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Business

Corporate culture is defined in many ways; however, it is generally referred to as the shared values and vision of the company that will serve to achieve short and long-term goals of the business enterprise. It is a top-down dynamic that will impact everyone in the company and is one of the most important responsibilities of a board member. Creating a strong culture will be expected by shareholders, customers, suppliers, and employees. If the culture is flawed or confusing, it will have a negative impact on the entire organization and will present obstacles to achieving the company’s strategic goals. Reputation is everything and as we all know, perception is paramount.

The key ingredients to the formation of a positive culture include transparency, high ethical standards, legal compliance, diversity and a long-term approach. If everyone in the organization consistently seeks to do the right thing, that will reflect positively on the board, meaning the board is fulfilling its responsibility to establish a corporate culture that will result in success. Directors are held to a high standard and if their decisions are viewed through the lens of a well-articulated corporate culture that is well-defined and communicated at all levels of the organization, success is inevitable.

An ethical corporate culture needs to be embedded in the strategic plan of the organization and embraced by management at all levels. Maintaining open communication regarding corporate values is essential and it starts at the board level, which should be comprised of individuals who are willing to challenge and ask questions without fear of reprisal. Owners should strive to populate the board with members who are independent thinkers that bring different perspectives and are fully engaged.

A board that shares ideas, develops strong relationships with management and constantly evaluates how they are doing is essential and will send clear messages to employees that culture is valued and essential. Evaluating corporate culture begins with clearly articulated and transparent goals, and must underscore diversity, legal compliance and the company’s overall strategies. Asking employees how they view the corporate culture creates trust and generally leads to positive actions. Surveys and assessments, if done openly, will provide a grading system that can serve as a guide to making improvements.

Corporate culture should also be reflected in who the company hires and how a succession plan will be implemented. What is the company’s code of conduct and what is the process in determining and dealing with violations? The board may consider hiring outside consultants to review the elements of its corporate culture and assist in measuring results. Finally, the board needs to be sensitive to how management is implementing corporate culture, i.e., what are the training methodology and hiring practices? Establishing a strong corporate culture is, and should be, a priority for every board member as it is a key to success. For further information on business planning strategies or other business matters, please contact PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.

 

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice

When purchasing another business, one of the most important aspects of due diligence is reviewing the selling business’ contracts. Often the selling business’ revenue stream is tied to some type of contract. For example, it may get income through services contracts, sales contracts, licensing contracts, or even insurance billing contracts. Accordingly, those types of contracts might actually represent most of the value of the seller’s business. The buyer is going to want to make sure that those valuable contracts are assignable to a new entity (the buyer) and remain in effect after the sale. Inability to assign crucial contracts to the buyer may affect the purchase price or even doom the entire transaction.

Second, a review of contracts shows how a selling business conducts its operations. Who are their vendors and suppliers? What consultants and professionals do they rely on? What substantial assets and services does the seller need to conduct its business? The answers to these questions are generally found in a business’ contracts. Review of such contracts can give the buyer a clearer picture of not only what is necessary to operate the selling business but also how well a particular business operates.

Finally, a selling business’ contracts are often the largest liabilities of the selling business. The contracts to which the selling business is a party will show its obligations. Some of these liabilities might arise through contracts entered into in the ordinary course of business, such as leases or loans, and some liabilities might arise through contracts outside of the ordinary course of business, such as non-competition agreements or settlement agreements.

A proper review of the selling business’ contracts is necessary to ensure that the buyer is getting what it actually bargained for and that the purchase price reflects the true value of the selling business. For more information on buying and selling businesses, contract law or other business matters, please contact PLDO Attorney Joshua J. Butera at 401-824-5100 or email jbutera@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice

It is widely recognized that the system of corporate governance is a key approach to preserving and protecting an enterprise and its stakeholders by checks and balances among the board and officers of a corporation. Strong governance policies make it possible to address potential and existing conflicts between the main parties in the organization; i.e., stockholders and directors. When reviewing governance within a corporate setting, we are either employing an agency theory or stakeholder theory. Under modern corporate governance policies, the board is empowered to act with independence so that it has the ability to act quickly when needed, while at the same time, making decisions that are in the best interests of the stakeholders.

Corporations and businesses in general have been devasted by the coronavirus pandemic and the governance system under which they operate will continue to be stretched to meet the challenges and uncertainties. The effectiveness of their corporate governance system and policies will dictate how corporate enterprises survive the financial impact. It will be critical for directors, officers and stakeholders to work cooperatively and in unity to overcome the challenges and the convergence of what is often competing interests. This is a time for trust in managers, owners and stakeholders inside and outside the organization. Survival will require a coming together of all forces in a collaborative manner so as to take full advantage of human intellect and advanced technology to reinvent how businesses operate now and in the future. The strength of the governance system will dictate how outsiders view the overall business operation and financial viability.

Strong corporate governance and a good control system by and among the directors for the benefit of the stakeholders is the key to preserving the financial viability of the enterprise. During these challenging times, which will not end soon, the strength of the governance system and trust that it builds throughout the organization to make appropriate decisions will be the key to survival of many corporate entities. Corporate governance should be viewed as a vital control system to solve difficult problems in normal circumstances, as well as during the pandemic. Studies show that when corporate governance and control systems are transparent, the managers, employees and stakeholders embrace its value and create opportunities for improved performance even in the face of a pandemic.

One significant reaction by businesses that have a solid corporate governance policy was the decision to transition to remote work. Although the individual details for each business may vary depending upon the nature of the business or geography, the directors and leadership of those businesses that reacted quickly to the transition have been able to survive, in part because employees and stakeholders trusted the judgment of management and the directors. Although the transition was necessary, it created the risk of cyberattacks. Those organizations with strong governance policies in cybersecurity that effectively communicated to their staff were key to addressing the challenges, along with improved technology and the right approaches to communication. For more information on corporate governance systems or other business issues, please contact PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice

In 2017, the State of Rhode Island expanded its medical marijuana program by creating a licensing process for the cultivation and manufacturing of cannabis and cannabis products for sale at the State’s three sanctioned compassion centers.  By all accounts – industry and otherwise – this licensing process was intended to set the table for the coming days of recreational cannabis in Rhode Island. However, year after year, the powers that be at the State’s General Assembly have been firmly opposed to recreational marijuana in the Ocean State, taking a wait and see approach with eyes on neighboring Massachusetts.

Now, just days after the State’s application period closed that will likely add six additional dispensaries to the medical program, smoke signals are beginning to billow over the State House.  As recently reported in the Providence Journal, Senate leadership has already begun to mobilize in the authorizing of adult use legislation:

https://www.providencejournal.com/story/news/politics/2020/12/21/senate-leaders-back-income-tax-hike-legal-marijuana-and-eviction-ban/3989528001/

This is undoubtedly exciting news for industry participants, actual and prospective alike.  Those interested in pursuing cannabis business opportunities in Rhode Island would be best served by reaching out to experienced legal counsel in cannabis law and regulations to get a head start on what many expect to be a “green wave” in the Ocean State.

For assistance and further information, please contact PLDO Partner Benjamin L. Rackliffe, a leading authority in the areas of corporate and regulatory compliance within nascent cannabis industries at 401-824-5100 or email brackliffe@pldolaw.com. For the better half of a decade, he has been at the forefront of advising businesses on the ever-evolving state and federal cannabis law and policy landscape in both medical and recreational markets throughout New England and elsewhere. Within the State of Rhode Island, Attorney Rackliffe has advised approximately two dozen licensed cultivation companies through real estate, licensing, regulatory compliance and investment related matters. Outside of Rhode Island, he routinely advises dispensary and cultivation operators, including the owner of the largest outdoor cannabis cultivation on the east coast, as well as a publicly traded Canadian company, on diverse corporate matters. In addition, Attorney Rackliffe advises investors on risk mitigation measures within the cannabis space, and has further parlayed this experience in the nation’s burgeoning hemp industry.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice

On August 26, 2020, the Securities and Exchange Commission (the “SEC”) adopted amendments to the definition of “accredited investor.” The amendments permit investors to qualify as accredited investors based upon additional criteria focused on financial sophistication, in addition to the historic tests relating to their income or net worth. The amendments become effective sixty (60) days after publication in the Federal Register.

Background

The definition of “accredited investor” has always been extremely important because it determines which persons or entities may participate in private (unregistered) offerings of securities. The current federal regulatory rules start with the proposition that any offering of securities must be registered with the SEC unless an exemption for the registration requirements is available. Registration refers to the complex and expensive process typical of an initial public offering (“IPO”) and is simply not a practical alternative for many smaller or development stage companies.

There are a number of exemptions from registration available to companies seeking to raise capital, including the commonly used exemptions set forth in Rules 504, 505 and 506 of Regulation D. However, as is often the case, the “devil is in the details” and how a company must qualify for those exemptions is largely dependent upon whether the securities will be offered only to accredited investors, or conversely, whether non-accredited investors will be given an opportunity to invest. If the securities are offered to even a single non-accredited investor (whether intentionally or unintentionally and whether or not the non-accredited investor actually purchases any of such securities), all potential investors must receive an enhanced level of disclosure in a specified format in order to qualify for the exemption from registration. That is both substantially more expensive in terms of legal fees, etc. and much more time consuming.

The purposes of the new amendments are to improve the exempt offering framework to include individuals and entities that are equipped to evaluate the merits of an offering they are considering, while at the same time protecting those investors who are not so equipped.

