Politicians have been fighting over health care reform for years, but the switch from a Democratic to a Republican majority in the House of Representatives has cast doubt on the future of the Patient Protection and Affordable Care Act.
“Employers should know the health care landscape is going to be fluid during this time,” says Jeffrey Porter, director with Kegler, Brown, Hill & Ritter. “They are going to have to try to meet some of the obligations contained within the bill now, but, over time, things may change.”
Smart Business spoke with Porter about how the reforms will affect businesses and how the new Congress will affect the reforms.
How will the new Congress affect health care reform?
It is going to be a fluid situation over the coming years. There are a lot of extended deadlines within the bill, and there are a lot of things that can happen between now and then, especially now that we have had a changeover in the House of Representatives.
Many candidates were using the mantra ‘repeal and replace’ when speaking about the health care reforms. But I don’t think we’re going to see a full-scale repeal and replace of this bill. At most we’re going to see a group of lawmakers trying to tatter it around the edges.
They may try to address certain things with funding. Given the fact that the Senate is still controlled by the Democrats albeit a very small majority and the president’s there, I don’t think we’ll see the ability to overcome a presidential veto.
However, a lot of the things that happen within the bill require funding. I think we will see the House of Representatives making moves to try to hold back funding as much as they can so it will be difficult to implement certain aspects of the bill.
What do all these changes mean for business owners?
There are many dates to remember spread out over 2011, 2012 and all the way to 2014 and beyond. Businesses are obviously concerned about meeting the goals the bill sets for them. Although the Department of Health and Human Services is working diligently on trying to implement the bill, if there is no funding available, some goals might not be able to be accomplished.
For instance, the creation of health insurance exchanges, which will provide the ability for people to go out and purchase health insurance on an exchange comprised of private companies offering coverage to individuals, that doesn’t take effect until 2014. It’s feasible that there may be changes to that plan along the way.
What exactly will be changing as a result of the health care reforms?
Some changes have gone into effect already. There are a whole host of reforms that are effective for plan years on or after Sept. 23, 2010 (Jan. 1, 2010 for calendar year plans). Some of the changes include:
- Protection from insurers rescinding existing coverage.
- Eliminating lifetime limits.
- Eliminate pre-existing conditions for children under age 19, eventually extended to all.
- Extend dependent coverage to age 26, in Ohio to 28.
- A group health plan can only impose annual limits on the coverage for essential health benefits that exceed a ‘restricted annual limit’ that is to be determined by the Secretary of Health and Human Services.
- Establishment of high-risk pools for individuals unable to obtain coverage due to their health status.
Also, starting Jan. 1, 2010, expenses incurred for over-the-counter (OTC) medications will no longer be eligible for payment/reimbursement through an FSA, HRA or Archer MSA.
What reforms should businesses look for in the future?
Effective Jan. 1, 2012, there is a change to Form 1099 reporting. Form 1099 must be provided to service providers that receive more than $600 for services to a plan for a calendar year. The Medicare Payroll Tax Increase, a new tax that helps pay for Medicare, will become effective Jan. 1, 2013.
Also, beginning in 2014, employers with more than 50 employees will be mandated to provide health insurance. Health insurance exchanges will be created at some point probably also in 2014.
How will those exchanges change the way businesses buy health insurance?
Quite honestly, what’s going to happen is that you’ll see some smaller businesses drop insurance altogether. They will stop providing it and move toward allowing their people to purchase insurance on these exchanges.
In a recent Virginia state case, a judge found the mandate to purchase insurance unconstitutional. That is just one decision out of many, but is still something to keep an eye on.
What can businesses do to make sure they are in line with these changes?
This bill is very comprehensive; it’s also very cumbersome. Employers are going to find that they will need a lot of help, not only from their human resources and benefits departments in disseminating the information to employees, but also in getting information from their attorneys or whomever else they can have advising them about the reforms.
If employers want to keep their current plan, they could try and maintain ‘grandfathered’ status. However, I think people are going to find that it is next to impossible over time to maintain that status because, if you have to make certain changes to your plan, like modifying the amount people pay, your plan will lose its grandfathered status. The ability is there on paper, but it will be tough to do in practice.
Jeffrey Porter is a director with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5418 or email@example.com.
If your company has just been sued, it’s natural to feel angry. However, letting your emotions take control of your actions can make it difficult to do what’s necessary to prepare for the lawsuit.
“Litigation, whether it is in state or federal court, is deadline-driven,” says Loriann E. Fuhrer, director with Kegler, Brown, Hill & Ritter. “In Ohio, the Senate has just 28 days to file and answer, in federal court they might have as little as 21 days.”
With fairly short deadlines for filing a response to the complaint, it’s important to get a trial lawyer involved as soon as you receive a complaint, adds Fuhrer.
Smart Business spoke with Fuhrer about how to prepare for a lawsuit.
What are the steps companies should take after being served with a lawsuit?
The first step is to get a competent trial attorney involved. Some companies have some sense that a lawsuit is imminent. In those instances, you should get your trial lawyer involved when you have some reason to believe that a lawsuit may occur. Nothing needs to happen overnight, but you don’t have a lot of time before something needs to happen.
