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Addressing Shareholder Disputes in the Cannabis Industry

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.

  • Profit-Sharing

  • Licensing

  • Shareholder Settlement

  • Separation

  • Operating

  • Management

  • Real Estate

  • Cultivation

  • Breach of Contract

  • Technology

  • Intellectual Property

  • Confidentiality/Non-Disclosure Agreements

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.

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