DLOM alive and well in 'AriZona Beverages' fair value proceedings

Ferolito v. AriZona Beverages USA LLC, 2014 N.Y. Misc. LEXIS 4709 (Oct. 14, 2014)

For the second time in October, a New York trial court pronounced on the issue of whether or not to apply a discount for lack of marketability in fair value proceedings. First came the Zelouf decision, in which the trial court declined to apply DLOM because of the minute probability that the company at issue would ever be sold, making illiquidity a theoretical rather than a real risk. In the more recent AriZona Beverages case, the court found there were genuine obstacles to the shareholders’ liquidating their shares and consequently found a rationale for applying DLOM.

The AriZona decision is rich in other valuation aspects as well. It revolves around the largest privately owned beverage company in the United States; its two acrimonious founders, the plaintiff and the defendant; and top-notch business valuators. Four years ago, the plaintiff, who by the court’s account was “frustrated with his inability to sell his shares in the company,” sued for dissolution of the company, prompting the defendant to pursue a buyout of the plaintiff’s 50% share.

An array of valuation issues dominates the court’s decision, including which valuation methodology to use, how to deal with strategic or synergistic value, what role to accord various expressions of interest in buying part or all of the company, how to account for the defendant’s key role in making the company the success it has become, and how to treat the plaintiff’s alleged “bad acts” for valuation purposes.

Readers may find answers to some of the questions here.

According to expert Gil Matthews (Sutter Securities Incorporated), there are two considerable problems with the court's analysis concerning the applicable tax rate and DLOM. For Matthews's critique, click here.