Cannabis Governance and Corporate Law

Marijuana businesses are usually set up as LLCs or corporations that require corporate legal services just like any other business.

They’re made up of members, managers and investors whom together have to run the business in a manner that’s best for the company’s objectives.

Strategic decisions with a vision for the future must be made regarding business entity selection, tax elections, objectives, distribution elections, capital re-investment strategies and both long and short-term goal setting.

These items must be properly memorialized in the appropriate written agreements, or else they can be subject to misinterpretation and cause disagreement within the company that could end in dissolution of the business.

Proper planning upfront will direct the corporate activities in a manner that was mutually intended and agreed upon from the beginning.

Without proper planning, and even sometimes despite it, there will be disputes which come in many forms.

Owner against owner, member versus LLC, or shareholder vs. managers – conflicts can arise in multiple capacities.

Litigation, unfortunately, is often necessary to resolve disputes, although well-drafted corporate governance documents will make litigation less likely.

A long-term relationship with a good business law firm is vital.

Our office represents business entities, business owners, investors, or individual directors, because each of these groups may require legal counsel.

Drafting of Corporate Governance Documents: Operating Agreements and Corporate Bylaws

If the corporation isn’t governed properly, it will lead to disagreements, infighting, and self-motivated actions.

When tensions rise, the possibility of deadlock increases and could lead to the failure of the business, resulting in dissolution or a sale of the business for below market value.

There are a multitude of business structures that can be considered.

The governing corporate documents must be drafted properly to ensure the intent and agreement of the parties. Those documents can include the articles of incorporation, operating agreement, corporate bylaws and other documents.

Each of them have specific and comprehensive provisions that must be tailored to each company and their members/shareholders.

The following issues must be clearly and accurately contained in the appropriate documents including:

• Whether there’s a member managed or centralized management framework
• The duties and make-up of the board of directors
• The frequency and manner in which the board meets to conduct business
• What makes a quorum to conduct business and what’s a super-majority for certain types of decisions
• Determining capital contributions
• How are additional capital contributions made and how are equity shares allocated
• How and when distributions of profits are made
• Admission of new members, investors or shareholders
• Withdrawal of members or shareholders, and if their capital contribution shall be returned and how is it valued
• How a member, investor or manager can be expelled
• Voting rights
• Covenants of confidentially, non-competition, non-solicitation, non-exclusivity, and non-circumvention.
• Transferability of shares or equity positions
• Indemnification
• Dissolution

This list isn’t exhaustive. In fact, it’s very common for equity stakeholders to get creative with their agreements, which requires the corporate governing documents to be creatively and expertly drafted as well.

The Cannabis Legal Group employs corporate lawyers with years of experience in drafting these documents to ensure they capture the true agreements of the parties involved.

We’ll identify issues that the parties may not have thought of in order to ensure the documents are properly drafted to cover all potential contingencies and issues that typically arise in the future.

The organization will have the documents necessary at all times to ensure it knows what to do when unexpected things occur or when there is a question about how to proceed.

If well drafted and comprehensive corporate governing documents aren’t in place, it could cost thousands of dollars in dispute resolution, which has the potential to injure the business.

Investment Due Diligence

There are many investment opportunities in the cannabis industry.

Those seeking to invest may believe that any investment in cannabis must be a good opportunity.

This is simply untrue. There are many unscrupulous people who will take advantage of a potential investor.

Even more common are those who think they have a good business plan with lofty expectations, but are based upon unrealistic or unsupported assumptions.

Additionally, the team and company must be investigated to determine if they have a track record of success, whether they would qualify for licensure and how realistic their business model is.

Many companies haven’t operated in the cannabis field and aren’t aware of the difficulties that lie ahead.

Fortunately, we do. We can qualify good investment from bad ones.

We know the right questions to ask and perform the investigations necessary to properly evaluate an opportunity. CLG can evaluate any investment opportunity to truly assess your risk.

Dispute Resolution and Litigation

Member vs. Member Dispute Resolution and Litigation

In Michigan, a limited liability company is owned by its members.

Each member has a fiduciary obligation to the company.

That means that have a duty to do what’s in the company’s best interest and what’s consistent with the bylaws and articles of organization.

If one member doesn’t act in that fashion, one of the remaining members may have an action against them, which will need to be resolved.

Member vs. Company Dispute Resolution and Derivative Action Litigation

A member may have a problem with the manner in which the business is being managed.

As a member, they have rights to see the corporate books, evaluate the operation and the managers.

If there’s a problem, a member has a right to institute litigation or even start a derivative suit on behalf of the company against a third-party if the managers refuse to do so.

Members have a lot of rights that people generally overlook, and our firm will help identify the best course of action in asserting those rights.

Breach of the Operating Agreement

If a member is in violation of the company’s operating agreement, other members or the business itself can file an action against that member.

The opposite is true as well.

Shareholder rights consultation

Shareholders in a corporation have rights depending upon the class of shares they own.

But regardless of class, they always have rights. We can explain those rights to shareholders and then help enforce them.

Mergers and Acquisitions

Business Valuation

Understanding the true value of a marijuana business is essential for both the buyer and the seller.

There are three basic valuation methods:

• Discounted cash flow (DCF), which attempts to put a present value on anticipated future income streams;
• Book value which is based upon an owner’s equity as reflected on the balance sheet, and
• Liquidation value, which is the expected value of a company’s assets if there were to be a fire sale.

The method selected generally depends upon the health of the business at the time of sale, the provisions of an applicable operating agreement and whether only a minority of owners are selling.

DCF will usually produce the highest value, but it’s important to evaluate revenue numbers that are realistic.

Operators have a tendency to overstate revenue. It can also be assumed the reported number is overstated unless accompanied by actual and verified sales figures.

Sometimes, it’s necessary to evaluate a potential material change in the marketplace, like the addition or elimination of competitors, change in regulations or even change in market demand.

License Transfers

The sale and purchase of a licensed cannabis facility will likely necessitate a municipal and/or state license transfer.

Different municipalities accomplish this task in different ways.

Sometimes, it necessitates a stock or membership sale, and other times this isn’t necessary.

Additionally, a city often requires that a full transfer of the municipal license cannot be accomplished until the state license transfer has been accomplished.

The Cannabis Legal Group has navigated all of these situations and can expertly handle any type of license transfer.

Real Estate Purchase Agreements

The Cannabis Legal Group can draft all necessary documents to effectuate the sale or purchase of real estate including letters of intent, purchase agreements and related documents, like easements or private road agreements.

When there’s a proposed purchase or sale of real estate related to a cannabis facility, it’s important to ensure the correct provisions are properly addressed.

Need specialized corporate law and governance counsel? Unhappy with your current representation? Request a consultation now.