If the company has never been sued before and doesn’t have a regular trial attorney, they should look for lawyers that are experienced in handling similar cases. Experience in handling similar cases in the court in which the case is pending is important, as well, because there can be some differences between state and federal court.
Who else needs to get involved?
It’s important to keep discussions of the lawsuit to a minimum until counsel is engaged. This is especially true with people outside the company, but also with people inside the company who don’t need to be involved.
This is important because those discussions may be discoverable by the opposing party. So a company can create additional and unintentional witnesses by discussing the case with people who were not involved in the underlying facts in the first place.
What mistakes do companies often make?
Many companies underestimate the importance of preserving documents. Document collection and preservation issues are really important to pay attention to at the outset of a lawsuit. The civil rules place an obligation on parties to preserve evidence that might arguably be relevant to the lawsuit.
That duty can arise even before the lawsuit is filed. If you have a reason to know that future litigation is likely, and if the documents are likely to be relevant to that future litigation, the duty to preserve them can arise even before the lawsuit is filed. Certainly once a lawsuit is filed you have notice of it.
How can you determine which documents could be construed as evidence?
Today, more than ever, the evidence that is relevant to a lawsuit is in the form of e-mails and other electronic documents. Sometimes companies have systems set up for automatic destruction of electronic data. When you have notice of a lawsuit, make sure there is a hold placed on the destruction of any documents that might arguably be relevant. Err on the side of being over-inclusive.
That often means involving the IT department to make sure potentially relevant e-mails are captured or that any mechanisms for the destruction of that data are disabled until they can be collected and preserved.
What type of legal consequences exist if information gets destroyed?
There is a range of potential sanctions that a court can impose for the destruction of relevant evidence. One severe sanction that can be imposed is what’s called an adverse inference. That is where the opposing party can gain an instruction to a jury to infer that the destroyed documents contained information that was harmful to the case of the party that destroyed them. That’s never a situation you want to be in.
Those documents may have been helpful to the case. In any event it always looks bad. It doesn’t put you in a favorable light with the court, and even if the destruction is not intentional, it never looks good.
What should be done next?
Another important step to take is to consider whether there is insurance coverage for the claims made. Breach of contract claims are often not covered by insurance, but negligence claims often are. Many employers have employment practices liability insurance, which covers liability that arises from employment practices, and companies that don’t get sued often can forget they have it.
Most policies require prompt notice of claims or potential claims. So it is important to identify whether there is any possibility of coverage and to notify the carrier as promptly as possible. That duty to notify often arises when a company is first put on notice of a potential claim. At that point, companies should think about whether they have potential insurance coverage and notify their carriers.
What is the last step?
If the case is high profile, the company might want to involve its public relations team. When that happens, it’s important to make sure there is coordination between your legal counsel and your public relations team, so that any messages conveyed publicly are consistent with the legal positions.
It wouldn’t be unusual for lawyers and public relations professionals to have differing objectives and orientations. That’s why it’s particularly important to get them in the same room. The corporate defendant could be bound in litigation by public statements made by the company, which could be considered admissions of the company in the litigation. If the PR team’s work is detrimental to the legal defense, that would be an unfortunate consequence of not coordinating those efforts.
Loriann E. Fuhrer is a director with Kegler, Brown, Hill & Ritter. Reach her at (614) 462-5474 or firstname.lastname@example.org.
A letter of intent is used by a buyer and a seller to memorialize their intent to negotiate toward a sales transaction, and includes a general description of some of the fundamental terms of the deal. Naturally, any document that illustrates intent in an M&A transaction can have far-reaching implications for both parties.
“Even though letters of intent usually do not create binding obligations, they heavily influence future negotiations between the parties. And, if not drafted carefully, they may create unintended legal obligations,” says Todd Kegler, a director at Kegler, Brown, Hill & Ritter and the chair of the firm’s M&A area. “Business people frequently negotiate letters of intent without involving legal counsel; however, most would benefit from engaging counsel as early as possible and, at a minimum, prior to signing any letter of intent.”
Smart Business learned more from Kegler about how to approach a letter of intent from both a buyer’s and seller’s standpoints.
How should a business negotiate and craft a letter of intent?
The primary function of a letter of intent is to provide each party with some assurance that they’re in general agreement regarding the basic terms of a transaction prior to either party spending significant resources on comprehensive due diligence and preparing and negotiating definitive agreements.
A seller’s bargaining power is usually greatest prior to signing a letter of intent that contains any type of exclusivity provision. Accordingly, a seller generally should attempt to negotiate a letter of intent that is detailed and explicit with respect to the material terms of the transaction.
By contrast, a buyer’s bargaining power usually increases after signing a letter of intent that includes an exclusivity provision. Consequently, a buyer will often prefer to negotiate a non-specific letter of intent, using general language and deferring the most difficult negotiation issues until a later date. Of course, there are exceptions, such as when a transaction will require a unique or material covenant from the seller, in which case a buyer may prefer to address that issue early to be sure that the seller will agree before proceeding further.
What are the risks of using letters of intent?
