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QUESTROM v. FEDERATED DEPT. STORES

February 4, 2000

ALLEN QUESTROM, PLAINTIFF,
V.
FEDERATED DEPARTMENT STORES, INC., DEFENDANT.



The opinion of the court was delivered by: Kaplan, District Judge.

MEMORANDUM OPINION

This is an action by Allen Questrom, former chief executive officer of Federated Department Stores, Inc. ("Federated"), to recover incentive compensation allegedly due him under his employment contract.

Briefly stated, the contract gave Questrom the right to a percentage of the increase in the appreciation in the equity value of the company, as determined by an investment banking firm chosen by Federated, over a defined period. The $16 million so determined has been paid to Questrom, who nevertheless contends that the investment banker's determination of the value as of the ending date was unduly low and that he is owed an additional $47 million.

In a prior opinion, familiarity with which is assumed, this Court rejected Questrom's damage claim, holding that the most to which he would be entitled in the event the investment banker did not act appropriately would be a redetermination under the contract.*fn1 It held also that the investment banker's determination is binding on the parties absent fraud, mistake or collusion, provided only that it acted within the scope of the discretion conferred upon it by the parties' agreement.*fn2 The decision left only one significant issue open for determination-whether, as Questrom alleges, the banker "failed to perform any analysis of the going concern market values of similar businesses as required by the Employment Agreement" in reaching its conclusion.

The matter now is before the Court on Federated's motion for summary judgment dismissing the complaint.

I

A. The Employment Agreement

The terms of Questrom's compensation are set forth in Article II of the Employment Agreement.*fn3 Questrom was entitled to $2,000,000 upon commencement of his employment followed by annual payments of $800,000 on January 31 of each of the years 1991 through 1995.*fn4 The Agreement further provided that Questrom was to receive incentive compensation of 0.75 percent of any amount of "Equity Appreciation" up to $500 million, plus 1.5 percent of any Equity Appreciation in excess of $500 million up to $1 billion, plus 2 percent of any Equity Appreciation in excess of $1 billion.*fn5

The contract carefully defined the terms by which Questrom's incentive compensation, if any, would be computed and the process by which the critical economic determinations would be made.

1. The Definitions

"Equity Appreciation"-of which Questrom was to receive a share was defined as "the amount by which the Equity Value of Federated/Allied on the Valuation Date [January 28, 1995] exceeds the Base Equity Value of Federated/Allied."*fn6 "Base Equity Value" in turn was defined as "the market value of the common equity of Federated/Allied on a consolidated basis as [of February 3, 1990.]"*fn7 The Agreement further provided that the "Equity Value of Federated/Allied on the Valuation Date" "shall be the market value of the common equity of Federated Allied on a consolidated basis as of that date, increased by the amount of any unusual or special dividends or other special or unusual distributions to shareholders after February 3, 1990, and prior to the Valuation Date."*fn8

2. The Process

The Employment Agreement contained detailed provisions governing the manner in which the components of Equity Appreciation were to be determined and, in some respects, the factors to be considered in doing so.

In all events, the components of Equity Appreciation were to be determined by an outside party. Section 2.1C provided that, for determining both the Base Equity Value and the Equity Value of Federated/Allied on the Valuation Date:

"the common equity value of Federated/Allied shall be determined by an investment banking or other qualified firm selected by the Board of Directors of Federated and Allied, provided that [Questrom] has no reasonable objection to such firm."*fn11

In making those determinations, the investment banking or other firm was to "base its determination on market values of similar businesses (on a going concern basis), taking into account net income, cash flow, capital structure, and such other factors as such firm deems relevant in establishing such values."*fn12 In certain circumstances, however, a different approach to valuation was to be employed:

The Employment Agreement thus called for two separate valuations of Federated as predicates for the determination of whether Questrom was entitled to incentive compensation and, if so, the amount to which he was entitled-the first ...


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