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How the Court Undervalued the Plaintiffs’ Equity in Ferolito v. AriZona Beverages – Part II

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  • Sutter Securities Financial Services, San Francisco
Article

How the Court Undervalued the Plaintiffs’ Equity in Ferolito v. AriZona Beverages – Part II

Abstract

This article criticizes the application of a marketability discount in a major N.Y. fair value decision.
&&(("(!* 
)' "#%$#%' #"&
The subject of New York statutory fair
value law and the application of dis-
counts for marketability on minority
shareholder interests is, as one expert
litigator and author in the field called
it, “highly complex and technical.”1
He went on to say that, “we will con-
tinue to see both theoretical and empir-
ically based attacks on DLOM in fair
value proceedings by New York
lawyers and their appraisal experts.”
Recently, a trial court judge called
DLOMs “an area of heated debate”
and pointed out that “more compelling
appellate resolution of these issues
would surely be welcomed by all.”2
In this article, Part II, we will not
discuss the contrasting legal interpre-
tations and history of New York fair
value and DLOMs. This article will,
instead, concentrate on understanding
the law as it is and as the Ferolito court
applied it and then attempt to show
why, even under the judge’s set of
assumptions, the court’s conclusion
was wrong. Solely on the facts of the
case, the court erred in placing a 25
percent discount for lack of mar-
ketability on Mr. Ferolito’s shares. A
DLOM of zero percent, as has been
awarded in several recent cases,3
would have been the correct outcome.
At most, an award in the area of 5 per-
cent might have been conceivable.
Part I of this article discussed the
tax-affecting of S-corporation earnings
in New York fair value determinations
and how an excessive pro forma tax
rate in Ferolito understated the value of
AriZona Beverages’ business (Ari-
Zona). Part II focuses on New York’s
interpretation of its fair value statute as
requiring the consideration of a dis-
count for lack of marketability
(DLOM) to be applied to dissenting
shareholders’ interests. This now out-
dated and anomalous interpretation
results in New York’s application of a
marketability discount to dissenters’
shares in a substantial majority of its
fair value cases.
Ferolito:
  
Both of the problems in the Ferolito
decision (the S-corporation tax issue
and the DLOM placed on dissenters’
shares) resulted in material benefits to
Mr. Vultaggio, the continuing share-
holder, at the expense of Mr. Ferolito,
who was being bought out. The result
of employing an erroneous pro forma
S-corporation tax, as discussed in Part I
of this article, was to reduce the valua-
tion of AriZona by approximately 10
percent. This error was specific to the
Ferolito case.
The second problem, the subject
of this article, Part II, is the DLOM
issue: the application of DLOMs to
minority interests in fair value pro-
ceedings. This problem is graver than
the S-corporation tax issue because it is
not case-specific and, in fact, reflects
the continuing confusion and contro-
versy over New York’s interpretation
of fair value and illiquidity discounts.
The Ferolito case illustrates the reduced
valuation awarded to dissenting share-
holders, as well as the resulting wind-
fall to the remaining shareholders, that
flows from New York’s inclusion of a
DLOM on minority interests in fair
value cases.
   
  
   s
The case law on marketability dis-
counts is complicated and lacking in
coherent rationale, yet the permissibil-
ity – some would say the “require-
ment” – for the application of those
discounts is firmly entrenched in New
York fair value law. However, certain
principles of New York fair value law
and its position on minority discounts
are clear. A concise enumeration of
these principles and their legal sources
was laid out by Fred D. Weinstein, an
experienced litigator in the area, at the
Business Valuation Conference of the
New York Society of CPAs, May 2012.
As presented in Chris Mercers blog of
May 24, 2012,4they are:
   

   
Sutter Securities Incorporated
San Francisco, CA
gil@suttersf.com
How the Court Undervalued the
Plaintiffs’ Equity in
Ferolito v. AriZona Beverages
Part II: Ferolito and the Application of DLOM
in New York Fair Value Cases
expert
TIP
The
Ferolito
case illustrates the
reduced valuation awarded to
dissenting shareholders, as well
as the resulting windfall to the
remaining shareholders, that
flows from New York’s application
of a DLOM to minority interests in
fair value cases, in contrast to
general practice in other states.
Continued on next page
&&(("(!* 
)' "#%$#%' #"&#"' "(
Value the corporation as an
operating business, not one in
liquidation.5
Valuation is based on “the
shareholder’s proportionate
interest in a going concern.”6
Equal treatment of all shares of
the same class of stock.7
As Mercer points out in his discussion,
all of these principles relate to the val-
uation of enterprises and were enu-
merated in Beway.
New York law is clear on its
position toward minority discounts: it
forbids them. It does so because to
impose a minority discount violates
each of the three principles above.
Blake held that minority discounts
were prohibited in New York fair value
proceedings by stating that:
[A] minority interest in closely
held corporate stock should not be
discounted solely because it is a
minority interest.8
When this holding was adopted by
New York’s highest court in Beway,
Blake’s position became precedent for
New York’s law on minority discounts.
In contrast, New York’s law that
mandates adjudicators to consider the
application of marketability discounts
on minority shares is opaque in origin
and obscure in reasoning. We cannot
delve its depths in this article. Mr.
Weinstein pointed out that from 1991
on, New York’s highest courts have
accepted a principle that allowed a
marketability discount to be placed not
on the enterprise, but on the minority
shares alone. He cited Seagroatt:
[W]hatever the method of valuing
an interest in such an enterprise, it
should include consideration of
any risk associated with illiquidity
of the shares.9
Similarly, in the Beway decision, the
Court of Appeals insisted that because
minority shares are limited in their sal-
ability by virtue of being minority
holdings, their value should be subject
to a DLOM. The Beway court agreed
with Blake’s approval of minority mar-
ketability discounts:
A discount for lack of marketabili-
ty is properly factored into the
equation because the shares of a
closely held corporation cannot be
readily sold on a public market.
Such a discount bears no relation
to the fact that the petitioner s
shares in the corporation represent
a minority interest.10
New York is now the only state that
applies a DLOM in a substantial major-
ity of fair value proceedings. As the
Ferolito court pointed out, “Nearly all
courts in New York that have consid-
ered the question whether to apply a
DLOM have answered in the affirma-
tive.”11 They do so because they
adhere to Beway’s precedent.
The New York fair value princi-
ples are explicit that all shareholders
have to be treated the same in fair
value proceedings: all have to receive a
pro rata share of the on-going busi-
ness. However, New York’s applica-
tion of a marketability discount on
minority interests is seen by many as
the equivalent in impact to the applica-
tion of a minority discount to minority
interests. The theoretical criticism is
that a DLOM is viewed as equivalent
to a minority discount in violating all
three of the fair value precepts listed
above. Criticism of Beway’s theoretical
foundations was made soon after the
Beway decision and continues to res-
onate increasingly today, as can be
seen in the recent Zelouf case discussed
below.
How could Beway and Blake
interpret fair value and marketability
discounts to end up with results
opposed to New York’s own fair value
principles? They did so by accepting
the reasoning in Blake, holding that a
DLOM bears no relation to the fact that
the petitioner's shares represent a
minority interest. They believed that
the marketability discount on minority
interests was a different kind of discount
from the minority discounts they had
forbidden. In fact, they emphatically
stated that a DLOM, although imposed
only on minority shareholders, was not
the imposition of a type of minority
discount at all.
Arguments that the effect of
placing a liquidity discount on one
group of shareholders alone was tanta-
mount to treating that group unequal-
ly were rejected. Beway thus ensured
that minority shareholders would not
receive a pro rata share of going-con-
cern value. Instead, they would
receive a reduced share value. Beway’s
insistence that the DLOM application
to minority interest was different in
character from other forms of minority
discounts justified its exclusion from
the prohibition on minority interests.
The Beway/Blake view is all the
more surprising when we understand
that the two courts recognized that
they were valuing the minority inter-
ests in the context of involuntary dis-
positions – oppression, appraisal, or
entire fairness proceedings not in
voluntary fair market sales. These pro-
ceedings arise only when the dissenter
has been forced out or is alleging
oppressive treatment. In these situa-
tions, the dissenter is statutorily grant-
ed the right to have a fair value judicial
determination designed to award him
the fair value of the interests he has
involuntarily lost. This right to a fair
value adjudication only becomes avail-
able after the majority (or controller)
has declined to dissolve the corpora-
tion or failed to offer what the dis-
senter deems to be a fair price. If the
controller or majority had agreed to
dissolve the corporation, the market
price received would be divided pro
rata by all shareholders with each
holder receiving the same, or equal
value, per share owned.
As stated in the principles above,
the fundamental equity purpose of fair
value determinations is that minority
interests must receive an equal pro rata
share of the value of the going-concern
value of the corporation as a whole.
