Blake v. Blake Agency, Inc.
Decision Date | 25 February 1985 |
Parties | In the Matter of Lawrence R. BLAKE, etc., Appellant-Respondent, v. BLAKE AGENCY, INC., Respondent-Appellant. |
Court | New York Supreme Court — Appellate Division |
Wimpfheimer & Sherman, Mineola (Steven Wimpfheimer and Eugene J. Cunningham, Mineola, of counsel), for appellant-respondent.
Broderick, Broderick & Redmond, Bayside (Peter E. Redmond and Patrick F. Broderick, Bayside, of counsel), for respondent-appellant.
Before MOLLEN, P.J., and TITONE, THOMPSON and WEINSTEIN, JJ.
These appeals concern the valuation of a minority interest in the shares of a closely held corporation, where the minority shareholder has commenced a special proceeding pursuant to Business Corporation Law § 1104-a to dissolve the corporation, and the corporation has elected to buy out the minority shareholder pursuant to Business Corporation Law § 1118. Specifically, we are called upon in this case to determine whether Special Term correctly valued petitioner Lawrence R. Blake's 25% interest in the common stock of Blake Agency, Inc., whether Special Term erred in failing to award interest on the "fair value" of petitioner's shares from the date immediately preceding the filing of the petition for dissolution to the date of payment, pursuant to Business Corporation Law § 1118(b), and whether Special Term erred in failing to impose all of petitioner's expenses in litigating this proceeding on the respondent-appellant corporation.
Blake Agency, Inc. is a storefront insurance brokerage firm, located in Queens County, which specializes in property and casualty insurance. The agency was incorporated in 1954 by William Blake, Sr. Upon his death in 1968, four of his sons each received a 25% share of the stock in the corporation. In 1971 William Blake, one of the sons of William Blake, Sr., bought his brother Richard Blake's 25% share of the corporation, thereby acquiring effective control of the company. The corporation has never declared or paid any dividends.
Petitioner Lawrence R. Blake apparently had various disagreements with his brother William Blake with regard to corporate operations. Petitioner believed he had been "frozen out" of the corporation's affairs, as evidenced by the fact that he was never consulted before corporate decisions were made and the fact that he was never paid After hearing the testimony of various witnesses, including four experts, the referee determined the "fair value" of petitioner's shares to be $64,834. The referee's calculations commenced by multiplying adjusted gross revenue from insurance commissions by a factor of one (a capitalization rate of 100%), in order to determine the value of the corporation's goodwill. Gross commission revenue was determined to be $254,210. This amount was then reduced by subtracting "Subproducer Revenues" of $32,744 and "Contingent Income" of $9,872, leaving a balance of $211,594. * The referee divided the $211,594 by four to determine petitioner's 25% share of the goodwill of the corporation, resulting in a figure of $52,898. He then applied a discount of 40% to this figure because petitioner's shares represented a minority interest in the corporation and because they were not readily marketable. After application of this discount, petitioner's share of the intangible value of the corporation (goodwill) was determined to have a fair value of $31,739. The referee also found that petitioner's share of the corporation's net tangible value was $33,095, representing 25% of the corporation's assets ($321,443.03) less its current liabilities ($189,060.25). He did not apply a discount to net tangible value. Combining the intangible value and the net tangible value, the referee concluded that the fair value of petitioner's shares in the corporation as of August 3, 1981 was $64,834. He found that the investment value should be considered in the determination of fair value in this case, and that neither "net asset value" nor "market value" should be considered. Additionally, the referee found that William Blake's annual compensation of approximately $84,000 was not excessive.
