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INDEX NO. 653652/2013
FILED: NEW YORK COUNTY CLERK 08/08/2014 03:10 PM
NYSCEF DOC. NO. 128
RECEIVED NYSCEF: 08/08/2014
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
ZELOUF INTERNATIONAL CORPORATION,
Petitioner,
-against-
Index No. 653652/2013
Shirley W. Kornreich, J.
Part 54
NAHAL ZELOUF,
Respondent.
PETITIONER’S POST-TRIAL BRIEF
Jason M. Koral, Esq.
Emily Abrahams, Esq.
Nicholas A. Flath, Esq.
Of Counsel
COOLEY LLP
1114 Avenue of the Americas
New York, NY 10036
Tel: (212) 479-6000
Fax: (212) 479-6275
Counsel for Petitioner
TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT ................................................................................................... 1
STATEMENT OF FACTS ............................................................................................................ 2
I.
II.
THE VANNUCCI VALUATION ..................................................................................... 2
A.
Vannucci estimated the value of a controlling ownership interest in Old
ZIC ......................................................................................................................... 2
B.
The SEAM, the DLOM and the Legacy Customer Revenue................................. 2
C.
Inventory ................................................................................................................ 4
FACTS RELEVANT TO RESPONDENT’S FORMER DERIVATIVE CLAIMS.......... 4
A.
Officer Responsibilities ......................................................................................... 4
B.
Kathrin Zelouf and Automobile Expenses............................................................. 5
C.
Shareholder Loans ................................................................................................. 5
D.
Zelouf West ............................................................................................................ 5
ARGUMENT ................................................................................................................................. 6
I.
LEGAL STANDARD ........................................................................................................ 6
II.
VALUATION OF OLD ZIC PURSUANT TO BCL § 623(H)(4) .................................... 7
III.
A.
There is no basis to apply a “control premium” to the Vannucci valuation .......... 7
B.
Both parties’ experts agreed that a SEAM is inapplicable .................................... 8
C.
The Court should accept Vannucci’s 30% DLOM ................................................ 9
D.
The Legacy Customer revenue should be removed from the valuation .............. 12
E.
The value of Old ZIC did not increase materially in 2013 .................................. 12
DERIVATIVE CLAIMS ................................................................................................. 14
A.
The relevant timeframe for the derivative claims is 2007-2010 .......................... 14
B.
Respondent presented no evidence that Old ZIC’s legal expenses
constituted waste .................................................................................................. 15
C.
Old ZIC’s officer salaries were reasonable; Vannucci’s normalization of
these expenses is not evidence of waste .............................................................. 15
D.
The Shareholder Loans are irrelevant .................................................................. 18
E.
Respondent did not prove that the Legacy Customers were a corporate
opportunity of Old ZIC ........................................................................................ 18
F.
Respondent’s misappropriation claim lacks a factual basis and is logically
absurd ................................................................................................................... 19
G.
The alleged understatement of inventory did not exist and is irrelevant ............. 22
CONCLUSION ............................................................................................................................ 25
-i-
TABLE OF AUTHORITIES
Page(s)
Cases
Adelstein v. Finest Food Distributing Co. N.Y. Inc.,
2011 WL 6738941 (Sup. Ct. Queens County Nov. 3, 2011) ...................................................10
Alexander & Alexander of N.Y. v. Fritzen,
147 AD2d 241 (1st Dep’t 1989) ..............................................................................................18
Batsidis v. Batsidis,
9 A.D.3d 342 (2d Dep’t 2004) .................................................................................................20
Beckerman v. Beckerman,
126 AD2d 591 (2d Dep’t 1987) ...............................................................................................10
In re Carolina Gardens, Inc. v. Menowitz,
1995 WL 17961777 (Sup. Ct. N.Y. County March 23, 1995) ...................................................6
In re Carolina Gardens, Inc. v. Menowitz,
1996 WL 34573714 (Sup. Ct. N.Y. County Jan. 26, 1996), affirmed as modified by 347
A.D.2d 189 (1st Dep’t 1997) ...............................................................................................6, 10
Matter of Cohen (Four Way Features),
168 Misc.2d 91 (Sup. Ct. N.Y. County Dec. 29, 1995) .............................................................6
Matter of the Dissolution of Walt’s Submarine Sandwiches, Inc. v. Basile,
173 AD2d 980 (3rd Dep’t 1991)..............................................................................................10
Matter of Fleischer,
107 A.D.2d 97 (2d Dep’t 1985) .................................................................................................9
Friedman v. Beway Realty Corp.,
87 N.Y.2d 161 (1995) ...................................................................................................... passim
Giaimo v. Vitale,
101 A.D.3d 523 (1st Dep’t 2012) ......................................................................................10, 11
Hall v. King,
177 Misc.2d 126 (Sup. Ct. N.Y. County May 21, 1998) ...................................................10, 11
Howard v. Carr,
222 A.D.2d 843 (3d Dep’t 1995) .............................................................................................19
-ii-
TABLE OF AUTHORITIES
(continued)
Page(s)
IDT Corp. v. Morgan Stanley Dean Witter & Co.,
12 N.Y.3d 132 (2009) ..............................................................................................................15
Kalisch v. Kalisch,
184 A.D.2d 751 (2d Dep’t 1992) ...............................................................................................9
Lehman v. Piontkowski,
203 A.D.2d 257 (2d Dep’t 1994) ...............................................................................................9
Marx v. Akers, 88 N.Y2d 189, 200-01 (1996) ...............................................................................16
Sandfield v. Goldstein,
33 A.D.2d 376 (3d Dep’t 1970) .........................................................................................16, 17
In re Seagroatt Floral Co. (Riccardi),
78 N.Y.2d 439 (1991) ..........................................................................................................9, 12
In re Vetco, Inc.,
292 A.D.2d 391 (2d Dep’t 2002) ...............................................................................................9
Statutes
BCL § 623 .............................................................................................................................. 6-8, 11
-iii-
PRELIMINARY STATEMENT
The parties in this appraisal case jointly retained a neutral valuator, who calculated a
value for the former Zelouf International Corporation (“Old ZIC”) and certain former customers
of Old ZIC, of $6,225,000. That value included a premium (the “SEAM” adjustment) for Old
ZIC’s status as an S-Corporation and a discount for lack of marketability. The SEAM
adjustment is unknown in the New York case law, and the experts for both parties agreed that it
should not have been applied. The marketability discount, on the other hand, is mandatory under
New York law for companies like Old ZIC. Removal of the SEAM results in a discounted value
of $5,460,202, as set forth in Annex I. Respondent presented no basis to conclude that this value
materially increased up until the merger date in September, 2013.
Respondent also presented evidence on former derivative claims of Old ZIC. But the
only evidence presented at trial that could support Respondent’s waste and misappropriation
claims related to: (1) the receipt of salary payments by Kathrin Zelouf (the CEO’s mother), and
(2) automobile lease expenses allegedly in excess of company needs. These claims amount to an
expenditure of $363,000 over the period analyzed by Respondent’s expert.