Summary of Amendments to Accredited Investor Definition

The new amendments:

  • Add a new category to the definition to permit natural persons who hold certain professional certifications, designations or credentials designated from time to time by order of the SEC Commissioner to qualify as accredited investors. These initially include holders in good standing of SEC Series 7 (Licensed General Securities Representative), Series 65 (Licensed Investment Advisor) and Series 82 (Licensed Private Securities Offering Representatives) licenses.
  • With respect to a particular private fund, include as accredited investors natural persons who are “knowledgeable employees” of such fund.
  • Add “family offices” with at least $5 million in assets under management and their “family clients” as those terms are defined in the Investment Advisors Act to qualify as accredited investors.

Some Practical Advice

The new additions expand the definition of accredited investors, and thus provide a benefit to smaller and development stage companies by expanding the pool of potential investors. If you have questions about this issue or other business matters, please contact PLDO Partner William F. Miller at 508-420-7159 or email wmiller@pldolaw.com.

Massachusetts and Rhode Island are among those states that have enacted a Wage Act, under which employees who receive less than their full compensation due can sue for treble damages. In fact, in Massachusetts, a Wage Act violation leads to mandatory treble damages. Add in that a violation also leads to an award of reasonable attorneys’ fees, and the power of the Wage Act becomes clear.

A question that frequently arises is whether a state’s Wage Act applies to bonuses. For many employees, bonus amounts can constitute a significant portion of their compensation. Employed physicians, for example, often have a multi-tiered compensation model, consisting of a base salary, plus metrics for productivity, quality, shared savings, and so on. Sales people frequently receive a large portion of their compensation through commissions. Some companies have a tradition of giving employees a share of each year’s net profits in the form of a holiday bonus. When circumstances lead to these “extra” amounts not being paid, whether they are covered by the Wage Act becomes a critical question.

Labelling a compensation metric as a “bonus” does not shield it from the Wage Act in any state. Instead, the test for whether the Wage Act applies is essentially whether the “bonus” amount is discretionary, and whether it can be calculated using a pre-determined formula. So, the fact that a company has voluntarily given its employees, say, five percent of its net profits each year as a holiday bonus does not mean that a failure to do so in a subsequent year is a Wage Act violation. On the other hand, a failure to contribute to a collectively-bargained, formula-driven Employee Stock Ownership Plan likely would be a violation.

In Rhode Island, the Wage Act specifically carves out bonuses “in additional to the payment of wages.” Wages “means all amounts at which the labor or service rendered is recompensed, whether the amount is fixed or ascertained on a time, task, piece, commission basis, or other method of calculating the amount.” What this means, in essence, is that a bonus that constitutes compensation for services rendered will be covered by the Wage Act. So, for example, failure by a physician group or a hospital to pay the formula-driven productivity metric in a physician’s employment agreement would be a violation; whereas, failure to pay a relocation bonus likely would not.

Whether a bonus such as a promise to pay stock options constitutes compensation for services rendered may return a different answer in different states. Under any state’s Wage Act, the guidance found in case law is swamped by the endless number of scenarios employers and employees can face. For help navigating this critical law and the treble damages and attorneys’ fees it carries, please contact PLDO Partner Joel K. Goloskie at 401-824-5100 or email jgoloskie@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

Forming a limited liability company, or “LLC,” does not require an attorney. Articles of organization are filed with the Secretary of State and the LLC is then created; no attorney necessary. However, while registration with the Secretary of State is all that is necessary before an LLC can legally operate, in reality, no LLC should be without an operating agreement drafted by an attorney. An operating agreement dictates how the LLC will be governed and provides the terms of the relationship among the governing members. Crucially, the operating agreement also names the owners, their respective percent of ownership and how much they each contribute to start the LLC.

Admittedly, at the start of a new business, the business owners are looking for every avenue to save costs. Hiring an attorney to draft an operating agreement may seem like an unnecessary expense when there is no cash flow yet and the business partners have known each other for years. However, the decision to forego an operating agreement because you trust your partners is penny wise and pound foolish.

Several months or even years after the LLC is formed and the business started, issues often arise among business partners who have known each other for years. For example, there may be confusion about each partner’s responsibilities, each partner’s exact ownership of the LLC, or about each partner’s respective investments (especially when partners invest differing amounts). Without an operating agreement governing these issues in writing, the partners may have to resort to litigation to resolve their issues and recoup their investments. Litigation is costly and time consuming and can threaten the underlying business. But litigation, and the uncertainty that leads to it, can be avoided from the outset by hiring an attorney to draft an operating agreement that reflects the business partners’ particular needs in managing their LLC. This small investment can provide long-term stability to the business and head off disputes among partners before they occur. For more information about this issue or other business matters, please contact Attorney Joshua J. Butera at 401-824-5100 or email jbutera@pldolaw.com.

 

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

In our Business Law practice, we routinely deal with entrepreneurs and investors who are trying to structure an investment opportunity on the basis of the company’s value before the outside investment is closed. This challenge exists whether the investment will be with debt or equity.  The backdrop in many of the discussions relates to how to value the start-up from a risk-reward standpoint.

Since funding a new business or idea is generally a high-risk endeavor, the valuation process is a combination of art and science to arrive at what is called a pre-money valuation, which is the value projected prior to taking into account the investment.

What the investor is seeking to accomplish during this process is weighing the company’s potential success against the risk being taken. The spectrum of what is determined to be success would range from never reaching its potential to being highly successful. In moving through this process, the investor may use one or more methods to value the company and corresponding financial investment.

One method used by investors and entrepreneur to value a company is called the discounted cash flow model, which means they would be estimating the present value of future cash flows from the company. Essentially, the investor is determining what the time value of money is for an investment in this particular company. The corollary is the value of equity is equal to the present value of future cash flows. What this means to the investor is that the company’s future cash flows should not only be equal to the present value of the equity investment, rather, it should exceed it; otherwise, the investor would likely conclude that investing in the prospective company is not worth the risk.

Predicting a company’s future cash flow and applying a discount rate that would reflect the risk is also a combination of art and science. If present value is projected to be higher than the cost of the investment, the investor may decide to proceed. And if it is equal to or lower, the investor would more likely withdraw from the discussion and seek other opportunities. When they use a discount rate in projecting future cash flows, the investor is seeking to find the difference between the present value of the investment compared to future cash flows. If projected future cash flow is high, the discount rate to be applied would be lower, and if the risk is determined to be high, the discount rate would be lower in attempting to predict the return on the investment.

A second method of determining a company’s value is by using what is called a multiple valuation, which compares the company’s earnings rate or projected cash flows to the current price of the equity, which calculates a price to earnings ratio. Using the enterprise value, which is the value of equity plus outstanding debt in comparison to what was determined to be value of future cash flows arriving at what is called EBITDA or earnings before interest, taxes, depreciation and amortization.

The challenge in using any valuation methodology is arriving at a multiple that is reflective of the type of company and industry. Once the multiple is determined, the investor has the tools to project a value by multiplying the multiple by the figure arrived at after determining its EBITDA. Our role as lawyers begins after the investor and entrepreneur have concluded their discussion relating to valuation of the shares or membership interest, which would be critical to determining the most appropriate structure to close the transaction. If you would like more information on valuation methods and related issues or other business matters, please contact  PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

Representing clients seeking to invest in a venture or finance a new business opportunity is a challenging experience for the lawyer as it routinely involves outlining the steps and various issues that are involved in the process of either type of transaction.  The discussion would involve addressing equity and non-equity financing structures and the types of entities that are appropriate, as well as the advantages and disadvantages when determining the corporate form to be pursued. The review would also include discussing the different types of investments that are available and how each vehicle impacts short- and long-term goals for the investor or the entrepreneur.

During the process of developing a strategy for investing or raising funds, it is paramount to protect the client from personal liability which involves determining the most appropriate corporate structure for the opportunity. The failure to be diligent in this exercise could expose the client to financial liability or adverse tax consequences. The forms of entities that should be explored would include general partnerships, limited partnerships, C corporations, S Corporations, limited liability companies and limited liability partnerships. The lawyer’s role is to explain what each form of ownership entails as well as outline the positive and negative impact depending upon the client’s goals as an investor or entrepreneur.

Another important consideration when investing or seeking funds relates to what jurisdiction is most favorable for creating the enterprise, especially if the goal is to conduct business in multiple states. If the entity is formed in one state and wants to conduct business in another state, it is required that the entity apply to the foreign jurisdiction for this purpose. One of the more complicated issues of doing business in multiple states is dealing with sales tax issues. Each state has different metrics, which requires the entity to withhold tax in each state in which it is selling products or providing a service. When business will be conducted in multiple states, in many cases, the preferred venue for incorporating is the state of Delaware because it has the most mature body of case law and the decisions are predictable.

The entrepreneur has multiple avenues to pursue in funding the business opportunity. If the business owner is reluctant to give up equity in the venture, he or she may decide that debt financing is most appropriate; however, a lender may be reluctant to grant loans to a business that only has a product or service and does not have a track record of profitability. Some business ventures may pursue grants or a crowdfunding campaign, which is a vehicle for raising capital in order to gather raw materials, conduct research or more fully develop a product.

The investor and entrepreneur must recognize that the business investment needs depend on its legal structure and ability to repay debt, as well as the anticipation of future investment needs. When non-equity capital infusion is the route that is pursued, the owner and lender recognize risk even though the owner may not be giving up any equity in the beginning of the venture. The downside for the lender is that it will not be repaid if the business model does not achieve the intended financial goals.  From the owner’s perspective, the risk is that the business collapses, which would expose the business owner to personal liability of guarantees that were required.

