A few months ago, my colleague Vince Sliwoski wrote Oregon Cannabis Dispensary Sales: What We See About the Assessment, which focused on the secondary market for cannabis licenses and businesses. Vince explained that the retail market, which is the buying and selling of pharmacies, is still mostly done at multiples of sales. But what’s a less than 100% interest in a marijuana dispensary in Oregon worth?
The answer depends on several factors beyond mere sales or profitability of the business. These include:
- how the pharmacy is organized
- What do the organizational documents say about the method of calculating the value of partial interests?
- whether there is a right of first refusal for other owners
- the degree of control that the Shareholder has over the business
- whether the question is raised in the context of adverse hostile litigation; and
- whether certain discounts apply.
This post explains how the type of facility selected at its inception and its authoritative documentation can affect the value of ownership of a marijuana dispensary.
Take the common process scenario in which one or more members of a limited liability company attempt to expel another member from the company for misconduct. As of 1997, a resigning or expelled member of an Oregon LLC has no right to redistribution of that member’s interests (ie, a buyout) unless the articles of association or company agreement specifically provide otherwise. Instead, the member who resigns or is expelled becomes a legal successor to their interest.
The distinction of the member / recipient status is critical. An assignee is not a member and cannot vote, but is still entitled to interim dividends, profit and loss distributions, etc. This means that it is an excluded or withdrawing member, unless the company agreement contains any purchase and sale provisions that govern the exclusion and Resignation specific You are not entitled to a buyout of your interest, and the other members may be prevented from sharing profits with that person.
The lesson here is to make sure that your Organization LLC documents have buy and sell regulations in place. Most do. Although, in the cannabis context, I’ve come across several company agreements that don’t – usually because the people involved didn’t keep a lawyer and downloaded a form from the internet.
Oregon’s related company law, on the other hand, contains so-called dissident rights provisions and allows the company, under certain circumstances, to compel a shareholder to sell their shares back to the company. In 2001, Oregon passed the Oregon Business Corporation Act (the Act) to encourage the courts to use the buyout appeal in certain proceedings initiated by shareholders of closely related companies.
Prior to 2001, the legal remedy against repression or wrongdoing was to dissolve the company, although the courts often used their fair powers to order takeovers rather than dissolve the company. The law allows a court to order a company to purchase dissident shares at “fair value” under certain circumstances. The shareholder must bring a lawsuit against the company and take one of the following actions: (a) deadlock of the director; (b) that the directors of the company have acted or act in a manner that is illegal, oppressive or fraudulent; (c) Shareholder standstill; or (d) corporate waste.
Alternatively, upon commencement of such action, the Company or any other shareholder may respond with an option to purchase and acquire all of the shares of the shareholder who initiated the proceeding. The Company may make this choice at any time within 90 days of filing a proceeding and the Company must state in writing the amount it will pay for the shares. In the event of a dispute about the value of the shares, a court can usually decide the question with the help of valuation experts.
The next post in this series discusses the similarities and differences between “fair value” and “fair value” and the discounts that can be used to determine the value of an interest in a pharmacy.
Below are some early, but still relevant, posts on buying and selling cannabis businesses in Oregon:
For posts that dig deep into scoring, here are a few more: