Poignant words from ‘Zelouf’ court on fair value appraisal and DLOM

Zelouf International Corp. v. Zelouf, 2014 N.Y. Misc. LEXIS 5595 (Dec. 22, 2014)

Valuation principles matter, but they are not the only factor a court needs to consider in a New York fair value proceeding. Fairness counts, too. This was one message a trial court recently delivered to the controlling shareholders in Zelouf in response to their post-trial motion for reargument.

When the court first ruled on the matter in late fall, it opposed the use of a DLOM given the facts of the case and the unlikely event that the majority would ever sell the company. The controlling shareholders orchestrated a freeze-out merger to render the minority shareholder, Nahal, powerless in pursuing her claims of corporate waste and self-dealing against them. According to the court, “nothing about how Nahal has been treated in any way resembles normative notions of fairness.” The use of a DLOM would amount to imposing a minority discount, which is anathema to New York courts in fair value proceedings.

The court’s rationale touched a nerve not only with the majority shareholders, but also with the valuation community. However, the court stuck to its position. In acknowledging “New York's contentious DLOM jurisprudence and the persuasive opinions of the academic community and non-New York courts,” the court provided further insight into the thinking that informed its earlier ruling.

There is no requirement to apply a DLOM to a fair value appraisal, the court said. At the same time, it was not saying that a DLOM “is necessarily legally inappropriate.” So that to do so would be “incompatible with binding New York precedent,” the court added.

To read more about this important ruling, click here.