There are several risks in using letters of intent. One is that letters of intent can create unintended, binding legal obligations, particularly if the parties do not involve legal counsel. Most often, some provisions are specifically intended to be binding, such as exclusivity provisions, while others are intended to be non-binding. This requires careful drafting, and the parties need to ensure that all non-binding provisions remain non-binding following the termination of the letter of intent, particularly if negotiations continue following a termination of the letter of intent. Second, a buyer risks getting bogged down in detailed letter of intent discussions too early in the process, before any momentum and trust has developed between the parties, which may result in a premature breakdown in negotiations.
What terms should be included in a letter of intent?
A seller should:
- Insist that the letter of intent specifically addresses the form of the transaction; sellers generally prefer to sell stock rather than assets.
- Negotiate the purchase price and any details regarding any pre- or post-closing purchase price adjustment, such as a working capital adjustment.
- Insist that the buyer disclose any closing conditions to avoid later surprises, such as a financing or due diligence contingency.
- Be specific with respect to what sort of indemnification provisions would be contained in the definitive agreement, including indemnification limitations such as indemnification caps, baskets, or other limitations on post-closing liability.
- Negotiate a right to terminate the letter of intent and exclusivity in the event that the buyer attempts to renegotiate any of the material terms, such as purchase price.
- Include confidentiality and non-solicitation provisions to protect the seller’s business, customers and employees.
- A buyer should:
- Try to describe the form of the transaction more generally to preserve flexibility as to whether to structure the sale as a stock sale versus an asset sale.
- Describe closing conditions, indemnification provisions and so forth in a very general way, with language such as: ‘The definitive agreement would include such provisions as is usual and customary for transactions of this type.’
- Always try to include an express exclusivity provision prohibiting the seller from entertaining offers from any other prospective buyers for some period of time usually 60 to 90 days.
Todd Kegler is a director at Kegler, Brown, Hill & Ritter and the chair of the law firm’s M&A area. Reach him at (614) 462-5409 or email@example.com.
There’s no one-size-fits-all plan for an owner’s exit from his or her business, which means that the process of succession planning requires a good deal of consideration and contemplation on the part of the owner.
Unfortunately, running the business often takes precedence to this important planning process that most owners would rather avoid.
“Succession planning is fraught with emotional issues for business owners, particularly if they’re the founder of the business,” says Chuck Kegler, a director of Kegler, Brown, Hill & Ritter. “Very often, owners are what they do and they have trouble envisioning themselves no longer being part of the business. They know it’s something they don’t want to talk about, unless there’s a health scare or some other triggering event.”
Smart Business spoke with Kegler about why succession plans are a necessary part of owning a business.
What issues are many owners dealing with surrounding succession and exit?
Owners are reluctant to deal with succession unless they feel financially secure. Often, if it’s a family succession, their goal is to do it in a way that they think maximizes the opportunity that the business will continue to affect their retirement. National statistics show that more than two-thirds of all businesses fail in the second generation. And the reason they fail is not surprising, considering that roughly 80 to 90 percent of all new businesses fail. So it makes sense that very often the owner’s children won’t have the skills that the parents have.
If you take lifetime financial security into account, many owners don’t feel secure selling or gifting their business to the next generation, because they don’t know how to invest the sale proceeds in a way that generates the income they need to maintain their lifestyle.
For example, assume an owner of a private business that generates $20 million a year earns $1 million a year of income, after all the expenses of the business are paid. That’s the lifestyle he’s developed. If he went to sell that business in today’s marketplace, let’s say, for a total of $5 million and paid taxes on the sale, he’d never be able to generate that $1 million a year of income based on what’s left.
That’s why owners really struggle with this process. They’re thinking they’re going to be rid of the risks of the business and retire, but then they run the numbers and they can’t maintain their lifestyle based on the results.
How does the planning process work?
Clients should start with something in writing, making a list of goals, which leads to the strategies for reaching those goals. It can take three or four meetings at times to write the goals down and fine-tune them.
Often, we share with them what other people have done in similar circumstances and have clients talk to each other, with the clients’ consent. It’s not legal advice, it’s more business advice, and it gives them a sense that they’re not alone.
What are some common exit strategies?
The typical exit strategies are 1) some combination of gifting and selling to the next generation, 2) a sale to employees or to an ESOP, or 3) a sale to a third party. A sale to a third party is not really succession, but you’re essentially saying that family is unable to run the company and it’s important to want to get the cash off the table and not have the business risk anymore. A fourth plan is: I’ll just wait until I die and let my heirs decide what to do. And that’s very often what happens. It’s more subconscious than conscious, but by not doing anything, that’s what happens.
From a succession standpoint, the most common plan we see is moving the business to the children. Owners gradually give their children some shares to incentivizes them, and they hang on to the business until they die, hoping that the children can take over. But clients need to have a clear plan on how the children are going to run it. Here, owners are worried not just about their children but all of the employees that have been with them for a long time.
There are many estate planning strategies to transfer businesses to children; the most common ones are a GRAT (grantor retained annuity trust) or an outright sale to the children. Sometimes there’s a combination of gifting and sales. But it always goes back to the goals and whether the client will be financially secure.
How can owners of family businesses develop a plan?
If a client’s estate consists primarily of the business and he or she wants one of his or her children to be in charge, the client is going to have a lot of complicated issues. The best plans are ones in which you give a separate area of responsibility to each of the children, and they get out of each other’s way. It’s not untypical to have a child who’s not great with sales or leadership in charge of the financial matters. Or another child might be in charge of a separate line of business.
