Last month, seasoned business appraiser Andy Ross of Getty Marcus CPA, P.C., and I made a presentation at the Nassau County Bar Association about appraisal proceedings in business divorce cases. With the subject of business valuations front of mind, this article – the first in a three-part series – is a treetops summary of the rules governing how business owners may wind up in an appraisal proceeding. Later articles will address the legal and accounting principles that apply in the valuation proceedings.

But before we get started, some context. What exactly is a valuation proceeding? A valuation proceeding is a special kind of lawsuit in which the owners of a business litigate the “value” (the relevant standard under New York’s Partnership Law) or “fair value” (the standard under the New York Business Corporation Law and Limited Liability Company Law) of a partnership, stock, or membership interest in a business for the purpose of a potential buyout or liquidation of that owner’s interest. Appraisal proceedings may be forced, or they may be voluntary. They may involve a variety of different accounting approaches or methodologies to value an ownership interest. They are always heavily dependent upon expert testimony of accountants. For that reason, the “determination of a fact-finder as to the value of a business, if it is within the range of testimony presented, will not be disturbed on appeal where the valuation rests primarily on the credibility of the expert witnesses and their valuation techniques” (Matter of Wright v Irish, 156 AD3d 803 [2d Dept 2017]).

What are the ways in which a business owner can wind up in a valuation proceeding? The statutory paths, or routes, to a litigated appraisal depend on the kind of entity involved. This article discusses three basic entity forms: partnerships, corporations, and LLCs, and provides a non-exhaustive list of the most common ways to get to a valuation proceeding. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 1

Three recent court decisions from three different states — New York, Pennsylvania, and Alabama — add to the rogue’s gallery of valuation cases stemming from poorly conceived and/or poorly implemented buy-sell agreements among shareholders or LLC members.

Each one, in its own way, teaches a valuable lesson for lawyers charged with drafting such agreements, and also highlights the wisdom of consulting with appraisal experts at the time of drafting.

New York: The Nimkoff Case

The Nimkoff case is an old friend of this blog, and I do mean old. I first wrote about the case in its infancy, in 2010 (read here). Eight years later, following discovery and a dozen or so motions, the case has yet to be tried.

Nimkoff is a fight over the value of a 3.6% membership interest in a single-asset realty holding LLC owned by a group of medical doctors. The plaintiff is the wife-executrix of one of the doctors, whose death in 2004 triggered the LLC’s obligation to purchase the deceased member’s interest for a “Stated Value” in accordance with the operating agreement which also required that the Stated Value be updated annually. Continue Reading Lessons From a Trio of Dysfunctional Buy-Sell Agreements

With a genuine sense of loss, we bid adieu to Manhattan Commercial Division Justice Shirley Werner Kornreich, who retired at the end of May after more than three decades of service on the bench, including nearly ten years as a Justice of the Commercial Division. Her accomplishments are many and varied. She is a detailed and scholarly writer. She ran an orderly and efficient part. Invariably well prepared, she asked probing questions at oral argument, arriving quickly at the “nub” of the issue. It was a pleasure and a luxury to be a litigant in her part.

Justice Kornreich also knew and understood as well as any judge the complexities and dynamics of business divorce cases.

As a testament to Justice Kornreich’s quality as a jurist, this blog has written about her opinions on many an occasion, with some of her decisions receiving repeat treatment. Rather than quantify her massive body of work, this week’s post will summarize a half dozen or so of Justice Kornreich’s more memorable decisions in the area of business divorce. You can click on the case name to read the earlier post. Continue Reading A Trip Down Business Divorce Lane with Recently Retired Justice Shirley Werner Kornreich

The steady flow and scholarly character of Delaware Chancery Court opinions in company valuation contests provide an important resource and learning tool for business divorce practitioners, appraisers, and judges in New York and elsewhere.

Over the years, I’ve reported on a number of Chancery Court decisions in statutory fair value cases arising from dissenting shareholder proceedings. In this post, I highlight two recent post-trial opinions by Vice Chancellors Sam Glasscock (photo left) and Tamika Montgomery-Reeves (photo right) addressing valuation and what I’ll call quasi-valuation in more atypical settings.

