Partnership disputes – whether between business partners or between owners and investors – remain an ugly feature of the cannabis industry. Such conflicts can be costly and time consuming. Plus, they can sink a cannabis company.
However, there are steps companies can take to prevent disputes – or at least manage them more effectively when they arise, which is all too often the case.
“When it comes to litigation in the cannabis industry, the most common issue we are likely to see is partnership disputes,” said Cassia Furman, executive partner of Vicente Sederberg’s California Practice Group.
For any business, a struggle between partners can divert millions of dollars in financial resources into legal fees. This is especially true for cannabis companies.
The industry is young and rich in inexperienced operators, as well as friends and family investors who may fail to prepare documents for their business relationships.
In addition, many legal operators are ex-illegal market participants who did not enter into contracts before legalization because they did not want to leave a paper trail for law enforcement. Now these owners have transferred this habit to the legal market.
To avoid legal pitfalls, marijuana operators can take various measures to reduce the risk and harm of partnership disputes. These steps boil down to the following:
- Check partners and investors beforehand.
- Bringing property, investment and other business relationships to paper through formal contracts
- Have attorneys review these documents to make sure they do not contain harmful terms.
Lots of different conflicts
Disputes usually arise at two points in a business relationship, said Katy Young, managing partner at Ad Astra Law, a cannabis-focused law firm in San Francisco.
Disputes can arise when the company is doing badly, causing the partners to blame each other. Conversely, disputes can arise if the company makes a lot of money and partners get greedy and try to displace others.
Young said it was also important to recognize the types of personalities and situations that can lead to conflict.
One problem she often sees is when start-up marijuana entrepreneurs over-promise the amount of money investors make. These investors are often friends and family and the owner owes too much money to too many people.
Another common situation is what Young refers to as an “absent financier”. In this case, a financier can give a grower a large sum of money to buy a greenhouse. Next, the investor gives the marijuana operator – who often has relatively little business experience – control of the bank account like any other business owner.
The investor takes his “eyes off the ball” for a few weeks or months – only to come back and find that the bank account is empty and the cultivator can only make excuses: for example, the harvest was stolen or bad weather damaged the plants.
In other cases, Young says, partners fail to write contracts or agreements when they attract friends and family to borrow or invest, making it difficult to resolve disputes.
Another problem is mismatched personalities – for example, one partner is funding a business and the other brings sweat into play and works a lot harder. In the end, the financier feels more justified because of the financial risk they have taken. In contrast, the other partner feels more justified because he or she has worked much harder.
“We often see partnership disputes arising from half-hearted partnerships, company agreements, or the articles of association and shareholders’ agreements that do not adequately summarize the relationship,” said Garrett Graff, managing partner at the Hoban Law Group in Denver.
Write it down in writing
Such partner disputes can be avoided or at least more easily resolved without litigation if the parties formally record their relationships on paper through investment agreements, loan agreements, works agreements, shareholders’ agreements or company statutes.
“Partnership disputes are essentially contract disputes,” said Young.
These documents regulate the company’s relationships with its owners and shareholders. If these conditions are violated, a lawsuit can ensue. Without the documentation, individuals and the company itself would be unprotected, Young said.
However, many groups do not create written contracts – or when they do, the contracts are often poorly executed.
“We often face disputes for which there is very little evidence on paper,” said Young.
When operators have the foresight to draw up contracts, they often do so superficially. For example, you will try to create legal documents using web-based tools or templates. Without the expertise of a lawyer, however, critical terms can be left out in such a document, so that the contracting parties have no legal protection in professionally prepared documents.
Furman emphasized that partnership disputes are not just a problem for early-stage companies. They can also occur in more mature and growing companies.
“You have to raise capital on a large scale, which involves contractual obligations with the lender or investor,” said Furman. “Expanding into other states can also mean connecting with new partners – and that’s another set of contracts.”
Don’t be afraid of contracts
State-approved cannabis business owners shouldn’t fear contracts from federal agencies will be used against them. Rather, marijuana business owners should view contracts as a shield. The more seriously a business owner takes their contracts – and the more knowledgeable the lawyer who drafts them – the stronger the shield will be.
“Got a voice in there. Be active. Hire an attorney who knows local and state regulations, ”said Young. “Never enter a contract unless you’ve had a lawyer review it.”
Lawyers stressed that disputes become unwieldy and ugly if there aren’t well-constructed agreements governing ownership, including how assets are distributed when a partner leaves the business.
“It’s important to hire a really good transactional attorney to help you start your business,” said Young.
Addressing these issues now can save you tens of thousands of dollars in litigation later, depending on whether you work with a boutique law firm or a national law firm. And that doesn’t include additional, costly expenses like collecting evidence to support your case.
“When there is scattered evidence across the Internet to show that you’ve made investments, loans, or expenses, it costs money to get vendors to get that information and pay paralegals to put it together. It’s usually five or six digits, ”said Young.
Furman advises clients to talk about the relationship they are entering into and what they would like to make of it before actually committing to a final agreement.
“Make up a detailed term sheet and find out if there is a meeting with the investor or the white label relationship you want to enter into,” she said.
In addition, official documents such as company or shareholder agreements can help the partners consider important details that can make future separation less harmful for the company and the individual parties.
“Not only does it set the legal parameters of how the business should be run and if necessary, it also forces parties to think about term sheets and where they could be in a year or two if the company is successful is or when The company is unsuccessful. Have some of these discussions right at the start, ”Furman added.
“You can treat your partners with all kinds of care, and that always helps. But it is difficult to have this crystal ball as a business owner to know how the relationship will play out until it is actually tested. Protecting your interests with contracts is therefore certainly recommended protection. “
Factors to Consider
Graff said dozens of issues need to be considered in agreements. These problems include:
- Voting rights – how much do votes count and are they per person or per share?
- The provisions on the dissolution of a partnership or a company. If an affiliate or shareholder wants to sell, are they facing restrictions on the terms of sale or the potential buyer? The other partners or shareholders may not want shares or ownership transferred to someone who does not match the rest of the team.
Graff says lawyers should consider how partners are working in the present when drawing up agreements and anticipate possible scenarios in case they don’t work well later.
“These are difficult conversations when things are going well and everyone is still in their honeymoon phase,” said Graff. “Of course, it gets a lot more subjective and emotional when you’re in an actual argument.”
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