New York Law Review

Tag: Fair Value

  • In re Penepent Corp., 96 N.Y.2d 186 (2001): Enforceability of Shareholder Agreements vs. Statutory Election

    In re Penepent Corp., 96 N.Y.2d 186 (2001)

    When a shareholder in a close corporation makes an irrevocable election to purchase another shareholder’s shares at fair value under Business Corporation Law § 1118 in response to a dissolution petition, that election takes precedence over a mandatory buy-out provision in a shareholder agreement that would otherwise be triggered by the petitioning shareholder’s death.

    Summary

    Francis Penepent, a shareholder in Penepent Corp., petitioned for dissolution under Business Corporation Law § 1104-a. Richard Penepent, another shareholder, elected to purchase Francis’ shares at fair value under § 1118. Before the fair value was determined, Francis died. A shareholder agreement stipulated that upon a shareholder’s death, the estate must surrender the shares to the corporation for a set price, lower than the anticipated fair value. The court addressed whether Richard’s election remained binding despite Francis’ death and the shareholder agreement. The Court of Appeals held that Richard’s § 1118 election was irrevocable and took precedence over the shareholder agreement’s buy-out provision. Once the election is made, it creates a vested right to receive fair value, which survives the shareholder’s death.

    Facts

    Anthony Penepent started Penepent Corp. with his four sons, each holding a 20% share. They entered into a shareholder agreement stating that upon a shareholder’s death, the corporation would purchase the deceased’s shares at a predetermined price. Later, the four sons bought out their father, each holding a 25% share. Disputes arose, and Francis petitioned for dissolution under Business Corporation Law § 1104-a. Richard elected to purchase Francis’ shares at fair value under § 1118. Before fair value was determined, Francis died. Richard then asserted the shareholder agreement required Francis’ estate to sell the shares to the corporation at the lower, predetermined price.

    Procedural History

    Francis filed for dissolution; Richard elected to purchase his shares. Supreme Court denied Richard’s motion to dismiss the dissolution proceeding and to revoke his § 1118 election, holding that Francis’ right to fair value vested upon Richard’s election. The Appellate Division affirmed. Richard argued for a discount in the share value due to a separate pending dissolution proceeding. The referee rejected this argument, which the Supreme Court adopted. The Appellate Division affirmed, and Richard appealed to the Court of Appeals.

    Issue(s)

    1. Whether a mandatory buy-out provision in a shareholder agreement controls when a valid Business Corporation Law § 1118 election has already been made to purchase shares at fair value before the event triggering the buy-out provision (death) occurs.

    2. Whether the value of shares should be discounted because of a separate, pending dissolution proceeding when the election to purchase shares in the present dissolution proceeding has already been made.

    Holding

    1. Yes, because once a shareholder makes an irrevocable election to purchase shares under Business Corporation Law § 1118, that election creates a vested right to receive fair value, which takes precedence over a mandatory buy-out provision triggered by death.

    2. No, because a pending dissolution proceeding involving different shareholders does not impact the fair value of the shares in a separate proceeding where an election to purchase has already been made.

    Court’s Reasoning

    The Court reasoned that Richard’s § 1118 election was irrevocable and binding. The purpose of making the election irrevocable was to prevent majority shareholders from delaying dissolution proceedings and exhausting the petitioning shareholder’s resources. The Court emphasized that once the election is made, the purchasing party is obligated to purchase the shares at fair value. The divestiture event (Francis’ death) occurred after Richard made the election, solidifying Francis’ right to fair value. The Court distinguished cases where shareholder agreements divested shareholders of their shares *before* a dissolution proceeding was commenced. Regarding the valuation discount, the Court stated that any litigation pending against the corporation could be considered. However, in this instance, the pending dissolution proceeding had no bearing on fair value because Richard had already irrevocably elected to purchase the shares. The court stated the objective in calculating “fair value” is to determine “what a willing purchaser in an arm’s length transaction would offer for petitioners’ interest in the company as an operating business”. Furthermore, imposing a discount due to a minority shareholder’s lack of control would violate equitable principles of corporate governance, depriving minority shareholders of their proportionate interest and treating shares of the same class unequally. The court quotes, “the stock so purchased shall be delivered and surrendered by the representative of the [deceased] to the Corporation, which shall thereupon retire such stock.”, illustrating the original agreement terms but ultimately prioritizing statutory 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”.

