As the legal cannabis industry suffers through a
period of distress brought on by global economic woes, along with punitive taxation structures
and an oversaturation of products, and plummeting prices, there has naturally
been an uptick in internal cannabis business disputes. Incidents of owners
suing other owners, shareholders making claims of poor business operations,
and disputes between investors are on the rise.
Some cannabis shareholders are wary of the way the industry is going and
want to get out. They are watching
stock prices drop and are getting nervous. Cannabis business owners are realizing that their
financial projections are not holding up and revenue is falling short.
When the average price of a pound of cannabis
flower in a state like Colorado has declined 51% since the fourth quarter of 2020, high anxiety sets in.
The disputes that arise are often the result of the unique nature of the
cannabis industry. Payments in cash, years-old casual agreements, and
old—or even non-existent—agreements can lead to an uptick
in stakeholder bickering as the industry suffers. Here are some examples
of where problems often occur, mainly because of a lack of established
agreements or the veracity of the agreements themselves.
Cannabis Business Agreements and Structures
Most of the cases we handle at Cantafio & Song relate to sales and
mergers. The industry is littered with contracts signed (often with a
handshake) years ago when the industry outlook was sunny and bright. Now
that the market is changing, people want to divest and dispute who paid,
who paid how much, who is owed, and who should get paid first.
Roles and responsibilities often lack clarity if the terms of a business
relationship weren’t put to paper early in the development process.
This lack of documentation is a driving force in why so many sales and
mergers are plagued by friction. As lawyers, we need to know—even
if the records are severely limited—what the documentation looked
like from the beginning. For example, a cannabis attorney needs to know
what sort of qualifications and disclosures were initially listed, what
the business projections looked like, and just how far off the projections are.
Because the cannabis industry is so different from others (in large part
due to federal prohibition), an ordinarily straightforward piece of due
diligence like projecting the financials for growing a cannabis business
in an emerging legal market can be very difficult. There is a tendency
for business owners to only focus on potential revenues and not the extensive
expenses and cost side of the balance sheet. Often owners do not fully
plan for how difficult it is to deploy capital in a way that makes sense
in the cannabis industry. This leads to aggravation, fear, and anxiety
for shareholders.
Real estate is an arena in particular that is leading to shareholder disputes
in the cannabis industry. A property owner renting to a cannabis business,
for example, might have initially offered a rent discount in exchange
for equity—a deal that becomes less appealing during downturns.
An equity stakeholder expects some sort of return on their investment
and may threaten to sue if they do not receive what they think is a fair
return for their stake. As a landlord, they hold a large degree of control
over the livelihood of the company, compounding anxiety around the business’s
short- and long-term prospects.
Why You Should Look to Cantafio & Song for Support
If you find yourself embroiled in a dispute as a shareholder, investor,
or owner, a skilled lawyer with historical experience in the cannabis
industry is critical. Cantafio & Song cannabis lawyers possess an
institutional knowledge that comes from operating on both the government
side as well as the compliance side of the cannabis sector, with experience
in civil litigation and business law. This unique skill set lends itself
to our ability to guide clients through this difficult period for the industry.
Struggling within the distressed cannabis industry? Learn more about how
Cantafio & Song’s
cannabis legal services for businesses can help you navigate through the tough times.