We have a client who had four sons in the business. The father told his children that he needed to have one leader. He divided the company up evenly among the four sons, but gave the voting stock to one child and the other children received non-voting stock. The son with the voting stock is fair, he makes all the final decisions and he tries to engage his brothers when he can. And he’s in charge of their compensation, which gives them great incentive to work harder.
Chuck Kegler is a director at Kegler, Brown, Hill & Ritter, practicing primarily in the areas of Business & Tax, Mergers & Acquisitions and Estate Planning. Reach him at (614) 462-5446 or firstname.lastname@example.org.
Owners are often too busy running their companies to take the time to properly plan far enough ahead to their eventual departure from the business.
Tim Jochim, chair of the Business Succession & ESOP Practice Group at Kegler Brown Hill & Ritter, says that there’s often some kind of catalyst, such as a health condition, that forces an owner to begin the process.
“Succession planning should be a 10-year process, minimum, before an owner exits,” says Jochim. “It’s a planning issue, and owners should set up the process relatively early on.”
Smart Business spoke to Jochim about what business owners need to consider during the succession planning process.
What are the management issues that owners face when considering exiting the business?
The key to the long-term success is the management quality of the business, no matter who owns it. This is an area where owners of closely held or family-owned businesses probably don’t spend enough time, especially early on in the planning and development stage. They have to recruit, develop and retain good management. If it’s a family business, it becomes a little more complicated. If the owner/founder wants the family in the business and tries to devise something that is fair to the individual members of the family, that fairness he’s seeking within the family may not necessarily be best for the business. Further, you may have the complication of outside managers or executives interacting with family members.
The business should come first. If family members are involved in the business, they should a) work their way up within the business, and b) spend some time at an outside business so they gain a broader perspective of what the management process is like.
What are some of the options for transferring ownership?
The options are relatively simple and straightforward. If it’s a family business, usually there’s going to be some combination of gifting, bequest and purchase by family members. If you started a business with other investors, then generally there’s a cross-purchase agreement funded by life insurance where, if one person leaves, the others have a right to buy his or her stock. If no one wants to buy it, the company has a right to redeem it. If the company doesn’t redeem it, then the exiting shareholder can sell to the outside. Usually in the buy-sell agreement, there is a built-in process a cross-purchase or redemption and if none of those is implemented, then the outside sale comes in to play.
On rare occasions, the company does have an opportunity for an initial public offering.
In an employee stock ownership plan (ESOP), the advantage is that the purchase of the stock is deductible. It’s expensable and it is pretax dollars. So if I’m an owner and the ESOP buys my stock, it’s funded or paid for by the company, but the company can deduct that expense. If the company is a C corp., they can structure it so that they don’t pay the capital gains tax or the Ohio income tax associated with any gains from the sale. That’s two advantages of the ESOP.
How can owners decide which options are right for them as well as their companies?
An ESOP is not appropriate for all companies. Values and culture are really the drivers for owners/founders who do ESOPs. In many instances, they could sell at a higher price to an outside buyer, but they want to share their success with their employees, and they want their company to remain independent.
The decision should be made on a case-by-case basis. There are instances where it may not make sense to remain independent. You could be in an industry where the small players are getting squeezed out, and the industry is consolidating and you don’t have the technical or managerial talent to keep going. In this case, it would make strategic sense to sell to a quality, larger outside buyer. Or if you’re the type of owner who wants the last buck, a third-party sale may be a better option.
How do taxes and the financial needs of the exiting owner factor into the decision?
There are three types of taxes to consider. There are taxes upon sale of the company, taxes to the company and estate taxes. Sellers are going to pay, at a minimum, capital gains taxes and the applicable state tax on any gain, depending on the structure of that sale.
In an outside sale in an auction situation, generally that will yield a higher price than selling to an ESOP. However, as noted before, the seller has tax benefits in selling to the ESOP that he doesn’t have on the outside sale. Also, if the ESOP company is an S corporation, the profits of the company are tax-exempt to the extent of the ESOP ownership. ESOPs, as a shareholder, pay no federal or state income tax at all. That’s a little secret that most owners are not aware of. Over the past few years, many of my clients that are S corp. ESOPs went out and made acquisitions. Why? Because business was slow, the prices of the targets were low due to the recession and these companies had built up a lot of cash over several years of being S corp. ESOPs.
One of the things that frequently comes up in business succession discussions is the federal estate tax. When the owner/founder dies and the value of the company is high let’s say greater than $10 million there’s probably going to be significant federal estate taxes to pay. But with proper planning, you can reduce or eliminate this tax. If the ESOP buys the stock, a common tool is for the seller to set up an irrevocable life insurance trust. The proceeds of that trust are generally outside of the estate, so they are not subject to the estate tax. The owner can sell to the ESOP, or even sell at a lower price to the ESOP, and use some of the proceeds to set up an irrevocable life insurance trust which then provides enough proceeds to the family upon the death of the owner/founder to offset any estate tax. If a charitable trust is combined with the insurance trust, it is likely there will be no federal estate tax at all.
Tim Jochim is chair of the Business Succession & ESOP Practice Group at Kegler Brown Hill & Ritter. Reach him at (614) 462-5443 or at email@example.com.
