fixing fair value in new york

FAIR VALUE PROCEEDINGS:
FIXING FAIR VALUE IN NEW YORK
by Phi lip M. Halpern
I.
623] was to protect dissenting shareholders, and
the process of appraisal was designed to mee t
two evils which arose because of limitations upon
the powers of majori1y shareholders to bind the
minority 10 a course of action beyond 1he powers
of the majority. which might well be greatly to
the advantage of those engaged in a corporale
enterprise. These two evils are well stated in
Mauer of Timmis (200 N.Y. 177 alp. 181), dealing with an analogous Statute:
FAIR VALUE AND ITS CONCEPTUAL UNDERPINNINGS:
BALANCING THE INTERESTS OF THE MAJORITY ANO
THE MINORITY
New York's Business Corporation Law gives a minority
stockholder in a closely held corporation the right to withdraw from the corporation and be compensated for the
value of his interest "when the corporate majority takes
significant action deemed iniinical to the position of the
minority."• When a closely held corporation and a dissenting shareholder who has demanded payment of the fair
value of his shares do not agree upon the price to be paid.
the corporation must commence a special proceeding "to
fix the fair value" of tJ1e shareholder's shares.2 New York's
legislamre has set forrh the general parameters for such
fair value determinations:
In fixing the fair value of 1he shares, the court
shall consider the nature of the transaction giving
rise to 1he shareholder's rigb1 to receive payment
for shares and its effects on the corporation and its
shareholders, the concepts and methods then customary in the relevant securities and financial
markets for determining fair value of shares of a
corporation engaging in a similar transaction
under comparable circumstances and all 01her relevant fac1ors.l
Those statutorily mandated considerations were added to
BCL section 623(b) in J982 . Tbe 1982 amendments also
provided that fair value determinations are now to be
made by the court "without referral to an appraiser or ref·
eree."• However, the purpose of fair value proceedings 10 strike a balance between the inte,·ests of majority and
the minority shareholders - has not changed since 1he
Court of Appeals described those compe1ing interes1s fifty
years ago:
The purpose of section 21 of the Stock
Corpora1ion Law [the predecessor to BCL section
14
"(I) The injustice to 1he bulk of the stockholders
from wanl of power in a corporation to sell its
business or an essential part thereof to another
corporation organized for the purpose, frequen1ly
from its own membership , on terms deemed
advantageous by the holders of a large majority
of the stock. (2) The injustice to minority stockholders of requiring them to abandon, change or
limit their business if the majority should have
the power to direct such a sale. An incidental evil
was the power of a dissenting stockholder to
compel the majority 10 buy him out on his own
terms in order to secure unanimous consent with
no one left to question the transaction."s
Fair value proceedings strike a balance by allowi11g the
majority to procure the interests of the minority for fair
value.
11.
METHODS OF VALUATION
The primary difficu lty in determining fair value is that
neither the legislature nor the courts have reduced the
concept of fair value 10 the niceties of a formula, an economic model or even semantic ce,titude. Value has been
said to be "the price on which a will ing and informed
buyer and seller. neither under compulsion to trade,
would meet."6 However, as Judge Jerome Frank wrote in
Andrews v. Commissioner,
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Vol. 2, No. 1 (May 1996)
·'[v]alue" is not a single purpose word. Men have
all but driven themselves mad in an effort to defin·
itize its meaning .. .. As we recently said, the
word "value" almost always involves a conjecture,
a guess, a prediction. a prophecy. . .. We cannot,
by the use of a symbol. "value," convert the risky
into risklessness.1
T he legislatu re, in enacting the current gu idelines for
determining fair value set forth in BCL section 623(h)(4),
acknowledged that traditional valuation concepts are not
useful in every circumstance:
The case law interpretation o f fair value has not
always reflected the reality of corporate business
combinations. These transactions involve the sale
of the corporation as a whole, and the corporation's value as an entirety may be substantiall y in
excess of the actual or hypothetical market price
for shares trading among investors. Thus, experience has demonstrated that large premiums over
market price are commonplace in mergers and in
asset acquisitions. In cases where the transaction
involves a restructuring of the share holders' relative interests in the corporation by amendment of
the certificate of incorporation, courts may find it
appropriate to determine only the fair value of the
d issenters' shares, rather than the value of the corporation as a whole, e mploying traditional valuation concepts.s
Nonetheless. New York courts have found traditional concepts of market value, net asset value and investment value
to be helpful tools in assessing fair value.9 The persuasiveness to be attributed to any one factor, of course, depends
upon the particular facts and circumstance of each case all three factors do not have to influence the resu h in every
valuation proceeding, so long as each is considered. •o
"[Mjarket value is the controll ing consideration where
there is a free and open market and the volume of transactions and conditions make the market a fair reflection of
the j udgment of the buying and selling pubUc.'''' However,
stock of a close corporation, where the stock was never
intended to be traded on tbe open market, has no market
value, especially the stock of a dissenting shareholder who
has been frozen out of managemen1. •2 Market value also
carries less weight where there has been a radical change
in the management of a company or a merger has pushed
market price to levels in excess of fair value.13
Net asset value also has Hmited usefulness in deten1tining
the fair value of closely held shares. This method takes a
balance sheet approach to the problem of valuing stock.