Respondent presented no evidence concerning officer salaries other than the amounts of
those salaries, and unrebutted testimony and documentary evidence established that Old ZIC
received reasonable value for those payments. No evidence was presented with respect to
alleged improper legal expenses, nor did Respondent present any evidence on her corporate
diversion claims. And Respondent’s outlandish claims of tens of millions of dollars of
misappropriated funds were exposed as nonsense, as Respondent’s own expert admitted his own
work and analysis refuted those claims.
Petitioner presents below a fuller factual and legal explanation of both the fair value of
Old ZIC and Respondent’s former derivative claims. Annex I displays the different components
of fair value, and Annex II displays the components of the alleged damages flowing from
Respondent’s derivative claims.
STATEMENT OF FACTS1
I.
The Vannucci valuation
By stipulation, the valuation prepared by the neutral expert Kevin Vannucci represents a
fair and reliable estimate of the value of Old ZIC. See R’s Pretrial Br. at 8. Vannucci’s fair
value estimate is presented in his report dated August 6, 2013 (the “Vannucci Report”). See Ex.
186. The Vannucci valuation is the agreed starting point for the fair value analysis.
A.
Vannucci estimated the value of a controlling ownership interest in Old ZIC
Vannucci valued Old ZIC as of December 31, 2012, using the capitalized economic
income method, which assumes that Old ZIC would earn a “sustainable” $737,000 of “EBITDA”
(free cash flow) annually, into perpetuity. Ex. 186 at 4-5; id. at Schedule 2.1. To reach this
estimate, Vannucci analyzed past results and qualitative factors. See id. at 5-9. Vannucci
estimated the entire value of Old ZIC assuming 100% ownership and control. See, e.g., Ex. 186
at 1; see also July 9 at 55:23-56:1 and 126:25-127:6 (Respondent’s expert identifying the
Vannucci Report as an “enterprise” and “control” valuation).
B.
The SEAM, the DLOM and the Legacy Customer Revenue
Vannucci applied three adjustments to the valuation at the request of counsel: (1) a passthrough entity adjustment of 18.4% (the “SEAM”); (2) a discount for lack of marketability of
1
“SOF ¶ __” refers to the Amended Stipulation of Undisputed Facts (NYSCEF Doc. No. 127). “Ex.
__” refers to exhibits admitted into evidence. References to the trial transcript take the form “[date]
at [page number].” For the Court’s convenience, the cited trial transcript pages have been compiled
as Exhibit 1 to the accompanying affirmation of Nicholas A. Flath, Esq.
2
30% (the “DLOM”); and (3) revenue from four customers of Zelouf West who were formerly
customers of Old ZIC (the “Legacy Customers”).
The SEAM reflects possible value associated with Old ZIC’s status as an S-corporation
as opposed to a C-Corporation. Ex. 186 at 9; see also Ex. 186, Appendix F at 31. The SEAM is
not typically applied to control-basis valuations, and was included in the Vannucci Report “at the
direction of Counsel” as a “hypothetical condition.” Id. at 9 n. 21.
Vannucci calculated a 30% DLOM for Old ZIC. See Ex. 186 at 9 ¶ 39. As with the
SEAM, Vannucci explained that in his experience a DLOM is not typically applied to controlbasis valuations. Id. at 9 n. 22. But Vannucci’s calculation of the DLOM was rigorous,
occupying five pages and three supporting schedules of his report, incorporating numerous
quantitative analyses and qualitative evaluations. Id. at 46-50; id. at Schedules D1-D3. The
quantitative analyses include restricted stock studies, option pricing models, and protective put
data, the latter of which Vannucci characterized as quantifying a “floor” DLOM. Id. at 50. The
qualitative factors include the conclusion that “there are a very limited number of hypothetical
buyers for ZIC,” which justified a DLOM “at the higher end of the range.” Id.
Finally, the Vannucci Report included projected income from the Legacy Customers.
Vannucci explained that this projection was requested by counsel, and that to attribute this
income to Old ZIC involves an “extraordinary assumption.” Ex. 186 at 8. Vannucci identified
two predicates for the “extraordinary assumption:” (1) that Old ZIC “has the capacity and ability
to provide the required inventory and service level to satisfy customers that previously left;” and
(2) that the Legacy Customers “are expected to remain with ZIC into perpetuity.” Id. at 9.
Vannucci expressed no opinion whether these assumptions were true (or even reasonable). The
3
impact of the Legacy Customer revenue on the Vannucci valuation was roughly $350,000. See
March 19 at 377:23 (Baliban).
C.
Inventory
Respondent’s forensic expert, Elliot Lesser, argued that Old ZIC’s inventory was
understated on Old ZIC’s financial statements. Lesser had previously presented this opinion to
Vannucci. See June 11 at 17:21-23:21. Vannucci noted that he “considered” Lesser’s report, but
he ultimately made no adjustment to the inventory. See Ex. 186 at 15; id. at Schedule A3.
II.
Facts relevant to Respondent’s former derivative claims.
A.
Officer Responsibilities
Danny Zelouf (“Danny”) was Old ZIC’s CEO. Danny oversaw Old ZIC’s daily
operations and its 50 employees and handled all purchasing. See March 17 at 60:21-22; 115:20116:9. Rony Zelouf (“Rony”) served as Old ZIC’s sales manager. See id. at 115:5-19.
Vannucci noted that Danny personally accounted for roughly half of Old ZIC’s sales. See Ex.
186 at Schedule 3.4. But neither Danny nor Rony took sales commissions (as their employees
do), thus saving the company hundreds of thousands of dollars each year. See March 17 at
116:15-117:2. Danny’s relationships with key customers and suppliers are so important that the
bank required Old ZIC to maintain a “key man” life insurance policy for $2 million. Id. at
79:23-80:11. In addition, Danny successfully steered Old ZIC through a time of profound
contraction in the industry. As Old ZIC’s domestic competitors died out, Danny responded by
shifting Old ZIC’s business to focus on overseas shipments, which now account for 75% of
annual sales. Id. at 66:12-67:12; id. at 61:7-10. As a consequence, Danny must spend 40-50
days every year traveling in Asia meeting with customers and suppliers. Id. 64:7-65:5.
4
B.
Kathrin Zelouf and Automobile Expenses
Kathrin Zelouf (Danny Zelouf’s mother) never worked for Old ZIC, but Danny explained
that she receives a salary because of the emotional support she provided to Joseph Zelouf. See
March 17 at 113:9-22. Old ZIC leases multiple automobiles for use by its officers. Vannucci
reviewed this line item and concluded that two automobiles would be a “reasonable cost required
for operating the business” at “$750/month each.” Ex. 186 at Schedule A10.
C.
Shareholder Loans
Old ZIC’s officers periodically borrowed funds from the corporation between 2007 and
2013. See SOF ¶¶ 50-53. The loan balances fluctuated up and down, from zero to over $2
million at times. March 18 at 264:19-265:3. Interest was paid on the loans, usually in cash
(March 17 at 104:17-105:19; April 11 at 23:7-22), but sometimes in the form of an increase in
the loan balance. Id. at 30:22-32:18.