Business owners interested in building “green” should be ready for some extra challenges. The coordination of a green building project requires the right strategies in order to reap the benefits of LEED (Leadership in Energy and Environmental Design) construction.
“Even in down economic times, green building is here to stay,” says Don Gregory, chair of the Construction and Litigation practice areas at Kegler, Brown, Hill & Ritter. “There are some tools you can use to give yourself a competitive advantage and deal with what is an increasing segment of the market.”
Smart Business learned more from Gregory about the complications involved in sustainable building projects and how to avoid common pitfalls.
Why build green?
Both public and private owners are increasingly interested in sustainability and green building as we are getting more focused on effectively using our resources. And there’s a lot of pressure to build green these days with public owners that answer to taxpayers and also with private owners who are interested in doing the right thing and showing that to customers.
There’s also the practical side of it. A lot of studies have shown that, while there can be some upfront investment in green building, it pays substantial dividends down the road in energy savings. There’s a lot of grant money that’s been tied in to this now, in the stimulus package and other legislation. It is projected that by 2015 half of all non-residential projects in this country will be green.
How does LEED fit in?
There are other rating services in addition to LEED, but LEED is the dominant player and it typically is the benchmark that’s used. For example, when the Ohio School Facilities Commission went to green building, it tied its standards to LEED standards. The Franklin County Courthouse is seeking ‘gold’ status from LEED. It’s increasingly the currency in which we measure whether a project is truly sustainable or not.
How is building to LEED standards different?
We’ve had decades to perfect contract documents for ‘normal’ construction, but LEED is so new and different. There are additional roles and requirements, and we’re still struggling with what the right contract documents ought to be and what risk ought to be assumed by both sides to those contracts.
One of the things that owners typically don’t provide for adequately in their contract documents is the risk of delays, which can occur from a lack of product availability. A lot of times, a green project will require, for example, wood from a local source within 200 miles or drywall from a sustainable source within 300 miles. Well, what happens if everyone else is looking for the same type of materials and they are unavailable, delivery is delayed or the only supplier goes out of business? Who is responsible for a) any delays while you try to secure the desired material or b) materials that become impractical to obtain? In that circumstance you’re obviously losing time or points toward LEED certification. Many times, the contract documents don’t really deal with who is responsible for that.
Owners also tend to think that because they’ve designed a project that they think is going to get gold certification from LEED that they can tell the public and the taxpayers about it. What they oftentimes don’t realize is it takes a long time and a lot of paperwork submitted to LEED before you know whether, in fact, you have achieved that status or not. And what happens if you don’t achieve the status or aren’t able to get the expected energy savings or you lose the benefit of the tax credit?
What can be done to make this process a little easier?
The more the parties think about the unique nature of a green project and provide for that in the contract documents, the less surprises they’ll have later. There are a couple of tools available now that weren’t available in the not-so-distant past. The first is that we now have people that are certified as LEED professionals. They’ve taken all the testing, they know what the LEED requirements are and have been formally approved as knowledgeable and experienced in the area of green building. The more owners can be involved with LEED professionals, whether they’re architects or lawyers or contractors, the better.
If you’re building a LEED project, you want to work with people that have done it before. We have a client here in town who built their own green office and obviously went through the experience firsthand as an owner and a contractor. That kind of experience would be helpful.
The most cutting-edge tool that’s available now and wasn’t available even a few months ago is a uniform nationwide contract document on green building. ConsensusDOCS brought together more than two-dozen construction trade associations, nationwide groups that represent owners, architects and engineers, bonding companies, and contractors and subcontractors to collaborate on and endorse the documents. The ‘ConsensusDOCS 310: Green Building Addendum’ can be found at www.consensusdocs.org. It’s the first national or uniform document that’s been created anywhere to deal with the issues of green building. It’s going to be very helpful because, for the first time, we have a document that says what expectations there will be with all project participants and their various roles.
Don Gregory is chair of the Construction and Litigation practice areas at Kegler, Brown, Hill & Ritter and served on the nationwide taskforce that drafted the Green Building Addendum. Reach him at (614) 462-5416 or firstname.lastname@example.org.
Though Issue 3 passed in Ohio by a margin of 6 percent, the debate is far from over when it comes to how this amendment will change the face of the state and the cities in which the casinos are slated to be built.
According to Michael E. Zatezalo, the managing director of Kegler Brown Hill & Ritter, there is an immense amount of work to be done before anyone can reap the benefits of tax dollars or increased tourism.
“First, the state legislature will have to set up the gaming commission,” he says. “And then they’re going to have to figure out the laws that they need to implement Issue 3, and what they’re going to leave to the gaming commission to pass in the way of rules.”
And that’s if no further amendments are put forth in the spring of 2010 to repeal or change Issue 3, which may include increasing the tax rates, the auctioning of casino licenses to the highest bidder instead of the drafters of Issue 3, or the option for the four cities of Cleveland, Cincinnati, Columbus and Toledo to veto their respective casino.
When the casinos finally do come to fruition, making them as profitable as possible for the owners and the state and integrating them into the existing regional economies will be yet another hurdle.
“What they have to try to do is capture two markets: one is the local people that are going outside the state to gamble, and second is the tourists from out of town,” Zatezalo says.