All assets are appraised as of a date certain and all liabiliVol. 2, No. 1 (May 1996)
Tbs NY Litigator
ties and claims against the corporation are subtracted from
the total. The utility of net asset value in valuing a busi ness which plans to continue as a going concern is marginal:
[N)et asset value is not the basis .. . in determin·
ing the value of . . . a going concern. The assets
are committed to the operation of the busi ness,
and inventories are constant ly shifting by the
process of sale and replacement, and any number
of factors besides the naked val ue of p hysical
assets wi ll determine the success or fail ure of
operations and consequent value ... of the business.I•
Indeed, the legislative history of the 1982 amendments to
section 623 makes clear the legislature's recognition of the
li mited utility of the net asset method:
Net asset value will normally be used only if the
corporation is to be liquidated or if its assets consist primarily of real estate or some other form of
property whose principal potentia l is capita l
appreciation. Maller of Tudor City Fifth Unit Inc.,
17 A.D.2d 794, 232 N.Y.S.2d 758 (!st Dept.
1962): Sands Point Land Co. v. Rossmoore, 43
M.2d 368, 251 N.Y.S.2d 197 (Sup. Ct. Nass. Co.
1964).15
Often, then, the only viable method by which closely held
shares of a going concern may be valued is the investment
value method. Investment value has been defined as the
amount ..a prudent informed investor would be willing to
pay in order to buy the entire business as a going concern,
considering its assets. liabi lities, tangibles and intang ibles.''16 Investment value may take into account such factors as capitalization of the company. earnings and dividends, position in the industry, prospect~ of the business
and the industry, the overall value of the company's securities in relation to general market conditions and the marke t value of comparable securities."
Investment value detenninations also have been made in
valuing closely held business assets in d ivorce proceedings,•s in valuing closely held stock for estate tax purposes,•9 and when a corporation elects, pursuant to BCL section 11 18, to buy the stock of a shareholder petitioning for
dissolution under section 1104-a for oppressive majority
conduc1.20 ln those cases, inveslment value has been treat·
ed as a function of the earning power of the corporation.
The Appellate Division's discussion of investment value in
Blake is illustrative:
[A)cceptable methods of determining investment
value include (I) a ..discounted income approach,"
15
by which either average earnings of the corporaI ion measured over a number of years, or a
weighted average of corporate earnings (giving
greater weight to corporate earni ngs of the most
recent years) is capitalized at a predetermined percentage. and using the capitalization rate, a multiplier is developed and that multiplier is then
applied to earnings; (2) capitali zation of dividends, if the corporation has a history of payment
of dividends; or (3) a "comparative appraisal''
approach, which utilizes a comparison with the
price-to-earnings ratios of publicly traded stocks
in similar industries and financial situations of the
closely held corporation.z•
The New York Cou,t of Appeals also has considered the
factors the Internal Revenue Service looks at in valuing
closely held shares for tax purposes.22
Although si,nilar substantive principles govern fair value
detenninations in a variety of contexts, each area of the
law has its own procedural idiosyncrasies. While BCL
section 1118 dissolution cases may provide guidance in
determining fair value under section 623, section 623 procedures are no! available in section 1118 cases.23 It is also
important to remember that section 1118, unlike section
623, has no statutory c,iteria for measuring fair value.u
shares being valued represented only a minority, rather
than a controll ing interest in the corporation.lo The Court
found that the imposition of a discount for minority status
·'would necessarily deprive minority shareholders of their
proportionate interest in a going concern," or what the
Court called "the intrinsic value of the shareholder's economic interest in the corporate enterprise."lt A minority
discount would "significantly undermine" the appraisal
statute's remedial goal to protect minority shareholders
"from being forced to sell at unfair values imposed by
those dominating the corporation while allow ing the
majority to proceed with its desired [corporate action].''31
A discount also would conflict with another central equitable principle of corporate governance - "equal treat·
ment of all shares of the same class in minority stockholder buy-outs."33
The Cou,t refused to draw a distinction between buy-outs
under BCL sections 623 and 11 18, rejecting the argument
that cases decided under section I l 18 are not authoritative
in fai r value determinations under section 623 because
oppressive majority conduct enters into fair value determinations in the dissolution-buy-out context:
[The assumption] that oppressive majority cond uct e nters into the court's fair value equation
under section 1118 is in error. . . . [O)nce the
corporation has e lected to buy the petitioning
stockholders' shares at fair value, "the issue of
[majority] wrongdoing [is] superfluous."3,.1
Ill. DISCOUNTING
Whatever valuation method is used, the gross value of
company stock must be adj usted downward in arriving al
"fair value." There is no discounting fonn ula, bu! factors
requiring discounting are well-established.1S
A.
Lack of Marketability
The Court of Appeals has held !bat, in fixing fair value,
courts "must 1ake into consideration inhibitions on the
transfer of the corporate interest resulting from a limited
market or contractual provisions.''l6 While there is no single method for calculati ng an "illiquidity discount." lack
of marketability may be taken into account by the application of a percentage discount against value or by factoring
it into the capitalization rate.21 In considel'ing how much
of a discount to apply, cou,ts may consider prior attempts
to sell the business, offers to purchase, restrictions o n
transferabi lity, expert testimony and a ny other perti nent
inforrnation.2s Discounts up to 25o/o for lack of marketability are not uncommon.z<>
B.
Minority Interest: Friedman v. Beway Realty Corp.
New York recently joined "a substantial majority of other
jurisdictions" when the Court of Appeals, in Friedman v.
Beway Really Corp., rejected the imposition, in a section
623 fair value proceeding, of a discotmt to reflect that the
16
Friedman is the current, definitive statement on minority
discounts. However. there are ample good faith bases upon
which to ask the Court of Appeals to revisit this evolving
area of the law in certain section 623 proceedings.