In a blatant attempt to mislead the Court, Respondent implied (through Elliot Lesser) that
the officers owed over $5.4 million in June, 2013. See id. at 33:2-22. Respondent knew this to
be false: Lesser admitted on cross that he knew this number was “very odd” and not likely to be
accurate. June 11 at 33:25-34:16. He also admitted receiving a parallel schedule that he testified
was more likely to be accurate, proving that the loan amounts in 2013 never exceeded $1.6
million. Id. at 41:7-44:5.
D.
Zelouf West
Danny founded Zelouf West in 2008. SOF ¶¶ 45-49. Zelouf West primarily sells junior
sportswear; Old ZIC primarily sells dressy fabrics. March 17 at 105:24-106:7. Four customers
of Old ZIC – Bee Darlin, City Triangles, Swat Fame, and UpFront/Misyd – began purchasing
fabric from Zelouf West in 2008. SOF ¶ 49; Ex. 186 at Schedule 2.4. Danny explained that the
5
Legacy Customers only had a limited desire to purchase “dressy fabrics,” and that the “lion’s
share” of their purchases from Zelouf West were of “junior sportswear." March 17 at 107:1-9.
To the extent that Zelouf West customers purchased Old ZIC products, Old ZIC was
compensated at a 20% markup. Id. at 111:8-112:24. Respondent presented no testimony or
cross-examination on Zelouf West, other than to establish that Zelouf West uses the same
business management software as Old ZIC. See March 17 at 152:4-11.
ARGUMENT
I.
Legal Standard
BCL § 623(h)(4) does not specify which party in an appraisal proceeding has the burden
of proving fair value. Because the statute “defies a burden-of-proof approach,” New York courts
often rely on neutral valuation experts. Matter of Cohen (Four Way Features), 168 Misc.2d 91,
95 (Sup. Ct. N.Y. County Dec. 29, 1995) (court must set fair value even if neither party’s
valuation expert is persuasive); see also id. at 98-99 (adopting neutral expert’s valuation,
including 25% DLOM).
The “no-burden” framework for fair value does not apply to any parallel civil claims that
are incorporated into the proceeding, such as Respondent’s former derivative claims. Such
allegations must be proved through evidence like any other civil claim. See In re Carolina
Gardens, Inc. v. Menowitz, 1995 WL 17961777 (Sup. Ct. N.Y. County March 23, 1995) (“The
actual relevance” of the derivative claims should be left “to the discretion of the finder of fact in
the appraisal proceeding.”); In re Carolina Gardens, Inc. v. Menowitz, 1996 WL 34573714 (Sup.
Ct. N.Y. County Jan. 26, 1996) (Respondents ultimately “failed to demonstrate” that certain
expenditures “were not warranted or were otherwise imprudent.”), affirmed as modified by 347
A.D.2d 189 (1st Dep’t 1997). The Court’s prior orders presumed that ordinary proof
6
requirements apply to these claims. See Dec. and Order dated Aug. 30, 2013 at 3, NY County
Index No. 603746-2009, NYSCEF Doc. No. 278 (referring to “the alleged diminution in value . .
. caused by defendants’ alleged corporate waste and self-dealing.”) (emphasis added); id. at 6
(“The appraisal . . . shall include the lost value, if any, resulting from defendants’ alleged bad
acts . . .”) (emphasis added).
II.
Valuation of Old ZIC pursuant to BCL § 623(h)(4)
“Fair value” under BCL § 623(h)(4) means “the minority shareholder’s proportionate
interest in the going concern value of the corporation as a whole, that is, what a willing
purchaser, in an arm’s length transaction, would offer for the corporation as an operating
business.” Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 168 (1995) (quotation marks and
citation removed) (emphasis added and in original). “Fair value” thus entails determining a
control-basis value of the company (i.e. the value of 100% ownership) and then calculating
Respondent’s pro rata 25% share of that value.
The parties agreed prior to the hearing that either side could raise arguments about three
specific valuation issues: (1) the “SEAM;” (2) the DLOM, and (3) the Legacy Customers.
Thereafter, Respondent presented an expert report that proposed adding a “control premium.”
Finally, after the submission of the Petitioner’s case-in-chief, Respondent argued for the first
time that the valuation should be altered based on Old ZIC’s financial performance during the
first six months of 2013.
A.
There is no basis to apply a “control premium” to the Vannucci valuation
Respondent’s valuation experts, James Ashe and Anthony Saunders, presented
fundamentally contradictory testimony on whether to apply a “control premium.” Saunders
advocated a “control premium” of 24%. March 21 at 629:6-26. According to Saunders,
7
Vannucci failed to account properly for the power of control. Id. at 659:13-19. Every other
expert in this case, however, agreed that Vannucci properly applied a control level of value. Ex.
186 at 6; see also July 9 at 126:25-127:19. Indeed, Ashe explicitly based his own opinions on
the DLOM and the SEAM on his understanding that Vannucci determined a proper control level
of value. See id. at 42:4-43:7; id. at 47:21-48:19. By contrast, Saunders’ view involves rejecting
the fundamental premise of this case: that the Vannucci Report reflects a reasonable estimate of
fair value. In any event, Saunders’ view that a redundant control premium could be
“compensation for minority shareholder being squeezed out in a merger,” is precluded by New
York law. See Friedman, 87 N.Y.2d at 168 (“[O]ppressive majority conduct” is not relevant to
the “fair value” determination.). Indeed, we are aware of no New York case applying a control
premium on top of a control basis valuation.
B.
Both parties’ experts agreed that a SEAM is inapplicable
Although he applied a SEAM at the “direction of counsel,” Vannucci noted that the
SEAM was intended only for use with respect to valuations of a minority interest. Id. at 9 n. 21.
Ashe corroborated this view, noting that “pretty much the whole valuation community agrees
that [the SEAM] does not apply in a controlling interest, it only applies in a noncontrolling
interest situation.” July 9 at 124:9-16; see also id. at 42:4-43:7. Thus, a SEAM is not
appropriate in a BCL § 623 appraisal assuming a controlling-basis level of value. Indeed, Ashe
could not recall a single instance where he had ever applied a SEAM to calculate the fair value
of a dissenting shareholder’s stock in a freeze-out merger. Id. at 128:6-10.
Ashe speculated that Vannucci might have applied the SEAM to reflect the
circumstances of the merger. July 9 at 128:25-129:23. But that is a temporal impossibility:
Vannucci finalized the valuation report on August 6, 2013 and the merger was not announced
8
until two weeks later. See SOF ¶ 4. And Vannucci’s motivation is not a mystery: the SEAM
was merely a “hypothetical condition” made at the request of counsel. Ex. 186 at 9 n. 21.
Because the experts are in agreement, the Court can set aside this “hypothetical
condition” and remove the SEAM.2 See Annex 1 (calculating impact of removing SEAM).
C.