  • Cawley v. SCM Corp., 72 N.Y.2d 465 (1988): Valuation of Dissenting Shareholder’s Stock

    72 N.Y.2d 465 (1988)

    When determining the fair value of dissenting shareholders’ stock in a merger, courts must consider all relevant factors, including nonspeculative post-merger tax benefits accruing to the acquired corporation, and these benefits must be distributed proportionately among all shareholders of the same class.

    Summary

    Cawley, a dissenting shareholder in the merger of SCM Corporation with HSCM Merger Company, sought an appraisal of his shares, arguing that the merger’s tax benefits to SCM, particularly those arising from his exercised incentive stock options (ISOs), increased the fair value of his stock. The New York Court of Appeals held that dissenting shareholders are entitled to receive fair value determined by considering all relevant factors, including nonspeculative tax benefits accruing to the corporation from the merger. The court further held that these tax advantages must be distributed proportionately among all shareholders of the same class, and remanded the case for a hearing.

    Facts

    Hanson Trust PLC initiated a hostile tender offer for SCM. SCM initially rejected the offer but later entered a merger agreement with Merrill Lynch. After a series of competing offers and litigation over lock-up options, Hanson acquired control of SCM and completed a merger, purchasing remaining shares at $75 per share. Cawley, an SCM treasurer, dissented from the merger, arguing that his ISO shares were worth more due to SCM’s tax deductions resulting from the merger triggering a disqualifying disposition of those shares.

    Procedural History

    Cawley filed a petition in Supreme Court, New York County, seeking a determination of the fair value of his shares, which was dismissed. The Appellate Division affirmed the dismissal. Cawley then appealed to the Court of Appeals of the State of New York.

    Issue(s)

    1. Whether the lower courts abused their discretion by disregarding the tax deduction that SCM became entitled to upon the consummation of its merger with HSCM Merger Company, Inc. in assessing the fair value of SCM Corporation stock.
    2. If so, whether the value of this postmerger factor should have been distributed equally among all of SCM’s stockholders or solely to those stockholders whose shares were responsible for this tax advantage.

    Holding

    1. Yes, because Business Corporation Law § 623 (h) (4) authorizes courts to consider relevant post-merger factors, including prospective tax benefits of a given transaction, in determining fair value.
    2. The value should be spread equally among all shareholders of SCM common stock because Business Corporation Law § 501(c) mandates that each share shall be equal to every other share of the same class.

    Court’s Reasoning

    The court reasoned that the 1982 amendment to Business Corporation Law § 623(h)(4) requires courts to consider “all other relevant factors” in determining fair value, including post-merger effects on the corporation. This includes prospective, nonspeculative tax benefits accruing to the acquired corporation from the merger. The court noted that the deduction for acquisition of the ISO shares was a corporate asset of SCM that represented value and arose from the merger. However, because ISO shares were identical in all respects to SCM common stock held by the investment public, Business Corporation Law § 501(c) mandates that ISO shareholders be treated no differently from other SCM common stockholders. The court stated that a dissenting shareholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. The court rejected Cawley’s argument that his personal income tax situation should be considered because it did not affect the value of SCM’s common stock. The dissenting judge argued that the lower courts properly applied the fair value appraisal criteria and that the majority’s decision effects an asset-specific accounting, complicating appraisal proceedings. Justice Bellacosa dissented that implementation of an appraisal proceeding requires that shares of the same class be equal in all respects to every other share of the class.