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 gpannone@pldolaw.com.

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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 brackliffe@pldolaw.com.

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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 gpannone@pldolaw.com. .

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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.

Have you ever wondered what happens to your emails, digital photographs, online accounts, Amazon store credits, digital gift cards, and iTunes library after you are gone? Almost all states have begun to address the issue of digital assets by passing laws dictating how digital assets are disposed in the absence of directives by a decedent. Rhode Island got to the game early on as one of only six states that in 2007 passed a law allowing executors to gain access to a deceased person’s email. Since that time, however, Rhode Island has been sitting on the sidelines as more than 35 other states have gone on to adopt the Revised Uniform Fiduciary Access to Digital Assets Act (the “Digital Assets Act”). This recent uniform law provides fiduciaries (like executors and attorneys-in-fact) with a legal path to managing the digital assets of deceased or incapacitated people.

As a uniform law, the Digital Assets Act is merely a guideline for states to consider and adopt. Most states have either enacted the law or are in process of doing so. Rhode Island introduced its version of the Digital Assets Act in February 2018, but the bill was tabled for further study. Thus far the Massachusetts legislature has been silent on the issue of digital assets. However, in 2017 the Supreme Judicial Court of Massachusetts ruled in favor of the administrators of an estate that were demanding access to a decedent’s email. The provider alleged actual consent of the user was required. In that case, the court concluded that the administrators’ legal ability to act on behalf of the deceased’s estate sufficed as “lawful consent,” and therefore, the deceased’s actual consent was not required. The court reasoned that limiting lawful consent to actual consent would significantly curtail the ability of personal representatives to perform their duties under state probate and common law.

The Digital Assets Act gives fiduciaries certain powers to manage digital assets, but it also attempts to provide some privacy protections for the “owners” of the digital assets, as well as legal protections for “custodians” (the businesses who make, store, or provide digital assets) such as limiting access for the purpose of administering an estate or charging administrative fees. Legislatures and the courts are in the process of balancing these very important policy concerns for individuals who fail to incorporate their wishes into their estate plan.

It is important to keep in mind that this area of law is still evolving. Providers, users, legislators and courts are all trying to navigate the digital afterlife with no simple, static solution on the horizon. But, the Digital Assets Act is a solid first step toward creating a predictable framework for the disposition of digital assets, store credits, e-book libraries, and the like. As more and more people amass vast digital assets and libraries – along with the continuing explosive growth of cryptocurrencies like Bitcoin – people would be well-advised to start thinking and planning how their estate plan deals with the disposition of these assets which, soon enough, may very well be worth more than grandma’s teapot. For further information about these important legal issues, please contact PLDO Partner Brian J. Lamoureux or Attorney Tracy A. Loignon at 401-824-5100 or email bjl@pldolaw.com and tloignon@pldolaw.com.

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