If the entrepreneur cannot secure or chooses not to use debt financing to grow the business, he or she will have to consider equity forms of investment, which include issuing common stock, convertible preferred stock, or convertible notes. All of the above forms of investment involve term sheets, due diligence and the negotiation of transactional documents that are oftentimes complex and time consuming, and could be frustrating for both the investor and entrepreneur. For more information on this issue or other business matters, please contact  PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

The process of negotiating an investment opportunity is oftentimes intimidating for first time investors or entrepreneurs. The business jargon is confusing, while the terms and conditions vary for each investment. The non-equity investment terms will vary from lender to lender, which requires careful examination by an accountant or lawyer. The transaction’s specific terms, which include interest rate and principal amount of the loan, will depend upon how the lender evaluates the borrower’s credit history, as well as the industry in which the business is competing. The terms of the loan may include warrants or options if the borrower is a start-up, and the amount of collateral required for the lender to make the loan will depend upon the size of the loan or repayment terms. Many loans will include financial covenants such as debt service coverage ratios, which are included to provide leverage for the lender in monitoring performance.

Another non-equity form of financing is crowdfunding, which is another form of debt obligation. This type of financing provides the lender(s) with a way to assess market potential for the product or services. The entrepreneur seeking financing through this mechanism must carefully examine the fee structure, the length of the campaign, what happens if the entrepreneur doesn’t deliver the service or product or the investor does not deliver the funding.

In addition to debt financing, the investor and entrepreneur will consider equity financing in the form of common stock, convertible preferred stock or convertible notes. When considering equity ownership as the vehicle, it will be necessary to determine the total number of shares to be issued, percentage of the authorized shares to be issued and the value of each share. Equity financing also requires the entity to create bylaws while the investors and founders execute a shareholder agreement, which will outline the rights and obligations of the shareholders. The shares may have a vesting schedule that must be carefully analyzed in order to protect the investment and founders.

If convertible preferred stock is the strategy for funding a start-up, the parties to the transaction will be required to consider and resolve many issues, such as those that will impact liquidity and potential dilution or restrictions to the founders leaving during a critical path of the company. Those who purchase convertible preferred stock may also want board seats for the investors in order to monitor the founder’s performance and protect their investment.

The most flexible form of equity financing is the use of convertible notes often used with start-up companies. When using this vehicle, the parties must decide when the note may be converted from debt to equity, the conversion price or discount rate, and how the discount rate or valuation cap will affect the entrepreneur’s ownership interest if the stock price is valued higher than anticipated.

Negotiating the investment deal can be intimidating to the beginner; however, with proper guidance by counsel and an accountant, the process becomes more routine and manageable. Both sides must work toward finding an investment solution that is fair to the entrepreneur while providing a return on the investment to those financing the entrepreneur’s effort to make a product or provide a service that is scalable. For more details about investment structures in a business transaction or other business matters, please contact  PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

The “influencer” marketing industry, which is predicted to become a $15 billion industry by 2022, is rapidly expanding, and with COVID-19 ramping up e-commerce, brands are increasingly turning to this marketing strategy. Influencers are people with varying amounts of online followers who promote and advertise products and services on YouTube, Twitter, Facebook, Snap Chat, Instagram, TikTok and blogs. Influencers can be celebrities, industry experts, or everyday people who have built a reputation for being knowledgeable on a specific topic. A successful influencer generates a large following of engaged people who trust and pay close attention to the influencer’s views and recommendations.

Businesses that utilize influencer marketing should be cautious of the legal risks. Consumer protection regulators, including the Federal Trade Commission (the “FTC”) and more recently the Food and Drug Administration (the “FDA”), are targeting deceptive influencer practices that could mislead consumers. Brands, media outlets, and influencers are legally obligated to disclose any social media post that was created from “material connections” between a brand and an influencer, and can all be held liable if the law is not observed. The FTC has stated that “material connections” could include a paycheck or gift in exchange for an endorsement, a family connection to a company, or an ownership stake in the company. Despite the requirements for disclosures on social media posts, many posts and influencers continue to not properly disclose.

To decrease the legal risks of influencer marketing, a business should consider implementing these practices:

  • Develop an influencer contract or terms of service which address the contractual terms necessary to properly create an influencer marketing campaign;
  • Monitor the continuous regulatory developments to ensure your business and influencers are complying with applicable law;
  • Provide your influencers with a set of guidelines as to what they must disclose and how they should disclose “material connections”; and
  • Develop active monitoring programs that monitor your influencers and vendors.

If you have questions about your organization’s influencer marketing policy and related legal issues, call Attorney Katherine D. Bishop at 401-824-5100 or email kbishop@pldolaw.com.

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

With little fanfare, the Bankruptcy Code received its first major revision in 15 years in February 2020. This new revision – called “Subchapter V” – is primarily designed to make it easier for qualified small businesses with total secured and unsecured debt of up to $2,725,625 to declare bankruptcy, reorganize their affairs, and come out of bankruptcy intact. Now, with the passing of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the maximum debt limit is raised to $7,500,000, offering more small businesses and sole proprietors impacted by the pandemic to take advantage of Subchapter V. Although the increased threshold amount under the CARES Act expires in March 2021, the $2,725,625 limit will likely increase over time.

Prior to Subchapter V, bankruptcy reorganizations for small businesses (versus liquidations) were often too expensive, too unwieldy, and too time-consuming. Indeed, one United States Senator observed that bankruptcy has historically been a “feeding trough” for attorneys and other professionals, all to the detriment of the bankrupt company and its creditors. It was no surprise, then, that small businesses had no choice but to liquidate and go out of business because they could not sustain the cashflow needed to navigate several months or years of the bankruptcy process.

Yes, going broke is a very expensive process. However, Subchapter V seeks to change all of this in several ways. First, this method of bankruptcy offers options and access expanding the number of potential small businesses who could take advantage of Subchapter V.

Second, small business debtors would be allowed to continue to operate their businesses as debtors in-possession, which is important because they will enjoy the benefits of bankruptcy protection (the so-called “breathing spell”) and still be able to operate. They would need to propose a plan of restructuring that would dedicate all of their projected disposable income for a period of between 36 and 60 months. After completing its repayment obligations, the business would receive a discharge of all unpaid unsecured debt and obtain its “fresh start.”

Third, unlike traditional bankruptcy reorganizations, there is no automatic requirement that a committee of unsecured creditors be appointed. This appointment, while well-intentioned and important in larger cases, can often lead to disputes and litigation that drive the costs of bankruptcy up, especially since debtors generally have to pay for the fees associated with an unsecured creditors committee. This administrative expense would most often crush a small business into submission, so Subchapter V works to free small businesses from that yoke.

Fourth, Subchapter V is more welcoming in allowing the bankrupt company’s attorney to remain on as its attorney throughout the bankruptcy process provided that certain requirements are met. One of the most unfortunate aspects of traditional bankruptcy is that the same lawyer who was helping a debtor navigate their troubles pre-bankruptcy was often disqualified from assisting their client in bankruptcy because that lawyer was usually owed money by the debtor, thus creating a conflict of interest. Subchapter V smartly allows debtors to be represented by their existing attorneys, in most cases.

Finally, Subchapter V promotes tighter and faster deadlines to bring a debtor through the bankruptcy process. All of this is designed to keep attorneys’ fees and professional fees at a minimum so that a small business debtor can get back on its feet as soon as possible. Although it is too early to tell how widespread or successful Subchapter V reorganizations will be, the pandemic and economic fallout will likely result in many more bankruptcy filings than were anticipated when the change was enacted. This new tool will undoubtedly be an important consideration for small businesses when they face financial struggles.

If you would like further information, please contact PLDO Partner Brian J. Lamoureux at 401-824-5155 or bjl@pldolaw.com. Attorney Lamoureux is a member of the firm’s Litigation, Labor and Employment, and Corporate teams. He also assists clients with creditor/debtor relationships and is qualified to serve as a Receiver by the Rhode Island Superior Court.

 

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

PLDO’s recent launch of its online multimedia learning center, Inside Business – Powered Up For Success, is dedicated to assisting entrepreneurs, startups and business owners grow, thrive and succeed in today’s business environment.

The platform is a resource library of information and features a six-part series of podcasts with business attorney Joshua J. Butera on topics ranging from corporate structure and governance options and their tax implications, to alternative work space locations and the advantages and disadvantages of owning or renting commercial space, to the pros and cons of different options available for start-up capital and/or to attract investors. Each podcast has an associated business advisory with further information and insights to help individuals make informed business decisions. Additional materials and resources will be added to the microsite, which is available by visiting Inside Business – Powered Up For Success.

The creation of the platform was led by the firm’s Managing Principal Gary R. Pannone, who has been selected by his peers and clients as Rhode Island’s Best Lawyer® “Lawyer of the Year” for his business practice over several consecutive years and recently recognized by Rhode Island Lawyers Weekly as a 2020 Excellence in the Law Hall of Fame honoree. He will be working with the firm’s team of business lawyers and other attorneys with experience in business-related areas. The firm welcomes suggestions for future podcasts and/or resource material about business concerns or questions owners may have as the center grows. Please contact Attorney Pannone or Attorney Butera at 401-824-5100 or email gpannone@pldolaw.com or jbutera@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

Representation and warranty insurance (“RWI”) has been around for some time. Historically, it was most commonly used in large transactions, often involving publicly traded companies. However, in recent years it has become much more common in smaller, private, “middle market” transactions. As the name implies, RWI provides insurance protection to a party (either the buyer or seller) in the event the representations of the seller in an asset purchase agreement, stock purchase agreement or merger agreement are breached and the buyer suffers damages as a result of such breach. In some cases, it may also provide protection for the buyer in the event of outright fraud by a seller.

