Lately, our cannabis litigation team has seen a massive spike in cannabis businesses owners suing their fellow owners within the same cannabis business. Whether you’re already headed to court or you’re just sensing a company mutiny brewing on the horizon, the five tips in this blog post will help you prevent an ownership dispute and best resolve one if one should occur.
- Perform due diligence on your co-owners. If you want to increase your odds of avoiding a dispute with your cannabis business co-owner, the most important thing you can do is to choose that co-owner wisely. What really kills me is how often I have been told by a party locked in a life or death ownership dispute that they barely knew their business partner before they jumped into business with them. If you are going to start a cannabis business, the first thing you do is find out as much as you can about your putative partner’s financial and business history. You should do this before you sign away your soul and money to joining with this person on a business project. It’s neither rude nor unexpected to ask your potential co-owner for documentation showing his or her financial and criminal history. It is even more important to conduct thorough due diligence if you are buying into an existing cannabis business. At minimum, your due diligence should include an investigation and analysis of the assets and liabilities of the company and its current owners. Your due diligence should also include confirming the appropriate standing of the company with state and local government regulators, and determining that the company and its principals understand how to comply with state and local laws as well as the Cole Memo.
- Make your business relationship with your partner as clear as possible. The days of handshake deals regarding ownership in a cannabis business should be history; you should do no such deal without first getting everything in writing. Operating agreements, bylaws, and shareholder agreements exist to ensure that the company structure and the relationship between its owners is clear. When starting a company together you and your fellow owners should have at least some understanding regarding how the company will be operated and how such things as equity versus debt, voting rights, sweat equity, preferred returns, owner employment, will be handled. Most of the ownership disputes we have handled have arisen either due to no or bad initial paperwork.
- Know your options and consider alternative dispute resolution. Well drafted corporate documents should cover most possible breakdowns in the business and set out the options for handling internal strife. If there is a fight or deadlock, what happens? How are problems resolved? Who makes what decisions? What about selling the business? What about selling an ownership interest and for how much? Can you sell just your membership interest or shares? Can you keep running the business free of your partner? What about dissolving the company and winding down? All of these thing can and usually should be covered in your corporate governing documents, and by doing so, you greatly minimize your likelihood of insurmountable problems later. Your company documents should also make clear how disputes are going to be handled. Are you going to want your dispute made public in a court, or kept quiet in an arbitration? It is a lot easier to reach agreement on such things when you are starting your business rather than in the midst of a hard fought dispute.
- Get your own attorney from the start. More often than not, the company has an attorney looking out for its interests. But it is important to realize that the company attorney is not your personal lawyer and that lawyer will almost certainly be conflicted out of any dispute between you and your business partner and/or investor. For this reason, and many others, it almost always pays for you to have your own lawyer providing you with your own counsel regarding your role in the company and your ownership rights. This lawyer should also make sure that the written agreements work for you and not against you. This lawyer will also be an asset for you if any dispute arises. For more on how to avoid a dispute relating to your cannabis business, check out Five Tips on How to Avoid Cannabis Litigation and How to Avoid Costly Marijuana Business Disputes.
- Make sure your lawyer knows what he or she is doing. When hiring a lawyer to help protect you when getting into a cannabis business, you should be sure to hire a law firm with lawyers who know both business law and cannabis law. And when confronted with a dispute involving your cannabis business, you need to be sure to hire a law firm with lawyers experienced in civil litigation (criminal litigation experience does not count here) and cannabis law, if possible. For more on choosing your cannabis lawyer, check out How To Choose Your Cannabis Business Lawyer.
Be careful out there.