Prior to Friedman, the leading New York case o n minority
interest d iscounts was Blake v. Blake Age11c)\ lnc. ,3s a section 11 18 proceeding in wh ich the Appellate Division
found that stock should not be discounted "si mply because
the interest to be valued represents a minority interest in
the corporation."36 The court reasoned that application of a
minority discount when a corporation exercises its statuto·
ry right to buy-out shares of a minority shareholder who
has petitioned for dissolution would create a windfall for
the corporation.37 Although Friedman extended the no-dis·
count rule to section 623 proceedings,38 the differing circumstances that underlie section 623 and section 111 8
buy-outs suggest that denial of a minority discount in at
least some section 623 valuations results, unfairly, in a
windfall for the dissenti ng shareholder.
disallowing a minority discount in Blake, the court cited
a California and an Iowa case discussing the reasons why
application of a minority discount is inappropriate when a
[n
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controlling shareholder elects to buy-out minority sbares
to avoid involuntary dissolucion.39 Those reasons are not
necessarily applicable to fair value proceedings under section 623 where a dissenting shareholder with no rigbc to
petition for dissolution elects co have the corporation purchase its shares.
First, although "there is no question" but chat the lack of
control inherent in a minority s tock position would substantially decrease the stock's value in the open market,
such shares are not worth less when purchased by someone who is already in control of the corporation, as is the
case in a section 1118 buy-out.•O Second, statutes affording a buy-out remedy to controlling shareholders who
want to avoid involuntary dissolution condition that remedy on paymem to the minority of the real "per share"
value of the corporation - an amount which, upon distribution of dissolution proceeds, had the dissolution gone
forward. would be "the exact same per share, with no consideration being given to whether the shares had been controlling or noncontrolling."41
By contrast, a minority shareholder exercising his rights
under section 623 does not have the right to force a dissolution, nor is his stock being bought by the majority shareholder.•2 The dissenter is merely given the option of
requiring tlie corporation to recire his stock,43 allowi ng
him to cash out of a going concern. That difference in circu mstances was emphasized in two other cases cited in
Blake where a minority discount was applied in determining the fair value of a dissenter's stock - Moore v. New
Ammesf44 and Perlman v. Permonile Mfg. Co. 4 5 Both cases
involved a dissent to a merger where the minority stockholder was to receive stock in a new entity. T here were no
allegations of misconduct or other special circumstances
affording the dissenter in either case a right to petition for
dissolution . Accordingly, both courts concluded that denial
of a minority discount would unjustly enrich tbe dissenter:
"A ntinority shareholder could not have expected
to receive a proportionate share of the going concern va lue of the assets if he had remained a
stockholder of An1mest as a going concern, unless
the assets as a whole, or the company as a whole
were to be sold .. .. A controlling block [of stock
in a going concern] usually has a per share value
higher than its proportionate interest, and a minority block, which does not possess the control element of value, has a lower per s hare value."46
However, the Court of Appeals in Friedman was addressing a different situation. The dissenter there, a minority
shareholder in nine fami ly-owned close corporations, each
of which had a parcel of real estate as its sole asset, was
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not opting to cash out rather than remain part of a going
concern. The transaction, a transfer of all the real estate to
a newly-formed partnership, was, in effect, a forced cash
out.4 ' The court. in denying a minority discount in that circumstance, cited two other cases involving "freeze out" or
"cash out" mergers -A/pen v. 28 William St. Co,p..is and
Cavalier Oi/.49 The Delaware Supreme Court in Cavalier
explained that discounting is unfair where the shareholder
is being forced out because he is being deprived of the
right "to maintain bis investment position , however
slight," perhaps resulting in a windfall for the majority.so
That is not the case, as in Moore and Perlman, where the
minority shareholder is not "being forced to selJ."S'
Accordingly. there may be room to revisit the no-discount
rule in cases where the minority shareholder is not being
forced out.
IV.
POST-MERGER FACTORS
Prior to the 1982 amendments to BCL section 623, cou,ts
were not pennitted to consider ·•appreciation or depreciation directly or indirectly induced by (the] corporate
action" in determining fair value.s2 However, that language was dropped in 1982. and a provision was added
allowing to courts to consider all relevant factors.s) Tn
1984, the Court of Appeals specified that "[ellements of
future value arising from the accomplishment or expectation of the merger which are known or susceptible of
proof as of the date of the merger and not the product of
speculation" were "relevant factors."S4
Such post-merger factors might include any damages from
a taking. canceled stock options, or incurred tax Liability,ss
as well as prospective tax benefits of the transaction.56 In
the case of a minority buy-out over time, interest deductions also should be considered.
Where fair value is determined based on the value of the
company as a whole and the entire company is being sold,
an ·•acquisition premium" should be added to reflect the
fact that a willing buyer would generally "pay a somewhat
inflated price or an acquisition premium in exchange for
his ·capturing' the assets of the corporation and in obtaining a target corporation's entire business."57 Such a premium is available "only when IOOo/o of the stock or controlJjng interest in the stock of a corporation is acquired."SS It
could be argued that no premium is wan-anted where the
minority position acquired to achieve I 00% ownership is
sufficiently small. For example, would a 99% owner pay
an inflated price to acquire the other percent minority
interest? For all practical purposes. the majority already
has "captured the assets" and obtained the corporation's
entire business. Nonetheless, the majority may be will ing
to pay a premium to not have to deal with the minority
shareholder at al 1.
17
V.
EXCESS COMPENSATION
In determining fair value, officer-shareholder compensation must be examined to determine whether any portion
is excess compensation paid in lieu of dividends in order
to lower the taxable income of the corporation.s? Expert
testimony,oo as well as evidence of salaries of non-shareholder executives (whose salaries, therefore, would not be
"inflated by disguised dividends") and salaries of executives in other companies61 may help identify any excessiveness. Courts also may consider prospects for future
growth that might warrant above average executive
salaries. 6?
VI.