Nevertheless, Beway established that in
New York it was acceptable, moreover
“correct,” for dissenters to receive the
reduced/unequal share that would
result after application of a DLOM,
and, further, that that result would not
contradict New York’s fair value
statute.
Continued on next page
1.
2.
3.
&&(("(!* 
)' "#%$#%' #"&#"' "(
The Ferolito court followed this
understanding of New York law when
it applied a material DLOM to Mr. Fer-
olito’s interest. The consequent and
foreseeable result was that Mr. Feroli-
to, the dissenter, received materially
less than his pro rata share of the
going-concern value of the corpora-
tion.
  
Ferolito 
The Ferolito facts are presented here
again to provide background.
Domenick Vultaggio and John Ferolito
co-founded AriZona Beverages in
1992; it has grown to become the
largest privately owned beverage com-
pany in the United States. The Ferolito
and Vultaggio families each owned 50
percent of the parent company, Bever-
age Marketing USA, Inc. (BMU), an S
corporation whose subsidiaries manu-
facture and distribute AriZona Tea and
several other proprietary products
(collectively, AriZona).
By mutual agreement, Mr. Vult-
aggio was the manager of the business.
Mr. Ferolito wished either to sell his 50
percent interest to a third party or,
alternatively, to sell the entire compa-
ny. After years of shareholder disputes
and after Mr. Vultaggio prevented sale
of the company or of Mr. Ferolito’s
shares, Mr. Ferolito sought dissolution
pursuant to BCL § 1104-a, which
required Mr. Vultaggio either to dis-
solve the company or to purchase his
interest at fair value. Mr. Vultaggio
then exercised his right under BCL §
1118 to purchase Mr. Ferolito's shares.
Because the parties disputed the value
of AriZona and of Mr. Ferolito’s shares,
the parties petitioned the trial court to
determine the fair value of AriZona
and of Mr. Ferolito’s shares.
After the court imposed a
DLOM of 25 percent ($0.5 billion) on
Mr. Ferolito’s 50 percent interest,12 he
was awarded a diminished 37.5 per-
cent of Arizona’s going-concern value.
Thus, 12.5 percent of AriZona’s value
was shifted to Mr. Vultaggio. Mr. Vul-
taggio’s half-interest was effectively
valued at 62.5 percent of AriZona’s
value, 67 percent more than was
awarded to Mr. Ferolito for his half-
interest. Mr. Ferolito’s reduced award
defeated the purpose of the fair value
adjudication, which is to give all share-
holders in the same class their propor-
tionate share in the business’s value.
 Ferolito 
  
  
 
Because New York requires a consider-
ation of a discount for lack of mar-
ketability in fair value assessments, the
Ferolito court undertook the determina-
tion of that discount. There was a
major difference between the two par-
ties on the appropriate discount for
lack of marketability to be applied to
Mr. Ferolito’s shares. Mr. Ferolito’s
expert argued for a zero DLOM and
Mr. Vultaggio’s for 35 percent. The
court applied a 25 percent DLOM,
describing it as “the DLOM typically
applied” in New York fair value cases:
The Court concludes that a 25%
DLOM is appropriate, which even
one commentator opposed to
application of a DLOM in most if
not all cases admits ‘hover[s] in the
range’ of the DLOM typically
applied.13
There was no discussion of any facts
specific to AriZona that supported the
amount of the DLOM selected by the
court. Thus, it appears that the court
selected the 25 percent DLOM because
25 percent was consistent with the per-
centage commonly used in other New
York cases.
The Ferolito court was following
in the tradition of numerous New York
decisions. New York courts have often
applied a 25 percent DLOM at the
shareholder level, usually without
explanation but citing Beway and/or
Blake and/or other subsequent appel-
late decisions.14 In contrast, some
courts have weighed the specific facts
in their cases and have applied
DLOMs at lower rates, such as 15 per-
cent15 or 10 percent.16 In fact, a small
number of New York cases have deter-
mined, again on the basis of the facts in
the specific case, that a zero DLOM
was appropriate.
Ferolito 
  
   
The Ferolito court gave four reasons to
justify its application of a DLOM:
(a) the fact that AriZona did not
have audited financial statements
for many years prior to the valua-
tion date, (b) the extensive litiga-
tion between the shareholders, (c)
the uncertainly about the compa-
ny’s S-Corporation status, and (d)
the transfer restrictions in the
Owners’ Agreement.17
None of these reasons justify a DLOM
in this case.