Smart Business learned more from Zatezalo about the future of gambling in Ohio.
What will be the impact of the passing of Issue 3 on businesses?
It depends on the business, where it’s located and what it does. Some of the businesses that are going to be vendors to the casino, of course, are positive about what’s happened. I’ve already had a couple of suppliers including a few from out of state contact me about licensing, asking what the state is going to do. Most vendors will need to get licensed to work with casinos. But right now it’s too soon to tell. The legislature has six months to come up with a regulatory scheme.
The racetracks are clearly going to be adversely impacted, because even if they do get the right to have VLTs (video lottery terminals), having a casino nearby is really problematical for them.
Charities are definitely going to be hurt. In any state where casinos have been legalized, charities have been adversely impacted. People are a lot less likely to go to bingo halls when they can go to a casino. Indiana’s casinos have had an adverse impact on charitable gambling in Ohio, and Issue 3 will probably have a further impact.
What about the effect on businesses in the areas surrounding casinos?
It’s hard to say. I’ve talked about this with an economics professor at University of Nevada, Las Vegas (UNLV), and he indicates that if a casino can bring in tourists from out of state and it does it in connection with a hotel, that’s a net win. To the extent that you’re just bringing in local people and they’re spending their dollars at a casino as opposed to somewhere else, for example going to the casino restaurant as opposed to the local restaurant, then it’s just trading dollars, and it will hurt the local businesses. If you do it so there’s a synergistic kind of relationship between the casino and other events and venues in the city, I think casinos can be helpful.
Businesses would be well served to tie in the presence of a casino with their own attractions. For example, if you can bring in people for a football or baseball game, you can run packages where they stay in a hotel near the casino, and spend a whole weekend instead of just coming in for the game.
What will businesses that want to work with casinos need to know?
There’s going to have to be a whole regulatory scheme set up for licensing and background checks, investigations and other decisions concerning all of the rules and regulations that govern casinos. Nevada has been doing this for years and has pages and pages of regulations. It’s not something you can just do in a day. So the specifics are secondary right now to the legislature getting something done. Businesses will need to keep abreast of the regulatory requirements as the legislative process develops.
What lies in the near future for gaming in Ohio?
The legislature is already talking about putting another amendment on the ballot. They have the authority to put in another constitutional initiative and amend this one. Already, several legislators have recommended that an amendment be proposed that provides for the option of competitive bidding and an increase in the tax percentage. So that has to filter its way through the process before it becomes clear what’s going to happen. It’s pretty aggressive to think they can get all this done in six months and do it the right way.
It’s interesting to note that the most successful gambling jurisdictions are New Jersey, Nevada and Mississippi and there have been studies by economists at UNLV that show that these states also have the lowest taxes on casino revenues. If you’re a casino operator and you have a decision to make about where to put your money, you’re going to put it in the jurisdiction where you can get the best return. This creates better properties and a better gaming experience, so the revenues go up.
Michael E. Zatezalo is the managing director of Kegler Brown Hill & Ritter, focusing his practice primarily in real estate and financing and gaming law, for which he serves as the practice chair. Reach him at (614) 462-5497 or email@example.com.
At some point, you may be faced with a high-stakes lawsuit which could place your company’s future in doubt.
It’s difficult to treat that case like any other when it has the potential to destroy your business, but there is a path you should follow.
“Each case must be examined objectively on its merits to determine what effect an adverse outcome may have on your business,” says Thomas W. Hill, a director at Kegler, Brown, Hill & Ritter.
Smart Business spoke with Hill about how to handle bet-the-company cases.
How do you know if you’re facing a bet-the-company case?
The answer to that question depends upon the answer to a number of other questions.
First, what are the allegations and legal claims? How strong are they? What are the available defenses? Second, what are the damages sought or the relief sought? Third, what happens if you lose? Can the company pay a ‘worst case’ damages award? Will an adverse result impair or potentially cripple the company’s ability to do business?
Failure to carefully analyze a lawsuit at the outset can result in disaster. It is very difficult for a company to answer those questions on its own without involving its legal counsel.
What should companies look for?
First, examine the merits of the claims and available defenses and make a realistic estimate of the potential damages that might be awarded should the company lose. If the case appears challenging and a realistic damages award could exceed the company’s ability to pay, it’s likely a bet-the-company case.
Second, some cases attack the core of the way a company conducts its business. In such a case, the amount of an adverse decision may not materially impact the company’s balance sheet, but an adverse result could devastate or substantially impair the company’s ability to continue its operations. That too would be a bet-the-company case.
Third, examine whether an adverse result may provoke ‘copy-cat’ lawsuits. A single case not seeking massive damages could, if lost, be the springboard for follow-on lawsuits by others with similar claims, the cumulative amount of which could destroy the company.
Also, examine the company’s loan covenants and think about what impact an adverse judgment could have on the company’s financing capabilities. If an adverse judgment would result in a violation of a company’s loan covenants or destroy the company’s financing capabilities, it is likely a bet-the-company case.
All these issues need to be examined early on and decisions must be preliminarily made. But those decisions are not necessarily final. Cases that may appear innocuous can turn ugly, and cases that appear challenging can take a dramatic turn for the better if properly handled. As my college basketball coach used to say, ‘you have to keep your knees bent,’ meaning stay flexible and be prepared to react quickly to changing circumstances.