OTHER CONSIDERATIONS: INTEREST RATES,
ALLOCATION OF FEES AND COSTS
After a fair value has been determined, several considerations affect the net result to the shareholder. These include
the awarding of interest on the fair value payment and the
allocation of fees and costs.
A.
Interest
BCL section 623(h)(6) governs the allowance of interest
and the determination of an interest rate:
The final order sha ll include an allowance for
interest at such rate as the court finds to be equitable from the date the corporate action was consummated to the date of payment. In determining
the rate of interest, the court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow
money during the pendency of the proceeding.
Interest begins to run from the effective date of the corporate action - not from the shareholder's authorization
date, as it had in the past.63 The requirement that the rate
of interest be "equitable" is intended to ''help facilitate settlements."64 The rate of interest the corporation is paying
on current borrowings is deemed to be an "equitable''
rate.65
If a dissenting shareholder has acted in good faith in
rejeccing a corporate offer for his shares, interest muse be
awarded on the unpaid value of his shares.66 Conversely,
no interest shall be allowed "[i]f the court finds that the
refusal of any shareholder to accept the corporate offer of
payment for his shares was arbitra,)\ vexatious or otherwise 1101 in goodfaith."61 The rationale for eliminating the
recovery of interest by such stockholders is chat they
would have had the use of their money if they had not
arbitrarily and vexatiously refused to accept it when
offered.68
The test whether a refusal was in bad faith is whethe,
"reasonable men could not reasonably have differed" with
the corporation's assessment of fair value.w "[T]he pivotal
tin1e for testing the shareholder's conduct is fixed at the
point of refusal."70 However, evidence on the issue of bad
faith "must take a rather wide range" and subsequent acts
may be admissible to prove that the shareholder's refusal
was in bad faith."
B.
Costs and Fees
In 1952, the Appellate Division announced its intention, in
future cases where the conduct of dissenting shareholders
was found to have been in bad faith, to impose allowable
costs and expenses on che stockholders personally.'2
However, until the 1982 amendments to section 623, costs
and expenses generally were borne by the corporation.73
The 1982 amendments changed the rules to give "a greater
degree of mutuality and tlexibility."'4
There is a scatutory presumption that "[eJach party . ..
shal l bear its own costs and expenses including the fees
and expenses of its counsel and of any experts employed
by it."75 However, t.he court, in its discretion, may apportion costs and fees in accordance with statutory parameters.
Dissenters who have refused a corporate offer in bad faith,
including dissenters who later rescind, may be apporcioned ''all or part of the costs, expenses and fees incurred
by the corporation."76 The corporation may be assessed
"alJ or part of the costs, expenses and fees incurred by any
or all of the dissenting shareholders who arc parties to the
proceeding" if the corporation has acted in bad faith in
failing to make an offer, making an offer which is materially less than the fair value determination, or otherwise
failing to comply with its statutory obligations. 77 In determining whether an offer was too low, "the court may consider the dollar amount or the percentage, or both, by
which the fair value of the shares as determined exceeds
the corporate offer."7&
CONCLUSION
The circumstances giving rise to appraisal rights should
weigh heavily in determining "fair value" in any particular
transaction so neither party receives a windfall. Whether
or not the adversary's costs and expenses will be assessed
or interest awarded is a function of the party's good faith
in the proceedings.
Endnotes
I.
Friedmllt1 ,.. 84!'M'tl)' Reolty Corp., 1995 WL 722867 at •2 {N.Y. Dec. 7.
199.S). Su N.Y. Bus. Colp. L.1w (hereinafter ..BCL"') § 623 (McKinney
1996), Hi.s1orical Note. Legislati\'C Finding for 1982 Amendment ("share·
holder·s right 10 diss.cnt from oerta.in COl'pOt3te actions and to rccch•e pay·
ment of fail' value for hjs shares is a basic righl of share ownership..). The
nppmisal remedy evolved because the 1raditional rule rcqu.i.ring unanimous
18
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Vol. 2, No. 1 (May 1996)
consen1 for any corporate 1rnnsaction changing the rights or common
stock-holders "was inconsis1em wi1h the growth ond devel0pme1n of large
busine$$ enterprises." ht re \1<1luo1iot1 of McltJon Oil Co., S65 A.2d 997,
1004 (Me. 1989) (djssentcr gives up veto right in exchange for right to be
bought oul at ·•foir value''),
2.
BCL § 623(h)( I), If 1he corporation does not inscitute the p1'0C«ding in a
timely manner. the dissenting shareholder nmy do so. BCL § 623(h)(2).
3.
BCL ~ 623(h)(4).
4.
Id.
S.
A11derso,r "· Im'/ Mi11er1ils & Cltem. Corp.. 295 N.Y. 343, 349-50. 67
N.E.2d 573, 576 ( 1946).
6.
/,. "Behre,.s. 61 N.Y.S.2d 179. 183 (Sup. CL N.Y. Co. 1946). ojf'd. 271
A.O. 1007. 69 N.Y.S.2d 910 (IS! Oep'1 1947).
7.
13S F.2d 314. 316 (2d Cir,) (quoling Commissioner,.. /.f(lrsha/1, 125 F.2d
943. 946 (2d Cir. 1942)). cert. dt,.fed, 320 U.S. 748 ( 1943).
$.
Su BCL § 623. Hisiol'ical Noce. Lcgislruive Finding for 1982 Amendment
(quoting section I of L.1982, ch. 202),
9.
See Friedma11. 199S WL 722867 at •3 (market value. net 11,SJ,et va.lue. and
invcs1men1 value arc ·'the lhre!! majol' elemems of fn.ir value").