First, although the Deloitte audit
partner working with AriZona had tes-
tified that it had “become increasingly
difficult to finalize the audit process
due to the S-Corporation issues and
the dissension among the parties,”18 he
also testified that “Arizona's financial
statements can be readily audited, par-
ticularly when the shareholders are no
longer battling with each other.”19
The second reason put forward,
the “extensive litigation between the
shareholders,” is irrelevant and has no
impact on the determination of value
of AriZona or any other economic enti-
ty for purposes of disposition (either
through dissolution, sale, or any other
means) under the New York or any
other fair value statute. New York case
law spells out that the value of the cor-
poration is to be determined as a
whole, that is, “what a willing pur-
chaser, in an arm's length transaction,
would offer for the corporation as an
operating business.”20 To buyers, the
quarrels of past or present sharehold-
ers may be the cause of their buying
opportunity but they are not relevant
to the buyers’ estimates of value to
themselves, since the quarreling share-
holders cease to be shareholders after
the transaction.
Continued on next page
&&(("(!* 
)' "#%$#%' #"&#"' "(
Fair value cases proceed as a
result of dissenters being forced out or
wanting out because of perceived
oppression or management differ-
ences, and controllers or majority
shareholders choosing to keep the
enterprise going and not dissolve it.
Mr. Vultaggio made the election to buy
out Mr. Ferolito, thereby terminating
the litigation and at the same time,
avoiding dissolution. Basing a DLOM
on prior litigation between the parties
unfairly penalizes the petitioner, Mr.
Ferolito, for asserting his rights.
Indeed, if the dissenter is pleading
oppression at the hands of the con-
troller, it is a miscarriage of equity to
punish the dissenter for attempting to
exit.
Third, the uncertainty about Ari-
Zona’s S-corp status would have no
impact whatever on the value of Ari-
Zona to a third-party buyer. The
uncertainty would be irrelevant to the
prospective willing buyers of a $2 bil-
lion company because a corporation
cannot be a shareholder of an S corpo-
ration and, therefore, any acquiror
would almost certainly be ineligible to
be an S-corp shareholder. In fact, as
discussed in Part I of this article, the
court utilized a tax rate higher than the
C-corp tax rate in its valuation of Ari-
Zona, evidencing that it effectively
concluded that S-corp status did not
add to AriZona’s value.
Fourth, a DLOM should not
have been applied based on the trans-
fer restrictions in the Owners’ Agree-
ment. Two Court of Appeals cases,
Beway and Pace Photographers, have
ruled that covenants that restrict trans-
ferability are inapplicable to fair value
determination. Beway explained:
[A] statutory acquisition of minor-
ity shares by a corporation pur-
suant to the Business Corporation
Law is not a voluntary sale of cor-
porate shares as contemplated by a
restrictive stockholder agreement
and, therefore, ‘the express
covenant is literally inapplicable.’21
 Ferolito  
   
   
The court explained how it distin-
guished AriZona from several New
York cases in which a zero DLOM had
been applied. We discuss three of them
here: In re Walt's Submarine Sandwiches,
Inc. (Walt’s),22 Academe Paving23 and
Zelouf.
As to the first, the Ferolito court
stated that the saleability of Walt’s Sub-
marine Sandwiches was highly evi-
denced in contrast to AriZona’s. He
stated that Walt’s differed because, in
Walt’s:
A DLOM was not appropriate
where there was testimony of
increased profits, expansion and
‘120 responses to a “for sale”
advertisement in the Wall Street
Journal.’ [Walt’s] at 981. There are a
geometrically smaller number of
expressions of interest for AriZona
in the present case, even assuming
that those expressions of interest
here had as much depth and
breadth as those in Walt’s Subma-
rine.24
In fact, AriZona, as made clear in the
facts presented at trial, was (and is) an
attractive acquisition candidate. It is a
large, highly successful company in a
niche market. Indeed, the decision dis-
cussed three large potential purchasers
that had submitted informal offers to
acquire AriZona: Coca Cola,25 Nestlé
Waters N.A. (Nestlé) (a subsidiary of
Nestlé S.A.),26 and Tata Tea (the parent
of Tetley Tea).27 The stature of the
potential acquirors who had discus-
sions with AriZona, as well as the fact
that at least two investment banks had
made pitches to represent AriZona in a
transaction,28 appear to indicate that
AriZona would have been quite mar-
ketable if both shareholders had
wished to sell.