What are the keys to winning a bet-the-company case?
The best way to win an argument is to begin by being right. So the first key is to carefully and thoroughly marshal the evidence and the law and then to present the evidence and argue the law in the courtroom in a way that makes it all seem effortless and self-evident.
Second, the company must make a conscious commitment to spend the time, effort and financial resources necessary to defend the case. The commitment of time is every bit as hard as the commitment of financial resources. Businesspeople are always busy. I worked a case a number of years ago in which the CEO had not spent the necessary time to prepare for his deposition. He gave answers that he later regretted. At trial, he changed his answers and the inconsistencies did not serve him well in front of the jury.
Third, the company needs to be willing to participate in the effort to get at the truth. Trials are an exercise in microcosmic history, reconstructing past events in a very specific and limited context relevant to the claims and defenses in the case. The truth should win, and, although juries and judges can sometimes make mistakes, more often than not they get it right. It is a lot easier for them to get it right if the evidence is presented to them in a clear, logical, succinct and understandable way. The company also needs to understand that trials put witnesses under significant pressure, both in depositions and in front of a jury, where the outcome can have a great deal to do with either the plaintiff’s or the defendant’s fortunes. Every witness needs to be well-prepared on the facts and be prepared to be forthright, honest and as articulate as they are able in explaining in simple words exactly what happened. Spending the time necessary to prepare the witnesses to do those things maximizes the company’s chance to win.
Fourth, the company has to have courage. If a case cannot reasonably be settled and the stakes are sufficiently high, the resulting trial places the company’s fate in the hands of a third party (a judge or a jury). No one can be sure how that third party will receive the company’s evidence and its arguments. The willingness and ability to persevere in the face of that uncertainty takes courage.
How can a company prepare for a bet-the-company case?
First, hire a very good, highly skilled business litigator with trial experience. Second, with that lawyer’s assistance, preliminarily evaluate and periodically re-evaluate the case in a level-headed way. Third, if the company determines that its fate could ride on the outcome, a thorough and effective trial preparation plan needs to be developed and implemented effectively and skillfully, recognizing that the plan can change as the case proceeds.
Trials are challenging things. They become, for both the trial lawyer and the client, a quest for victory and in some cases a battle for the company’s survival. No one can guarantee how the judge or jury is going to decide the case. But a well-prepared company aided by a skilled business litigator can maximize its chances of a favorable result.
Thomas W. Hill is a director with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5403 or firstname.lastname@example.org.
When one of your customers files for a Chapter 7 bankruptcy, you’re not only losing a customer, but, in many cases, you’re losing whatever assets they might owe you, and even what they’ve most recently paid you for products or services.
“Even when there are no assets in the case, the creditor has the right to participate in the bankruptcy proceeding, ask questions of the debtor, find out about the debtor’s financial affairs, and find out what happened to the debtor’s assets,” says Larry McClatchey, director and chair of the Creditors’ Rights & Bankruptcy practice at Kegler, Brown, Hill & Ritter.
Smart Business learned more from McClatchey about what businesses can do when faced with the bankruptcy of one of their customers.
What rights does a creditor have in these situations?
Although a lot of bankruptcy cases are what we call ‘no asset’ cases and no dividend is paid, the principal right that a creditor has in a Chapter 7 liquidating bankruptcy is to participate in the case to try to get a payment on the claim if there are any assets in the estate.
Another right that the creditor has is the right to expose any wrongdoing on the part of the debtor. In a lot of cases, the creditor will know a lot more about the debtor’s business than the trustee in the bankruptcy case, or even the debtor’s attorney. Particularly if a credit manager has been working with a problem account for several months or a year, the creditor may have a lot of information about what the debtor has been up to. That information can be invaluable to the court or the trustee.
What is the first thing a creditor should do?
Carefully read all of the notices that are received from the bankruptcy court and pay particular attention to the various dates that are set forth in the notice.
There are three important dates to note: the Meeting of Creditors; 60 days later is the deadline to object the discharge; 30 days after that is the deadline to file proof of claim.
You’re not required to attend the Meeting of Creditors, but it is an opportunity to ask questions. If you’re talking about an individual debtor if you’re selling goods to somebody who is a sole proprietor and if they’ve engaged in any kind of wrongdoing before the bankruptcy was filed you can object to the discharge. The significance of the third date is that if there’s going to be any distribution to creditors, only creditors who file proofs of claim will be entitled to receive any distribution. You should use the official proof of claim form from the bankruptcy court, and you should attach an official explanation of your claim and copies of invoices or other documents that support the claim.
Creditors who have filed proofs of claim will share pro rata in the net proceeds of whatever the trustee recovers. My experience is that there are many Chapter 7 bankruptcy cases where a lot of creditors do not file proofs of claim, so the ones who do can get a pretty large dividend. The national average dividend in Chapter 7 bankruptcy cases is between 7 and 10 percent on the dollar. But if few creditors file claims you can get 25, 50, 60 percent dividend.
What steps will creditors need to take during this process to help ensure success?