10.
f)rdicou Jolmson Corp. ,,. B"de. 31 N.Y.2d 585, 583, 376 N.Y.S.2d 103,
Su. t'.g.. Norrhem Trust Co.
20.
Su,
21.
Blake. 107 A.0.2d at 147. 486 N.Y.S.2d 111 348 (c·it:alions omined).
22.
Su Amodio. 70 N. Y.2d at 7, 516 N.Y.$.2d nt 924 (ciling Rev. Rul. 59··60.
1959-1 C.8. 237): 8/,,ke. 107 A.0.2d , i 146-47, 486 N.Y.S.2d al 347-48
(same).
23.
f'leiJclter v. Gift Pax. Inc.• 19 A.0.2d 636. 433 N. Y.S.2d 614 (2d Dcp't
1980).
24.
111 re Sr<1gm11 Floral Co.. Inc.. 78 N.Y.2d 439. 445. 576 N.Y.$.2d 831.
834 (1991). But sec discussion of Friedman,~ Beway Rt(III)' Corp. in pM
re Marcus. 273 A.O. at 727, 79 N. Y.$.2d at 78.
11.
/11
12.
Su Tai11es ,,, Gt•11e IJ.al'f)' 011e Hour Plwro Process. Inc•• 123 Misc. 2d
529. 535, 474 N.Y.S.2d 362. 36o·67 (Sup. Ci. N.Y. Co. 1983), ojf'd. 108
A.0.2'1630, 4$6 N.Y.S.2d699 (ISi Dep'1 1985).
13.
See c,,dicou Joflnso,r. 37 N.Y.2d at 588-91. 376 N.Y.S.2d :it 107-08.
l4.
/,1
IS.
Senate Journal. Sen.'ltc Bill No. 8220. memorandum in suppon of bill. p.
11 (Moy 10. 1982).
16.
Taine~._ 123 Misc. 2d at 535. 474 N.Y.S.2d at 367: see tilso ht" Pace
Pllotogra11/i,r.,, Lid.. 71 N. Y.2'1 737. 748. 530 N. Y.S.2d 67. 73 (1988).
17.
Su In re Fuho,,. 251 N.Y. -187. 495. 178 N.6. 766 ( 1931) (im•cstment
wluc of stock is latgely determined by rate of n:turn. amounl :ind regularity or dividends. selling price of like stocks, amount of pl'efcrrcd stock.
size of surplus. record or corp0r.nion and ils prospects for future): In rt
Pace Pltotogmphers. 71 N.Y.2d a1 748. 530 N.Y.S.2d at 73 (in rixing
value of business as a going coocem, coun mlt)' consider pro\'isions of
shmholders' agreement regarding value. dissenting ~hnrcholdc..r"s offer lO
buy. t()(J)Otation's past efforts to sell. and any other pcnincnt e\'idence):
Uii11es, 123 Misc. 2d a, 536-37. 474 N.Y.S.2d at 367-68 (s.ubstaminl positive C.lSh Oow, choice location, seasonal nnture of business. revolutionary
process offered al competitive price. h.igh name recognition ft1etor. like1i·
hood of futul'C compelition, nnd inherent stan·up risks considered in determining investmenl value of relativc1y new bu.i.incss).
18.
n: Mtm.:us. 273 A.O. :u 728·29. 79 N. Y.S.2d ot 79. Su also Tai11es, 123
Misc. 2d a1534·3S, 474 N.Y.S.2d at 366 (net asset mclhod docs not value
intangibles such as good will, location. or c,cploitation of n new process
which may have "iMinitely more \•alue" than tangible asse1s): lipe·
Hollway (;Qrp. l t Seligson. 59 Mjsc, 2d 805. $07, 300 N.Y.S.2d 478. 481·
82 (Sup. Ct. Onondaga Co. 1969) (net asse.1 vnluc is ..,east determinative
formula" in valuing a going concern).
See. e.g .. Amodio,.. Amo<Ho. 170 N. Y.2d 5. 516 N.Y.S.2d 923 ( 1987).
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The NY Litigator
Commi.ssiontr, 81 i .C. 349 (1986).
,.g..
Bloke \', Blok, Age11c)', hie., 107 A.D.2d 139. 486 N.Y.S.2d 341
(2d Dep'l). app,"I denied. 65 N.Y.2d 60'), 494 N.Y.S.2'11028 (1965).
lU(B) of 1he text 1M1 fol lows.
25.
Much has been written about disoounting issues. Su American Socie1y or
Apprni$crs. Business Valuation Suindards and Portions of Uniform
Standards of Professional Appraisal Pr.lctice (USPAP) ( 1994): American
Society of AppntiSCI$, Federal Tax Valuation Digest. 1990·91 Cumulative
Edit.ion: Terence L. Griswold, Debi-Free Approach to Business VahwliOlls,
Prc.c;entation to New York Cit)' Chapter. Americ:i..n Societ)' or Appl"rusers,
Apr. 20. 1993: t.cah J. Nathans. Wl1y "C,uh Flow" Might Srill ~ M'1gic
H0rds. Bus. Wk.. ~. 2S. 1989; Shannon P. Prutt. V3Juing :i Business:
The An:ilysis and Appraisal of Closcl)' Held Companies (2d ed. 1989):
Frank K. Reilly, Investment Analysis and PortfoHo Man:\ge~nt (2d ed.
1985): S1ephe:n A. Ross & Randolph W. Westerfield, Corpora1e Finance
( 1988): Richa.rd A. Schlueter. Cl al .. Dt1-·tlopmenl$ in tlte Mt!thods for
Derermi,ii,ig Discoum Rates. Presenrn1ion 10 New Yori. Cily Chapter,
American Society or Appraisers. Mny 17, 1994: Stocks. Bonds. Bills nnd
lnO:uiou: 1990 Yeari>ook: Rnndy C. $wad, Discoum a,ul Copiu1lh.1ulo,r
Rates 111 Business Valuatlt>nS. CPA J•• Ocl. 1994: Jomes C. Van Home.