The court discredited Nestlé’s
interest, stating:
According to ... Nestle’s then-CEO,
that company was very interested
in a deal with AriZona because it
had high growth and a great distri-
bution system. [He] testified credi-
bly that Nestle had a hard time
getting ‘good financial data’ from
AriZona, and that the information
Nestle did receive was ‘woefully
inadequate for a proper due dili-
gence.’ He further testified credi-
bly that Nestle required, prior to
making a binding offer, a ‘path to
control’ of AriZona upon which
both Ferolito and Vultaggio
agreed. Nestle’s discussions with
Ferolito and Vultaggio never
reached that point because Vultaggio
ceased returning Jeffrey's phone calls
[emphasis added].29
Looking at the facts set forth by the
court, it appears that it was Mr. Vultag-
gio’s lack of cooperation that barred a
deal with Nestlé. Mr. Vultaggio was in
management control of the company
and the lack of “good financial data”
and other deficiencies for sale were
under Mr. Vultaggio’s control. The
court concentrated on the potential
problems in selling AriZona rather
than on the fact that the impediments
to marketability were caused by the
continuing/controlling shareholder’s
volitions and actions. When con-
trollers do not wish to further a sale,
they can easily thwart any interest or
offers. Controllers who, in fact, wish to
continue their corporations and freeze
out minority interests or dissenters,
would be given an incentive for doing
so, if, in the fair value determination,
they knew they could be enriched by
the court’s imposition of a discount for
lack of marketability on the forced-out
shares. The Ferolito court failed to
appreciate that the goal of a fair value
adjudication is to remedy the loss of
interests by the dissenters, not to
enrich the majority who remain in the
on-going corporation.
In addition, the comparison of
the marketing process with Walt’s is
inapt. Large private companies like
AriZona are not sold the same way as
sandwich shops. The sale process for
large companies is not effected
through public advertising, but is com-
Continued on next page
&&(("(!* 
)' "#%$#%' #"&#"' "(
monly carried out by having an invest-
ment bank discreetly contact a limited
number of industry and financial buy-
ers.
For the second case, Academe
Paving, the Ferolito court also rejected
the zero DLOM that court had award-
ed. It distinguished AriZona from
Academe Paving by saying that “the
trial court appears to have applied an
impermissible minority discount,
rather than a DLOM.”30 The judge in
Ferolito appears to have misread Acad-
eme Paving. The Academe court applied
no discounts, rejecting a minority dis-
count,31 a DLOM at the enterprise
level,32 and the 30-35 percent DLOM at
the shareholder level proposed by
respondents’ expert.33
ZelouF
The third case that the Ferolito court
distinguished and rejected, Zelouf,
came down only eight days before Fer-
olito. In Zelouf, the court considered
not only the facts in the case but also
the fundamental purposes advanced to
justify shareholder-level DLOMs in
New York. After doing so, the court
awarded a zero DLOM.
Zelouf International Corp. is a
family-owned company whose share-
holders are all members of the
founder’s family. In appraising the 25
percent interest owned by Nahal
Zelouf, the widow of a shareholder,
the court decided that the facts of the
case merited a DLOM of zero percent.
The judge observed that “it seems
unlikely that the company would or
could ever actually be sold” because of
the controllers’ intent to keep the com-
pany within its family due to its remu-
nerative family benefits; the court
therefore concluded that “the rationale
for a applying a DLOM breaks down
when one considers that any liquidity
risk ... is more theoretical than real.”34
The denial of a DLOM in Zelouf
was based on the court’s conclusion
that the company would not be sold,
that the company was under the con-
troller’s control and could not be sold
without his desire, and that the con-
troller had no desire to sell. The Feroli-
to court had come to the same conclu-
sion and stated, “Vultaggio admittedly
does not want to sell and instead wants
to stay in the business and keep the
company for his children.”35 If the
Zelouf reasoning discussed above had
been applied in Ferolito, the court
would have applied a zero DLOM to
Mr. Ferolito’s 50 percent interest.