any dividends. On August 4, 1981, he filed a petition pursuant to Business Corporation Law § 1104-a for the judicial dissolution of Blake Agency, Inc. On October 30, 1981, the corporation elected to purchase Lawrence R. Blake's shares in the corporation for their "fair value", pursuant to Business Corporation Law § 1118(a). By order dated November 19, 1981 (Graci, J.), the dissolution proceeding was stayed pursuant to Business Corporation Law § 1118(b), pending negotiations undertaken by the parties in an attempt to agree on the "fair value" of the minority shares. On April 5, 1982, the parties stipulated that they were unable to agree on the value of petitioner's shares. Special Term (Graci, J.), on or about April 8, 1982, appointed Samuel S. Tripp, Esq., as a referee to help determine the question of the "fair value" of petitioner's shares in the corporation. The "fair value" of the shares had to be determined as of August 3, 1981, the day immediately preceding the filing of the petition and order to show cause (Business Corporation Law § 1118[b] ).
The referee's valuation of petitioner's 25% interest in Blake Agency, Inc. can be summarized as follows:
Intangible Value ------------------------------------- Gross Commission Revenue for the period ended June 30, 1981 $254,210 Less: "Subproducer Revenues' (32,744) Less: "Contingent Income' (9,872) --------- Adjusted Gross Commission Revenue $211,594 --------- Petitioner's 25% share $ 52,898 --------- --------- Less: 40% combined minority interest and lack of marketability discount (21,159) Petitioner's share of goodwill $ 31,739 --------- --------- Net Tangible Value ------------------------------------- Assets $321,443 Less: Current Liabilities (189,060) --------- Net Tangible Value $132,383 Petitioner's 25% share $ 33,095 Intangible Value $ 31,739 Net Tangible Value $ 33,095 --------- Fair Value $ 64,834 ---------
By judgment dated May 11, 1983, Special Term adjudged the "fair value" of petitioner's
shares in Blake Agency, Inc. to be $64,834 as of August 3, 1981. The judgment failed to grant interest to petitioner on said amount from August 3, 1981 to the date of payment, and failed to impose petitioner's costs in litigating the proceeding (costs, disbursements, and experts' and attorneys' fees) on the corporation.
Petitioner contends (1) the referee erred in his determination of goodwill by applying a multiplier of only one to gross commission revenue instead of a multiplier of at least two, as suggested by his expert, Herbert Lapidus; (2) the referee erred in deducting "Subproducer Revenue" and "Contingent Income" from gross commission revenue; (3) the referee should not have discounted petitioner's interest in the corporation's goodwill; (4) William Blake's compensation was excessive, and a portion of the compensation should be added to the corporation's net tangible value; and (5) Special Term erred in not awarding petitioner interest on the "fair value" of his shares and in not imposing all of petitioner's costs, disbursements and expenses incurred in litigating the proceeding on the corporation.
Respondent-appellant corporation argues (1) the referee failed to recognize the corporation's need for working capital in determining the fair value of petitioner's shares; (2) the referee should have discounted petitioner's share of net tangible value, as well as discounting goodwill; and (3) the referee's calculation of goodwill was excessive.
Business Corporation Law § 1104-a and § 1118 were enacted in 1979 (L 1979, ch 217) for the specific purpose of enabling minority shareholders of closely held corporations to obtain relief, when they found themselves in a situation of being denied participation in or being "frozen out" of corporate management (see O'Neal, "Squeeze-Outs" of Minority Shareholders [Callaghan 1975]; see also Matter of Kemp & Beatley [Gardstein], 64 N.Y.2d 63, 484 N.Y.S.2d 799, 473 N.E.2d 1173) and being refused employment by the corporation and/or participation in dividends (see NY Legis Ann, 1979, pp 143-144). The statutes were enacted to afford a minority shareholder the right to bring a proceeding to dissolve the corporation and to distribute its assets among the shareholders. Section 1118 counterbalances section 1104-a by affording the corporation the option of electing to purchase the minority's shares, thereby avoiding dissolution (see, e.g., Matter of Gift Pax, 123 Misc.2d 830, 475 N.Y.S.2d 324, affd. 107 A.D.2d 97, 486 N.Y.S.2d 272). The statutes provide:
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