Articles, Tax-Affecting, Valuation

How the Court Undervalued the Plaintiffs’ Equity in Ferolito v. AriZona Beverages, Part I

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By Gilbert E. Matthews, CFA, Sutter Securities, Inc. (San Francisco, Calif., USA)

Domenick Vultaggio and John Ferolito co-founded AriZona Beverages in 1992; it has grown to become the largest privately owned beverage company in the United States. The Ferolito and Vultaggio families each own 50 percent of the parent company, Beverage Marketing USA, Inc. (BMU), an S corporation whose subsidiaries manufacture and distribute AriZona Tea and several other proprietary products (collectively, “AriZona”). By mutual agreement, Mr. Vultaggio was the manager of the business. After years of shareholder disputes, Mr. Ferolito sought dissolution under New York Business Corporation Law (BCL) §1104-a in order to require Mr. Vultaggio either to dissolve the company or to purchase his interest. Mr. Vultaggio then exercised his right under BCL §1118 to purchase Mr. Ferolito’s shares of BMU at their fair value. Fair value is the standard courts use to measure the value of dissenting or oppressed shareholders. The goal of this standard is to equitably remunerate the petitioner for that which he has lost. Because the parties disputed the value of AriZona, the trial court1 determined the fair value of AriZona and of Mr. Ferolito’s shares in Ferolito v. AriZona Beverages USA LLC.2

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