After reargument in which the
respondents claimed that New York
required a DLOM, the court stated in
Zelouf II that “no New York appellate
court has ever held that a DLOM must
be applied to a fair value appraisal of a
closely held company.”36 The court
reiterated its rejection of a DLOM in
the case, concluding that “application
of a DLOM here would be tantamount
to the imposition of a minority discount.37
[emphasis added] She explained:
In effect, applying a DLOM here
would be the economic equivalent
of imposing a minority discount —
that is, Nahal realizing less for her
shares because she is being forced
to sell while Danny gets to realize
their full value by staying in con-
trol. It is well settled that minority
discounts are not permitted under
New York law. Indeed, it is the
tension between the application of
a DLOM, which is done in most
cases but is not legally required, and
the practical effect of a DLOM here
serving as a minority discount,
repugnant to New York courts and
never allowed, that drives the
court’s ruling.38 [emphasis added]
Zelouf II acknowledged that it would
be inconsistent with New York prece-
dent to decide that a DLOM was legal-
ly inappropriate.39 However, the court
commented:
This court’s understanding of the
applicable precedent is that, while
many corporate valuation princi-
ples ought to guide this court's
analysis, this court’s role is not to
blithely apply formalistic and
buzzwordy principles so the
resulting valuation is cloaked with
an air of financial professional-
ism.40
The Ferolito court distinguished Zelouf
but failed to see the similarities. Feroli-
to distinguished the facts by emphasiz-
ing one aspect of Zelouf: the fact that
the company involved in Zelouf was
highly unlikely to ever be sold. The
Ferolito court wrote:
[Zelouf] concluded [that because of
controller’s intent to retain the
company and keep it private] ‘any
liquidity risk associated with
[Zelouf International] is more the-
oretical than real.’ By contrast, as
readily demonstrated by the
stalled Nestle negotiations, the
very reasons for a DLOM here
have resulted in or are at least
strongly correlated with — the fail-
ure of Ferolito to sell his shares
prior to this proceeding.41
This quote reveals that the Ferolito
court failed to see that not only were
important facts in the two cases simi-
lar, but the context in which the facts
existed were similar: Danny Zelouf
wished to retain the company and had
no desire to dissolve or sell, and Mr.
Vultaggio was in the same position.
Mr. Vultaggio, like Mr. Zelouf, wished
to retain the company. Mr. Vultaggio
did not wish to allow a dissolution in
which all the dissolving shareholders
would share equally, nor did he wish
to sell – as evidenced by his lack of
willingness to prepare and present his
company for sale.
The Zelouf court drew a com-
pletely opposite conclusion from simi-
lar facts as to equity and fairness.
Zelouf concluded that the dissenting
shareholder should not suffer the bur-
den of a discount on her shares
because of the controller’s volitions
and actions. In stark contrast, the Fer-
olito court felt comfortable imposing
the financial burden of “illiquidity”
onto the exiting shareholder, despite
the fact that the illiquidity resulted
from Mr. Vultaggio’s unwillingness to
allow the business to be fairly priced in
an authentic marketing process or to
permit Mr. Ferolito to sell his 50 per-
cent to a third party. Mr. Ferolito’s dif-
Continued on next page
&&(("(!* 
)' "#%$#%' #"&#"' "(
ficulty in selling his shares, empha-
sized by the court, resulted to a signif-
icant degree from Mr. Vultaggio’s fail-
ure to cooperate and unwillingness to
sell. As a New York decision com-
mented in 2009, “The creators of the
cause of the non-marketability should
not gain from their handiwork.”42
Unfortunately, that is the result that
occurred in Ferolito, and a material gain
for Mr. Vultaggio ensued from the
DLOM on Mr. Ferolito’s shares.

There is broad consensus that mar-
ketability discounts should seldom, if
ever, be permitted in appraisals. With
respect to DLOMs, New York contin-
ues to be out of line with the Model
Business Corporation Act43 and the
American Law Institute,44 as well as
the widely accepted view in other
states and in legal literature. New
York’s approach is based on outdated
valuation approaches that were uti-
lized three or more decades ago:
Determination of “fair value”
under [N.Y.] BCL [§] 1118 has
become the subject of increased lit-
igation, and grows more compli-
cated with the increasing sophisti-
cation of the appraisal industry,
effectively in its infancy in the
1980s, when defining case law per-
taining to same evolved. Despite
proliferation of new studies and
greater understanding of financial
theory within the appraisal com-
munity, a court’s ability to accept
and recognize these changes is lim-
ited at best, if principal reliance is
upon cases determined in the
1980s.45
Authoritative legal and valuation writ-
ers have long recommended that the
Court of Appeals reconsider New
York’s view of DLOMs.46 A change in
New York’s obsolete and misguided
position on DLOMs in fair value cases
is long overdue, but until that occurs,
cases such as Ferolito that result in
inequity call for examination at least
on their facts alone. In the end, Mr. Fer-
olito was awarded 75 percent of his
1Peter Mahler, “The Marketability Discount in Fair Value
Proceedings: An Emperor Without Clothes?” July 11,
2011, available at http://www.nybusinessdivorce.com/
2011/07/articles/valuation-discounts/the-marketability-
discount-in-fair-value-proceedings-an-emperor-without-
clothes/ (Mahler, “Emperor Without Clothes?”).
