Peter Mahler writes the New York Business Divorce blog. Last week, he published his eighth annual list, the Top Ten Business Divorce Cases for 2015. I was interested and pleased to discover that the number one case on the list was that of Chiu v. Chiu, a case in which I testified as an expert witness in 2012. Mahler writes, in summary, about the case:
Top 10 Business Divorce Cases of 2015 | NY Business Divorce
1. Chiu v Chiu, 125 AD3d 824 [2d Dept 2015], in which the appellate court affirmed without comment a 0% discount for lack of marketability in fixing the fair value of a membership interest in a single asset realty company pursuant to LLC Law § 509, but disagreed with the lower court’s assignment of a 10% interest to the withdrawn member — rather than 25% as reflected in the LLC’s initial tax returns — based on additional capital contributions made by the other member that, according to the appellate court, should have been characterized as loans.
Mahler cites two earlier posts he wrote about the Chiu case. The two-part series was written following the release of the lower court’s decision and can be found here and here. I also wrote about the case on my former blog, ValuationSpeak.com.
New York Fair Value
The case made Mahler’s top ten list, in part at least, because the decision allowed for a marketability discount of 0%. There is some confusion in the case law regarding the application of the marketability discount in statutory fair value cases in New York. I am not a lawyer, so I can only approach fair value matters from business and valuation perspectives. I’ve now testified in four fair value matters in New York.
The first case occurred many years ago, and there is no written record in our files that has survived our document retention policies. Mahler mentions another in his article, that of Giamo v. Giamo, in which a Special Master ruled, after an extensive trial, that the appropriate marketability discount for another real estate holding company was 0%. The trial court agreed with the Special Master, but on different logic. The appellate court then held that the marketability discount should be 16%. Mahler writes about Giaimo here.
In Chiu, as in Giaimo, I made the same argument that there is no theoretical basis for a marketability discount applicable to a controlling interest in a company. I also testified that all of the real estate appraisers (in both matters) had taken an appropriate marketing period into account in their appraisals of the underlying real estate. To take an additional discount because there is a corporate wrapper around the real estate was therefore not appropriate from a valuation perspective. Finally, I suggested that to take a marketability discount in a fair value matter was the functional equivalent of taking a minority discount, which is specifically prohibited by New York case law.
The most recent case in which I testified was that of AriZona Iced Tea. I wrote about that case here. Unlike all three of my previous testimonies, which involved the fair value of real estate holding companies, AriZona was an operating company. Based on theoretical grounds, the overall attractiveness of AriZona as an acquisition candidate, and references to New York cases in which other attractive companies had been accorded 0% or very small marketability discounts, I concluded that the appropriate discount was 0%. The court disagreed and applied a 25% marketability discount, which lowered value by a whopping $478 million. Even so, the court’s valuation was based on my discounted cash flow valuation method in which a few changes were made to assumptions. Before the marketability discount, our results were reasonably close.
I don’t normally write about cases on this blog, but Mahler’s post was interesting. And it reminded me of the other cases.
From the viewpoint of business owners and their advisers, just know that if you have minority shareholders and a company engages in a transaction that gives rise to the statutory right to dissent (in its state), then you may learn more about statutory fair value than you ever wanted to know. All such transactions should consider good legal and valuation advice prior to engaging in them.
My best to all for a wonderful holiday season and a wonderful New Year!