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”.