2Zelouf Intl. Corp. v. Zelouf, 999 N.Y.S.2d 731, 735
(N.Y. Sup. 2014) (Zelouf II).
3For example, Zelouf Intl. Corp. v. Zelouf, 2014 N.Y.
Misc. LEXIS 4341 (N.Y. Sup., Oct. 6, 2014) (Zelouf)
(discussed below and in Robert J. Grossman, “Dis-
counts for Lack of Marketability and Fair Value, Finan-
cial Valuation and Litigation Expert, April/May 2015, pp.
12-14); Application of Zulkofske, 2012 N.Y. Misc.
LEXIS 3088 (N.Y. Supr., June 28, 2012) at *7, *11 (50
percent shareholder awarded an undiscounted half of
the value of the corporation); Man Choi Chiu v. Chiu,
125 A.D.3d 824 (N.Y. App. 2015) at *3, *4 (Appellate
Division did not overturn trial court’s ruling that the
DLOM should be zero).
4Z. Christopher Mercer, “New York Statutory Fair Value:
To ‘Marketability Discount’ or Not,” May 24, 2012,
available at http://mercercapital.com/assets/Mercer-
Capital-Statutory-Fair-Value.pdf, p. 54.
5Matter of Blake v. Blake Agency, 107 A.D.2d 139 (N.Y.
App. 1985).
6Friedman v. Beway Realty Corp., 661 N.E.2d 972 (N.Y.
1995) (Beway).
7Cawley v. SCM Corp., 530 N.E.2d 1264 (N.Y. 1988).
8Blake at 149.
9Matter of Seagroatt Floral Company, Inc., 583 N.E.2d
287, 290 (N.Y. 1991) (cited in Beway at 974).
10 Blake at 149.
11 Ferolito at *46.
12 In most fair value cases, the parties seeking the fair
value determination are dissenting minority sharehold-
ers and the parties continuing in ownership are majori-
ty and controlling shareholders.
13 Ferolito at *50-*51, quoting Mahler, “Emperor Without
Clothes?”
14 E.g., Matter of Vetco, Inc., 292 A.D. 391, 392 (N.Y.
App. 2002), which rejected a 40 percent DLOM and
said, “The appropriate percentage for the illiquidity dis-
count is 25%.”
15 E.g., Quill v. Cathedral Corp., 215 A.D.2d 960, 963
(N.Y. App. 1995) (15 percent DLOM for business
retained, zero for business sold before trial); Murphy v.
U.S. Dredging Corp., 74 A.D.3d 815, 818 (N.Y. App.
2010).
16 E.g., Matter of Joy Wholesale Sundries, 125 A.D.2d
310, 311 (N.Y. App. 1986); Matter of Raskin v. Walter
Karl Inc., 129 A.D.2d 642, 644 (N.Y. App. 1987); Matter
of Carolina Gardens, Inc., 238 A.D.2d 189, 190 (N.Y.
App. 1997); Cortes v. 3A N. Park Ave. Rest. Corp.,
2014 N.Y. Misc. LEXIS 4693 (N.Y. Sup., Oct. 28, 2014)
at *64.
17 Ferolito at *49.
18 Ferolito at *16.
19 Ferolito at *49.
20 Matter of Pace Photographers, Ltd., 525 N.E.2d 713,
718 (N.Y. 1988), quoting Blake.
21 Beway at 977, quoting Pace Photographers at 719.
22 173 A.D.2d 980 (N.Y. App. 1991).
23 O'Brien v. Academe Paving, Inc., No. 99-2594 (Sup.
Ct. Broome Co., N.Y., Sept. 25, 2000).
