How is a business valued in a New York buyout or dissolution?

This page explains New York law on valuing an ownership interest when a co-owner leaves: the court-supervised buyout in a corporate dissolution case, the appraisal right of shareholders who dissent from major corporate actions, and the rules for partnerships and LLCs. KOR Law LLP's business divorce practice handles negotiated and contested buyouts, valuation disputes, and litigation arising from forced exits or denied exits. Valuation questions also come up when an owner divorces, which follows different rules described near the end of this page.

When does a New York court value a business?

The most common setting is a shareholder's petition to dissolve a closely held corporation. Holders of at least 20% of the votes may petition on grounds such as oppressive actions or the looting or waste of corporate assets (BCL 1104-a(a)). Within 90 days after the petition is filed, or later if the court allows, the corporation or any other shareholder may elect to buy the petitioner's shares at fair value, on terms the court approves (BCL 1118(a)). If they cannot agree on the price, the court may stay the dissolution case and set fair value itself (BCL 1118(b)). When a dissolution case is the starting point, whether a minority shareholder can force a buyout or dissolution in New York explains the petition.

A second setting is a shareholder's appraisal right after certain major corporate actions, such as a merger, where a shareholder who properly dissents is entitled to be paid the fair value of the shares through a special proceeding if the corporation's offer is not accepted (BCL 623(h)). A third is a partnership or LLC exit, where the agreement usually sets the price or formula and the statutes fill gaps.

How does a buyout valuation work, step by step?

1. The petition is filed. The valuation date is fixed by statute as the day before the filing date (BCL 1118(b)).
2. Records open up. Within 30 days after a BCL 1104-a petition is filed, those in control must make the corporation's financial books and records for the three preceding years available for inspection and copying (BCL 1104-a(c)).
3. The election. The corporation or other shareholders elect to buy within 90 days, or later with court permission; the election is irrevocable unless the court decides otherwise (BCL 1118(a)).
4. Appraisals and negotiation. Each side's appraiser values the company. Many cases settle at this stage.
5. The valuation hearing. If there is no agreement, the court stays the dissolution proceeding and determines fair value (BCL 1118(b)), often after a nonjury trial, as in Matter of Murphy v United States Dredging (2010).
6. Adjustments. The court gives effect to any adjustment or surcharge found appropriate in the dissolution proceeding, which can include a surcharge on those in control for wilful or reckless dissipation or transfer of assets (BCL 1104-a(d); 1118(b)).
7. Interest, expenses and security. The court may award interest from the filing date to payment at an equitable rate, may award the petitioner's reasonable expenses if the election came after 90 days, and may require a bond or other security before the purchase (BCL 1118(b), (c)).

What does "fair value" mean in New York?

In Murphy v United States Dredging, the Second Department explained that the issue under BCL 1118 is "what a willing purchaser in an arm's length transaction would offer for petitioners' interest in the company as an operating business," quoting the Court of Appeals, and that the terms "fair value" and "fair market value" are used interchangeably. Three rules from that decision shape almost every New York buyout:

• No minority discount. Quoting the Court of Appeals, the court said "a minority shareholder's stock should not be further discounted because of its minority status."
• A marketability discount is allowed. For a close corporation, "any risk associated with illiquidity of the shares" should be considered, so New York "does not permit a 'minority discount,'" but "does permit a 'lack of marketability' discount." In Murphy, the trial court's 15% discount for lack of marketability was upheld.
• Hindsight is limited. Because BCL 1118(b) values the shares as of the day before the petition and "exclusive of any element of value arising from such filing," the court excluded a pension obligation the board approved after the valuation date. By contrast, the appraisal statute for dissenting shareholders tells the court to consider "all other relevant factors" (BCL 623(h)(4)).

The method itself is a matter of evidence. In Murphy, the parties agreed to weight the company's net asset value and its income value under a discounted cash flow method, and the appeal turned on details: how to treat taxes on built-in gains for real estate the company intended to hold, whether a post-valuation pension liability counted, and what rate of return to apply to working capital.

What about LLCs and partnerships?

