Now that we’re about two years into California cannabis licensing, our California cannabis attorneys are seeing a enormous uptick in mergers and acquisitions in the cannabis space. It is crucial for possible M&A transactions to have an understanding of California cannabis laws and regulations and assure that any M&A contracts are drafted with the regulations in thoughts. This is in particular so for purchasers who will have to reside with the errors of the seller and any defects in the M&A contracts—some of which can be fatal to a cannabis license. For purchasers in particular, it is quite simple to overlook crucial regulatory needs in a complicated M&A transaction and jeopardize a target business’ license. In this post, I’ll go more than some of the greatest difficulties that our California cannabis attorneys routinely see with M&A transactions.
1. Not Contemplating the Regulations
The greatest M&A error that our California cannabis attorneys see, hands down, is not taking into consideration the California cannabis regulations and their needs from day a single. Parties routinely come to an agreement on the industrial terms of a deal, and in some situations even draft contracts with no taking into consideration the influence of the regulations. We can’t underscore how problematic this can be. Failure to contemplate the guidelines from day a single could demand the parties to re-draft a 60-web page contract on the eve of signing—or worse, soon after signing—because they forgot to address regulations that could outcome in the loss of a license. In particular for a purchaser, who is left holding the bag for any regulatory difficulties brought on by the seller, this can be disastrous.
two. Licenses Can’t be Sold
California cannabis law is quite clear that licenses could not be sold or transferred in any way. Nonetheless, our California cannabis attorneys have observed transactions exactly where parties have attempted to sell licenses, which would outcome in the automatic termination of the license. Most of the time, nevertheless, the problems we see are subtler. For instance, it is usually widespread in M&A for the purchaser to supply one thing as safety if the purchaser is not paying the complete buy value up front. But since licenses can’t be transferred, they should really not be pledged or provided as safety. That as well could outcome in loss of the license.
three. Acquisitions of a Parent Firm Can Nevertheless Trigger Owner Disclosures
Quite a few cannabis corporations in California are owned by holding businesses. Some of them even have 3 or 4 levels of corporate ownership prior to acquiring to the parent organization. Most cannabis offers involve acquiring a parent (which nearly normally is not licensed), as opposed to the subsidiary licensee. Even although that parent is not licensed, the parties to the transaction need to nevertheless comply with California cannabis regulations. Even in these offers, the purchaser need to contemplate that it will nevertheless be viewed as an owner. At least a single California cannabis agency explicitly calls for identification of equity and non-equity “owners” all the way up the chain to the parent company—no matter how far removed—and has the discretion to demand these persons to make complete owner disclosures. Failure to contemplate the needs of ownership and disclosure timetables could be disastrous for the purchaser who will have to scramble to make tight 10–14 day disclosures to the state and who could have missed the neighborhood-level pre-closing disclosure needs.
four. Total Modifications of Ownership at After are Forbidden
The California cannabis agencies (and most neighborhood jurisdictions) do not permit corporations to be sold or transferred completely at a single time. The Bureau of Cannabis Handle, for instance, calls for that at least a single original owner stay on the license whilst the incoming owners are evaluated. In the occasion of an M&A transaction that outcomes in a comprehensive adjust of ownership at as soon as, the business enterprise could shed its license. Mainly because of this, our California cannabis attorneys have observed a surge in phased offers exactly where only portions of a business enterprise are transferred to the purchaser at a single time. This is most likely the greatest location exactly where failure to contemplate regulations at the outset could outcome in a lost license.
five. Foreign Purchasers Have Even A lot more Prospective Issues
More than the final year, we’ve observed extra and extra foreign businesses looking for to invest in any even obtain California cannabis businesses. Notwithstanding legal ramifications in the purchaser’s house nation (cannabis is nevertheless illegal in most nations), there are main impacts in U.S. laws for foreign purchasers. For instance, owners of California cannabis corporations need to have Social Safety numbers (“SSNs”) or Person Taxpayer Identification (“ITINs”), which foreign purchasers do not have. ITINs can take months to get, so not getting a single prior to closing can interfere with regulatory disclosures. There are also immigration issues for cannabis market participants (see here, here, and here), so a new owner coming to the United States to close a transaction or get their expected reside scan could be barred from entry. Failure to contemplate these problems from the outset could naturally outcome in tremendous difficulties for foreign investors who could be barred from entry into the US and could jeopardize a license if they can not make timely disclosures.