New York’s highest court recently weighed in on a long and ugly partnership dispute in which a minority shareholder had unilaterally dissolved the partnership. The court approved the discount-laden valuation of the departing partner’s interest. The crux is that this case is not a dissenting shareholder action.
FMV-driven valuation: The defendant, who had a minority interest in a general partnership that owned and operated a shopping center in upstate New York, withdrew from the partnership in the mid-2000s. The remaining partners accused him of breaking the partnership agreement and continued the business pursuant to New York’s Partnership Law § 69(2)(b). Litigation ensued. The trial court and the appellate division concluded the dissolution was wrongful. In valuing the exiting partner’s interest, the appellate division found discounts for goodwill, lack of marketability, as well as a sizable (66%) minority discount were appropriate. Further, the appellate division affirmed a $1.6 million award in attorneys’ and expert fees to the plaintiffs.
On review, the New York Court of Appeals recently upheld the rulings, except for the fee award. The majority opinion said the applicable statute contemplates a fair market value determination of the wrongfully dissolving partner’s interest “as if that interest were being sold piecemeal and the rest of the business continuing as a going concern.” Because a minority interest is worth less to a buyer of just that interest, a minority interest is applicable. Just because the exiting partner’s interest “may be absorbed by the remaining partners … does not render the value generated by application of a minority discount an inaccurate valuation of the intrinsic worth of that partner’s interest.”
The majority differentiated the instant case from dissenting shareholder cases that rely on a different statute requiring that the dissenter be paid “fair value.” The high court noted: “The term ‘fair value’ is not present in the statute under review here.”
Two judges dissented on the minority discount issue. The dissent said there was an analytical flaw in applying a minority discount where the actual purchasers are the remaining shareholders, not a hypothetical “willing buyer.” The dissent also objected to using the minority discount to deter or punish “wrongful” conduct because New York’s Partnership Law already requires a deduction for goodwill and payment for damages. “A further discount for lack of control is cumulative and unnecessary in light of these other provisions,” the dissent said.
A digest of Congel v Malfitano, 2018 N.Y. LEXIS 496 (March 27, 2018) (Congel II), and the court’s opinion will be available soon at BVLaw. A digest of Congel v Malfitano, 2016 N.Y. App. Div. LEXIS 3706 (May 18, 2016), is available at BVLaw now.
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