THIS ISSUE'S HEADLINES

The Impact of Current Market Conditions on Acquisition Transactions

Forthcoming Trends in Artificial Intelligence Regulation

Nuts & Bolts of a Roll-up Strategy in Business Acquisitions

Directed Trusts Provide Flexibility for the Closely-Held Business Owner

The Trees Can Stay (For Now) Ð A Lesson on Writ of Mandamus

Stay Informed — PLDO COVID-19 Resource Library


THE IMPACT OF CURRENT MARKET CONDITIONS ON ACQUISITION TRANSACTIONS

Due to uncertainty in current economic conditions, as well as other factors, acquisition transactions (ÒM&A TransactionsÓ) are being impacted in a variety of ways. These factors include, but are certainly not limited to, the following:

  • Supply chain problems are continuing, and they are adversely affecting target company revenue across many industries, thus making it more difficult to predict future operating results and the pricing of proposed transactions.

  • Inflation continues at recent record highs and will certainly affect interest rates and thereby, the cost and availability of debt financing going forward.

  • With respect to larger transactions, the evolving changes in the Biden administrationÕs approach to anti-trust and related issues under Hart-Scott-Rodino.

  • The recent increase in litigation by sellers and their shareholders over the legal propriety of prospective buyers terminating pending signed agreements. (Many of these cases relate to Covid but the pending uncertainly will likely result in the trend continuing.)

  • RussiaÕs invasion of Ukraine.
Attorney William F. MillerÕs latest advisory, The Impact of Current Market Conditions on Acquisition Transactions, discusses in more detail the possible implications, which include a likely increase in earn-outs and sign and close transactions, more restricted availability of debt financing, and sellersÕ willingness to accept deferred payments that are unsecured.

If you have further question on M&A transactions or other business matters, please contact PLDO Partner William F. Miller at 508-420-7159 or email wmiller@pldolaw.com.

[back to top]


FORTHCOMING TRENDS IN ARTIFICIAL INTELLIGENCE REGULATION

Technological advancements continue to spawn new avenues of business and consumer concern. Chief among these advancements is Artificial Intelligence, or ÒAI.Ó AI is the catch-all term referring to the array of emerging computing technologies that perform tasks traditionally requiring human input. As companies increasingly embed AI in their products, services, and decision-making processes, together with the many proposed benefits have also come predictable concerns about the risks of misuse and/or or unintended consequence inherent in any nascent technology. Attention is now shifting quickly from the relatively well-established privacy debates and related ensuing regulations to how that data is used by the softwareÑparticularly by complex, evolving AI algorithms that might approve loans or home purchases, diagnose physical and mental health conditions, drive automobiles, recommend prison sentences, or screen job applicants, for example.

This has prompted a myriad of related discussions and recent regulatory initiatives for developing applicable standards as both the private and public sectors seek to provide reliable, robust and transparent AI systems. There is currently little or no legislation at the Federal level that has yet been enacted to regulate the use of AI, but there has been a significant increase in State initiatives and proposed regulatory frameworks across the country, including a recent bill being considered by the Rhode Island General Assembly.

In an Advisory entitled, "Forthcoming Trends in Artificial Intelligence Regulation," PLDO Partner Kas R. DeCarvalho discusses the challenges and benefits of AI and the growing body of new regulations introduced to study and/or attempt to reasonably mitigate the related concerns. In addition, he provides best applicable practices for businesses - both directly and indirectly - involved with AI, as this area continues to evolve. If you have questions pertaining to AI or other business matters, please contact Attorney DeCarvalho at 401-824-5100 or email kd@pldolaw.com.

[back to top]


NUTS & BOLTS OF A ROLL-UP STRATEGY IN BUSINESS AQUISITIONS

In a roll-up strategy, the buyerÑusually a private equity fundÑidentifies a highly fragmented industry, which is a situation where multiple companies compete, and there is no single or small group of companies that dominates that specific industry.

Subsequently, the buyer acquires one of the most prominent industry players, the so-called platform, and starts adding smaller companies to it, generally, those that own less than 5% of the market share. After fifteen to twenty acquisitions over three to five years, the goal is to sell the rolled-up companies with an IPO or a strategic sale at ten times EBITDA, having purchased them at around five times EBITDA (acronym of Earnings Before Interest, Taxes, Depreciation, and Amortization, which evaluates the operating performance of a company).

Roll-ups are often sponsored by private equity groups, taking the financial tactic of arbitrage to the extreme, where a large-cap buyer (e.g., ten times EBITDA) purchases smaller companies (e.g., four companies that trade at five times EBITDA, per each). Hence, the private equity group targets that industry and starts buying five or ten companies a year: it is like rolling them all up into a big ball that rolls down the hill, eventually determining what we call the snowball effect.

Due to the expeditiousness and the high volume of these transactions, the buyer can neither perform custom-made acquisition agreements nor spend a lot of time on due diligence. Therefore, the acquirer employs standard contracts and standard financial structures, which also entails that the negotiation phase with the multiple sellers is almost absent. Indeed, in a roll-up tactic, the purchase price and deal structure are rigidly predefined.

For example, the purchase price might be five- or six-times EBITDA, and the private equity group presents the same offer to each seller, and since the deals tend to be relatively small, sellers are bound to align with take-it-or-leave-it offers.