Financinl Management and Policy (6th ed. 1983): J:,.mcs H. Zukin,
Fi1\anc-ial \/11,luation: Business and Business (nterests (1990).
26.
Nnod;o, 70 N.Y.S.2d al,. 516 N.Y.S.2d 31924 (ci,ins Blolu:. 107 A.0.2d
106 (1975): /11 rt Behrens, 61 N.Y.S.2d a1 182: Tabulorh,g Card Co. 1t
LeMesdo,f. 132 Misc. 2d 720. 723. 223 N.Y.S.2d 652. 656 (Sup. Cc. N.Y.
Co. 196 1). In other stales. courts assign weight to eaeh method and ob1ain
an average V:lluc based upon all three mc1hods (sometimes culled the
"Oduw:lre Block" method or vnluntion). See Donn.1 M, Morello,
Reapprai.ri11g Mi11orfry Sharehol,ler Pro1tc1ion i11 Free:.etJ111 Magers:
\\W11bcrger\~ UOI~ /11c.• 58St. John's L. Rev. 144 (1983).
Ahhough all three concepts or value must be considered. fair \'alue pro·
ceedings ..should be kept within 1•c.asonable bounds:· 111 re Marcus. 213
A.O.•• 725. 729. 79 N.Y.S.2d 76. 80 (1st Oep'1 1948) (proc«<lins --need
not be an exhausti\'C excul'Sion into every conceivable angle. h must be
objec1ivcly rair. lbu1J the court is noc required 10 blind itself to reality :u)d
permit 1hc ptocceding to go beyond what is 1lC<:ess.-vy to award petitioner
fair vnJue for her stock Md become a device for ob(a..ining mol'C tb.'ln fair
\'tlluc"),
~~
19.
a1 149. 486 N.Y.S.2d at 3-'9-SO). Su also 111 re Seag,0011, 78 N.Y.2d at
-W6. 576 N. Y.S.2d at 834 (lack or public market "should certainly be co1\·
sidered in determining whttl a willing purchaser would pay" for shnres of
closely held col'p()nt.1ion).
27,
Sellgrou. 73 N.Y.2d nt 446~7. S76 N.Y.S.2d :11 834.
28.
ht" Pace Photographers. 71 N.Y.2d at 748. 530 N.Y.$.'2d at 73. See (I/so
111 rt U~lt's S1,b111ari11e Sa11dwicl1es. l,ic.• 173 A.0.2d 980. S69 N. Y.S.2d
492. 493 (3d Dcp't 1991 ) (no illiquidi1y di$00un1 warranted in view of
increased profits. expansion. "nd 120 rcsponse.s to •·for sale" a.d\'ertise·
ment in Wall Street Journal).
29.
See, e.g.. 111 re Gifi Pa:c. Int., 123 Misc. 2d 830, 475 N.Y.S.2d 324 (Sup.
C1. Nassau Co. 198-1) (25%); R,ukin ,~ \\.biter Kori, /11c.. 129 A.D.2d 642.
644, 514 N.Y.S.2d 120.122 (2d Oep'l 1987)(10%. reduced from 35%): In
"FJ,;sdier. 107 ,\,0,2d 97, 486 N.Y.S.2d 272 (2'1 Oep'c 1985) (25%):
Blake, 107 A.D.2d at 148. 486 N.Y.S.2d :u 349 (25%. reduced from 40%):
/,1 re Joy Whole$lllt> Sundries. Inc.• 12S A.D.2d 310. SOS N.Y.S.2d 594 (2d
Oep'c 1986) ( 10%. rcdoccd from 25%).
30.
1995 WL 722867 at •3.4 & n. 2 (N.Y. Dec. 7, 1995). Courts in O::laware,
Iowa. Mnioe. Massachusetts. Minne.c;ota, Nebraska and Oregon also h.nve
refused to apply minority discounts. See C'1Vlllier Oil Corp. ,.. Hametr.
564 A.2d 1137 (Del. Sup. 1989): 11-w•nl" Qu;gle)', 133 N.W.2d 38
(IO\Va 1965): /11 re Wtlumio11 ,,JMcloo11 Oil, S6S A.2d 997. supro note I~
BNE MassacllllStllS O,rp. ~~ Sims, 538 N.E..2d 14 (Mass.. App. a. 1992)~
MT Propi'rties. Inc. "· CMC Rt(I/ Estate Corp., 481 N.W.2d 383 (Minn.
Cl. App. 1992): R;~,I Corp. v. Cutchall, 511 N.W.2d 519 (Neb. 1994):
O,l111,1bill Afot1'1gemem Co. ti \~s.16S P.2d 207. reviewder1ied. 771 P.2d
!021 (Or. 1989).
Couns in a number of states, including Georg,ia., Illinois. Indiana. Kan.sas.
Mi.ssissippi and Missouri. hn"-e allowed minority discounts in appraisal
situations. See Atlamic States Co11s1r. f,rc. ~~ Beavers. 314 S.B..2d 24S (Ga.
C1. App. 1984); s,amo,1 v. Rep11blic B""k of Sou1li Chicog<>. SS I N.E..2d
678 (Ill. 1991): Perlmo11 lt Permo11ite Mfg. Co.• 568 F. Supp. 222 (N.O.
Ind. 1983). ujf'd. 734 F.2'1 1283 (7lh Cir. 1984): H,ma..do Bank " Huff.