The Court should accept Vannucci’s 30% DLOM
The relative absence of marketability of a closely-held company must be considered in a
“fair value” analysis. In re Seagroatt Floral Co. (Riccardi), 78 N.Y.2d 439, 445-46 (1991)
(analysis must reflect “any risk associated with illiquidity of the shares.”); Friedman v. Beway
Realty Corp., 87 N.Y.2d 161, 165 (1995) (requiring courts to consider risk that “a potential
investor would pay less for shares in a close corporation because they could not readily be
liquidated for cash.”). The DLOM reflects that interests (including 100% share interests) in a
closely-held private company are generally more difficult to dispose of than equivalent share
interests in a public company, and is distinct from a discount applied due to minority status. See
Friedman, 87 N.Y.2d at 169.
New York courts typically apply a percentage DLOM, the size of which depends on the
circumstances. By far the most commonly-applied DLOM is 25%. See, e.g., In re Vetco, Inc.,
292 A.D.2d 391, 392 (2d Dep’t 2002) (merchant of health aids); Kalisch v. Kalisch, 184 A.D.2d
751 (2d Dep’t 1992) (two-year college); Lehman v. Piontkowski, 203 A.D.2d 257, 259 (2d Dep’t
1994) (medical practice); Matter of Fleischer, 107 A.D.2d 97 (2d Dep’t 1985) (childcare product
2
Ashe opined in the alternative that the SEAM should be 37.8% (rather than the 18.4%
calculated by Vannucci) to account for Respondent’s idiosyncratic tax circumstances in 20082010. July 9 at 135:6-8. But Ashe acknowledged that Vannucci’s calculation of the SEAM was
“one way professionals do approach it.” July 10 at 26:19-21. And since New York law provides
that value is based on what a “willing purchaser” would pay, the particular tax circumstances of
a specific seller are not relevant. See March 19 at 389:3-390:12. Thus, if a SEAM were to
apply, Vannucci’s judgment regarding the values in the formula ought to control.
9
distribution company); Hall v. King, 177 Misc.2d 126 (Sup. Ct. N.Y. County May 21, 1998)
(antique dealer). A DLOM of 30% is also not unprecedented. See Friedman, 87 N.Y.2d at 171
(remanding for trial court’s evaluation of a 30% DLOM for a real-estate holding company);
Beckerman v. Beckerman, 126 AD2d 591, 592 (2d Dep’t 1987) (30% DLOM).
Lower DLOMs are only occasionally applied and typically involve peculiar
circumstances. In some cases, the evidence demonstrated substantial market interest in the
specific company being valued, in the form of multiple recent offers. See Matter of the
Dissolution of Walt’s Submarine Sandwiches, Inc. v. Basile, 173 AD2d 980, 980-81 (3rd Dep’t
1991) (120 responses to classifieds proposing sale of company); Adelstein v. Finest Food
Distributing Co. N.Y. Inc., 2011 WL 6738941, (Sup. Ct. Queens County Nov. 3, 2011) (minority
shareholder had offered to buy the company on three separate occasions). Other cases involve
real-estate holding companies (“REHCs”), whose only assets are highly marketable real estate,
such that the DLOM reflects only the additional loss of liquidity inherent in corporate
ownership. See Giaimo v. Vitale, 101 A.D.3d 523, 524 (1st Dep’t 2012); Menowitz, 1996 WL
34573714 (Sup. Ct. N.Y. County Jan. 26, 1996). Here, by contrast, the 30% DLOM reflects
Vannnucci’s considered judgment that the pool of potential buyers for Old ZIC was limited,
suggesting that the 16% applied to the REHC in Giaimo should be read as an absolute floor. Ex.
186, Appendix I at 50.
Respondent raises three arguments relating to the DLOM. First, Ashe contended that a
separate DLOM is not appropriate for a valuation of a controlling interest (a proposition also
apparently accepted by Vannucci). See July 9 at 143:16-19. But he acknowledged that this
question is not fully settled, with valuation theorists on “both sides of the fence.” Id. at 144:1121. Indeed, Saunders admitted such a discount could be appropriate if there was “a willing seller
10
and a willing buyer and there was no market or liquid market for private equity of textile and
apparel firms.” March 21 at 641:9-18. Whatever the contours of the academic dispute, New
York law clearly provides that DLOMs are to be applied to “fair value” determinations under
BCL § 623, which by definition are control-basis valuations. Friedman, 87 N.Y.2d at 167-170.
New York courts, most recently the First Department, have repeatedly considered and rejected
Ashe’s argument. See, e.g., Giaimo, 101 A.D.3d at 524.
Second, Ashe suggested that in his “experience” a typical DLOM might be zero to fifteen
percent. July 9 at 143:6-10. He is mistaken: case law plainly shows that DLOMs in the midtwenty percent range are the norm. See, e.g., Hall, 177 Misc.2d at 132 (collecting cases). Ashe
himself did no work to calculate a DLOM for Old ZIC, instead conceding that Vannucci had
good reason to conclude “that the potential scope of hypothetical buyers for [Old ZIC] was
limited” (July 9 at 163:10-23), warranting a higher DLOM. See Ex. 186, Appendix I at 50.
Finally, the methods employed by Vannucci, although criticized obliquely by Ashe, have in fact
been specifically endorsed by the Court of Appeals. Friedman, 87 N.Y.2d at 170-71 (endorsing
use of restricted stock studies to calculate percentage DLOM); Ex. 186 at Schedule D1.
At trial, Ashe speculated that marketability was already taken into account by the
“Strengths, Weaknesses, Opportunities, and Threats” or “SWOT” analysis which Vannucci
performed to determine a “capitalization” rate. See July 9 at 49:15-50:11. This speculation was
not disclosed in Ashe’s report. It is also misguided: the factors in the SWOT are distinct from
those reflected in the DLOM. Compare Ex. 186, Appendix I and Schedules D1-D3 with id.
Schedule 3.4. Appendix I references the lack of potential buyers as the key factor justifying a
30% DLOM. The SWOT in Schedule 3.4, by contrast, is driven by Old ZIC’s “key person risk”
and “lack of industry diversification,” factors of no relevance to the DLOM. As Baliban
11
explained, the SWOT affects the capitalization rate, which reflects “the riskiness of the forecast,”
whereas the DLOM “is something entirely different,” as it reflects the “inability[y] to quickly
convert the business to cash.” July 10 at 84:7-85:15. If Vannucci believed that his capitalization
rate already incorporated in full an appropriate DLOM, he would never have gone through the
elaborate exercise of calculating a second, redundant DLOM. At the very least, the supposed
redundancy would have been noted in the Report. Cf. Matter of Seagroatt Floral Co. v.
Riccardi, 78 N.Y.2d 439, 447 (1991) (expert stated explicitly that the capitalization rate took
into account “lack of marketability.”).
D.
The Legacy Customer revenue should be removed from the valuation
Respondent presented no proof that the Legacy Customers were a corporate opportunity
of Old ZIC (see infra III.E), nor any proof that Vannucci’s conditions for inclusion of that
revenue were satisfied. See supra Statement of Facts I.B. The evidence showed declining
revenues from these customers. See March 17 at 107:22-24; Ex. 186 at Schedule 2.4. Thus, the
Legacy Customer revenue calculated by Vannucci should be removed from the “fair value”
analysis. See Annex 1.
