that led to its designation as a Superfund cleanup site.

Thanks to a court decision earlier this month, in Alf Naman Real Estate Advisors, LLC v. Capsag Harbor Management, LLC, 2012 NY Slip Op 32559(U) (Sup Ct NY County Oct. 3, 2012), the Bulova watchcase factory can also lay claim to a small legal legacy in the nascent field of limited liability company (LLC) mergers.


The story picks up around 2006, when a Manhattan-based developer known as Cape Advisors acquired the watchcase factory site for development as condominiums. The project stalled for about two years while the developer wrangled with Village officials over various issues which were resolved just in time for the 2008 crash of Wall Street and the real estate market. At that point the developer put the project on hold, only to reappear three years later, in mid-2011, with new financing and plans that were quickly approved by the Village. The renovation of the factory building and new construction on the site are well underway. Continue Reading Too Late Gets Too Little: LLC Minority Member Fails to Block Merger, Must Accept $465 Buy-Out

There are many reported decisions addressing the rights of dissenting minority shareholders in merged corporations to receive cash payment for the fair value of their shares pursuant to an appraisal proceeding (e.g., see last week’s post on the Barasch case). Dissenters’ rghts, embodied in statutes enacted over 100 years ago, protect minority shareholders from majority actions that fundamentally change the nature of their investment without their consent, while abrogating the ancient common-law rule that permitted a single shareholder to block a merger.

There’s also ample statutory and case law addressing the rights of the controlling shareholders to compel the cashing out of a minority shareholder for fair value subject to appraisal, in what’s known as a “freeze-out merger.”

But what about that relatively recent invention, the limited liability company? Do minority members of LLCs have a statutory right to demand payment for their interest if the LLC is merged into another entity? Can the majority members force a minority member to cash out his or her interest in a freeze-out merger? Is there any case law on the subject?

Yes, the LLC laws in New York and some other states make provision for dissenters’ rights.

Yes, the majority can effectuate a freeze-out merger.

Yes, there is decisional law but the cases are few and hard to find.

Continue Reading Freeze-Out Merger and the Limited Liability Company