The LLC Law has no buyout election like BCL 1118. A member's exit price usually comes from the operating agreement's buy-sell or withdrawal terms, or from a negotiated deal. If the company is dissolved and wound up, assets go first to creditors, then to members owed distributions, then to members for their contributions and interests, except as the operating agreement provides (LLC Law 704). A deadlocked LLC's path to that point is explained in how to dissolve a New York LLC when the members cannot agree.

For general partnerships, when a partner retires or dies and the others continue the business without settling accounts, the departing partner or the estate may, unless otherwise agreed, have the value of the interest determined as of the date of dissolution and be paid it with interest, or choose the profits attributable to the use of the partner's share instead (Partnership Law 73). In an action to dissolve or for an accounting, the court may value the partnership property and each partner's interest and provide for payment to retiring partners as justice requires (Partnership Law 75).

What changes the answer?

• The entity and the route. BCL 1118, BCL 623, Partnership Law 73 and 75, and LLC operating agreements each set different rules.
• The valuation date. Events after the date generally do not count in a BCL 1118 buyout (Murphy; BCL 1118(b)).
• Illiquidity. A marketability discount may apply to a close corporation; a minority discount may not (Murphy).
• Misconduct. The court may adjust valuations and surcharge those in control for wilful or reckless dissipation of assets (BCL 1104-a(d)).
• Timing of the election. An election after 90 days can lead to an award of the petitioner's expenses (BCL 1118(c)(1)).
• The agreement. A buy-sell formula or a release signed in a buyout can control. In Pappas v Tzolis (2012), sellers who signed a no-reliance certificate could not later claim the buyer hid a higher-value deal.
• Interest. The court may award interest at an equitable rate from filing to payment (BCL 1118(b)).

For example: a 40% shareholder in a family real estate company

Common mistakes

• Arguing for a minority discount. New York does not allow one in fair value cases (Murphy).
• Relying on events after the valuation date. A BCL 1118 valuation looks at the day before the petition (BCL 1118(b); Murphy).
• Missing the 90-day window. A late election needs court permission and can cost the buyer the petitioner's expenses (BCL 1118(a), (c)).
• Ignoring the buy-sell clause. In LLCs and partnerships the agreement often fixes the formula (Partnership Law 73 "unless otherwise agreed"; LLC Law 704).
• Signing a no-reliance release without diligence. It can bar later claims about hidden value (Pappas v Tzolis).
• Not using the records right. Within 30 days after a BCL 1104-a petition, those in control must make three years of financial books and records available (BCL 1104-a(c)); appraisers need them.

What to do this week

1. Find any shareholders', operating or partnership agreement with a buy-sell or valuation formula.
2. Collect three years of financial statements and tax returns, or request them.
3. List every transaction that may have drained value, with dates and amounts.
4. Note the dates that could become the valuation date.
5. Do not sign any release or certificate in a buyout without review.
6. Speak with counsel about whether to hire an appraiser now, before positions harden.

Records requests before a case is filed are covered in how to get access to company books and records in New York.

Frequently asked questions

Does the court hire its own appraiser?

In a dissenting shareholder appraisal under BCL 623, the court fixes value without a jury and without referral to an appraiser or referee (BCL 623(h)(4)). In a BCL 1118 buyout, the parties' appraisers usually present competing values and the court decides, as in Murphy.

Can the buyer pay over time?

The purchase happens "upon such terms and conditions as may be approved by the court" (BCL 1118(a)), and the court may require a bond or other security before the purchase (BCL 1118(c)(2)).

What happens to my claims against the other owners in a buyout?

BCL 1118(b) gives effect to adjustments or surcharges found appropriate in the dissolution proceeding. Claims for breach of duty are explained in what duties business partners and LLC managers owe each other in New York.

Is a divorce valuation the same?

No. In a divorce, the court sets valuation dates anywhere from the start of the action to trial (DRL 236(B)(4)(b)), and the question is how marital property is divided between spouses. See how a family business is divided in a New York divorce.

Can I stop the other owners from selling assets during the case?

Interim relief may be available where assets are at risk; see how fast you can get a TRO or preliminary injunction in a New York business dispute. In a partnership case, the court may let the business continue during the action on an undertaking (Partnership Law 75).

Where are valuation disputes heard?

Dissolution cases can be heard in the Commercial Division of the Supreme Court without regard to the dollar threshold; see whether your business dispute belongs in the New York Commercial Division.