Predictably, there are pros and cons to RWI that must be carefully weighed by both buyer and seller. Furthermore, that process needs to start early because the decision to seek RWI will impact negotiation of the purchase or merger agreement.

PLDO partner and business attorney, William F. Miller, describes RWI benefits and what the insurance does not typically cover in his latest advisory, The Pros and Cons of Representation and Warranty Insurance in Merger and Acquisition Transactions. He also offers practical and financial considerations to help organizations make informed decisions. If you have questions about RWI or other business matters, please contact PLDO Partner William F. Miller at 401-824-5100 or email wmiller@pldolaw.com.

 

The Rhode Island General Assembly recently created a new program designed to promote private funding for Rhode Island small businesses. The program creates a tax credit for Small Business Investment Companies (“SBIC”) that invest in eligible Rhode Island businesses.

An SBIC is an investment fund recognized by federal law (15 U.S.C. § 681) and licensed by the U.S. Small Business Administration. The SBIC program incentivizes private investment in eligible small businesses by offering certain benefits, including favorable terms on federal loans (so the SBIC may invest the loan funds) and exempting the SBIC from both the Volcker Rule and SEC registration.

Rhode Island is now offering its own incentives for SBICs that invest in Rhode Island small businesses. The program will be administered by the Rhode Island Commerce Corporation. Beginning on the third anniversary from the initial capital investment, the tax credit takes effect and lowers the SBIC’s state tax liability by 21.5% multiplied by the amount invested.

To take advantage of this tax credit, the SBIC must invest in an “eligible business,” which is defined as (1) having fewer than two hundred fifty employees; (2) having no more than fifteen million dollars in net income from the preceding tax year; and (3) having its principal business operations located within Rhode Island. In addition, the funding is only available for certain industries that the General Assembly believes will contribute to economic growth, such as clean energy, life sciences, defense, shipbuilding, and composites. The list of industries is relatively broad (it includes food, design, hospitality and “advanced business services”) and SBICs may even petition the Commerce Corporation to allow the investment if the company is not within an enumerated industry so long as the Corporation determines that the investment will be beneficial to economic growth.

An SBIC seeking to certify a capital investment in an eligible Rhode Island business must apply to the Commerce Corporation. The Corporation begins accepting applications in Fall of 2019. For more information about this program or other business matters, contact Attorney Joshua J. Butera at 401-824-5100 or email jbutera@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

 

In 2018, Massachusetts passed a new law that provides workers with paid family and medical leave (the “PFML Law”). With limited exceptions, it applies to most Massachusetts employers, large and small, and includes both W-2 employees and some independent contractors who receive Form 1099MISC.

Earlier this month the Massachusetts Department of Family and Medical Leave (the “Department”) announced changes to two fast-approaching deadlines under the PFML Law. First, the deadline for employers to provide written notice, including email notice, to their employees was extended from May 31, 2019 to June 30, 2019. The Department has posted sample forms of notice on its website.

Also, employers that maintain a private plan with comparable or better benefits for its employees may apply for an exemption from the PFML Law. Private plan exemptions must be approved in the calendar quarter prior to the quarter in which they become effective. The deadline for requesting an exemption for the first quarter of 2019 has now been extended to September 20, 2019. However, it is important to note that this extension of the exemption application deadline only affects contributions required under the PFML Law if the exemption is approved. If the application is not approved, the employer will be required to remit all required contributions retroactive to July 1, 2019. For more information on this issue or other business matters, please contact PLDO Partner William F. Miller or Attorney Joshua J. Butera at 401-824-5100 or email wmiller@pldolaw.com and jbutera@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

The Artificial Intelligence (“AI”) industry is rapidly emerging as one of the most interesting new advancements likely to impact a broad array of industries. AI is well beyond the nascent stages of development, and is quickly taking center stage as a gateway profit maximizer for forward-thinking business leaders. In short, AI has arrived.

While the roots of the current wave of technologies stem as far back as the 1950’s, current related advancements have provided both the critical rationale and the technical underpinnings for today’s advancements. Industry observers will recall that as recently as three to five years ago, the buzzword in the technology space was “Big Data,” springing out of advancements in the Internet and media fields. As defined, Big Data describes the gathering and storage of previously unimaginable amounts of data across virtually every consumer platform. The subsequent issue was not a lack of data, but rather, a need for new and faster tools to effectively manipulate and use that data, without which Big Data collection and storage was meaningless. The new computing architectures that have been developed to solve this problem define the essence of today’s Artificial Intelligence.

More specifically, the modern landscape of cutting-edge AI tools falls into the three basic elements of: a) Gathering and storage of massive amounts of information; b) Training computing systems to analyze the information for purpose-specific outcomes such as predictive analyses of risk profiles and likely consumer trends; and c) Generating nimble, current and understandable reporting to human end-users.
Predictably, the banking and insurance fields have been early adopters, driving investment at creating faster and more effective methods of evaluating current/immediate coverage risks and borrower viability, using an astonishing array of information parameters, from digital imaging of post-accident automobiles, geographic data, consumer spending habits, political affiliation, and virtually limitless other potential factors.

Is AI for you? Address the business problem, first.

A commonly heard frustration voiced by AI developers is the prevalence of C-Suite/Executive directives for the technical corps to “get [us/our business/the company] up to date with Artificial Intelligence.” The typical responses include various iterations of, “…to do what?”

This isn’t to suggest a limitation to the array of potential uses for AI, but it does define the basic premise that AI is not merely a new software or hardware platform to be draped over any existing enterprise wanting an uptick in profitability. Rather, the current slate of AI technologies functions to address a specific business problem, and the most effective deployment of any AI platform necessarily requires first targeting the problem to be addressed. With that said, the array of currently active uses of AI is eye-opening. Among the uses includes tailoring educational/tutoring services to individual students for best results, a popular streaming service’s platform for individualizing the screen interface for each consumer browsing the site (including the reporting metrics and follow-up data showing materially improved viewership), bleeding-edge improvements to robot and prosthetic technologies, improvements to curating social media user interfaces, fraud prediction in lending and consumer credit markets, instructing self-piloting drones to avoid real time obstacles, identifying “fake media” reporting, and many others across dozens of verticals such as the health care, retail, and security industries. In short, before undertaking a material investment, the critical exercise is to determine what aspect of a given business can potentially be improved with an Artificial Intelligence solution, followed by building and/or training the AI platform to suit that specific need.

Navigating the legal and regulatory issues with AI

As fast as AI is disrupting industries across multiple verticals, we’ve already observed a rise in related regulatory issues, beginning with the inherent problems around over-reliance upon machine generated decision-making. Where the design, training and/or testing of an AI system are faulty, critical variables can be overlooked, yielding poor results. Alternately, a given system may function perfectly, but any AI system can only be as vibrant as the data provided. By way of example, in 2017, a lending institution in Australia erroneously sent thousands of debt recovery letters to welfare recipients, based upon a data error in the lender’s AI system. Closer to home, Facebook announced in an earnings report in April 2019 that the company expects to be fined as much as 5 Billion USD by the Federal Trade Commission over privacy issues…at least some of which related to company activities likely involving AI engine determinations related to targeted advertising to subscribers.

Ironically, we can also expect a material rise in the use of Artificial Intelligence by regulators to seek out and identify potential misconduct and improve market oversight. Earlier this month, the Financial Times reported that the Australian Securities and Investments Commission is pursuing AI and natural language processing technology as a viable compliance and enforcement tool for the financial industry. This trend will predictably continue around the globe, and across virtually every major market sector.

PLDO attorneys are carefully following how plaintiffs and government agencies have begun to challenge uses of Artificial Intelligence in the U.S. Courts, and on a closely related front, we’re tracking the national landscape of privacy-related regulations (notably including the California Consumer Privacy Act, the first material equivalent of the EU-based GDPR, which will be going into effect on January 1, 2020)—all of which will potentially intersect with the use of AI and machine learning platforms. Can the GDPR’s “right to an explanation” requirement be interpreted broadly enough to require full reporting of AI matrixes otherwise protected as trade secrets? Will Facebook survive the US government’s argument that they violated US federal and state antidiscrimination laws with the company’s targeted job and housing advertisements?

The tech industry appears to recognize that a broader adoption of AI technology necessarily requires building consumer trust, which in turn drives a need for fair, interpretable, safe and transparent systems. Consequently, industry efforts to combat system bias and create responsible Artificial Intelligence platforms is currently one of the most interesting and key discussions in the development space.
As our team continues to monitor these developments and the continuing evolution of Artificial Intelligence in the marketplace, we will advise on best practices for anticipating and mitigating the related legal and regulatory risks. If you have question on this issue or other business matters, please contact Attorney Kas R. DeCarvalho at 401-824- 5100 or email KD@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

The phrase, “piercing the corporate veil,” relates to a circumstance in which a claimant is attempting to hold individuals (shareholders or members) liable for the debts and/or obligations of the entity. This issue is also confronted in a parent-subsidiary structure when the claimant is seeking to hold the parent liable for the debts and obligations of the wholly owned subsidiary. Courts are faced with applying a balancing test in deciding as to whether or not the corporate veil should be pierced in the above described circumstances. The factors to be reviewed and method of applying the balancing test may vary from state to state; however, most state law or court decisions proclaim that the piercing of the corporate veil to expose shareholders and members to personal liability should be an extra-ordinary event. The Rhode Island courts generally apply a balancing test on a case-by-case basis, which is a similar approach to Delaware, by considering the following factors:

  • Capitalization of the entity;
  • Interlocking boards;
  • Who are the officers and what is their authority;
  • Do the shareholders/members share premises with the entity;
  • Do they not deal together at arm’s length;
  • Is there confusion in the marketplace over the entity being part of the shareholder;
  • Were corporate formalities observed, including keeping of separate financial and corporate records;
  • Did the shareholder regularly siphon off cash of the entity;
  • Did the shareholder provide or arrange the entity’s capital in the form of loans so that the corporation was “thin”;
  • Did the entities use separate attorneys and professionals;
  • Were employees shared;
  • Did the shareholder guarantee the debts of the entity; and
  • Does the fact pattern smell of fraud or sharp practices by which a counterparty would be misled to economic disadvantage?

