Valuation of Shares; Dissolution; Corporations
By: Steven Cuttonaro | Staff Writer
Petitioner commenced this action seeking to dissolve two business corporations, Gould Erectors & Rigging, Inc. (“Gould”), and Flach Crane and Rigging Co., Inc. (“Flach”) pursuant to Business Corporation Law § 1104-a. After a trial, both parties agreed that Respondent would purchase the Petitioner’s shares of both companies at their respective fair market values when litigation commenced. Petitioner commenced this proceeding to dissolve Gould and Flach; the instant dispute arose in relation to the methods used to value the corporations.
While Petitioner’s expert relied on Gould’s earnings and profits for the 2012 fiscal year, and assigned no weight to previous fiscal years, Respondent’s methodology conflicted with Petitioner’s in three ways. First, Respondent’s expert used a weighted average which accounted for four fiscal years. Second, the expert found that Gould had underpaid Flach in non-arm’s length transactions. Third, the expert applied the tax rate of a C corporation. Furthermore, the Respondent’s expert used a market and income-based approach to valuation, whereas the Petitioner’s expert only used an income-based approach.
The first issue the Court determined was the effect of Gould’s income in previous fiscal years on the valuation. The Court found that while some weighting of income was appropriate, no weight should have been given to fiscal years prior to the substantial income growth which occurred in 2011. Further, the Court concluded that the years that a willing purchaser would rely upon in a sale should be given equal weight in the valuation.
The second issue before the Court was the extent to which Gould’s income should be normalized to reflect its non-arm’s length transactions with Flach. The Court adopted Respondent’s “analytical” approach. Additionally, the Court observed that Respondent’s analysis constituted a good-faith effort to examine the company’s business records, and to estimate the amount that Gould would have paid had Gould had engaged in arm’s length transactions for the same services.
The third dispute before the Court concerned the tax rate to be applied to Gould’s net income. On the valuation date, Gould was a C corporation. Petitioner argued that a different tax rate should be applied because: (1) Gould operated as a pass-through entity, or (2) a purchaser could convert Gould to an S corporation. The Court dismissed both arguments, and held that neither party had presented a basis for a deviation from the standard tax rate of C corporations.
The fourth dispute between the parties was regarding the amount of weight that might be assigned to historical transactions of comparable businesses in a valuation. The Court found that this “market approach” should be assigned no weight because the contractors selected by Respondent were not comparable to Gould’s. Further, the Court did not consider the applicability of a market approach to a valuation where the businesses selected were comparable.
The last issue before the Court was the interest rate which should be applied to Petitioner’s award. The Court observed that Petitioner did not act in bad faith. As such, the Court found that Petitioner’s competition against Gould should not affect the interest rate because Respondent terminated Petitioner’s employment, and deprived Petitioner of the benefits associated with his shares. The Court concluded that absent evidence which would lead the Court to apply an equitable rate of interest, the statutory rate should be applied.
Matter of Digeser v. Flach, Index No. 2382-13 (Platkin, J.).