Management Agreements for Assumption of Existing Operations

State licenses are non-transferrable, meaning once a license is approved at an established location, or amongst a specific group of owners, that license cannot be transferred to a new location, nor to a completely new group of owners. Notwithstanding this fact, cannabis business investors and owners are entering and exiting the space all the time. This is also not to say that individual, original owners may not exit, or that new owners may not enter as participants in an existing cannabis business. However, successfully achieving transfers of ownership within an existing cannabis business involves a delicate process that requires significant supporting documentation and attention to detail.

Similarly, when evaluating whether to take on a new owner, officer, or manager for your cannabis business, or when considering whether to acquire an existing cannabis business entirely, due diligence and exchange of validating documentation is critical to protecting your business and investments therein.

We assist in conducting due diligence on potential buyers, including validation of proof of funds, drafting management agreements for the assumption of operating cannabis businesses as going concern while transfers of assets progress and affecting regulatory disclosures as necessary to protect the integrity of existing licenses while new license and owner applications are developed and advanced.

Documents to be Considered in Preparation of the Sale or Purchase of a Licensed Cannabis Business

Documents include but are not limited to the following:

• Business Formation Documents, Shareholder Agreements & Operating Agreements
• Corporate Records such as prior board resolutions and minutes
• State licenses and local permits
• Federal, State and Local Tax Records
• Existing Contracts, including leases, purchase and supply agreements
• Financial Records including Profit and Loss Statements, and accounting
• Bank Records
• Letters of Intent & Term Sheets
• Disclosure of liabilities including existing debt

Interim Management Agreements

While these materials are under evaluation, Buyer and Seller may want to engage in transferring funds and/or operations immediately. Interim management agreements may serve to facilitate these steps, while proper planning and delivery of regulatory disclosures will ensure the smooth, uninterrupted transition of ownership.

Issues to be mindful of when entering interim management during acquisition of a cannabis business include disclosure to State and local authorities, assumption of liability by managers moving forward, indemnification of managers for existing liabilities prior to the assumption of management duties, as well as potential changes to the administrative structure as well as the nature of operations themselves. Each of these issues should be addressed with respect for the intentions of the parties, as well as for the regulatory restrictions and guidelines that govern cannabis business operations at the State and local level.

The terms of interim management agreements should speak specifically and explicitly to these considerations, dictating the roles and responsibilities of each party, and detailing the specific facilities, uses, permits and licenses which could be affected through performance of the agreement. Similarly, the terms should expressly state the disclosures to be made for each party, as well as the contingencies, and potential consequences that could occur due to non-performance. During performance of an interim management agreement, parties should be advancing and affecting the necessary disclosures and application filings both on the State and local level in order to accomplish each party’s goal.

Not only do we serve to advise, negotiate, draft and oversee execution of the management agreements themselves, but also prepare, file, and manage correspondence with local and State regulators to gain approval for the ultimate transfer of the beneficial entitlements of holding cannabis permits and licenses, and protecting the achievement of the goals of our clients.

Navigating State Regulation

Disclosure is required whenever a new owner as well as new management, as defined by DCC regulation, enters participation in an existing cannabis business.

If at least one owner remains within the licensed company’s structure, the existing licenses may be maintained and the business allowed to continue operations under such licensure. However, if all of the original owners of a cannabis business leave the business, the business cannot legally maintain operations under the original licenses granted to the original ownership group.

Navigating Local Permit Transfer Approval Processes

Each local jurisdiction maintains its own set of standards to approve or deny cannabis projects, as well as standards for the approval of individual ownership in local permits. Some may have established, clearcut processes to define how such transfers should occur, other local regulatory programs may be lacking these guidelines. In either case, engaging with local program administrators, government executives, as well as local leaders may also play a critical role in affecting transfer of cannabis business ownership on the local level.

Just as clients we have represented were some of the ‘first to approval’ for their cannabis businesses, so too are some of our clients to be engaged as the ‘first to transfer’ (or acquire) ownership in existing cannabis businesses at the local level. This may simply involve updating local permit records to disclose new owners and have their ownership interest in existing permits approved administratively following passage of background checks. Others may involve submitting more detailed proposals illustrating the particular qualifications of a proposed new owner.

We’ve spearheaded new initiatives to facilitate the transfer of existing permits, development agreements, and ownership of cannabis facilities in multiple local jurisdictions. Developing ownership profiles, meeting with local leaders with new entrants to the space, and even affecting regulatory amendments to allow for new application submittals has been part of the continuing evolution for our firm and the businesses we represent.