In a parent-subsidiary structure, the analysis may involve capitalization; i.e., insufficient capital, or the advancing of loans by a parent to a subsidiary in less than arm’s length fashion, which can result in adverse tax consequences. Thin capital in the tax sense is not determinative of a piercing situation in corporate cases; however, this fact may inform a decision maker in applying a balancing test of all factors. Courts are generally reluctant to pierce the corporate veil unless the facts demonstrate that the pierced entity is a sham designed to defraud investors and creditors.

Piercing the veil may occur when a tort has occurred, a contract has been breached, a corporation has been party to a fraud, or when a corporation is a mere agent of shareholders. A common-sense approach would be to answer the following question: Has someone been injured by being misled materially. Rhode Island courts look to inequity, fraud, undercapitalization or in a parent-subsidiary circumstance, the domination by the parent of the activities and decision-making of the subsidiary. For more information, please contact Managing Principal Gary R. Pannone at 401-855-2601 or email gpannone@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

Business succession planning should be part of the overall business development strategy of any enterprise. Leaving it until it is too late may have negative consequences to the future of the business. Important considerations and options for successfully transferring ownership and control to new management when the time is right are highlighted in the following “succession planning learning series.”

Balance of Power in a Closely Held Business

In a closely held corporation created for reasons beyond lifestyle, the relationship between a board of directors and shareholders could become tenuous if the goals of the founding shareholders are not aligned with those of the directors. This is especially true when the shareholders elect board members who have unique skills such as financial, accounting or legal, and want them to take actions that are in the best interests of the corporation versus a shareholder or group of shareholders. As a general proposition, the board of directors possess distinct powers and controls that are authorized under state statute or common law. At times, this issue may create a unique tension if the shareholders electing them have a different vision for the enterprise.

The directors of a corporation are principally concerned with the management and operation of the company. The challenge in a corporate setting is how the two bodies; i.e., shareholders or directors, are aligned in terms of vision. A further challenge would occur if one body misuses its powers to the detriment of the other.

The never-ending discussion is who should have control of the company. The power of the shareholders is restricted by the governance documents that were agreed upon during the formation of the enterprise, while the board is vested with management powers which, in many circumstances, would leave the shareholders at the mercy of the directors who they elected.

Throughout the course of history, the evolution of corporate governance principles has tended to tame the powers of the directors. Once strong principles have been implemented, the shareholders are more assured that the directors will act in the best interests of the company and its shareholders without favoring either body.

Business Succession Planning Considerations

Business owners of closely held or family business should routinely consider succession planning options in order to preserve the long-term value of the business enterprise. A comprehensive succession plan becomes the strategy to grow the business, reduce taxes and serve as a retirement strategy. Most importantly, a well-planned and communicated succession plan will preserve harmony in the family especially as it relates to those family members who participate in the day-to-day activities and contribute to its success.

The general considerations in developing a business succession plan include devising a strategy that achieves the personal goals of the founders; choice of entity structure; valuation methodology and how the plan will be financed. During the process of developing a succession plan, it is necessary to evaluate the talent of the next generation so that when there is a transfer of control the likelihood of success is high. It should be noted that statistically the success rate in transferring a business to the second generation is not extremely high and, therefore, it is essential for the founders to develop a mechanism to save the business if they become concerned that the transfer will not achieve the stated financial goals.

Considering the most recent changes to the tax code under the Trump administration, the income and estate tax implications must be reviewed carefully with the tax consultant for the family so that the structure of the transfer takes full advantage of the revamp to the tax code. Balancing business needs and family requirements will be challenging and developing a governance structure that includes the requisite controls for decision making is critical once the founders are no longer in control. Adopting best practices will mitigate risk given the possibility that the next generation will have difficulty meeting the demands of the business after the transfer, which may negatively impact the retirement goals of the founders.

Identifying the “Categories of Concern” in Succession Planning

During the next ten years, we will more than likely witness significant transfers of wealth and business to the next generation. These transfers will involve new business structure, which will depend on careful and diligent planning to achieve success. Succession planning involves multiple disciplines and requires well thought out planning and training of the successor to the founder of the business. Statistically, thirty percent of businesses survive to the next generation and the odds become much worse for the second generation.

Founders of business are motivated to fulfill their vision; however, it is not a given that the next generation will embrace the vision or have the same passion for success. Long term planning and training the next generation are the keys to a successful transition. Preparing a successor for leadership requires discipline and the right balance in terms of holding on and letting go at the right time. The strategy to be implemented for an orderly transition of a family business involves multiple disciplines that focus on maintaining a customer base, quality controls, preservation of company assets and harmony within the family unit.

A comprehensive strategy to transition a business will also include family estate planning techniques designed to minimize estate taxes and preserve the value of the overall estate. The founder must maintain control of the decision-making long enough to become comfortable watching the successors perform and be assured that when the reigns are turned over, the founder’s hard work and retirement will be preserved. The categories of concerns that must be addressed include articulating short- and long-term goals; effective communication; shareholder relationships; compensation models; stock transfer strategy; management; valuation and continuity of the business.

Navigating Key Issues in Succession Planning

The issues confronted in developing a business succession plan range from the simple decision to anoint a family member as the next leader to a comprehensive restructuring of the enterprise to achieve long term goals. Succession planning in the context of a family business is often more challenging due to conflicts in the goals of the founder and successor, which might involve who runs the business or what the business will do in the future.

A major challenge in developing an effective succession plan relates to how the business enterprise is valued and understanding the costs involved in making the transition. The founder’s goal generally relates to slowing down and receiving a return on his or her investment. If the successor does not have an appreciation of either the value of the business or the costs that will be involved in the transition, it is unlikely that there will be a mutually beneficial process.

The major goals in planning the succession of a business is appreciating its value, developing strategies to preserve and grow it, while at the same time establishing a plan that will be successfully implemented by the successor. Deciding upon a form of entity will be critical in addressing corporate and personal and estate tax implications, which may be different depending upon whether the business structure is a partnership, limited liability company, S Corporation or C Corporation. Whether the founder intends to continue participating in decision-making following the transition will influence the type of structure to be adopted.

Choosing the Entity for Succession Planning

The choice of entity for a closely held business is an important decision for both tax and non-tax reasons. It is especially important in developing a strategy for succession planning purposes that will achieve the long-term goals of the founders of the business. Tax implications and liability will always be a consideration in deciding upon a corporate structure, as well as how the structure may be integrated with an estate plan.

Operating a business as a general partnership is relatively uncomplicated; however, this structure exposes the general partners to unlimited liability and could ultimately jeopardize personal assets. Using a limited partnership structure reduces the personal liability; however, the limited partners must be very disciplined in remaining passive regarding operational and the decision-making function. If the family business has been operated as a general partnership, it is prudent to consider alternative structures that reduce the risk to the owners while at the same time enjoys a favorable tax treatment, which may be possible by converting to a limited liability company that provides the protection against creditors and at the same time allows the owners to be treated as a corporation or partnership for tax purposes.

Using the S corporation structure provides for the business to be operated as a separate legal entity while taking advantage of pass through taxation such that the shareholders pay the tax at their personal income tax rate. Converting to an S corporation is often more complicated than converting to a limited liability company in that there exist specific criteria for converting and operating the enterprise after selecting S status. The effect of the pass-through structure may impact an eventual succession plan as it relates to tax efficiency and achieving shareholder goals.

In a C corporation structure, the enterprise is considered a legal entity separate from its owners or shareholders, which provides significant protection to the shareholders from liability. The downside is a two-tier tax at the corporate and personal level. This structure is often the choice when the desired outcome is to pursue equity financing or going public.

In all the scenarios outlined above, the choice of entity structure may change the strategy implemented in developing a succession plan. The ultimate goal will be to adapt a strategy that allows the company’s value to grow, achieve long-term goals and align with the succession planning strategy.

Succession Planning and Employee Morale

Developing an effective succession plan in a business setting requires diligence and execution. In our practice we have often recommended non-family members to become part of the process when children or relatives do not possess the requisite skills to effectively operate the business. Overlooking key employees could lead to morale issues and diminishing productivity or unexpected departures by those who believed they were next in line.

Communicating a comprehensive succession strategy to key employees will serve to motivate those who have been significant contributors to the business success even if they are not relatives. Multiple studies in this area have demonstrated that organizations with succession management practices extending to employees who make valuable contributions results in high engagement and retention. It is therefore important for founders to provide performance feedback to key employees and make it known that there are potential future opportunities within the organization. This principle will apply regardless of the industry because key employees are generally motivated to make certain the business succeeds after a transition.

A few critical elements of developing a successful succession plan include:

  •  Identifying critical positions that must be filled to assure a smooth transition.
  • Identifying talent for critical positions.
  • Train successors early and often.
  • Make it clear to the rank and file that the founder believes in those he or she has chosen to be their successor.
  • Communicating regularly with employees about the succession management process and its importance to their careers and the company.