E.
The value of Old ZIC did not increase materially in 2013
At a pre-hearing conference, the Court asked whether the Vannucci Report would need to
be updated to reflect Old ZIC’s 2013 financials. Respondent’s counsel, having received the
relevant data the previous week, replied that “the numbers hardly change at all. They are,
frankly, immaterial changes. . . . It’s within probably a percent or two of what the numbers were
at the end of December 2012. Simply wasn’t much change, based upon the data we received
from the [Petitioner’s] firm.” Feb. 4 at 27:24-28:9 (NYSCEF Doc. No. 80).
12
No evidence was presented at trial to contradict this representation, certainly nothing that
would suggest a $2.1 million increase in value. But in a belated attempt to inflate the valuation
after the close of Petitioner’s case-in-chief, Respondent disclosed a report from Ashe, who
performed an update “calculation” incorporating data from Old ZIC’s 2013 six-month financial
statement. The “calculation” performed by Ashe resulted in a number $2.1 million higher than
the Vannucci valuation on a control, marketable basis – in other words, a hypothetical 23%
increase in value. July 10 at 8:6-8; July 9 at 117:15-118:3. But Ashe did not actually offer the
opinion that Old ZIC’s value had increased during the year 2013. On cross, he repeatedly stated
that he had only performed a calculation, not a valuation. Id. at 173:4-6 and 177:8-19.
Critically, Ashe did not perform an update to any of the qualitative analyses performed by
Vannucci to analyze whether Old ZIC’s business had become fundamentally stronger in the
intervening months. Id. at 178:4-179:16. As Baliban testified, without such a finding, there is
no basis to believe that the new data from 2013 signal a “sustainable increase in value.” July 10
at 61:9-26.
Indeed, Ashe admitted the truth of Respondent’s counsel’s earlier representation to the
Court that the 2013 numbers involved “immaterial changes.” He agreed that Vannucci’s
projection of a 4.3% normalized EBITDA margin was intended to project profitability “[o]n a
smoothed-out basis,” meaning that “there’s going to be years where it’s higher, there’s going to
be years in where it’s going to be lower, and it will all smooth out somewhere.” July 9 at
187:20-188:4. He further agreed that his calculation of a 5.1% normalized EBITDA margin for
the first six months of 2013 was “perfectly consistent … with Vannucci’s conclusion that the
sustainable future EBITDA rate should be 4.3 percent,” July 9 at 189:1-11. Thus, the mere fact
that the normalized EBITDA margin increased in the first six months of 2013 does not justify an
13
upward departure from Vannucci’s valuation conclusion. See July 10 at 104:26-105:5 (“No
buyer would write a higher check based solely on June 30th financial statements . . . because
they would say, you have to show me that this change in the six month period represents a
sustainable, long-term change into perpetuity that as – that I as a buyer will benefit from.”).
In addition, the results of Ashe’s calculation are drawn almost entirely from a deviation
from Vannucci’s weighting methodology for determining a normalized EBITDA margin. See Id.
at 9:19-12:4. Vannucci chose a three-year lookback in which the most recent year was weighted
double. But Ashe chose a four-year lookback with a straight average. July 10 at 11:5-19. Of
course, a change in weighting has nothing to do with the existence of new data. When
Vannucci’s weighting is applied to the 2013 data – which Ashe presented as an “alternative”
calculation – the result differs by only $354,000 from the Vannucci valuation. Id. at 6:5-21;
9:19-10:20. In other words, simply by changing the weighting scheme, Ashe artificially boosted
his calculated increase from $354,000 (a 4% premium) to $2.1 million (a 23% premium). See
July 9 at 117:15-118:3.
III.
Derivative Claims
A.
The relevant timeframe for the derivative claims is 2007-2010
On Respondent’s motion in limine, the Court ruled that “the parties agree not to use the
2011 and 2012 financials at trial,” thereby setting December 31, 2010 as the end of the relevant
time period for derivative damages. Dec. and Order dated April 25, 2013, NY County Index No.
603746-2009, NYSCEF Doc. No. 214; April 25, 2013 Transcript at 50:6-26, NY County Index
No. 603746-2009, NYSCEF Doc. No. 219 A second in limine ruling from the Court sets May
2004 (the date of Joseph’s Zelouf death) as the beginning of the relevant time period. See id. at
91:26-92:4 and 94:13-17; March 17 at 73:3-6. Accordingly, Respondent’s counsel stated in his
14
opening that proof on derivative claims would be limited to the period 2004-2010. Id. at 50:914. Of course, the three-year statute of limitations bars monetary recovery for years prior to
2007. See IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132, 139 (2009).
At trial, Lesser’s testimony regarding Respondent’s contentions of waste was limited to
2009 and 2010. See April 11 at 63:9-14; id. at 71:21-73:6; id. at 76:4-14. The exclusion of prior
years was deliberate. Respondent’s purported waste claims are simply transpositions of
“normalizing adjustments” made by Vannucci beginning in 2007, the most significant of which
relate to Old ZIC’s officer salaries. See id. at 97:24-99:21. But in 2007 and 2008 the officers
were paid less than an industry average, so the adjustments are actually negative. Ex. 186 at
Schedule A10.
We have summarized Respondent’s derivative damages calculations as presented at trial
in Annex 2, omitting only the facially preposterous misappropriation claims, discussed infra in
Parts III.F and III.G. As set forth below, Respondent failed to make out even a prima facie case
on her claims that Old ZIC’s officer salaries were wasteful and that the Legacy Customers were
a corporate opportunity of Old ZIC. Thus these line items should be removed from Annex 2,
leaving only the claims based on the salary paid to Kathrin Zelouf and the excess automobile
expenses. For the relevant years – 2009 and 2010 – these expenses totaled $363,000.
B.
Respondent presented no evidence that Old ZIC’s legal expenses constituted
waste
Before the hearing, Respondent had she might raise a claim of waste based on legal
expenses paid by Old ZIC in connection with the derivative lawsuit. See R’s Pretrial Br. at 13.
This claim was not raised at trial and Respondent has never asserted (much less proven) that
these payments were improper or were made without consideration.
15
C.
Old ZIC’s officer salaries were reasonable; Vannucci’s normalization of
these expenses is not evidence of waste
The business judgment rule applies to Respondent’s claims of corporate waste. See Dec.
and Order dated Jan. 3, 2013, NY County Index No. 603746-2009, NYSCEF Doc. No. 160
(“Ultimately, for plaintiff to prevail on these derivative claims, she will have to overcome the
presumption that the challenged transactions are subject to the business judgment rule.”) (citing
Marx v. Akers, 88 N.Y2d 189, 200-01 (1996)). Officer salaries are “properly a matter for the
business judgment of the board of directors,” even when the recipient of the salary is himself a
director. Sandfield v. Goldstein, 33 A.D.2d 376, 380 (3d Dep’t 1970); see also Marx, 88 N.Y.2d
at 203-04 (allegation that “the compensation set lacked a relationship to duties performed” did
not state claim for waste, even though majority of board was interested).