24 Ferolito at *47.
25 Ferolito at *13.
26 Ferolito at *9-*11.
27 Ferolito at *8-*9.
28 Ferolito at *12-*13.
29 Ferolito at *9-*10.
30 Ferolito at *47.
31 Academe Paving, slip op., p. 12.
32 Academe Paving, slip op., p. 15.
33 Academe Paving, slip op., pp. 12-14.
34 Zelouf at *22.
35 Ferolito at *31.
36 Zelouf II at 735. The court commented, “[E]ven if this
court were required to apply a DLOM, the evidence
submitted at trial does not justify a DLOM of 25% or
higher. If it had applied a DLOM, the court would have
applied a 10% DLOM.” (Zelouf II at 737, fn. 5)
37 Zelouf II at 737.
38 Zelouf II at 735.
39 Zelouf II at 738.
40 Zelouf II at 738.
41 Ferolito at *48.
42 Murphy v. United States Dredging Corp., 2008 N.Y.
Misc. LEXIS 9900 (N.Y. Sup., May 19, 2008) at *15;
rev’d on other grounds, 74 A.D.3d 815, 818 (N.Y. App.
2010).
43 MBCA § 13.01(4)(iii) (1999).
44 ALI, Principles of Corporate Governance: Analysis and
Recommendations § 7.22(a) (1994).
45 Kenneth J. Weinstein and Joel Rakower, “Marketability
Discount and Dissenting Minority Ownership,” N.Y.L.J.,
July 8, 2011, pp. 7-9, at p. 9.
46 See, e.g., Barry M. Wertheimer, “The Shareholders’
Appraisal Remedy and How Courts Determine Fair
Value,” 47 Duke L. J. 613, 641 (1998) at fn. 136.
proportionate share of the value of Ari-
Zona, leaving Mr. Vultaggio with 125
percent for his portion. Mr. Vultaggio
was given a windfall and unjustly
enriched, an outcome diametrically
opposed to the fair value the dissent-
ing shareholder is supposed to receive
when the controller acquires his
shares. c
ResearchGate has not been able to resolve any citations for this publication.
The Marketability Discount in Fair Value Proceedings: An Emperor Without Clothes?
  • Peter Mahler
Peter Mahler, "The Marketability Discount in Fair Value Proceedings: An Emperor Without Clothes?" July 11, 2011, available at http://www.nybusinessdivorce.com/ 2011/07/articles/valuation-discounts/the-marketabilitydiscount-in-fair-value-proceedings-an-emperor-withoutclothes/ (Mahler, "Emperor Without Clothes?").
Discounts for Lack of Marketability and Fair Value, Financial Valuation and Litigation Expert
  • Robert J Grossman
For example, Zelouf Intl. Corp. v. Zelouf, 2014 N.Y. Misc. LEXIS 4341 (N.Y. Sup., Oct. 6, 2014) (Zelouf) (discussed below and in Robert J. Grossman, "Discounts for Lack of Marketability and Fair Value, Financial Valuation and Litigation Expert, April/May 2015, pp. 12-14); Application of Zulkofske, 2012 N.Y. Misc. LEXIS 3088 (N.Y. Supr., June 28, 2012) at *7, *11 (50 percent shareholder awarded an undiscounted half of the value of the corporation);
New York Statutory Fair Value: To 'Marketability Discount' or Not
  • Christopher Mercer
Z. Christopher Mercer, "New York Statutory Fair Value: To 'Marketability Discount' or Not," May 24, 2012, available at http://mercercapital.com/assets/Mercer-Capital-Statutory-Fair-Value.pdf, p. 54.
The appropriate percentage for the illiquidity discount is 25%
  • E G N Y App
E.g., Matter of Vetco, Inc., 292 A.D. 391, 392 (N.Y. App. 2002), which rejected a 40 percent DLOM and said, "The appropriate percentage for the illiquidity discount is 25%."
Matter of Pace Photographers, Ltd
Matter of Pace Photographers, Ltd., 525 N.E.2d 713, 718 (N.Y. 1988), quoting Blake.
the evidence submitted at trial does not justify a DLOM of 25% or higher
  • Zelouf
Zelouf II at 735. The court commented, "[E]ven if this court were required to apply a DLOM, the evidence submitted at trial does not justify a DLOM of 25% or higher. If it had applied a DLOM, the court would have applied a 10% DLOM." (Zelouf II at 737, fn. 5) 37
Marketability Discount and Dissenting Minority Ownership
  • J Kenneth
  • Joel Weinstein
  • Rakower
Kenneth J. Weinstein and Joel Rakower, "Marketability Discount and Dissenting Minority Ownership," N.Y.L.J., July 8, 2011, pp. 7-9, at p. 9.