Business
Opinion: 3 ways to protect a cannabis business partnership from litigation
The cannabis industry has grown dramatically with each new state that legalizes its sale.
Still, the industry continues to have the reputation of being a no-holds-barred Wild West.
As a result, partnership disputes, bad business practices and “off-the-books” backroom dealings abound, particularly in contrast to other, more mature, established industries.
Here are three key pieces of advice on how to protect yourself from bad actors, acrimonious partnership disputes and costly legal disputes:
1. Protect your licensing: Each state typically requires that every marijuana business be licensed and the company owners undergo a background check.
It is critically important that your name is on the license if you are a partner or owner. For one thing, it is usually the law.
For another, having a name on the license is vital in preventing later ownership disputes about the existence and amount of your ownership.
Unfortunately, I often see people get cute with their licensing requirements. They have owners with handshake deals who aren’t on the license.
Investor groups, in particular, sometimes hear that they don’t need to be on the license, but in reality, they do.
If your name isn’t on the license, you might not later be able to claim an ownership stake or partnership rights.
On the other hand, if you are on the license, you have leverage in any disputes or major business decisions (including a sale) because regulators often require proof that all owners have consented to a transfer.
2. Formalize your partnership agreements: There are countless examples in the cannabis industry of handshake deals that have been happily in place for years until one of the parties tries to disown or dissolve it for any number of reasons.
These types of informal partnership agreements might be a lingering reminder of pre-legalization days when people were reluctant to put anything marijuana-related in writing.
However, now that marijuana is legal in many states, the old way of doing business serves no purpose other than to open up partnerships to contentious and expensive legal disputes.
Many states have enacted statutes requiring the recognition of partnership agreements, even if no signed paperwork exists.
However, the crux of the issue is not necessarily whether a handshake deal is enforceable – nearly all will be considered enforceable – but, rather, the sizable cost of the litigation required to prove its existence and to enforce it.
There’s also the onerous statutory provisions of the Uniform Partnership Act that apply to partnerships without a written partnership agreement.
The issues can get particularly muddy and lead to litigation when winding up a partnership.
Without a written agreement setting forth the process for dissolution, including potential liquidation of assets or buyout requirements, many partnerships will end up in litigation.
Signing a partnership agreement at the outset is always the best course of action because trying to unwind one after the fact can be as tricky as getting toothpaste back into the tube.
Once you attempt to formalize something informal, both parties usually begin jockeying to make new changes to the existing agreement that will work in their favor.
3. Safeguard minority owners: Shady accounting is one of the most notorious issues I regularly see in the cannabis industry, particularly regarding calculating profits and distributions.
A common problem I’ve encountered is a majority owner who tries to make profits look lower to reduce required profit distributions to minority owners while increasing profits for themselves.
A frequent example of this type of self-dealing is when payments for goods or services are made to affiliate businesses of the majority owner, meaning that they are, in effect, paying themselves twice and reporting lower profits to minority partners.
Perhaps surprisingly to many, such a practice might not be illegal or a breach of contract.
Many limited liability company operating agreements and partnership arrangements contain provisions allowing managing or majority owners to engage in some level of self-dealing.
Minority owners should protect themselves from this type of situation by having a written partnership agreement that requires:
- Notification of transactions with companies in which the majority owner has a stake.
- Any transaction with an interested party to be done on the same terms as an arm’s-length transaction.
Agreements should also provide minority partners with the ability to obtain an accounting of the amount spent and specific uses.
Having that language in writing is often enough to deter dishonesty because majority owners understand that minority owners have protections in place and can take legal action if needed.
These three examples illustrate why it’s beneficial for marijuana business partners to have an experienced cannabis litigation attorney prepare and review partnership agreements.
Don’t be penny-wise and pound-foolish. Spending a few hundred dollars upfront can save many thousands of dollars in potential litigation costs down the road.
David Olsky is a partner at Denver-based law firm Fortis Law Partners. He can be reached at dolsky@fortislawpartners.com.
Source: https://mjbizdaily.com/3-ways-to-protect-a-cannabis-business-partnership-from-litigation/
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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