THIS ISSUE'S HEADLINES

Reasons Why a “Letter of Intent” is Critical in a Transaction Deal

RI Supreme Court Clarifies Insurers’ Obligations in Auto Accident Claims


Pros and Cons of LLCs Electing S Corporation Status



REASONS WHY A “LETTER OF INTENT” IS CRITICAL IN A TRANSACTION DEAL

Clients oftentimes minimize the importance or impact that a letter of intent (“LOI”) will have in a prospective transaction. Although an LOI is generally a non-binding outline of the intent of the parties, it should be carefully drafted as certain aspects of the document will be legally binding and it will have significant implications relating to the terms of the transactional documents, as well as the structure of the transaction.

The goal of an LOI is to establish the basic understanding of the parties, while at the same time binding them to certain terms that will ultimately be included in the final documents. It should outline the structure of the transaction, which will have an impact on potential tax issues as well as the overall economics of the deal.

Buying or selling involves either a stock or asset purchase, which may vary and cause a different economic result to the parties. Allocating risk is part of the negotiations and will ultimately impact the purchase price and tax consequences. A transaction structured as a stock deal is generally more favorable to the Seller for tax purposes. However, the Buyer bears significant risk, which must be accounted for in the purchase price and/or escrow provisions. If the LOI does not contemplate the potential risks, it is likely that there will be an attempt to renegotiate the terms when drafting the transactional documents, which could lead to delay or withdrawal by one of the parties.

The serious nature of an LOI is such that it is wise for both parties to have experienced counsel to ensure that the LOI is specific enough to avoid confusion or dispute when it comes time to negotiate the transactional documents in either an asset or stock deal. In addition, should the parties decide to negotiate the terms of the LOI, it is wise to have advisors address important terms so as not to later impede, delay or torpedo the deal. Most importantly, one side or the other may give up their leverage in the transaction by not carefully weighing all issues that will flow from the LOI to the operative documents. To learn more about an LOI and for information about legal issues regarding mergers and acquisitions, please contact PLDO Managing Principal Gary R. Pannone at 401-855-2601 or email gpannone@pldolaw.com.

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RI SUPREME COURT CLARIFIES INSURERS’ OBLIGATIONS IN AUTO ACCIDENT CLAIMS

In a recent Rhode Island Supreme Court decision, the Court clarified the duty owed, or better yet not owed, by an insurer to third party claimants in auto accident matters. In Summit Insurance Company v. Eric Stricklett et al., No. 2017-185-A (R.I. 2019), a minor was struck by a vehicle and suffered serious injuries. The minor had to undergo several surgeries to repair various fractures. In doing so, the minor incurred medical bills of over $80,000. Unfortunately for the minor, the insurance policy limits of the striking driver, provided by Summit Insurance, were $25,000 per person and $50,000 per accident.

While Summit initially denied the minor’s claim, alleging that its insured was not at fault, Summit eventually offered the minor the $25,000 policy limits. The minor rejected this offer and asserted that because Summit had previously failed to offer the policy limits, they believed that Summit would be responsible for damages above and beyond the limits in accordance with Asermely v. Allstate Insurance Company, 728 A.2d 461 (R.I. 1999). In Asermely, the Court “promulgated a new rule,” which in Rhode Island has resulted in what is commonly referred to as an “Asermely Demand.” This new rule holds that if an insurer receives a reasonable written offer to settle a matter within the policy limits, and if the insurer declines to settle, then the insurer does so at its peril in the event that a trial results in a judgment that exceeds the policy limits. The obligation owed by the insurer runs to the insured and therefore, also to any party to whom the insured assigned their rights.

At issue in Summit was whether the obligation owed by the insurer also ran to third party claimants who had not had the insured’s rights assigned to them. The Court made abundantly clear that it has “never allowed a third party to bring a claim under Asermely without an assignment from the insured.” Moreover, the duty to act reasonably and in good faith in considering settlement offers only runs to the insured, which is why the assignment would be necessary if the third party wished to pursue such a claim. Accordingly, should one find themselves contemplating an Asermely style demand, it is important to make sure you are assigned the rights of the insured to be in a position to bring a lawsuit to recover pursuant to Asermely. For further information on this issue, please contact Attorney Patrick J. McBurney at 401-824-5100 or email pmcburney@pldolaw.com.

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PROS AND CONS OF LLCS ELECTING S CORPORATION STATUS

An S corporation is a business corporation (or more recently, an LLC or partnership) organized under state law that elects to be treated, for income tax purposes, as a so-called “S corporation,” under Subchapter S of the Internal Revenue Code. S corporations have been around for over 60 years. They were enacted primarily to assist small business owners by permitting them the benefits of operating as a corporation (less personal liability, etc.) and at the same time avoiding double income tax on business profits. Absent an S corporation election, a corporation and its owners are subject to double income tax: once at the corporate level in the year earned and again when profits are distributed to its owners. S corporations were arguably the most common choice of entity for new businesses until the advent of limited liability companies (“LLCs”), which were recognized by virtually all states by the end of the 1990s.

The primary disadvantage of an S corporation is that, in order to file a valid S corporation election, a number of technical requirements must be met. In his latest business advisory, Pros and Cons of LLCs Electing S Corporation Status, PLDO Partner William F. Miller, illustrates the requirements in a comparative review between an S Corp and LLC and explains why LLCs appear to have usurped the historic position of S corporations as the most popular choice of legal entity for new businesses. To learn more about corporate structure options or other business matters important to your organization, please contact Attorney Miller at 401-824-5100 or email wmiller@pldolaw.com.

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Corporate & Business Overview

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