In the first case, Vice Chancellor Glasscock applied a fair value standard to resolve a buy-out settlement agreement between ex-spouses who co-owned two operating companies and a real estate holding company. In the second case, Vice Chancellor Montgomery-Reeves determined whether a biotechnology start-up company was insolvent for purposes of appointing a receiver under Section 291 of the Delaware General Corporation Law. Continue Reading Delaware Chancery Court Rulings Address Valuation and Insolvency Disputes

If you haven’t yet listened to prior episodes of the Business Divorce Roundtable (a) it’s time you did and (b) absolutely you won’t want to miss the latest episode (click on the link at the bottom of this post) featuring first-hand, real-life, business divorce stories told by business appraiser Tony Cotrupe of Melioria Advisors (photo left) and attorney Jeffrey Eilender of Schlam Stone & Dolan (photo right).

Tony’s and Jeff’s stories have a common element: both involve the contentious break-up of a poisonous business relationship between two brothers. The similarity ends there. In my interview of Tony, he puts us inside a fast-paced and ultimately successful effort by the feuding second-generation owners of a propane distributorship, guided by their respective lawyers working in collaboration, to avoid litigation by engineering a buy-out of one brother by the other based on Tony’s business appraisal as the jointly retained, independent evaluator. It’s a happy ending to what otherwIse could have turned into a drawn-out courtroom slugfest.

Courtroom slugfest aptly sums up Jeff’s story as counsel for the brother owning the minority interest in Kassab v. Kasab, a case I’ve featured on this blog several times including last month’s post-trial decision giving the other brother the opportunity to buy out the minority interest upon pain of dissolution if he doesn’t (read here, here, and here). Jeff’s insider analysis of the case provides unique insights into a multi-faceted, roller-coaster-ride of a case involving novel issues under the statutes and case law governing business corporations and limited liability companies.

If you’re a lawyer, business appraiser or business owner with a business divorce story you’d like to share for a future podcast, drop me a line at pmahler@farrellfritz.com.

 

Regular readers of this blog know it’s been anything but summer doldrums in the world of business divorce, what with case law developments such as the Appellate Division’s potentially far-reaching ruling on the purposeless purpose clause and LLC dissolution in Mace v Tunick reported in last week’s post, and the astonishing story of minority shareholder oppression in the Twin Bay Village case also reported earlier this month.

This year’s edition of Summer Shorts picks up the summer pace with short summaries of three must-read decisions by New York and Delaware courts on three very different business divorce topics: use of a Special Litigation Committee to evaluate derivative claims brought by LLC members (New York); grounds for dissolution and the court’s remedial powers in shareholder oppression cases (New York); and LLC deadlock dissolution (Delaware).

Appellate Ruling Rejects Appointment of Special Litigation Committee in LLC Derivative Suit Where Not Authorized By Operating Agreement

LNYC Loft, LLC v Hudson Opportunity Fund I, LLC, 2017 NY Slip Op 06147 [1st Dept Aug. 15, 2017].  In Tzolis v Wolff, New York’s highest court recognized a common-law right of LLC members to sue derivatively on behalf of the LLC. Subsequent lower court decisions have clarified other aspects of the right by analogy to corporation law, such as requiring the plaintiff LLC member to allege pre-suit demand or demand futility. In shareholder derivative suits involving corporations, the board’s inherent authority to appoint a Special Litigation Committee composed of independent and disinterested directors to assess derivative claims is well established and, when properly implemented, can result in the court’s dismissal of derivative claims based on the SLC’s conclusion that the claims do not merit prosecution by the corporation. Continue Reading Summer Shorts: Three Must-Read Decisions

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?

jaime-dalmeidaForensics means different things to different people in different contexts. But what does it mean in the context of valuing equity interests in closely held business entities?

You’ll learn the answer – and a lot more – in the latest episode of the Business Divorce Roundtable podcast in which I interview Jaime d’Almeida, a Managing Director at industry leader Duff & Phelps in its Disputes & Investigations practice.

To hear the interview, click on the link at the bottom of this post.

Jaime’s valuation and forensic credentials include Senior Appraiser of the American Society of Appraisers and Certified Fraud Examiner. Based in Boston, Jaime has over 20 years of experience in economic and valuation analysis and consulting, and has provided both deposition and trial testimony on valuation and damages issues. Jaime also is a contributing author of Litigating the Business Divorce, the recently published, must-have treatise that I wrote about here.

