New York Law Review

Tag: Appraisal Rights

  • Matter of Friedman v. Beway Realty Corp., 87 N.Y.2d 161 (1995): Fair Value and Minority Shareholder Rights in Appraisal Proceedings

    Matter of Friedman v. Beway Realty Corp., 87 N.Y.2d 161 (1995)

    In statutory appraisal proceedings, dissenting minority shareholders are entitled to receive their proportionate interest in the going concern value of the corporation without any discount for minority status or transfer restrictions.

    Summary

    Minority shareholders in family-owned corporations dissented from a merger and sought appraisal rights. The New York Court of Appeals addressed whether a minority discount should be applied when determining the fair value of their shares. The Court held that a minority discount is inappropriate in appraisal proceedings under Business Corporation Law § 623 and § 1118, as it would deprive minority shareholders of their proportionate interest in the corporation and undermine the remedial purpose of the statute. The court remanded the case for recalculation of the unmarketability discount.

    Facts

    Petitioners were minority stockholders in nine family-owned corporations holding income-producing real estate. The majority voted to transfer all property to a new partnership, triggering petitioners’ appraisal rights under Business Corporation Law § 623. A valuation trial ensued to determine the fair value of the shares. The corporations’ expert proposed applying both a discount based on the difference between REIT net asset value and share price (initially 9.8%) and a discount for the lack of marketability (30.4%, later increased by 14.6% for transfer restrictions).

    Procedural History

    The Supreme Court determined the net asset value of the corporations. It rejected the petitioners’ expert’s valuation. It accepted the corporations’ expert’s methodology but eliminated the 9.8% discount as a minority discount and reduced the unmarketability discount. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether a minority discount should be applied in determining the fair value of dissenting minority shareholders’ shares in an appraisal proceeding under Business Corporation Law § 623.

    2. Whether contractual restrictions on the transfer of shares should further diminish the value of those shares in a statutory appraisal proceeding.

    Holding

    1. No, because imposing a minority discount conflicts with the equitable principles of corporate governance and the statutory objective of achieving a fair appraisal remedy for dissenting minority shareholders.

    2. No, because a statutory acquisition of minority shares is not a voluntary sale as contemplated by a restrictive stockholder agreement.

    Court’s Reasoning

    The Court reasoned that imposing a minority discount would deprive minority shareholders of their proportionate interest in a going concern and violate the principle of equal treatment of all shares of the same class. The Court stated, “Consistent with that approach, we have approved a methodology for fixing the fair value of minority shares in a close corporation under which the investment value of the entire enterprise was ascertained through a capitalization of earnings (taking into account the unmarketability of the corporate stock) and then fair value was calculated on the basis of the petitioners’ proportionate share of all outstanding corporate stock.” The Court emphasized that the appraisal statute protects minority shareholders from being forced to sell at unfair values imposed by the majority. The court found that restrictions on transfer were literally inapplicable because a statutory acquisition is not a voluntary sale. However, the Court found an error in the Supreme Court’s calculation of the unmarketability discount, as it had erroneously removed a minority discount element twice. The case was remanded for a new determination of the appropriate unmarketability discount. The Court referenced the Delaware Supreme Court: “to fail to accord to a minority shareholder the full proportionate value of his [or her] shares imposes a penalty for lack of control, and unfairly enriches the majority stockholders who may reap a windfall from the appraisal process by cashing out a dissenting shareholder”.

  • Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557 (1984): Exclusivity of Appraisal Remedy for Dissenting Shareholders

    Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557 (1984)

    Under New York Business Corporation Law, shareholders who elect statutory appraisal rights in response to a merger generally forfeit other rights as shareholders, and any action they may bring alleging fraud or illegality is limited to actions seeking equitable relief, not monetary damages, in their individual capacity.

    Summary

    Minority shareholders of Old Shepard dissented from a merger and sought appraisal. They then sued derivatively and individually, alleging an inadequate price due to Vulcan’s controlling influence and director misconduct. The New York Court of Appeals held that exercising appraisal rights generally precludes other actions as shareholders. While an exception exists for actions alleging fraud or illegality, this exception is narrowly construed to allow only individual actions for equitable relief, not derivative suits or actions for monetary damages, as the appraisal proceeding provides an adequate legal remedy.

    Facts

    Shepard Niles Crane and Hoist Corporation (Old Shepard) merged into Shepcan Corporation, a subsidiary of Vulcan, Inc. Appellants, minority shareholders of Old Shepard, dissented from the merger and initiated appraisal proceedings to determine the fair value of their shares. Subsequently, they filed an action as individuals and derivatively on behalf of Old Shepard, alleging that Vulcan, while exerting control over Old Shepard, offered an inadequate price for their stock in the merger agreement. They also claimed that Old Shepard’s directors knew or should have known about untrue statements and material omissions in the merger agreement.

    Procedural History

    The respondent moved to dismiss the complaint. Special Term dismissed the derivative action claims but upheld the individual claims. The Appellate Division reversed, dismissing the complaint entirely. The New York Court of Appeals then reviewed the Appellate Division’s decision.

    Issue(s)

    1. Whether shareholders who dissent from a corporate merger and pursue their statutory appraisal rights can simultaneously maintain a derivative action on behalf of the merged corporation.

    2. Whether these dissenting shareholders can maintain an action for money damages in their individual capacity for fraud alleged to have occurred in connection with the merger, absent a primary request for equitable relief.

    Holding

    1. No, because subdivision (k) of section 623 of the Business Corporation Law permits a dissenting shareholder to pursue an appropriate action only in his individual capacity and not as the instigator of a derivative suit.

    2. No, because the exception to the exclusivity rule codified in subdivision (k) of section 623 permits a dissenting shareholder to bring an “appropriate action” in his individual capacity, which is construed to mean an action seeking some form of equitable relief, not monetary damages.