609 F. Supp. 1124 (N.D. Miss. 1985), ojf'd, 796 F.2d 803 (51h Cir. 1986):
King v. F.T..J., /,ic.• 765 S.W.2d 301 (Mo. Cl. App. 1938): Moore,,. New
Ammest. Inc.. 630 P.2d 167 ( Kan. Ct. App. l981). 8111 see Hickqry Cr?ek
N11rsery v. Jolmstm. 521 N.E.2d 236, 239-40 (DI. 1988) (application or
19
discounl not appropriate where minority interest being assumed by
remnining shareholders): Eyler~·. Eyler. 492 N.E.2d 1071 ( Ind. 1986)
(m..inority djscou,.u not warranted in v.\luing wife's intertst in stOC·k owned
jointly with husband for purpose of division or m.arit:il assets: stock oons1itu1ed 90.2% of business and W8$ nol burdened by (ac1ors which might
warran1 consideration of minority discount); Humer v. Mlrtk Indus.. Inc. .
721 F. Supp. 1102 (E.D. Mo. 1989) (declining to apply discount as a dis·
cretionruy matter, citing Cal'nliu Oil and Hickory Cruk).
31.
Id. at *2· 3.
32.
Id. at *3.
33.
Id.
34.
Id.
3S.
S"pm J)Q(e 20.
36.
107 A.D.2d at 149, 486 N.Y.$.2d at 349. Accord Ra.fkin, 129 A.D.2d at
644. 514 N.Y.S.2d at 122 (imposition or minority diS(OUnl would dcreat
protective purpose of sectiot1 1118).
37.
107 A.D.2d a, 149, 486 N. Y.S.2d at 349.
38.
Prior 10 Friedman. some lower New York courts had rejected minority dis-
counlS in section 623 proceedings. Set, e.g.. Slom/Fin Corp. , ,. Chicago
Corp.. N.Y.L.J .. Oe1. 26. 1995. 31 35 (Sup. Ct N,ssau Co. 199S) (application of minority discounl ..can only result in an unfair not a fair valua·
tion·').
39.
107 A.0.2d al 149. 486 N.Y.S.2d at 349 (citing Brown v. Allied
Corrugo,cd Box Co.. 91 Cal. App. 3d 477, 154 Cal. Rptr. 170 ( 1970);
"oodwam' v. Quigley, 133 N.W.2d 38, supra note 30).
40.
Brown. 91 Cal. App. 3d at 486. l54 Cal. Rptr. at 175·76. Accord
"wdwam'. 133 N.W.2d at 42 (majority will not be subjtct to handicaps of
minority stockholder by purchase of minority shares).
4 1.
8rowtt, 9l Cal. App. 3d at 486-87, 154 Cal. Rptr. at 176; Woodward. 133
N.W.2d :i.t 42·44.
42.
s~e In rt Fulton. '251 N.Y. nt 492, 178 N.E,. at 768 (transactions en1itling
dissenting stockholders 10 appraisal do no1 conuitu1e ·•practical dissolu·
tion" of oorporiuion. even if character of business is changed).
43.
52.
Cawley" SCM Corp.. 12 N.Y.2d at 471. 534 N.Y.S.2d at 347 (quoting L.
1982. ch. 202. § 9).
53.
Id. (ci1ing BCL § 623(hX4)).
54.
Alpert. 63 N.Y.2d at 571. 483 N.Y.S.2d 3t 675.
SS.
See Morello. supra note 10. SS St. John's L Rev. at 161 & n.91 .
56.
Cawley. 72 N.Y.2d at 472-73. 534 N.Y.S.2d •• 348.
57.
See In r< Gift Pax. 123 Misc. 2d at 836, 475 N. Y.S.2d at 329 (denying premium in acquisition or one· thitd of stock).
58.
Fleischer v. Gift PM. Inc.. 107 A, D.2d 97. IOI, 486 N. Y.S.2d 272. 275 (2d
Dep't 1985).
59.
Ste Raskin v. \Voller Kati. Inc.. 129 A.D.2d at 643, 514 N.Y.S.2d at 121:
Blake v. BlakeA,:t>ncy, J11c., 107 A.D.2d at 147. 486 N.Y.S.2d at 348; In re
Walt's Submarine SandwicJ1es. Inc.. 173 A.D.Zd 111 980. 569 N.Y.S.2d at
493; Gert.of v. Coons, 168 A.D.2d 619. 620. 563 N. Y.S.2d 458, 459 (2d
Dcp't 1990); Malvica \ t Mid·lsland Radiology Assoc.. 170 AD.2d 681.
567 N.YS.2d 94, 9S(2d Dcp't 1991).
60.
E.g.. BlaJ:e. 107 A.D.2d at I 50. 486 N.Y.S.2d al 349-50.
61.
Ras.kin, 129 A.D.2d at 643. Sl4 N.Y.S.2d at 121. There arc a number of
salary studies in addition lo the Research Institute of Americ.a study used
in Raskin. E.g.. Officers, Compensation Repor1 (Panel Pub.. Inc.):
Natiot1a.l Sur\'ey or Executive Compensation (F.mst & Young); Arrcglo.do
& Peck. Top Executh-e Compensation; Guordano & Tightman, Executi\'e
Compensation: Pavlik & Belkaoui. Determinants of Executi,•e
Compcnsaiion.
62.
Raskin, 129 A.D.2d •• 643. S 14 N.Y.S.2d a, 121.
63.
Su Senate Bill No. 8220, Calendar No. 753. memorandum in suppon o(
bill, p. 15 (May lO, 1982). Th:n change was enacted to take into accoun1
the new sixty-day rescission period afforded dissenters. running from the
authorization date. Su BCL § 623(g).