Aside from filing a proof of claim, the most likely involvement that a creditor is going to have in a business bankruptcy case is if they are asked to repay a preferential payment. The bankruptcy code allows the trustee to recover certain kinds of payments made within 90 days before the bankruptcy is filed.
Creditors should think defensively and gather up all the records of the business dealings they’ve had with the debtor over at least the last year before the bankruptcy was filed. They should look for any information about concealed assets or property transfers that the debtor made. For example, if the creditor learns that the principal of the company repaid a large debt to a family member within a year before the bankruptcy was filed, the creditor should bring that information to the attention of the bankruptcy trustee and the court. The trustee may be able to get that money back.
If the debtor has committed some sort of wrongdoing, the creditor could take action to get a court order barring the debtor from getting a discharge. If there’s no discharge, then the creditor could still try to collect the debt.
What expectations should creditors have of the outcome?
Be realistic about the likelihood of a small dividend or no dividend. Take a look at the business you’ve done with the debtor and be prepared to defend yourself if it looks like you’ve been paid a significant amount of money by the customer before the bankruptcy was filed, because the trustee may try to recover it.
You do need to be a little careful here because the discharge and objections to discharge are really significant if the debtor is an individual. A corporate debtor that is being liquidated in a bankruptcy proceeding and has ceased operation does not actually get a discharge by law. There are obviously a lot of proprietorships out there and you could very well have a customer who’s an individual.
Work with an experienced bankruptcy lawyer to learn whether you are in a class of creditor with special rights under the bankruptcy code that will give you some additional protection.
Larry McClatchey is director and chair of the Creditors’ Rights & Bankruptcy practice at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5463 or email@example.com.
Taking the proper steps to protect some of the most critical information for how you conduct your business is paramount to its livelihood. There’s a lot at stake.
“There’s a 2005 statistic that says 70 percent of identity theft starts with an employee stealing personal data from their employer,” says Traci A. McGuire, director in the Litigation, Labor & Employee Relations and Health Care practices at Kegler, Brown, Hill & Ritter. “Although you want to be trusting of your employees, you also have to realize the far-reaching nature of technology and who has access to that information. You have to assume that once it’s out there on the Internet, it is available to the whole world.”
Smart Business learned more from McGuire about steps businesses should take to properly monitor their critical information.
What are the risks businesses face by not regulating employee access to information?
The No. 1 concern is that employees can steal confidential information and do a lot of damaging things with it. There are a number of cases where employees steal confidential information about, for example, a manufacturing process or something that would be of interest to a competitor. If they go to work for a competitor, they have information that’s going to be used against you.
An employer may have one view of what is confidential information. On the other hand, an employee’s job may be just one slice of how a company operates, yet that employee may have access to information he or she does not realize is confidential. An employee may think it’s appropriate to share information in an e-mail or on Facebook as part of a routine dialog, or even just in conversation. But the company views that as an egregious breach of sharing confidential information because of who their clients and customers are.
What can, and should, employers monitor?
Generally speaking, employers can monitor any kind of electronic media that they want, including an employee’s use of Facebook or Twitter, their cell phones, digital cameras, computers so long as they create a realistic expectation of privacy or the lack thereof for the employee.
An employer needs to first focus in on what information is important to the company and what they really want to protect. They can write a policy as broad as they want, but that’s only good if that’s what they really need. You have to be practical and realistic about how employees actually use technology. Is it really realistic to think that you’re going to control and prohibit each employee from doing any online shopping at Christmas time or from checking Facebook during the day? And do you really want to have that level of control?
You need to identify first what information exists within the business and what employees have access to. Do all employees have access to trade secrets, client lists, customer lists, or billing practices? The policy you’re putting in place also needs to address the specifics of the technology that you want to monitor. Do you have a policy that restricts the use of company-provided cell phones to work-related things only? The more sophisticated a business is, the more thought needs to be devoted to that process. Employers need to consider whether they provide laptops that employees take home, or whether they have an external Web-based system that could be accessed from anywhere, even if it’s not on a company-provided computer. You need to be thorough when you think about all the ways employees can access a company’s information.
Once the employer determines the type of media that the company wants to monitor, they have to decide how to carry it out. How are you actually going to monitor it? What are you going to do if you find somebody has breached protocol? You need to have a policy in place that’s consistent and treats employees uniformly during that process. You can’t treat one employee better or differently than another employee when something unexpected happens because you could be looking at the possibility of some type of discriminatory treatment.
How should employers communicate their confidentiality policies?
Employers have to inform their employees and put them on notice of their privacy rights. You can’t just monitor things and not tell them and then try to crack down. That’s not really going to be helpful.
Typically these types of policies are written into the handbook. And certainly if you hire somebody new, you give them a handbook, allow them some time to read it and then you have them execute some type of document that acknowledges their receipt of the handbook. For ongoing employees, as technology changes, obviously it’s hard to keep up, so you want to update your handbook. The important part is to get the employee to acknowledge that they have received the information that is a supplement or update to the handbook, that they’ve had an opportunity to read it and they understand what it says. It is those documents that are going to be the key part to being able to enforce the policy down the road.
Traci A. McGuire is a director in the Litigation, Labor & Employee Relations and Health Care practices at Kegler, Brown, Hill & Ritter. Reach her at (614) 462-5408 or firstname.lastname@example.org.