Buy-sell agreements can go bad if all parties to them do not pay attention to their terms before signing them.  This is particularly true in the New York case of Yakuel v. Gluck, which was filed in early May in the Supreme Court of New York County.  Thanks to Peter Mahler for his post about the case which called it to my attention.

Petitioner is Yakuel, the 65% owner of Agency Within LLC (“the Company”).  We will use Yakuel and the Company interchangeably. Respondent is Gluck, who owned the remaining 35% of the Company’s member units.  The Company was formed on February 20, 2015, and apparently achieved fairly rapid success. According to its website, Within is a performance branding company.

The Company says about itself:

Working with VC backed startups and Fortune 100 companies alike allows us to see around corners. This spectrum of challenges keeps us highly adaptable within a constantly changing media landscape.

Background

An amendment to the original operating agreement was signed on March 23, 2018.  Presumably, this amendment was negotiated between Gluck and the Company; however, a reading of this case suggests that either this did not happen or that Gluck was not paying attention.  The amendment describes a valuation by a single appraisers as follows:

For purposes of this Amendment, “Fair Market Value” shall mean, as of the date of determination, the fair market value of such fully vested Units reduced by appropriate valuation discounts to account for the minority interest represented by the Units, the lack of marketability of such Units, and such other applicable valuation discounts. The Company shall obtain an appraisal (the “Appraisal”) of the Fair Market Value by engaging a third party appraisal firm, whose appraisal will be final and binding on all parties and the cost of which shall be borne by Gluck and the Company on a 50-50 basis.

The amendment called for an appraisal if a triggering event occurred that would be conducted by “a third party appraisal firm, whose appraisal will be final and binding on all parties, and the cost of which shall be borne by Gluck and the Company on a 50-50 basis.”  The appraiser selection process was as follows.

• Five large accounting firms were named as potential appraisers in the amendment
• Each of Gluck and the Company got to veto one of the firms, and they did so
• The Company was then entitled to select the appraiser from the remaining three firms.  The Company selected PwC which was apparently “the firm which has offered to perform the appraisal at the lowest cost.”

Section 3(f) of the amendment gave the Company certain rights, including:

• The right to exercise the option to purchase “at any time.”  In fact, the option was exercised by the Company on May 11, 2018, or less than two months after the execution of the amendment.
• The right to exclude Gluck from the affairs of the Company and from entering its business offices.

The sole right accruing to Gluck was the right to receive the purchase price of his units as determined by the appraisal described in the amendment.

Presumably, the parties negotiated this amendment with its appraisal process; however, it is not apparent that Gluck was a party to the negotiation, or else he was not paying attention to an amendment that gave Yakuel the unfettered right to exercise the option to purchase Gluck’s shares and to summarily fire him.

Litigation Ensued

Not surprisingly, litigation followed in July 2018.  This litigation led to a stipulation in which the Company agreed in good faith to allow Gluck to participate in the appraisal process.  Gluck also agreed to participate in the process “in good faith, without delay or obstruction.”  Those agreements did not last long.  Justice Cohen wrote:

The Peace Treaty did not last.  Yakuel contends that he held up his end of the bargain and permitted Gluck to participate in the appraisal process, including by providing information and arguments to PwC with respect to the valuation.  Gluck vigorously disagrees.  According to Yakuel, Gluck’s “bad faith and litigious approach to the appraisal process eventually caused PwC to halt its work and threaten to quit,” and Gluck’s obstructive behavior “forced the Company to exercise its right under Section 3 of the Amendment to exclude him from the appraisal process.

The Court did point out that it was less than clear that the rights accorded to the Company under this section would apply to the very appraisal process for determining the purchase price.

Not surprisingly, PwC did not like being in the middle of this situation.  Early in the process, PwC raised the issue that both parties should be subject to their engagement letter to avoid any “perception of a conflict.”  Yakuel’s response was negative and that the Company should be the only party to the letter.  PwC tried again, expressing discomfort about proceeding “without agreement from all parties” and agreement on the information that would be provided to the appraisers.  Yakuel again refused to change the scope of the engagement.

The Court pointed out that Yakuel and Gluck had widely different views of the same set of facts.  Gluck contends that he was never interviewed by PwC and did not have the opportunity to submit information to PwC for consideration.  He also claims he was not allowed to discuss information submitted by the Company to PwC.

PwC ultimately provided an appraisal with a conclusion.  Peter Mahler writes about the appraisal:

In March 2019, PwC issued its written appraisal determining the value of Gluck’s 35% interest as of December 31, 2018. Unfortunately for us, all financial information is redacted from the copy of PwC’s appraisal publicly e-filed with the court, including its conclusion of value.

According to Gluck, Yakuel refused to provide Gluck with a copy of the PwC appraisal for five months even while he tried to force Gluck to close on the repurchase. In August 2019, Yakuel filed a petition to confirm the appraisal award. Gluck responded with a cross-petition to vacate the award.

We have no idea what the PwC appraisal conclusion was, but it set the purchase price for Gluck’s 35% interest in the Company.  Gluck claims that the appraisal process was unfair and that it was influenced by Yakuel to devalue his interest by “tens of millions of dollars.”

Peter Mahler discusses the Court’s analysis of the standard for confirming or vacating the appraisal award.  Read about that here.  However, after everything we’ve written about so far, the beat will continue to go on.  The Court denied both Yakuel’s motion to confirm the award and similarly denied Gluck’s motion to vacate the award.  The parties were ordered to appear for a status conference in June to discuss the continuation of the litigation.

Business and Valuation Questions Raised

When parties agree on valuation processes in buy-sell agreements, they can agree on almost anything.  Apparently, this was the case in Yakuel v. Gluck.

1. Why would Gluck have agreed to an amendment that would put both his investment in the Company and his employment in obvious jeopardy?  What was his consideration for giving up so many of his rights of ownership and employment?
2. How did Yakuel get Gluck to agree to a valuation process where he had no real say in the selection of the appraiser, if and when, or more likely when, he would be fired?
3. Why didn’t Gluck, or his attorney if he had one, ask that there be an initial appraisal to see what its conclusion would be before he signed the amendment?  That is why I recommend for single appraiser agreements?  In this case, the agreement specified that the appraiser should consider the minority nature of Gluck’s shares and take into account, potentially, a minority interest discount, a discount for lack of marketability, and other unnamed discounts.  This amendment was a ticking time bomb for Gluck from the moment it was signed.
4. Why would anyone agree to have accounting firms, even the largest in the nation, perform appraisals without insuring that the persons retained to do the appraisal had appropriate valuation credentials and experience?  That may well have been the case regarding PwC, but appraisal credentials and experience should always be specified in buy-sell agreements.
5. The folks at PwC are big boys and girls.  Nevertheless, the amendment was designed to create discomfort for any appraiser retained.  Gluck was clearly an intended user of the required appraisal, and yet he was not made a party to the PwC engagement letter.  It appears on this point that the folks at PwC did the best they could.  I cannot comment on the appraisal for reasons noted above.
6. Why would Gluck agree to pay 50% of the cost of the appraisal when it was clearly set to devalue his interest and insure that whatever purchase price he received would be offset by half of the appraisal fee. Yakeul shifted costs to Gluck in the amendment and retained all of the benefits of the repurchase in that following the transaction he would own 100% of the units outstanding.

In the next post, I’ll outline a superior single appraiser valuation process.  This process is clearly superior to the process we’ve just reviewed in Yakuel v. Gluck.  It is outlined in my book, Buy-Sell Agreements for Closely Held and Family Business Owners.

Be safe and be well!

Chris