Respondent presented no factual evidence to substantiate her allegation that Old ZIC’s
officer salaries were “grossly excessive and unwarranted.” R’s Pretrial Br. at 5. Instead, the
unrebutted evidence at trial established that Old ZIC received value for the salaries paid. See
supra Statement of Facts II.A. Critically, Vannucci found in his SWOT analysis that Danny is
vital to Old ZIC, producing “approximately half” the company’s sales. See Ex. 186 at Schedule
3.4. Respondent’s own expert James Ashe singled out this SWOT analysis as demonstrating
“thoroughness.” July 9 at 47:1-10; 49:15-50:4. Moreover, on cross-examination, Ashe
conceded the value provided by Danny and Rony, agreeing that any prospective acquirer would
have to pay them additional compensation to access their personal relationships with customers
and to prevent them for competing. Id. at 166:3-167:10.
There is no basis on which the Court could conclude that the salaries paid to Danny and
Rony “lacked a relationship to duties performed.” Marx, 88 N.Y.2d at 204. Respondent’s sole
effort at proof to the contrary was the testimony of Lesser. But Lesser rendered no opinion on
16
the reasonability of Old ZIC’s officer salaries. See April 11 at 63:18-64:13 (discussing closecompany officer salaries in general); id. at 96:24-97:26 (admitting that at his deposition he had
disclosed no opinion about the reasonableness of Old ZIC’s officer salaries). Rather, all he did
was copy over verbatim “normalizing adjustments” from the Vannucci Report. See id. at 58:1721 (describing scope of assignment as simply to “quantify these amounts that Mr. Vannucci had
identified in his report”); id. at 98:10-99:21.
These normalizing adjustments simply reflect the degree by which Old ZIC’s officer
salaries exceed the median of salaries paid by an unknown sample of companies drawn from a
very broad industry group (the “RMA Data”). See Ex. 186 at Schedule A10, n. 1. Vannucci
explained that normalizing adjustments are not judgments on past conduct but were applied to
historical data “to reflect the best possible estimate of future economic earnings from a thirdparty, controlling perspective.” Ex. 186 at 6 (emphasis added). They are merely a “prospective
assessment of what salaries could be in the future.” March 20 at 539:11-540:15 (Baliban).
Vannucci disclaimed any view as to whether there had been a “breach of any obligation or other
wrongful conduct.” Ex. 186 at 1; see also id. at 51; April 11 at 94:18-95:19.
The fact that close company officers pay themselves higher salaries than a median or
midpoint value does not establish waste. See Sandfield, 33 A.D.2d at 380 (error to award
damages to minority shareholder based solely on finding that defendant’s salary exceeded the
“average value of [his] services.”) (emphasis added). Were it otherwise, half of the companies
in New York would be the victims of actionable corporate waste.
Moreover, the RMA Data, though used in appraisals, is not suitable evidence to prove a
civil claim. Because RMA keeps reporting companies confidential, Respondent has no way to
authenticate the RMA Data and Petitioner cannot verify its accuracy and validity. June 11 at
17
104:11-105:7. Lesser admitted that the sample sizes used by RMA are too small to draw
statistically reliable conclusions. Id. at 137:9-138:18; id. at 139:3-15; Ex. BBBB. And the
industry code from which these companies were drawn was so broad – encompassing disparate
industries like hair accessories and jute piece goods – that there is no reason to think the sampled
companies are comparable to Old ZIC. Id. at 113:12-114:25. For all these reasons, the Risk
Management Association itself instructs that the RMA Data is not to be used for the very
purpose employed by Respondent here, as an absolute benchmark to establish damages. Id. at
124:9-126:15.
D.
The Shareholder Loans are irrelevant
Although Respondent devoted substantial trial time to Old ZIC’s shareholder loans, she
never claimed that the loans were not properly authorized. Nor has she ever asserted any
derivative damages relating to them. Vannucci was aware of the shareholder loans and treated
them as assets of Old ZIC. See Ex. 186 at Schedules 1.1 and A3. Because the Vannucci Report
is a control-basis valuation, whatever benefit the controlling shareholders did or could derive
from the company by taking loans is fully accounted for, and thus Respondent already stands to
reap her pro rata share of that benefit.
E.
Respondent did not prove that the Legacy Customers were a corporate
opportunity of Old ZIC
To prevail on her claim that the four Legacy Customers represented a corporate
opportunity of Old ZIC, Respondent would have had to prove that Old ZIC had an “interest or
tangible expectancy” in the four Legacy Customers; in other words, that these customers were
“necessary for or essential to” the business of Old ZIC. Alexander & Alexander of N.Y. v.
Fritzen, 147 AD2d 241, 248 (1st Dep’t 1989).
18
But at trial, Respondent did not establish that Old ZIC had an interest or tangible
expectancy in the Legacy Customers. Zelouf West markets an entirely different product line
than Old ZIC, and to the extent that any Zelouf West customers purchase Old ZIC styles from
Zelouf West, Old ZIC is compensated at a set 20% markup. See supra Statement of Facts II.D;
Ex. U. The mere fact that Zelouf West’s business is “similar” to that of Old ZIC is not sufficient
to show that the Legacy Customers were a corporate opportunity. Cf. Howard v. Carr, 222
A.D.2d 843, 845 (3d Dep’t 1995) (claim only actionable when defendant’s conduct “cripple[d]
or injure[d]” the company).
F.
Respondent’s misappropriation claim lacks a factual basis and is logically
absurd
Respondent contends that Petitioner misappropriated $13,400,000 from ZIC in the years
2004-2009. Per Respondent’s calculation, in 2006-2008 alone, Petitioner’s principals made off
with $11 million in profits. June 11 at 62:21-63:15. Since Vannucci concluded that the
sustainable yearly cash flow of Old ZIC was only $737,000 on a normalized basis, Respondent’s
allegations are a mathematical impossibility. See Ex. 186 at Schedule 2.1. Given such
extraordinary claims, one would expect extraordinary proof. But Respondent presented no
evidence showing even a single dollar of misappropriated sales. On the contrary, Lesser
admitted that both Old ZIC’s accounting systems and the vast array of sales data recorded in
MOD2 were consistent with the reported financial statements. See June 11 at 60:7-66:10.
The basis of Respondent’s fantastic misappropriation claim is a single half-page back-ofthe-envelope calculation. Lesser performed essentially the same calculation five years ago. June
11 at 60:7-23. It involves determining the degree by which Old ZIC’s gross profit margins fell
below 25% in certain years and then simply assuming that the difference resulted from
misappropriated sales. Id. at 52:24-53:12.
19
The use of such an analysis as proof of misappropriation is unheard of in American law.
See e.g., Batsidis v. Batsidis, 9 A.D.3d 342, 342 (2d Dep’t 2004) (requiring proof of taking of
“tangible personal property or specific money” of corporation) (emphasis in original). It is also
not accepted as valid proof of misappropriation in the forensic accounting field. See July 9 at
18:5-18:23 (Ammirati testified that an RMA comparison should be used only as an “analytical
tool” or a “sensitivity analysis” rather than as an “absolute” measure of damage); June 11 at
67:19-23 (Lesser acknowledged that after doing a such a calculation “one needs to then look at
additional information and see whether or not it corroborates.”).