64.
Senaie Bill No. 8220. supra ooce 63.
65.
Id.
66.
Stt 111 re Mohosco Corp.. 188 A.D.2d 407. 408. 591 N.Y.S.2d 399. 400
(1st 0.p't 1992).
See BCL § 623(hX8) (acquired shares become creasury shares. are can·
ct.lled. or are held for disposition as provided in any merger or consolida.~
tion plan).
44.
640 P.2d 167 (Kan. 1981 ). supra note 30.
45.
568 F. Supp. 222 (N.D. Ind. 1983). supra no« 30.
46.
MOOC'C, 640 P.2d at 117 (quoting from coutt,appointed apprajse.r's rtport):
Perlman. 568 F. Supp. at 231 (same). Su al.so BCL § 623. Historical
Note, Legislative Finding for 1982 Amendment (where stockholders dis·
sent co merger or other ··resm1cturing of the shareholders' relati\'e inter·
esu." cou11 may determine "only the fair value of the dissenters' shares,
rather than the ,•alue of the corporation as a whole"). The valuation of a
dis.senter·s stock as a part intcrcSI in a going concem, thus requiring a
minority discount, also is in accord with the Coun of Appeals' l 988 ruling
in Cowley v. SCM Corp. that prospective. nompe,culativc benefits to the
corpora1ion t"rom a merger must be considered in dctc-rmining the ..fair
value" of a dissenter's interest. n N.Y.2d 465. 47 1•73, 534 N. Y.S.2d 344,
347-48. See also lhc discussion in the text that follows in pan JV.
67.
BCL § 623(h)(6) (emphasis added).
68.
In re Demschmann, 116 N. Y.S.2d 518. 585 (1st Ocp't 1952). Stt also
Dlmmock v. Relchold Chem., Inc.. 41 N.Y.2d 275, 278. 392 N.Y.S.2d 396.
399 ( 1977) ("protection afforded minority s1ockholdcrs should not be
wielded as an offensive weapon nor employed to cause unwarranted
expense or embarrassmen1 to the eotp0t:uion"),
69.
In re Oeursclimtmn. 116 N.Y.S.2d at 585.
70.
Dimmock. 41 N.Y.2d at 276. 392 N.Y.$.2d tu 398. Becnuse a dissenter
now has six1y days 10 rescind, 1he "poim of refu.saf' now has become a
"period of rtfusal."
71.
DimmocJ:. 41 N.Y.2d at 276. 392 N.Y.S.2d a, 398. See olso 2 Wigmore.
Evidence§ 394 (3d ed. 1940) (where hostili1y a1 speciftc time is in issue.
existence or hostility in same person nt another time i.s •'in general admis·
sible'·).
72.
De11tscl1ma,1n. 116 N.Y.$.2d at 586.
s~e
hr rt Kaufman, Alsbey & Co.• 15
A.D.2d 468. 468. 222 N.Y.S.2d 305. 307-08 (ISi O.p't 1961) (lhis "may
,•cry well be a case for adherence 10 this declared policy." subject 10
review of appraiser's report).
47.
See Fritdmon, 1995 WL 722867 at• 1.
48.
63 N.Y.2d 557, 483 N.Y.S.2d667 (1984).
49.
S64 A.2d 1137. Sllpra note 30.
73.
S,e, e.g.. White on co.,,....tions, 1623.05(41,
so.
Id. at I 14S (discounting injects spcc.ulalion into appraisaJ procus). See
n~in"'°rgt>n•. UOP. Inc., 457 A.2d 701, 113 (Del. 1983)(disscnting Sh.arc·
holder enti1led to compcnsa1ion for "loss of the ownership right which
u1ider normal <:ircumstances entitles a stockholder 10 buy or sell 30COC'ding
to [his) own whim"). See also In l l Valuation of Mcloon Oil. 56S A.2d a1
1004 (..in\'olunt.ary change of ownership caused by a merger requires as a
maner or fairness tha1 a dissenting shareholder be «mtpcnsatcd for the
Joss of his proportionate interest in the business :is an entity..). McU>()n
did not im-ol\'e a cash out merger. However. the cowt relied on Cavalier. a
cash out case, in denying a discount.
74.
Senate Bill No. 8220. supra noce 63, memorandum in suppon of bill, pp.
13· 14.
75.
BCL § 623(hX7).
76.
Id.
17.
Id. Any finding of bad faith may result in the apportionment o( costs and
rees against the corporation. See Senale Bill No. $220. supra no1c 63,
memorandum in suppon of bill. p. 16.
78.
Id. ACC<Jm' Sh<>~ li Parkla,re Hosiery Co.• Inc.• 61 A.0 .2d S26, S35, 415
N.Y.S.2d 878, 884 (2d O.p'1 1979) ($1.00 increase o,·er $2.00 per share
offer for 30.000 shares would be material). Su also 111 re Dorsey. 31
Si.
20
See Alpert. 63 N.Y2d at 567-68. 483 N.Y.S.2d a, 673.
The NY Litigator
Vol. 2, No. 1 (Ma~ 1996)
Misc. 2d 747, 749. 221 N.Y.S.2d 927. 929 (Sup. C1. N.Y. Co. 1961)
($6.125 difference on 1,750 shares was "nol inconsiderable.. ::md wnrrant·
ed usscssmeol of OOSlS),
Philip M. Halpern is a Section member and a
partner in Pirro, Collier, Cohen, & Halper n,
LLP with offices in New York City and White
Plains.
© 1996 Philip J\1. Halpe.r n. All rights rese rved
Vol. 2, No. 1 (May 1996)
The NY Litigator
21