To summarize, in a roll-up strategy, the goal is to add substantial value quickly through the "snowball effect" and then realize robust profits by going public or selling to a strategic buyer at ten- or twelve-times EBITDA. Accordingly, a roll-up strategy is just a different take on the time-tested business strategy of buying wholesale and selling retail. If you would like further information on business acquisition structures and options or other business matters, please contact Attorney Joshua J. Butera or Legal Intern Tommaso Ugolino at 401-824-5100 or email jbutera@pldolaw.com or tugolino@pldolaw.com.

[back to top]


DIRECTED TRUSTS PROVIDE FLEXIBILITY FOR THE CLOSELY-HELD BUSINESS OWNER

In July 2021, Florida adopted the new Florida Uniform Directed Trust Act (ÒFUDTAÓ). Modern directed trusts are one of the best vehicles to provide intergenerational wealth preservation and flexibility. Historically, all the functions of a trustee have been handled by the same trustees. This meant that the same person(s) and/or entity was responsible for trust administration, investment, and distribution decisions. With a directed trust, a trust adviser has the power under the trust to direct the trustee as to one or more of the trusteeÕs responsibilities. Typically, in a directed trust arrangement, the trustee has no discretion over the area of administration or matter under the third partyÕs control.

The directed trust should be considered for clients with assets that require particular attention or special skills to administer such as a closely held business. Such clients may wish to designate an individual or trust company as trustee of their trust but might not feel that the designated trustee is best suited to handle the special asset. In those instances, the client could grant authority to a trust adviser who has a particular skillset or knowledge in handling such assets to make decisions regarding the special asset. For example, the power to vote the shares of stock of the family business or otherwise make business decisions for the company.

Other examples include where the trust will own assets, such as real estate, portfolio investments, or alternative investments, such as private equity or hedge funds and cryptoassets (e.g., nonfungible tokens or ÒNFTsÓ). Ideally, such assets would be transferred to a limited liability company or other entity to be managed by someone other than the trustee who has the requisite expertise. However, delegation of the trusteeÕs authority over trust investments that would result from this set-up would not generally relieve the trustee of potential liability and the duty to monitor the activities of the LLC manager. If the clientÕs objective is to provide the LLC manager with a free hand in managing the LLC and underlying investments without trustee oversight, a trust adviser could be appointed to serve in this external management role by directing the trustee as to such decisions.

Clients should be aware of the benefits of using these modern trusts and their ability to protect against current and future uncertainties. In addition to allowing specialized expertise in an asset class, directed trusts can be used to ensure a familyÕs views and goals are incorporated in the decision-making regarding the trust assets, reduce the total cost of trust services as an institutional trustee is likely to charge less when acting in a directed capacity, and increase overall flexibility with respect to management of trust assets. For more information about estate and trust administration and planning, please contact Attorney Jason P. Jones in PLDOÕs Boca Raton, Florida office at 561-362-2030 or email jjones@pldolaw.com.

[back to top]


THE TREES CAN STAY (FOR NOW) - A LESSON ON WRIT OF MANDAMUS

In a recently published opinion, the Rhode Island Supreme Court addressed when it is and is not appropriate for the court to grant the issuance of a writ of mandamus. A writ of mandamus is used to compel the performance of an act by a public officer. In the case before the Rhode Island Supreme Court, Gloria Nerney v. Town of Smithfield, Ms. Nerney sued the Town of Smithfield seeking to compel the Town to order the removal of certain trees that were planted on Town property by another party, the Andersens. Ms. Nerney and others continually contacted the Town about the trees but never received a meaningful resolution as to why the trees (which were planted upon Town property) were allowed to stay.

Ultimately, Ms. Nerney turned to the judicial system for relief, seeking the entry of an order of mandamus compelling Town officials to order the removal of the trees. Unfortunately for Ms. Nerney, she fared no better before the court.

A writ of mandamus may issue when the function to be performed is a ministerial duty as opposed to discretionary duty. That is, when the action to be performed has no room for discretion, such as acceptance of a filing by the town clerk, then a writ of mandamus can issue. However, in this case, when the action involves a degree of discretion, such as how to deal with the location of the trees and whether to enforce various Town by-laws, then mandamus does not apply. Ultimately, the Court denied Ms. NerneyÕs request for mandamus, but did suggest that she may have other remedies available to her, such as an action against the Andersens. For now, the trees can stay.

If you have questions on writ of mandamus or other legal issues, please contact PLDO Partner Patrick J. McBurney at 401-824-5100 or email pmcburney@pldolaw.com.

[back to top]


STAY INFORMED – PLDO COVID-19 RESOURCE LIBRARY

PLDOÕs team of attorneys continue to add updates and advisories regarding the pandemic and its impact on families, businesses and organizations. To access our COVID-19 Resource Library, click here.

[back to top]

 





             
Thank you for reading our newsletter. For further information about the firm and the Corporate & Business and Health Care Teams, please visit our website at www.pldolaw.com or contact PLDO Managing Principal Gary R. Pannone at gpannone@pldolaw.com or 401-824-5100. We welcome your inquiry and appreciate your feedback. If you feel you have received this email in error, or would no longer like to receive this newsletter, please click here to unsubscribe. Thank you.

Attorney Advertising