As a best practice, maintaining some level of transparency in this process provides the employee with a clear understanding of the quality and milestones expected of them and others, which will inspire them to work toward specific goals and will reduce resentment when others are promoted. Regardless of the type of business, employees are always looking for a ladder for opportunity and overlooking key employees leads to lower morale and productivity. A well-developed and executed succession plan that is understood by the employees increases the possibility of success when a transition is finally implemented.

 

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

 

Cannabis industry watchers can expect that the tale of New England Treatment Access (NETA) – one of Massachusetts’ first registered marijuana dispensaries and a predominant player in the Commonwealth’s burgeoning recreational marketplace – leading to its sale to a national company will be duplicated in the New England region.

As the storyline goes, investors work to establish a cultivation and dispensary, obtain licensure, and then sell to and consolidate with a larger, oftentimes, a national firm within the cannabis space. The cycle has already played out and will continue in more established state-sanctioned markets such as California, Oregon, Washington State and Nevada. In the case of NETA, Georgia-based Surterra Wellness, a cannabis firm that operates over 20 cannabis facilities in various locations, has agreed to acquire NETA through a combination cash and stock transaction.

Industry consolidation is becoming commonplace.  While cannabis operators work within jurisdictional silos given state-specific laws and regulations, industry experts see increased value in undertaking corporate “roll-ups” to increase market presence and branding on a national basis, while allowing for needed funding to complete facility buildouts and physical expansions. Such transactions are also appealing for the long-term game – national legalization – which has already come to fruition in other nations. The best example to date is Canada’s cannabis industry.

However, corporate roll-ups come with certain risks. Proper structuring of the deal requires experience in corporate law and regulatory arenas to ensure the process goes smoothly and that interests are adequately protected. Moreover, due diligence is advisable in such a transaction, including by the company targeted for acquisition. The due diligence process will confirm the value of the consolidation and protect company and investor interests once the acquisition has been approved by the proper regulatory bodies and consummated. Experienced legal counsel is, therefore, a virtual necessity. PLDO Partner Benjamin L. Rackliffe, who is a leading authority on licensing, compliance and regulatory law in the cannabis industry in New England and multiple other states, has successfully advised investors and owners of cannabis facilities. He is available to provide counsel on corporate roll-ups and other legal issues regarding business matters in the cannabis industry. He can be reached at 401-824-5100 or email brackliffe@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

Feeling the pressure from other New England states that have already implemented recreational marijuana programs or have signaled they will do so shortly, Rhode Island Governor Gina Raimondo announced that her administration will be introducing legislation this session to legalize and tax cannabis. This announcement comes on the heels of Massachusetts’s recent implementation of its adult use marijuana program, recreational program roll-outs in Maine and Vermont, and announcements from Connecticut’s Governor that a recreational cannabis program is an administration priority. Governor Raimondo cites the need to generate revenue to combat the perceived social costs from cannabis and related products making their way into Rhode Island from other states as a primary basis for her decision. The Providence Journal has reported that the state anticipates $14.3 million in gross revenue by the end of fiscal year 2020. (R.I. governor to propose legalizing recreational marijuana)

A recreational program would be welcomed by many, including the licensed cannabis cultivators that were established to grow and wholesale medical cannabis to Rhode Island’s three state-sanctioned dispensaries. It may be anticipated that there will be an application process to convert or add licenses for these medical cannabis cultivators to serve the recreational marketplace if, and when, the Governor’s legislation is enacted into law. This process is often the case in other states that have medical marijuana programs that predate recreational counterparts. It is also highly likely that a separate application process with Rhode Island’s Department of Business Regulation will be put in place for the award of dispensary licenses.

As the Governor has noted, her proposal is expected to establish one of the most highly regulated programs for recreational cannabis in the country. Interested applicants, investors and cultivators are wise to seek advice and counsel from an experienced industry attorney. PLDO Partner Benjamin L. Rackliffe, who is a leading authority on licensing, compliance and regulatory law regarding the cannabis industry in Rhode Island and multiple other states, is available to answer your questions and assist you in preparing for Rhode Island’s entry into the recreational cannabis industry. He has advised over a dozen licensed cultivators through the Rhode Island process and has counseled dispensary clientele in several states through each state’s regulatory process, as well as worked with license holders and investor groups through private placement processes to fund license applicants. To contact Attorney Rackliffe, please call 401-824-5100 or email brackliffe@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

This past September at the 5th Annual Global Investigations Review Conference (“GIR”), Deputy Assistant Attorney General Matthew S. Miner discussed recent changes in the Department of Justice (“DOJ”) policy regarding the prosecution of business organizations. The new policies generally expand upon existing policies encouraging self-reporting, cooperation and remediation while underscoring the importance of robust compliance programs to detect and prevent wrongdoing. However, in a marked departure from existing policy, such corrective steps by the offending corporation now create a “presumption” that the DOJ will decline prosecution in the absence of “aggravating circumstances.” This new policy is the result of not-so-subtle pro-business pivot in direction by the Trump Administration since coming to office in January of 2017.

Long before he became President, Mr. Trump was a harsh critic of the Foreign Corrupt Practices Act (“FCPA”) that became law in 1977. The FCPA bars US companies from bribing foreign officials with anything of value. Mr. Trump has long claimed that the law put the US at a competitive disadvantage because US companies can’t compete effectively in places where it is a common practice to pay bribes.

In November of 2017, the DOJ under Trump announced the final adoption of an existing “Pilot Program” regarding FCPA violations, which increased the resources devoted to FCPA enforcement but also made it much easier for companies to avoid criminal prosecution by “self-reporting” violations and taking necessary steps to remediate the problem. In March of 2018, the DOJ further expanded this policy when it told its prosecutors that this new policy should be considered as “non-binding guidance” in all Criminal Division corporate criminal investigations, not just those involving violations of the FCPA. In his remarks at the GIR Conference, Mr. Miner cited several cases where, even though “aggravating circumstances” existed, e.g. the participation of senior executives in the misconduct, those companies were still granted a DOJ declination because the company had responded properly. Mr. Miner emphasized that the goal is to foster a “culture of compliance.”

As recently reported in the New York Times, a comparison of the first 20 months of the Trump Administration to the last 20 months of the Obama Administration reveals that there has been a substantial 72% decline in corporate monetary penalties collected by the Criminal Division of the DOJ. Likewise, the Times reports a 62% decline in civil penalties and restitution collected by the Securities & Exchange Commission (“SEC”) over the same period. Indeed, SEC Chairman Jay Clayton has made it clear that the SEC is more interested in pursuing the small fraudsters rather than larger institutions. These statistics are very similar to earlier reports in the New York Times and other media that enforcement actions brought by the Environmental Protection Agency (“EPA”) had declined precipitously and that penalties sought by the EPA had declined 39% during the first nine months of the Trump administration.

The Trump Administration has responded to its critics that it’s simply too early to draw any conclusions and that the President does not want to punish individual investors, innocent employees or the other stakeholders of wayward companies by forcing them to pay for the misconduct of senior officials. From now on the focus of the Trump Administration will be on holding individuals accountable for transactional corruption.

In his September comments, Mr. Miner stated that “Businesses thrive in a stable environment. A stable environment exists when laws are enforced consistently and fairly. When business thrives, it benefits all of us.” If you have questions about the new policies, please contact PLDO Partner and criminal defense attorney James W. Ryan at 401-824-5100 or email jryan@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

Gifting interests in a closely held business can result in a significant planning opportunity for the right donor as well as a substantial benefit to a favorite charity. Consider the following three planning strategies for charitable gifts utilizing private and closely held business interests:

1. Give and Sell Strategy. The goal is to gift the business interests before entering into a binding agreement to sell to secure “double” tax benefits of (a) obtaining a charitable income tax deduction to help offset gain realized by the donor, while (b) avoiding, or at least significantly reducing, tax on the proceeds to the charity. This strategy is beneficial if the individual donor holds business interests with low basis that would result in a significant long-term capital gain if the business was sold. If the interest is gifted prior to sale, the donor would obtain a charitable income tax deduction equal to the fair market value of the gifted interest, which first offsets higher taxed income, and the donor avoids tax on the interests gifted. In many cases, the charity will not pay unrelated business income taxes (known as UBIT) upon the subsequent sale of the business interest. For taxpayers who are potentially subject to the “net investment income tax” on passive income (under Internal Revenue Code Section 1411), the tax of 3.8% is not imposed on gain realized by the charity.

2. Give and Hold Strategy. This involves gifting an income producing asset to be held by the charity without contemplation of a pending sale. The donor’s charitable deductions would be the same as in the Give and Sell Strategy. The charity will now be a partner or shareholder in business, effectively receiving interest in income that the donor would have previously received and paid tax on. The income the charity receives may be subject to UBIT depending on the underlying nature of the business entity now held by the charity (i.e., C Corp, S Corp or partnership) and they type of income generated. Dividends, interest, annuities, royalties, rental income from real property and capital gains on sales of appreciated assets are exempt from UBIT (except for S Corps).

3. Gift by Business Entity of Underlying Asset. This strategy involves the closely held business entity making a gift of its underlying asset(s). This strategy is mostly used by pass through entities. Charitable gifts of non-liquid assets made by a partnership is reported as a separate item proportionately to each partner, and partners only reduce their basis in their partnership interests by the proportionate amount of the adjusted basis in the asset gifted.