    Court’s Reasoning

    The court reasoned that upon filing a notice of election to dissent and seek appraisal, shareholders relinquish their other rights as shareholders, as per Section 623(e) of the Business Corporation Law, which states they cease “to have any of the rights of a shareholder except the right to be paid the fair value of his shares”. The exception in subdivision (k) allows a dissenting shareholder to bring an “appropriate action to obtain relief on the ground that such corporate action will be or is unlawful or fraudulent as to him”. However, the court interpreted “as to him” to mean that the exception applies only to individual actions, not derivative suits.

    The court further clarified that an “appropriate action” under subdivision (k) is limited to actions seeking equitable relief, such as injunctions or rescission, rather than monetary damages. The court noted that subdivision (k) codified the common-law exception to the exclusivity rule that a proceeding in equity will lie when corporate action is alleged to be fraudulent or illegal. Allowing a legal action for damages would be unnecessarily duplicative, as the appraisal proceeding provides a full monetary recovery. The court stated, “Limiting the exception to equitable relief thereby serves the valid function of denying dissenting shareholders the ability to reopen prior appraisal proceedings and again seek the identical relief merely by alleging fraudulent or unlawful corporate conduct in relation to the merger.” Since the complaint lacked a primary request for equitable relief, the action for monetary damages was not permissible.

  • Dimmock v. Reichhold Chemicals, Inc., 41 N.Y.2d 273 (1976): Determining Interest and Costs in Corporate Appraisal Proceedings

    Dimmock v. Reichhold Chemicals, Inc., 41 N.Y.2d 273 (1976)

    In corporate appraisal proceedings under Business Corporation Law § 623, a dissenting shareholder’s good faith in refusing a corporate offer should be assessed at the time of refusal, not based on subsequent litigation conduct, to determine eligibility for interest and cost allocation.

    Summary

    Clarence Dimmock dissented from a merger involving Modiglass Fibers, Inc., and sought appraisal of his shares. After a protracted legal battle, an appraiser valued the shares higher than Reichhold’s initial offer. The court denied Dimmock’s request for interest, apportioned appraiser fees against him, and denied his request for attorney and expert witness fees, citing his alleged bad faith during the proceedings. The New York Court of Appeals modified the Appellate Division’s order, holding that the shareholder’s good faith should be assessed at the time of the refusal of the corporate offer, and remanding for reconsideration of interest and appraiser fees, while leaving open the possibility of revisiting attorney and expert fees if the lower court’s discretion was improperly influenced by later events.

    Facts

    Reichhold Chemicals, Inc. sought to merge Modiglass Fibers, Inc., a subsidiary, into itself. Dimmock, a minority shareholder of Modiglass, dissented from the merger and demanded the fair value of his shares. Reichhold offered $3.82 per share, which Dimmock rejected. Reichhold initiated an appraisal proceeding, which was dismissed as untimely. Dimmock then commenced his own appraisal proceeding under Business Corporation Law § 623.

    Procedural History

    Dimmock initiated a special proceeding under Business Corporation Law § 623 to determine the fair value of his shares. The trial court confirmed the appraiser’s report valuing the shares at $4.75 but denied Dimmock’s requests for interest, attorney’s fees, and expert witness fees, and assessed half of the appraiser’s costs against him. The Appellate Division affirmed. Dimmock appealed to the New York Court of Appeals, challenging the denial of interest, the apportionment of costs, and the denial of fees.

    Issue(s)

    1. Whether the lower courts erred in denying Dimmock’s request for interest on the appraised value of his shares, based on a finding of bad faith stemming from his conduct during the legal proceedings rather than his initial refusal of the corporate offer.
    2. Whether the lower courts properly apportioned the costs and expenses of the appraisal proceeding, including the appraiser’s fees, against Dimmock based on a finding of bad faith.
    3. Whether the lower courts abused their discretion in denying Dimmock’s application for attorney’s fees and expert witness fees.

    Holding

    1. No, the denial of interest may have resulted from a consideration of events that occurred after the refusal, which is an incorrect application of the statute. The court should assess good faith at the time of refusal.
    2. No, the apportionment of appraiser fees was potentially based on Dimmock’s conduct after the refusal, also misapplying the statute.
    3. Possibly. The court’s decision on attorney and expert fees was within its discretion, but the Court of Appeals allowed the lower court to revisit the issue if the original decision was influenced by its incorrect assessment of Dimmock’s good faith.

    Court’s Reasoning

    The Court of Appeals focused on the statutory language of Business Corporation Law § 623(h)(6) and (7). It emphasized that the assessment of a shareholder’s good faith, for purposes of determining eligibility for interest and cost allocation, must be based on the shareholder’s conduct at the time of refusing the corporate offer, not on their subsequent litigation tactics. The court noted that the lower court appeared to have based its finding of bad faith on Dimmock’s delaying tactics during the legal proceedings, which was an improper basis for denying interest and apportioning costs. The court quoted the statute: “The final order shall include an allowance for interest at such rate as the court finds to be equitable, from the shareholders’ authorization date to the date of payment. If the court finds that the refusal of any shareholder to accept the corporate offer of payment for his shares was arbitrary, vexatious or otherwise not in good faith, no interest shall be allowed to him.”

    Regarding attorney’s fees and expert witness fees, the court acknowledged that the decision to award such fees is discretionary. However, it allowed the lower court to reconsider its denial of these fees if it found that its original decision was influenced by its incorrect assessment of Dimmock’s good faith. The court cautioned against using minority shareholder protections as an offensive weapon to cause unwarranted expense or embarrassment to the corporation. The court noted the potential disparity between the amount recovered and the legal fees sought, suggesting a need for careful scrutiny of the reasonableness of the fees.