Valuation

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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.

 

shutterstock_581026324As promised in the postscript to last week’s post about the appellate ruling in the Gould case, affirming Justice Platkin’s order granting the oppressed minority shareholder’s dissolution petition involving a pair of construction firms, we now arrive at Justice Platkin’s subsequent determination of the fair value of the minority shareholder’s equity stake.

The decision raises several important issues of interest to business appraisers and business divorce counsel, including selection of tax rates, the appropriate look-back period in determining historical earnings, adjustments for non-arm’s length inter-company transactions, and use of the market approach.

Justice Platkin’s valuation ruling last month in Matter of Digeser v Flach [Gould Erectors & Rigging, Inc.], 2017 NY Slip Op 50220(U) [Sup Ct Albany County Jan. 31, 2017], is the culmination of an oppressed minority shareholder dissolution petition filed in April 2013. In his November 2015 post-trial decision, which I wrote about here, Justice Platkin found that Digeser, a minority shareholder in the two corporations, established grounds for dissolution based on oppression, but he left open the question of remedy. Continue Reading Business Appraisers Spar Over Tax Rates, Market Approach and Other Key Issues in Fair Value Buy-Out Case

Litigating

There’s little doubt in my mind that “business divorce” has achieved name recognition as a distinct subgenre of commercial litigation whose regular practitioners, by dint of experience dealing in and out of court with the many and varied legal and practical issues arising from dysfunctional family and non-family owned closely-held businesses, offer clients a level of expertise not shared by civil litigation generalists.

I like to think that my blog, in its tenth year and still chugging along, has contributed to the enhanced recognition along with the efforts of a small but growing cadre of fellow bloggers, contributors of articles in legal publications, and speakers at bar association programs and business valuation seminars.

Now, with the publication of a smartly constructed and well-written treatise called Litigating the Business Divorce (Bloomberg BNA 2016), the law practice of business divorce truly has come of age.

LBD, as I’ll call it, is the fruit of a two-year project led by contributing editors Kurt Heyman and Melissa Donimirski in collaboration with an all-star cast of contributing authors. Kurt is a partner and Melissa a senior associate at the firm of Heyman Enerio Gattuso & Hirzel LLP in Wilmington, Delaware. Kurt, a seasoned business divorce litigator whom I’ve known for about ten years and whom I interviewed last year for my podcast, is a founding Co-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee. Continue Reading Announcing Must-Have Treatise on Business Divorce Litigation

SurchargeHidden in plain view in Section 1104-a (d) of the New York Business Corporation Law, which authorizes an oppressed minority shareholder to petition for judicial dissolution, is a provision empowering the court to adjust stock valuations and to “surcharge” those in control of the corporation for “willful or reckless dissipation or transfer” of corporate assets “without just or adequate compensation therefor.”

A second, fleeting reference to surcharge appears in Section 1118 (b) of the buy-out statute, empowering the court in its determination of the stock’s fair value to give effect to any surcharge “found to be appropriate” under Section 1104-a.

The ordinary definition of surcharge, at least in the context of settling accounts, is to show an omission for which credit ought to have been given. But what does it mean in its statutory setting, and how has it been applied by the courts? Continue Reading The Elusive Surcharge in Dissolution Proceedings

Good faithIf, as appears likely, the drafters of the LLC membership interest repurchase provisions at issue in Saleeby v Remco Maintenance, LLC, 2016 NY Slip Op 31447(U) [Sup Ct NY County July 25, 2016], thought they were helping the company avoid the possibility of litigation over the value assigned to the outgoing member’s interest, as it turns out they were sorely mistaken.

Poorly drafted or not, the LLC’s managers also likely did themselves and the company no favor by assigning a zero-dollar value to the membership interest of the terminated member in the Saleeby case, and by muddling the timing of the company’s exercise of its repurchase option.

Here, in a nutshell, is what happened in Saleeby as described in Manhattan Commercial Division Justice Anil C. Singh’s decision: In 2005, the defendant company Remco Maintenance, a New York based Delaware LLC, hired plaintiff Saleeby as its President and CEO. Saleeby’s employment agreement granted him a 7.5% Class B membership interest which fully vested by the time he was terminated without cause in February 2012. Over the next two years, Saleeby and the company attempted without success to negotiate their dispute over his termination, severance, vacation pay, and rights to unemployment insurance. In 2014, the company informed Saleeby that in 2013 it had exercised its option under the LLC Agreement to repurchase his membership units at a “fair market value” of zero dollars. Saleeby subsequently filed suit against the LLC for breach of contract and conversion. Continue Reading Good Faith Trumps Sole Discretion in LLC Agreement’s Repurchase Provision

Goodwill

This is a story about a recent case involving a fight over the inclusion or exclusion of goodwill in valuing the interest of a retired partner in a medical practice organized as a limited liability partnership, and how it easily could have been avoided. But first, it helps to understand the legal framework for valuing such an interest and the type of goodwill at issue.

The limited liability partnership or LLP is a highly popular form of business association for professional practices including law firms and medical groups. As its name suggests, the LLP combines the attributes of a partnership with the limited liability traditionally associated with corporations, except that professionals in LLPs generally remain personally liable for their own misconduct or negligence.

In New York, the formation and registration of LLPs is governed by Article 8-B of the Partnership Law. In all other respects, as to both their internal and external affairs, the New York LLP is governed by the same provisions governing general partnerships codified in Sections 1 through 82 of the Partnership Law based on the ancient Uniform Partnership Act promulgated in 1914. Continue Reading How to Avoid Bad Blood Over Goodwill in Professional Partnership Valuations

PlanetOne of my favorite quotes from the realm of business valuation is found in a Delaware Chancery Court decision about 20 years ago in which, commenting on the vast disparity between the appraisals offered by two opposing experts — that for the seller making wildly optimistic assumptions about the subject firm’s business prospects while that for the buyer predicting doom and gloom — the court quipped, “In sum, one report is submitted by Dr. Pangloss, and the other by Mr. Scrooge.”

Dr. Pangloss and Mr. Scrooge were at it again in a decision handed down last week by Westchester Commercial Division Justice Alan D. Scheinkman, determining the fair value of a minority interest in two limited liability companies that, as franchisees, own and operate almost three dozen Planet Fitness health clubs in the New York City metro area and also own exclusive rights to develop additional clubs in New York and parts of Southern California.

The case is Verghetta v Lawlor, 2016 NY Slip Op 30423(U) [Sup Ct Westchester County Mar. 9, 2016]. The opening paragraph of Justice Scheinkman’s 33-page post-trial decision aptly sets the stage for the fair-value drama that follows, starring dueling appraisals over two thousand percent apart:

This Court is called upon to determine the value of two corporate entities for purposes of permitting the buy-out of a minority shareholder. It is not surprising, and rather in the nature of things, that the parties have a significant disagreement as to the value of the enterprise. The would-be seller relies on a valuation report that places the value of both corporations at over $162 million and the seller’s share at over $53 million. The would-be buyers rely on a valuation report that values one entity at $6.2 million, the other at $208,000, for a total for the two of approximately $6.4 million, and with the buyer’s share of the total being approximately $2.2 million. The Court must resolve the difference.

Continue Reading Threading the Fair-Value Needle: Court Finds Major Flaws in Both Sides’ Appraisals in Arriving at Its Own Value