The gift of a closely held business interest poses special challenges for both a transferring donor and recipient charity. Great care must be exercised to avoid inadvertent consequences and attain the desired charitable benefits. PLDO attorneys are well versed in tax law, wealth management and asset protection, and other business planning strategies. For assistance, please contact Attorney Jason S. Palmisano at 561-362-2034 or email jpalmisano@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

The tax reform enacted by Congress last year in the Tax Cuts and Jobs Act provided a nice tax break for businesses. Among other companies, banks have benefited greatly from this windfall, and in addition to rising stock prices, many have announced raises for their employees. This must be good news for everyone, right? Well, as is often the case with tax law, the answer is “Not exactly.”

Many not-for-profit organizations recently have been receiving correspondence from their lenders, that is, banks holding their tax exempt bond indebtedness, informing them that as a result of the change in the maximum marginal statutory rate of federal tax imposed on corporations due to the new tax law effective on January 1, 2018, the interest rate being charged on their loans is going to increase. Whether intended by the new tax law or not, the reduction in income taxes often entitles a bank holding direct purchase tax exempt obligations to increase the amount of interest the borrower must pay. This somewhat ironic result is based on the premise that the lower tax-exempt rate payable by not-for-profit organizations is based on the “taxable equivalent yield” that holders of such debt obligations, such as banks, enjoy by purchasing tax exempt debt.

Buried deep in the documentation evidencing the tax-exempt debt are often provisions requiring the borrower (such as a not-for-profit organization) to pay an increased interest rate if the tax law changes and the income tax payable by the bank is reduced. The concept is to provide the bank with the same taxable equivalent rate of return on its loaned funds as it would have received if the tax rate did not change. So, if properly documented, the tax rate reduction results in the bank being authorized to charge a higher interest rate to make up for the “loss” in yield that resulted from the tax rate reduction. So, the bank pays less in taxes but at the same time can charge more in interest, at the cost of the not-for-profit. Confused yet?

There are two critical questions affecting a bank’s ability to charge more interest as a result of the tax reduction: (1) does the documentation expressly provide for a change in the applicable interest rate based on a change in the federal tax law, and (2) what is the method for calculating the “gross-up” of the interest rate to provide the same taxable equivalent yield? Some bond documents very clearly specify when and how the interest rate increases, and some are quite vague, and may not actually entitle the lender to increase the interest rate charged to the not-for-profit.

Any not-for-profit organization that receives communication from its lender saying that the interest rate is increasing should consult with bond counsel to review the documentation and determine if the interest rate increase is legally warranted. PLDO Partner John (Jay) R. Gowell, who is a nationally recognized bond counsel and listed in the Bond Buyer “Red Book,” is available to assist you and your organization. To contact Attorney Gowell, call 401-824-5100 or email jgowell@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

As the year concludes, the focus for many business owners turns to tax planning given the numerous changes in the tax law under the Tax Cuts and Jobs Act of 2017 (TCJA). Here are five year-end tax planning considerations for business owners:

1. The allowable deduction for businesses under Internal Revenue Code Section 179 for the full purchase price of qualifying equipment and/or software purchased during 2018 increased from $500,000 to $1 million. The allowable deduction now begins to phase out, dollar for dollar, once total asset purchases reach $2.5 million. And, qualified asset purchases (which now includes purchased new or used property) made after September 27, 2017 may qualify for 100 percent bonus depreciation. These increases could prove valuable to businesses seeking to expand.

2. Consider converting to a C corporation. The TCJA permanently decreased the top C corp tax rate from 35 percent to 21 percent. However, keep in mind the effect of double taxation applicable to C corps, which occurs when C corp owners are taxed on the dividend income received from the entity – income that’s already been taxed at the C corp level.

3. Review tax-attribute carryovers, such as net operating losses, capital losses, tax credits, and charitable contributions to determine if any are expiring and to what extent they can be used in 2018. The net operating loss (NOL) deduction for NOLs arising in 2018 is now limited to 80 percent of taxable income. Under previous law, NOLs could be carried back two years and forward 20 but TCJA eliminates NOL carrybacks and allows unused NOLs to be carried forward indefinitely.

4. Pass-through entity owners such as partnerships, S-Corps or sole proprietorships may be entitled to a maximum 20% deduction of domestic “qualified business income.” The deduction reduces taxable income, not adjusted gross income, and eligible taxpayers are entitled to the deduction whether or not they itemize. S-Corp shareholders should determine their eligibility for the 20% qualified business income deduction and then review year-end compensation to distribute business profits, as well as meet 2018 estimated tax requirements through final income tax withholdings.

5. Cash basis taxpayers may accelerate deductions by prepaying certain expenses before year-end. Also, credit card charges incurred before year-end may be deducted in 2018 and paid in 2019.

There are over 130 new tax provisions in the TCJA. Business owners are faced with the opportunity and challenge of maximizing their tax benefits under the new law. PLDO attorneys are well versed in tax law, wealth management and asset protection, and other business planning strategies. For assistance, please contact Attorney Jason S. Palmisano at 561-362-2034 or email jpalmisano@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

The most recent PricewaterhouseCoopers U.S. Family Business Survey (2017) concludes that succession planning is a “perennial problem” for family businesses. Nearly one-third of family businesses have no succession plan at all, and just 23% have a formal documented plan in place.

One reason why so many family business owners do not engage in proper succession planning is that they view the process as difficult and complex. To be fair, it can be overwhelming to account and plan for family dynamics, career objectives of children, the state of the market in which the business operates, and how the business should be transferred, if at all, to the next generation. Further, business owners typically want to leverage their lifetime work to ensure financial support for their lifestyle after they exit the business.

As one might expect, a comprehensive, tailored succession plan is a significant undertaking. A business owner’s exit strategy should address and take into consideration personal and business asset protection, strategies for tax minimization and value maximization, business continuity planning, estate planning, and possible lifetime transfers of ownership of the family business to the next generation.

To help business owners understand how they can construct an effective business succession plan, an experienced attorney can develop an organized, logical, step-by-step blueprint for the transfer of the business. The blueprint should provide the owner flexibility and adaptability if plans were to change, which they often do. For example, if a key employee were to leave or a third party came along offering top dollar, a well-designed succession plan would be able to adjust.

Business owners have the absolute right to determine how to transition the control and ownership in their business to the eventual successor. Planning for the eventual transition, in whatever form it takes, will take time, and the earlier one starts, the better. Now is the perfect time to begin. To get started, contact Attorney Jason S. Palmisano, who has extensive experience helping clients prepare succession plans as well as wealth management strategies and trust and estate administration. He can be reached at 561-362-2034 or email jpalmisano@pldolaw.com, or you can contact the firm’s Managing Principal and business attorney Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

Rhode Island has set its date to officially enter our nation’s burgeoning and highly profitable industrial hemp marketplace. On October 9, 2018, the Rhode Island Department of Business Regulation (DBR) will begin accepting license applications from aspiring growers and handlers (license holders who process industrial help commodities). DBR is the State’s chief regulatory body that is granted authority for licensing and oversight of the program, pursuant to The Hemp Growth Act, Rhode Island General Laws § 2-26-1 et seq.

Much excitement surrounds the launch of Rhode Island’s hemp program. The hemp industry is expected to double in the United States over the next three years into a multi-billion-dollar market.  The anticipated passage of further federal legislation to broaden the acceptability of U.S. grown and processed hemp is believed to further expand the marketplace and decrease demand for foreign hemp imported to the States from China and others.  It comes as no surprise then, that many will move quickly to be in at the ground floor in state programs like that of Rhode Island’s to obtain favorable market share.

Having a professionally drafted and thoroughly vetted application will best ensure quick processing and acceptance of hemp grower and handler applications with the Department.  Indeed, the Department itself has explicitly recommended that “all potential Applicants thoroughly review the Act and the Regulations governing license application procedures and licensee requirements” before attempting to advance an application through the State’s regulatory process.  Engaging legal counsel with experience with the Department’s regulatory process, and broader experience within the hemp industry would be most prudent. PLDO Partner Benjamin L. Rackliffe is a leading authority on licensing, compliance and regulatory law regarding the cannabis and hemp industry and has successfully advised investors and owners of cannabis facilities and hemp farms in Rhode Island and throughout the New England region. He can be reached at 401-824-5100 or email brackliffe@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

Wealthy individuals have been flocking to Florida for years. According to the website howmoneywalks.com, from 1992 to 2016, the IRS Division of Statistics, U.S. Census Bureau reported Florida gained $27 billion in taxable income from New York, $18 billion from New Jersey, $13 billion from Illinois and $11 billion from Connecticut and Pennsylvania, respectively. Individuals from Rhode Island have brought $1.72 billion in taxable income from the Ocean State. And this doesn’t include the dollars newcomers bring that aren’t taxed. Individuals will continue to relocate to the Sunshine State, perhaps even at a greater pace, because of the Tax Cuts and Jobs Act (TCJA) passed by Congress last year and the favorable income and transfer tax environment Floridians enjoy.

The TCJA made several significant changes to the individual (and business) income tax. The TCJA modifies or eliminates most itemized deductions for individuals. Perhaps the most significant limitation is the cap on the amount deductible for state and local taxes (comprised of income, real estate and sales taxes) at $10,000 per year. This hurts high income earners in high-tax states. Governors in high-tax states are understandably concerned about the caps impact on home prices, job creation and economic growth in their states. This past July, a lawsuit by New York, Connecticut, Maryland and New Jersey was filed against the federal government to void the $10,000 cap. Commentators have suggested the suit is not likely to succeed. As individuals from high-tax states prepare their 2018 personal income tax returns and realize higher taxes, resulting in part from the cap on state and local taxes, many may be seeking to move to a low-tax state.