My interview of Jaime covers a lot of interesting ground, including:

  • defining forensic analysis in valuation
  • the goal of forensic analysis in a valuation engagement
  • forensics methodology
  • the lawyer’s role in the forensic process
  • when to engage the analyst
  • the interplay of forensics and the different valuation approaches
  • forensics and valuation date
  • the types of company records typically sought by the forensic analyst

If you enjoy the podcast, and if you haven’t done so already, check out prior episodes of the Business Divorce Roundtable featuring interviews with leading experts in the field of business divorce and valuation. Please also consider subscribing to the podcast on iTunes, SoundCloud, or your other favorite podcatcher.

crazyWhenever I contemplate New York’s unusual case law on the discount for lack of marketability (DLOM) in statutory fair value buy-out proceedings, I cast my eyes westward, to the far banks of the Hudson River, and take comfort in the fact it could be worse — I could be in New Jersey.

A “business appraiser’s nightmare” is how Chris Mercer described New Jersey’s “bad behavior discount” in his commentary on the Wisniewski v Walsh case decided a little over a year ago by a New Jersey appellate court, in which it affirmed the trial court’s application of a 25% DLOM seemingly plucked out of thin air, and notwithstanding what the trial court itself admitted were “strong indicators of liquidity,” for the stated purpose of penalizing the selling shareholder for his oppressive behavior toward the other shareholders — behavior that in no way harmed the corporation’s business or affected its marketability!

Now comes another New Jersey trial court decision in another fair value buy-out case, and guess what? The court applied the same 25% DLOM without any discussion of the factors supporting its application or quantification other than the court’s finding that the selling shareholder was guilty of oppressive conduct against the purchasing shareholder.

In Parker v Parker, 2016 N.J. Super. Unpub. LEXIS 2720 [Dec. 22, 2016], two brothers, Richard and Steven Parker, took over from their parents and for the next 25 years operated as 50/50 owners a wholesale flower business and a separately incorporated wholesale plant business which eventually became a garden center. Richard ran the flower business and Steven the garden business as separate fiefdoms with minimal overlap. Continue Reading Has New Jersey Gone Off Its DLOM Rocker?

RosenbloomAMediation continues to grow in popularity as a means of resolving legal disputes in lockstep with the rising costs and delays attendant to litigation and arbitration. Mediation allows the parties to air their grievances face-to-face in a confidential setting and, with the help of a skilled mediator and a willingness to compromise on both sides, to arrive faster and more economically at a resolution of their own design rather than having one imposed on them by a judge or arbitrator.

An argument can be made that business divorce disputes are less amenable to mediation, not only because of the high emotions and sense of betrayal experienced by the co-owners, but also due to the loosely framed legal standards in the governing statutory and common law that give courts broad discretion in the exercise of their equitable powers. In other words, the bitterness and intrinsic uncertainty of business divorce litigation outcomes can foster a zero-sum approach on both sides that favors combat over conciliation.

On the other hand, if the relationship between feuding co-owners is terminally ill but the business nonetheless remains viable, chances are one side eventually is going to buy out the other, which is where, in my opinion, mediation can be most effective in bringing about a resolution by focusing on valuation of the equity interest of the selling business owner.

Which brings me to the topic at hand, my podcast interview of Arthur Rosenbloom (pictured above) for the Business Divorce Roundtable, a link to which appears at the bottom of this post.

Art is a veteran lawyer, mediator, and arbitrator who last year was appointed by the court to mediate a case in which I represented the majority owner in litigation that followed a cash-out merger of the minority owner who was contesting the value placed on his interest. What distinguished Art from other mediators was his in-depth knowledge of business valuation, much of it gained from his many years working as an investment banker. In the course of the mediation, Art employed his valuation expertise to critique each side’s valuation reports, and by doing so was instrumental in getting the parties to bridge the gap between their respective valuation positions.

In my interview with Art, he shares his insights on a number of issues vital to the mediation of business valuation disputes, including the different pathways to mediation, the optimal timing for mediation, the utilization of appraisal reports in mediation, the retention of a neutral appraiser to assist the mediation, the mediator’s role in critiquing the parties’ valuation positions, and how the mediator deals with the  intense emotions the parties often bring with them to the mediation.

After you listen to the podcast, I recommend you also read Art’s article, Mediating Valuation Disputes in Minority Oppression Litigation, published last year in the New York Law Journal.