Lesser’s back-of-the-envelope calculation is at best a departure point for a proper
investigation. And that is how Lesser treated it in 2009. Id. at 66:11-67:23. To test his
hypothesis of missing sales, Lesser first sought access to Old ZIC’s general ledgers and journals.
Id. at 60:24-61:9. But these records were consistent with the financial statements. Id. at 61:1062:5. Lesser then sought to review Old ZIC’s MOD2 system, to review actual purchase and
sales records. June 11 at 62:6-13. Lesser conducted over a dozen sales-related queries of the
MOD2 system, culminating in a comprehensive custom query of his own design. See Ex. 3;
June 10 at 5:19-6:21. Each spreadsheet returned by MOD2 in response to this query contains
tens of thousands of rows, each representing a sale. See Ex. 4-A (2007); 4-B (2008); 4-C (2009)
and 4-D (2010). After “a detailed, meticulous exhaustive forensic accounting review” of this
data (March 17 at 50:9-14), Lesser concluded that it did not show evidence of $13 million in
missing sales. June 11 at 65:16-66:10.
Respondent’s failure of proof should not surprise. Lesser’s half-page calculation is based
entirely on the assumption of a 25 percent gross profit “benchmark;” a benchmark even a few
percent lower would eliminate any material difference. Id. at 57:6-18.
20
Respondent’s invocation of Vannucci’s use of a similar benchmark in fact only reinforces
the deficiency of her case. As noted earlier with respect to the officer salary claim, derivation of
an absolute benchmark from RMA Data is inherently unreliable and improper, and Vannucci’s
use of RMA Data was limited to projecting what Old ZIC might be capable of in the future. His
normalizing adjustments were explicitly not intended to be a forensic judgment on
misappropriation. See supra III.C. Indeed, as such normalizing adjustments are routine in
valuations, Respondent’s theory would suggest misappropriation liability for any business
subject to a valuation report. The law does not support such a theory.
In the absence of any actual evidence of misappropriated sales, Respondent raised three
supposedly corroborating pieces of evidence at trial. In fact, these points further undermine the
claim. First, Lesser found a total of $420,000 of cash sales recorded in MOD2 in 2004-2010.
June 11 at 59:13-21; 44:6-25. But Lesser acknowledged that there is nothing improper about a
business receiving cash for goods (id. at 45:16-19), that the amounts at issue were immaterial (id.
at 46:8-11), and that he had not reviewed Old ZIC’s general ledger to verify his suspicion that
these cash receipts were not recorded on the Company’s books and records. Id. at 47:17-48:26.
Needless to say, evidence of a mere $420,000 of cash sales rather conclusively refutes the
hypothesis of over $13 million of misappropriated funds.
Second, Lesser testified that he had found “some anomalies” in the sales information
recorded in MOD2, notably the fact that gross margins on foreign sales were typically less than
those on domestic sales. April 11 at 40:3-18. But there is no mystery here. As Lesser admitted
on cross, since overseas sales are “drop shipments,” without overhead costs for warehousing,
insurance and duty, such sales can be made at lower gross margins, while still yielding higher
net margins. See June 11 at 131:26-133:3.
21
Finally, Lesser noted an increase in Old ZIC’s profits between 2008 and 2009, which
Respondent not very subtly suggested was prompted by her threat of litigation in early 2009
(nothwithstanding the fact that Respondent had made statutory records demands years before).
June 11 at 74:11-75:16. But the MOD2 sales data and the general ledgers were consistent with
Old ZIC’s financial statements throughout the entire 2004-2010 time period, not just beginning
in 2009. And on cross, the supposed difference in 2008-2009 financial performance was
revealed to be a mirage. Lesser acknowledged that the 2008 inventory write-down “could
explain” the 2009 increase in gross profits. Id. at 75:17-77:17. He admitted that unit costs for
Old ZIC’s purchases declined significantly in 2009, thus contributing to higher gross profits on
paper. Id. at 82:9-85:17. And the cash flow statements in the Old ZIC 2009 financial statement
show that higher paper gross profits did not translate into actual cash receipts for those sales. Id.
at 95:20-96:16.
G.
The alleged understatement of inventory did not exist and is irrelevant
Lacking any evidence of misappropriation, Respondent expended enormous effort
analyzing the reporting of inventory on the Old ZIC’s financial statements. That effort was
pointless. Whether Old ZIC accurately stated inventory costs in its financial statements is
irrelevant to either the valuation of Old ZIC or to the former derivative claims. Indeed, on the
motion in limine, Respondent (then plaintiff) conceded that Lesser’s inventory analysis was not
being offered as proof of any misappropriation or breach of duty, but rather to show a supposed
cover-up of cash sales (that were never proven). See Pl.’s Mem. of Law in Opp. Dated April 18,
2013 at 3, NY County Index No. 603746-2009; NYSCEF Doc. No. 211. Whatever finding the
Court might make with respect to the inventory allegations could thus have zero impact on the
amounts awardable to Petitioner on the derivative claims.
22
Respondent did not identify a single penny of derivative damages associated with
Lesser’s inventory analysis, either in Lesser’s report or in his testimony. Lesser did not opine
that any inventory was missing -- his analysis actually assumes that Old ZIC’s inventory
quantities were accurately reported. April 8 at 54:21-55:9.
In fact, Lesser gave no opinion at all concerning the value of Old ZIC’s inventory. He
very carefully qualified that his opinion was limited to the inventory’s historical cost, as opposed
to its value. April 8 at 60:9-16; id. at 63:4-7; April 11 at 156:24-157:5; June 10 at 89:15-19 (“Q:
So, I’ll ask you directly: You’re not rendering any expert opinion in this case as to the value of
Zelouf International inventory as of any date, correct? A: That’s correct, I’m not.”); see also
June 11 at 13:24-26.
This qualification of Lesser’s analysis renders it worthless. Lesser acknowledged that
under Generally Accepted Accounting Principles, inventory is not stated at historical cost, but at
the lower of cost or market. June 10 at 93:17-96:4. At trial, Respondent made much of the fact
that the Old ZIC financial statement notes do not explicitly mention the lower of cost or market
principle, as best practices would counsel. See id. at 98:17-99:10. But Lesser admitted that
since lower of cost or market is a default principle of accounting, the proper implication to be
drawn from silence would be to assume that inventories are indeed marked down to market. Id.
at 99:2-10; see also March 20 at 510:7-15.
Even more significantly, Lesser admitted that he was aware from the very beginning of
this case that Old ZIC had substantially written down the value of its inventory. The very
earliest discovery taken in the case by Respondent included a trove of e-mails describing an
inventory write-down in excess of $2 million in 2008 alone. See Ex. BO, BM, BD; see also
March 17 at 97:24-102:13 and March 18 at 239:12-18 (Danny testimony regarding Old ZIC’s
23
inventory write-downs); March 19 at 296:19-299:12 (Joel Helman testimony regarding the 2008
write-down). Lesser admitted that was aware of the write-down back in 2010, over a year prior
to commencing his inventory analysis, based on these emails and on a conversation his assistant
had with Joel Helman, Old ZIC’s outside accountant. See June 10 at 84:24-85:5; id. at 88:1989:8. Incredibly, the very MOD2 spreadsheet that Lesser used to construct his inventory rollforward plainly disclosed marked-down values for Old ZIC inventory on an item-by-item basis.