So, what’s so great about Florida? It’s not just the weather. Florida has no personal income tax, no capital gains tax, no state gift tax, and no state estate or inheritance tax. Professionals and retirees flock to Florida because of the favorable tax environment but there are additional benefits to being domiciled in the Sunshine State. For example, Floridians enjoy asset protection in the form of strong state laws that exempt their homestead, retirement assets, insurance, and certain spousal joint property from being used to satisfy a creditor’s judgment against an individual.

Further, Florida permits individuals to set up long-term trusts to benefit multiple generations for up to 360 years without federal transfer tax. These trusts can be structured to include a spouse as a beneficiary and they may be funded with any type of asset, including life insurance. The creators (and beneficiaries) of these trusts can rest assured that the assets in the trust are protected from divorcing spouses, business creditors and personal injury plaintiffs.

After the passing of the TCJA, individuals who were already looking to leave high-tax states for lower-tax states could be persuaded to take the plunge and relocate. Others will likely follow suit and states such as Florida will continue to benefit from the income and dollars that follow. Given the significant changes to the tax law resulting from the TCJA, individuals should talk to their advisors to ensure they are doing all they can to minimize taxes and protect and plan for their loved ones, regardless of whether they are considering relocation or not.

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

After numerous failed attempts, the Massachusetts legislature has finally passed a new law limiting noncompete agreements between a company and its employees and independent contractors. The legislation was signed into law by Massachusetts Governor Charlie Banker on August 10, 2018. It becomes effective on October 1, 2018.

In many respects, the new law simply codifies many of the historic common law requirements for an enforceable non-compete: it must be reasonable in scope and be necessary to protect the reasonable business interests of the employer. However, the law also contains some additional requirements, several of which promise to be problematic for many employers, as further discussed below.

In order to be enforceable, the new law requires the following:

  • A non-compete must be in writing and signed by both the Company and the employee or independent contractor;
  • It must state that the employee or independent contractor had the right to consult with legal counsel before signing the agreement;
  • The employer must provide a copy of the non-compete to the service provider. For a new employee or independent contractor, the agreement must be provided by the earlier of (i) the making of a formal offer to the service provider or (ii) at least 10 business days before he or she starts work. A non-compete required of an existing employee or independent contractor must be provided at least 10 business days before it is to become effective and it must be supported by additional consideration (e.g., a raise, bonus, etc.). Continued employment is NOT deemed to be additional consideration sufficient to support the new non-compete agreement.
  • With limited exceptions, the term of the non-compete is limited to one-year or less following termination of the service provider’s employment by the Company.

At least two provisions of the new law are likely to reduce the use of non-competes by companies that employ Massachusetts employees or independent contractors. First, the new law states that a non-compete will not be enforced unless it contains a provision requiring the employer to pay the former service provider throughout the post-employment term of the non-compete. The amount to be paid is at least 50% of his or her highest salary during the past two years of employment.

Secondly, the non-compete will not be enforced if the employee is terminated without cause or is laid off.

It is important to note that the new law only applies to non-competes required by a company in connection with services provided by employees and independent contractors. It does not apply to agreements arising in connection with a sale of the business and it does not apply to agreements restricting solicitation of other employees or customers. For further information, contact PLDO Partner and business attorney William F. Miller at 401-824-5100 or email wmiller@pldolaw.com.

 

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

The RI Department of Business Regulations (DBR) will hold a public hearing tomorrow (August 16, 2016) at 10 a.m. on its proposed regulations for the state’s Industrial Hemp Agricultural Pilot Program (Hemp Regulations). The hearing will be held at the Department of Labor and Training, Building 70, Conference Room 70-1, 1511 Pontiac Avenue in Cranston.

The Hemp Regulations were announced by the DBR on August 1, 2018 and include the application, licensing and operational framework, and guidelines related to both growing and handling hemp plants and products.

For more information on the proposed regulations and the hearing, visit https://risos-apa-production-public.s3.amazonaws.com/DBR/HempSOSPost8-1-18.pdf. Public comments may be made to the DBR on the proposed regulations through August 31, 2018.

Prospective industry participants who are interested in learning more about the proposed license application process and Rhode Island’s Industrial Hemp Agricultural Pilot Program are encouraged to contact PLDO Partner Benjamin L. Rackliffe at 401-824-5100 or email brackliffe@pldolaw.com.  Attorney Rackliffe is a leading authority on licensing, compliance and regulatory law regarding the cannabis and hemp industry and has successfully advised investors and owners of cannabis facilities and hemp farms in New England.

 

Disclaimer: This blog post is for informational purposes only. This blog is not legal advice and you should not use or rely on it as such. By reading this blog or our website, no attorney-client relationship is created. We do not provide legal advice to anyone except clients of the firm who have formally engaged us in writing to do so. This blog post may be considered attorney advertising in certain jurisdictions. The jurisdictions in which we practice license lawyers in the general practice of law, but do not license or certify any lawyer as an expert or specialist in any field of practice.

If you are like me, you are always seeking tips on how to overcome challenges. When accelerating progress in your business and professional life, though, you want to avoid reinventing the wheel.

We all know that entrepreneurs have vision; however, what sets them apart is their ability to overcome disappointment and obstacles, so that they can achieve their goals. A recent article in Forbes.com chronicled the life of Barry Shore, who founded Dlyted.com, a very successful eGift card business. What is incredible about his story is that he founded Dlyted.com after spending four years in physical therapy to overcome a rare neurological disorder that left him paralyzed from the neck down. His business model for Dlyted.com combined revenue generation with charity. His audacious goal? Raise $1 billion in charitable giving without costing anyone a penny. Shore likened his business model to his struggle to recover from the neurological disorder: “It’s the idea of incremental growth—and just never giving up, being resilient and always moving forward.”

Another compelling story is about Gigi Stetler—victimized by a maniac in the early 1980s, who stabbed her and almost strangled her to death. After recovering from the attack, she founded and became the CEO of the first female led RV business in the United States. She actually had to restart the business on two occasions after setbacks as well as endure a contentious legal battle with a major competitor. Her goal was to overcome the obstacle of a female entering into a male dominated business. Thirty years later, her business is thriving. In an interview with Business News Daily, she cautioned entrepreneurs to avoid letting personal crises defeat them: “Don’t give up, don’t give in—just get back up and start rebuilding your life as quickly as possible.”

Here’s what I learned from these stories. Regardless of the obstacles in my way, I must always keep moving forward. I believe it is important for us all to learn from our mistakes and stay the course.

What do you do when your largest customer goes bankrupt? Panic? Probably. But, once the immediate panic subsides, some smart business owners call their insurance company and put in a claim under their “accounts receivable insurance” policy. Accounts receivable and other similar trade debt make up a significant portion of any small business’s assets, and business owners are often unaware that they can be insured. These policies may cover about 90% or more of the lost revenue due to a customer’s bankruptcy or other covered events.

Trade credit insurance is a risk management tool that protects businesses from many of the risks involved in extending credit to customer. Moreover, businesses insured with trade credit insurance often find it easier to obtain financing against their assets and, have also used such policies to increase sales through new lines of credit and extensions to new and existing customers or to pursue new, larger customers that would have otherwise seemed too risky.

This protection also allows companies to strengthen cashflows without the increased exposure associated with customer defaults. Banks are more likely to extend financing to companies with stronger balance sheets, and may consider the existence of such insurance in determining whether to increase or expand the insured’s credit limits. Businesses would be well advised to talk to their insurance broker to determine whether this type of insurance makes sense considering their customer mix, accounts receivable exposure, and the need to obtain more financing or credit. For legal advice about this business management tool or other business issues, contact our business lawyers, PLDO Partner Brian J. Lamoureux at bjl@pldolaw.com or Attorney Christopher F. Homsy at chomsy@pldolaw.com or call 401-824-5100. We welcome your comments, questions and suggestions.

The RFA represents a legislative determination to preserve and protect remaining agricultural operations. The 2014 amendment provided that:

‘agricultural operations’ includes any commercial enterprise that has as its primary purpose horticulture, viticulture, viniculture, floriculture, forestry, stabling of horses, dairy farming, or aquaculture, or the raising of livestock, including for the production of fiber, furbearing animals, poultry, or bees, and all such other operations, uses, and activities as the director, in consultation with the chief of division of agriculture, may determine to be agriculture, or an agricultural activity, use or operation. The mixed-use of farms and farmlands for other forms of enterprise including, but not limited to, the display of antique vehicles and equipment, retail sales, tours, classes, petting, feeding and viewing of animals, hay rides, crop mazes, festivals and other special events are hereby recognized as a valuable and viable means of contributing to the preservation of agriculture.’

The Court decided that while the first sentence of the amendment provided definitional guidance as to what constitutes “agricultural operations,” the second sentence merely provided “a list of encouraged activities that the General Assembly has deemed ‘valuable and viable’ with respect to ‘contributing to the preservation of agriculture.'” Thus, the Court determined that the listed activities were “nonagricultural operations” and subject to local town control.

Accordingly, while many of the listed activities in the second sentence of the 2014 amendment may contribute to the long term success of a farm (which would further effectuate the purpose of the RFA), this does not mean that those activities may be conducted as a right regardless of local ordinances, such as zoning restrictions. If a farm is located in a district that is not properly zoned for such activities, then the landowner will need to apply for relief from the local zoning board. Only with such relief will a farm owner be able to offer the activities listed, such as hosting a wedding for a fee. For further information about this issue or other business matters, contact Attorney Patrick J. McBurney at 401-824-5100 or email pmcburney@pldolaw.com. We welcome your comments, questions and suggestions.