NY court’s different spin on DLOM application

Zelouf v. Zelouf, 2014 N.Y. Misc. LEXIS 4341 (Oct. 6, 2014)

New York is awash in family businesses soaring one generation and becoming the center of nasty family feuds the next. The end result is often a statutory buyout culminating in a fair value proceeding to establish the value of the minority shareholder’s interest. New York law does not allow for a minority interest discount in an appraisal proceeding, but it does allow for the application of a DLOM and many times courts have applied it. Readers may remember the 2012 Giaimo v. Vitale case in which the court found a DLOM for a real estate holding company was appropriate.

But is it mandatory? A recent ruling from the New York Supreme Court (trial court) explored the issue in a case involving a very successful textile business and a freeze-out merger with which the majority shareholders tried to disable the minority shareholder from pursuing derivative claims of waste and misappropriation. In its analysis, the court looked closely at the rationale behind the DLOM, the idea that “since the company as a whole can be difficult to sell (e.g., buyers of closely held companies in niche businesses are not as plentiful as buyers of publicly traded corporations), a frozen-out, minority shareholder should recover less to reflect this fact.”

Did this rationale really apply here, the court asked? What was the probability of an actual sale and what did a low probability mean for purposes of the DLOM?

Find out more about the case here.