Opinion
November 18, 1999
The matter at hand is an action for dissolution of a closely held corporation. Respondents elected to purchase petitioner's outstanding shares (BCL § 1104-a ). On June 22nd and 24th of 1999, the Court conducted an evaluation hearing pursuant to BCL § 1118 to establish the value of petitioner's shares as of the day immediately preceding petitioner's commencing the dissolution action (BCL § 1104-a , see In the Matter of the Dissolution of Bambu Sales Inc., 177 Misc.2d 459 [Supreme, Nassau Co., 1997]). As the Court noted in In the Matter of Seagroatt Floral Company Inc., 78 N.Y.2d 439 (1991), 576 N.Y.S.2d 831, "Business Corporation Law § 1118 offers no definition of fair value and no criteria by which a court is to determine price or other terms of the purchase. . . Rather, fair market value, being a question of fact, will depend upon the circumstances of each case; there is no single formula for mechanical application" (Id. at 445).
We heard two witnesses. Petitioner's expert, Mr. Martin Randisi (CPA), and respondents' expert, Mr. Thomas Giordano. Though both claimed to use the same methodology and drew from the same books and records, their conclusions were surprisingly different. There is a $400,000.00 difference in the claimed value of the company and a $150,000.00 gap in the alleged value of petitioner's shares. It falls to us to ascertain the cause of these discrepancies and determine petitioner's 34 percent interest in the corporation.
A precise and exact definition of the term "fair value" is an elusive quarry. A Court should begin by acknowledging that there are three basic elements to fair value, namely: market value, net asset value, and investment value (Endicott Johnson Corp. v. Bade, 37 N.Y.2d 585 [1975], 376 N.Y.S.2d 103 ; Matter of the Dissolution of Gift Pax, Inc., 123 Misc.2d 830 [1984], 475 N.Y.S.2d 324 ). Additionally, we should be guided by the Internal Revenue Service's experience in appraising a closely held, non-publicly traded company. "Revenue Ruling 59 — 60 identifies eight fundamental factors which should be analyzed in arriving at a valuation:
(1) The nature of the business and the history of the enterprise from its inception.
(2) The economic outlook in general and the condition and outlook of the specific industry in particular.
(3) The book value of the stock and the financial condition of the business.
(4) The earning capacity of the company.
(5) The dividend-paying capacity.
(6) Whether or not the enterprise has good will or other intangible value.
(7) Sales of the stock and the size of the block of stock to be valued.
(8) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market" (Kaye v. Kaye, 102 A.D.2d 682, 687, 688 [2nd Dept., 1984], 478 N.Y.S.2d 324 ).
Using the above criteria, we find that respondents' expert's analysis of the company's worth to be flawed. Specifically, Mr. Giordano was inconsistent in his treatment of the owner's income. In his report, he relates that the owner's income was $200,000.00. Regina Hahn and Andrew Hahn, Jr.'s salaries, totaling $120,000.00, were not included in this computation (trial transcript. p. 69). When this number is properly factored into the company's profits, the value of Hahn's roughly approaches the value offered by petitioner's expert (trial transcript p. 80).
Petitioner's expert testified that he utilized a market approach and valuation approach to ascertain the company's worth (trial transcript p. 47). He determined the value of the company as a whole to be $1,039,000.00 (trial transcript p. 61). We found it somewhat disconcerting that he would not reveal all of his source material used in valuation because it was "confidential" (trial transcript p. 73). What compels us to accept this number is the corroboration provided by respondents' expert when his figures are properly retabulated. Therefore, the Court finds that the value of Hahn's Old Fashioned Cake Company to be $1,039,000.00.
The above referenced figure does not take into account any discount arising from the company's lack of marketability or illiquidity. Such a discount is entirely proper to prevent the departing shareholder from receiving a windfall (Matter of the Dissolution of Gift Pax, Inc., supra). It is equally true that penalizing a minority shareholder is improper in a valuation hearing. Such a practice ". . . will inevitably encourage oppressive majority conduct, thereby further driving down the compensation necessary to pay for the value of minority shares" (Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 169 [1995], 638 N.Y.S.2d 399 ). Once again, both petitioner and respondents have produced sharply disparate results by offering different discount rates.
Respondents' expert, under the guise of a marketability discount, reduced the petitioner's pro rata share of the business by 40 percent based on various factors which rendered the stock a less desirable commodity for potential purchasers (trial transcript pp. 29-30). During cross-examination, Mr. Giordano admitted that his 40 percent discount relates to the marketability of fractional interests (p. 105). To deny that this is a reference to petitioner's minority status is pure sophistry. Respondents' written report confirms this opinion (respondents' Exhibit "A," p. 21). Petitioner's expert, however, only applied a marketability discount of 20 percent. The Court is not persuaded by either witness as to their ultimate opinions concerning the appropriate discount. Each has noted (in cursory fashion) that most accepted industry standards place a marketability discount at approximately 30 percent. "Older studies showed median discounts in the 30 percent range" (petitioner's expert report, Exhibit "I," p. 34). "The general consensus from these studies seems to be that 35 percent is a reasonable average discount to apply in valuing a nonpublicly traded stock" (respondents' expert report, Exhibit "A," p. 20).
Caselaw gives some example of discounts applied by the Courts. In Dissolution of Gift Pax, Inc., supra, a 25 percent figure was used. There is "ample precedent" for such a percentage (Myers v. Myers, 255 A.D.2d 711 [3rd Dept., 1998], 680 N.Y.S.2d 690, 693 citing Matter of Seagroatt Floral Co., supra, at 443, 576 N.Y.S.2d 831, 583 N.E.2d 287 ; Kalisch v. Kalisch, 184 A.D.2d 751, 753, 585 N.Y.S.2d 476; Matter of Joy Wholesale Sundries, 125 A.D.2d 310, 311, 508 N.Y.S.2d 594; Matter of Blake v. Blake Agency, 107 A.D.2d 139, 149, 486 N.Y.S.2d 341, lv. denied 65 N.Y.2d 609, 494 N.Y.S.2d 1028, 484 N.E.2d 671; Matter of Fleischer, 107 A.D.2d 97, 101, 486 N.Y.S.2d 272). The evidence at trial, however, argues that the Court should make an upward departure from 25 percent. During Mr. Randisi's cross-examination, he once again reiterated that 30 percent was a "median range" for a discount of a business of this sort. Although this admission was quickly followed by the statement that a 30 percent discount was "illogical," petitioner's expert never satisfactorily explained why this figure was irrational. Likewise, Mr. Giordano never articulated a viable reason to exceed 35 percent. Therefore, we find that the clear preponderance of the credible evidence establishes that the marketability (or illiquidity) discount is 30 percent.
Applying these factors, the Court determines that the value of the company, less the appropriate marketability discount, to be $727,300.00. Petitioner's 34 percent interest is $247,282.00. The parties are directed to settle judgment. Respondents will be directed to pay this sum within ninety days from service of a copy of the judgment.