|THIS ISSUE'S HEADLINES
Shareholder Disputes Are Often Resolvable
RI Governor Announces Recreational Marijuana Legislation Forthcoming
Business Succession Planning Considerations
The Digital Afterlife: What Happens to Your iTunes Library When You Die?
SHAREHOLDER DISPUTES ARE OFTEN RESOLVABLE
Lawyers often hear “we will always be able to work out our issues” or “we have been operating as a partnership for 10 years without an issue.” When two or more individuals decide to formalize their relationship, a critical issue to contemplate is what can go wrong, and if it does, what are the avenues to pursue a resolution without damaging the company.
A shareholder dispute is as simple as a disagreement regarding strategy or the operations of the company, to more critical causes such as fraud, embezzlement or misappropriation of client assets. Shareholders all have a financial stake in the business, which could cause tension when the business is challenged for any reason. However, there are at least five causes for shareholder disputes that must be contemplated when developing a governance platform and shareholder agreement terms.
In Rhode Island, shareholders in a closely held corporation have a fiduciary duty to one another and the enterprise which, if not respected, could lead to serious implications both to the relationship and the success or failure of the business. A shareholder attempting to sell his or her shares without offering the shares to fellow shareholders or as a buyback to the company could lead to serious consequences if there is no prohibition in a shareholder agreement. In particularly, it is also very common for shareholder disputes to arise in a business owned by family members. Family owned businesses can be fraught with challenges when a dispute arises regarding the direction of the business, significant investments or divestitures or the need for capital.
The fiduciary duty of a shareholder in a closely held business is a serious responsibility and in order to comply with this duty, it is necessary that shareholders are committed to open and honest communication. Common law and statutory duties govern the conduct of majority shareholders and creates duties to minority shareholders who do not have the ability to control the actions of the majority without court intervention. If a conflict of interest arises, it must be disclosed and if not, it could lead to a serious dispute by and among the shareholders that might damage the enterprise. In a worst-case scenario, non-disclosure may result in a court-ordered receivership unless the dispute is resolved effectively by and among the shareholders.
Minority shareholders in private corporations are at a disadvantage from the outset since they have fewer shares than the majority shareholders and do not have the legal ability to make changes. However, if a minority shareholder is being taken advantage of or frozen out of decisions, the only course of action may be to seek injunctive relief, which damages the corporation and jeopardizes the investments of all shareholders.
Compensation may be another area of dispute especially if not all shareholders are employees of the corporation. Conflicts may arise when compensation is not fair and equitable or based upon industry standards. How shareholders contribute capital to the corporation is another area of potential dispute, which should be addressed in a carefully drafted shareholder agreement.
The reality is that disputes are inevitable in a closely held business. However, if the founding members of the enterprise are diligent in anticipating differences of opinion and craft written strategies to resolve disputes or develop exit strategies if the disputes are not resolvable, the continuity of the business and return on investment could be preserved. To learn more about this topic or other business matters, please contact PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email firstname.lastname@example.org.
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RI GOVERNOR ANNOUNCES RECREATIONAL MARIJUANA LEGISLATION FORTHCOMING
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’ 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 email@example.com.
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BUSINESS SUCCESSION PLANNING CONSIDERATIONS
Business owners of closely held or family businesses 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 and reduce taxes, and can 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 are participating in the day-to-day activities and contributing to its success.
The general considerations in developing a business succession plan include developing 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.
In light of the most recent changes to the tax code under the Trump administration, the income and estate tax implications must be reviewed carefully with a 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 provide a backstop to the possibility that after transfer the next generation has difficulty meeting the demands of the business which may negatively impact the retirement goals of the founders. For more information about your organization’s business strategy and succession plan, please contact PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email firstname.lastname@example.org. .
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THE DIGITAL AFTERLIFE: WHAT HAPPENS TO YOUR ITUNES LIBRARY WHEN YOU DIE?
The world has gone digital, and digital platforms and devices are everywhere. For the first time in history we are seeing a generation that has grown to adulthood whose everyday life has always been focused around technology. Even older adults who grew up listening around a radio have logged onto the digital bandwagon. Indeed, almost 70% of adults over the age of 65 report going online. Technology has changed the way we live and now estate planning attorneys are realizing it is changing what happens to our assets when we die. Until just a few years ago, clients were primarily concerned about who gets the family home, their 401(k) or grandma’s teapot. Today more and more clients are asking about planning tools for their digital assets.