Questionable DLOM ruling in recent AriZona case

The New York business divorce case involving the valuation of a 50% interest in the company that makes AriZona Iced Tea has prompted comments from Gil Matthews (Sutter Securities Inc.). He tells BVWire that one of the "substantial" problems in the ruling is the decision regarding the discount for lack of marketability (DLOM), which resulted in a "material windfall" to the continuing shareholder.

The plaintiff’s expert argued for zero DLOM because the company was successful and there were a number of “expressions of interest” from potential acquirers. The defendant’s expert asked for a 35% DLOM. The court decided a 25% DLOM was appropriate. This “results in the petitioner receiving 3/8ths of the value of the company, inequitably valuing the continuing shareholder’s half-interest at 60% more than the petitioner’s half-interest,” says Matthews. The court gave four reasons for applying a 25% DLOM. One of the reasons is the transfer restrictions in the owners' agreement, which is relevant to a DLOM, says Matthews. But the other three reasons the court gave seem “questionable,” he says.

  • AriZona did not have audited financials. “However, the opinion also states that ‘Arizona's financial statements can be readily audited, particularly when the shareholders are no longer battling with each other,’” Matthews says.
  • Extensive litigation between the shareholders. “However, the petitioner should not be penalized for litigating and, in any event, the litigation will be concluded when the petitioner is paid,” he says.
  • Uncertainty about AriZona’s S corp status. “However, the court concluded that S corp status did not add to the company’s value,” Matthews observes.

For more on Matthews' comments and a link to the AriZona case (including a case digest), see the BVWire (free registration required).