OHIO: An Introduction to Corporate/M&A
Overview: Corporate/M&A (Ohio: North)
Northern Ohio Business Update
As we come out of the initial shock of COVID-19, we see trends in our region and across the board. Below we discuss our observations with regard to business and deal activity and Ohio’s new LLC law.
Business Climate for the 2020s
Did we just pack a decade of business cycles into 12 months? From our perspective, we very well may have. Our benchmark is the pace of change from the Great Financial Crisis, the aftermath of which was still being worked through a decade later. By contrast, we wonder if the COVID-19 pandemic may have accelerated the pace of change but not significantly altered the arc of change in the business environment. For example:
Three Months In
Beginning in late March 2020, our clients across industries experienced hesitancy similar to what we saw during the Great Financial Crisis (2008-2012). From vendors to customers to employees to business partners, it was difficult to get people to focus on getting things done, let alone starting new projects; however, by the early Summer of 2020, the best businesses and businesspeople had regained their footing. Business activity has since gained momentum and shows no signs of abating. Fueled by continued low interest rates and heavy government spending, the global economy appears poised for long-term growth. While inertia resulting from the Great Financial Crisis took years to shake, lethargy from COVID-19 lasted less than three months in many sectors.
Deal-making Is Thriving
In both our M&A practice and our strategic advising of clients, we have found that the best-capitalized and best-managed businesses have emerged determined to grow stronger and expand. The profound economic seizure followed by a truncated recovery cycle means that weak businesses failed much faster, causing less long-term disruption for the survivors.
Likewise, privately held businesses will continue to be tempted to transition ownership while valuations are high and taxes are low. Interest has come from both strategic purchasers and sponsors. And, with the impending end of term for funds raised in the aftermath of the Great Financial Crisis, the market for sponsor deals remains robust. Vanishingly low interest rates offered to investors for fixed-income alternatives makes equity investing all the more attractive, adding additional juice to deal-making.
Finally, it’s worth emphasizing that deal terms have not been materially modified. Early in the pandemic, acquirers slow-played deals and closed on acquisitions for only the strongest businesses. But more than a year later, deal terms reflect the balance of power, where strong businesses can drive hard terms and mediocre operating results can attract multiple offers.
Organic Growth Is Harder Than Ever in Many Industries
While opportunities for organic growth are open, winning new business remains difficult, so, flush with cash, strong balance sheets, and untapped borrowing capacity, strong businesses are buying growth, paying full purchase prices to add new revenue.
People Matter More Than Ever
A consistent refrain we hear from our clients is that they can’t find qualified candidates to fill their open positions. The stress of being understaffed compounds a second worry: many employees have indicated in anonymous surveys that they intend to look for a new position once the pandemic is behind us. As a consequence, businesses must take extra care to retain and train their best workers, and they need to be prepared to accommodate remote work and devise strategies to win back female employees who left the workforce. The fight for talent will be fierce.
Technology Is Critical – But Not Sufficient
Many of the businesses that responded most effectively to the pandemic had invested wisely in technology, which helped them more successfully pivot to remote work, deploy social distancing, and take other measures to blunt the effects of COVID-19. Continued development of artificial intelligence and other emerging technologies is critical moving forward, but the past year has underscored the limits of technology and the role people play in implementing, maintaining and improving tech.
Location, Location, Location
Commercial real estate, particularly malls and office space, are high-profile casualties of the pandemic. By contrast, the importance of liking where you live has sent residential real estate soaring to new heights. Both trends were already in play, but the pandemic accelerated the forces, packing years of change into months. We aren’t suggesting that change will stop, we expect the ramifications on commercial real estate to continue as businesses rationalize their real estate.
Ohio’s New Limited Liability Company Act (applicable to all Ohio LLCs in January 2022)
In early January 2021, Ohio adopted a new Limited Liability Company Act to completely replace existing Ohio law. The New Act, applicable in January 2022, significantly updates Ohio’s codified law governing limited liability companies by adopting provisions from other states’ laws. The result will provide increased flexibility for the operation and management of Ohio LLCs.
The New Act revises prior concepts addressed in Ohio’s existing law and incorporates several new concepts intended to address ambiguities in the existing law. Selected highlights include:
Default Nature of Provisions: The New Act emphasizes that its contents are generally 'default' provisions, applicable only to an LLC that has not adopted an operating agreement with contradicting terms (with limited exceptions). The result is greater flexibility to negotiate and structure an LLC by contract, with fewer circumstances where the statute would override a contractual provision that the members of the LLC, or certain other parties, have agreed to.
Governance Structure Flexibility: The New Act eliminates this distinction between member-managed or manager-managed LLCs and allows an LLC’s operating agreement to describe the governance structure of the LLC without categories. For example, under the New Act, an LLC may implement a form of governance body more akin to that of a for-profit corporation or partnership, such as a board of directors or an oversight committee.
Ability to Eliminate Fiduciary Duties: The New Act permits an LLC to more comprehensively limit or eliminate entirely all fiduciary duties of members, managers and officers. The only fiduciary duty that cannot be waived is that the members, managers and officers must abide by the implied covenant of good faith and fair dealing.
Penalties for Failure to Perform: The New Act permits an LLC to set forth specified penalties and consequences in its operating agreement that will apply if a member breaches the operating agreement or upon the occurrence of a certain event. This drafting flexibility allows members to contractually penalize certain actions as a method of maintaining control over the ownership and operation of an LLC, especially when the members of an LLC own their interests disproportionately to one another.
Ability of Operating Agreement to Confer Rights to Person Without Economic Interest: The New Act permits a person to be a member of an LLC without making any asset or capital contribution to the LLC or having any economic interest in the LLC. The New Act also permits an operating agreement to provide enforceable rights to third parties who are not members of the LLC.
Protections Against Creditors of Members: The New Act also includes provisions designed to allow an LLC to protect itself from any claims by creditors of a member, including situations where a creditor claims a security interest in a member’s interest in the LLC.