See Ex. 4-E column BS; June 10 at 70:11-82:18. Lesser simply made a deliberate choice to
ignore the marked-down values and pretend the inventory write-down never happened.
Respondent, desperate to explain away this deliberate obfuscation by its star expert
witness, repeatedly accused of Petitioner of hiding information on these write-downs. But the
only relevant inventory documents not produced by Old ZIC in discovery – Excel spreadsheets
of Old ZIC inventory – were in fact obtained separately by Lesser back in 2010 from Helman.
See Ex. LLL; April 8 at 39:23-6. Lesser elected to ignore them. June 10 at 84:24-85:5; id. at
88:19-89:8. Respondent’s counsel’s demands to see “inventory write-down documents” were a
red herring; as Helman explained at trial, such documents do not exist, nor would he expect them
to. See March 19 at 304:6-21. But the very MOD2 spreadsheet used by Lesser did permit him to
see write-downs on a per unit basis. See Ex. 4-E column BS.
Lesser’s inexplicable decision to ignore write-downs in excess of $2 million was by no
means his only error. He treated over 1.6 million yards fabric as if they had been purchased by
Old ZIC with zero cost, thereby grossly underestimating cost of goods sold. July 9 at 8:6-9:16;
id. at 14:10-15:12. He ignored obvious data entry errors in the MOD2 system which he admitted
accounted for at least $316,000 of phantom cost data in 2010 alone. June 10 at 68:19-70:10;
June 11 at 170:8-171:21. And although Old ZIC distributed hundreds of thousands of yards of
24
fabric every year as samples to customers, Lesser failed to exclude samples from his analysis,
despite recognizing that under GAAP such items are not part of a company’s reportable
inventory as they are not held “for sale.” See June 10 at 92:21-93:12; Ex. 4-A (137,215 yards in
2007 for which “Sales Order Model” – Column P – is designated as “Sample”); Ex. 4-B
(136,256 yards in 2008); Ex. 4-C (125,423 yards in 2009); Ex. 4-D (132,521 yards in 2010).
Finally, Respondent’s attempt to corroborate Lesser’s 2004-2010 inventory analysis by
pointing to a so-called MOD2 “costed inventory report” for the years 2011 and 2012 was blatant
opportunism. Lesser had earlier unequivocally stated that the MOD2 costed inventory reports
were “unreliable.” June 10 at 27:7-28:6; id. at 46:5-25. Corroborating this, Danny testified that
he does not use the report in question and that it is just one of “thousands” of possible reports
that the system can generate. March 18 at 221:16-222:8.
CONCLUSION
For these reasons, Petitioner respectfully requests that the Court fix the value of
Respondent’s shares of Old ZIC at $1,303,801, deny Respondent any adjustments to this value,
and order any other relief that it deems just and proper.
Dated: New York, New York
August 8, 2014
Respectfully submitted,
COOLEY LLP
By
/s/ Jason Koral
Jason Koral
1114 Avenue of the Americas
New York, NY 10036
Tel: (212) 479-6000
Fax: (212) 479-6275
[email protected]
Counsel for Petitioner
25
ANNEX 1: Impact on Valuation of Legacy Customer Revenue and SEAM
Line Item
(Headings taken from Ex. 186
at Schedule 1.2; new or
modified rows indicated by
italics)
Indicated value, operating
equity value (control,
marketable)
Vannucci (unadjusted)
Vannucci without
SEAM
Vannucci without
SEAM or Legacy
Customer Revenue
$5,930,000
$5,930,000
$5,930,000
Less: Incidental value due to
$2.08 million of Legacy
Customer Revenue
- $350,000*
Old ZIC Operating Equity
Value
$5,580,000
Times: SEAM
Fair value, operating equity
(control, marketable)
18.40%
$7,022,980
$5,930,000
$5,580,000
Cash and cash equivalents
Excess working capital
Non-operating assets
(liabilities)
Fair value, equity (control,
marketable)
$282,539
$692,902
+ $894,848
$282,539
$692,902
+ $894,848
$282,539
$692,902
+ $894,848
$8,893,269
$7,800,289
$7,450,289
30%
30%
30%
$6,225,000
$5,460,202
$5,215,202
Respondent’s 25% interest
based on DLOM of 30%
$1,556,250†
$1,365,051
$1,303,801
Respondent’s 25% interest
based on DLOM range
(30% - 16%) ‡
$1,556,250 - $1,867,586
$1,365,051 - $1,638,061
$1,303,801 - $1,564,561
Less: DLOM of 30%
Fair value, equity (control, non
marketable) (rounded)
*
Baliban testified that he had calculated the valuation impact of the Legacy Customer revenue as
roughly $350,000. March 19 at 377:23.
†
Calculations in this column are taken verbatim from the Vannucci Report. The resulting figure
was the basis for Petitioner’s offer for Respondent’s shares pursuant to BCL § 623(g). SOF ¶ 9.
‡
Range based on 16% floor from Giaimo (for REHCs) and Vannucci’s unrebutted finding that
30% would be appropriate for Old ZIC.
ANNEX 2: Respondent’s Waste and Corporate Opportunity Allegations
2009-2010 (as presented by Lesser)
2009
2010
Total
$1,153,857
- $959,000
$194,857
$1,591,243
- $1,188,000
$403,243
$598,100
Kathrin Zelouf Salary
$113,200
$110,800
$224,000
Automobile Expenses
Actual Expenses
Vannucci Benchmark
"Excess"
$93,000
- $18,000
$75,000
$82,000
- $18,000
$64,000
+ $139,000
$92,000
$229,000
+ $321,000
Officer Salaries
Total Salaries
Vannucci Benchmark
"Excess"
Legacy Customers
Estimated Profit
Grand Total
Respondent's Interest
$1,282,100
$240,275
2007-2010 (Lesser calculations with 2007 and 2008 data from Vannucci Report)
2007
2008
2009
2010
Total
$653,665
- $1,071,000
($417,335)
$727,620
- $1,228,000
($500,380)
$1,153,857
- $959,000
$194,857
$1,591,243
- $1,188,000
$403,243
($319,615)
Kathrin Zelouf Salary
$124,800
$124,800
$113,200
$110,800
$473,600
Automobile Expenses
Actual Expenses
Vannucci Benchmark
"Excess"
$109,000
- $18,000
$91,000
$117,000
- $18,000
$99,000
$93,000
- $18,000
$75,000
$82,000
- $18,000
$64,000
$329,000
$47,000
$92,000
$229,000
+ $368,000
Officer Salaries
Total Salaries
Vannucci Benchmark
"Excess"
Legacy Customers
Estimated Profit
Grand Total
Respondent's Interest
$850,985
$212,746