Buying a cannabis business doesn’t come in a matter of days, and transactions fall apart for a variety of reasons, as we discussed in Part 1 of this blog series that focuses on the buy side of a cannabis M&A transaction. In this part 2, we focus on the regulatory environment and discuss concepts that first-time buyers and their lawyers should be aware of.
Navigation through the illegality of the federal government
Marijuana remains a Schedule I controlled substance under the US Federal Controlled Substances Act. Many states have passed laws and legal frameworks that allow the cultivation, processing, manufacture, and retail sale of marijuana within their borders.
However, the acquisition agreements, beginning with the term sheet (or letter of intent) and the law firm’s engagement letter, should clearly recognize the illegality of marijuana under federal law. They should also contain provisions that relate to future changes, positive or negative, in applicable laws and regulations (and their uneven enforcement) that may defeat the entire purpose of the transaction.
Do you deal with marijuana or hemp?
The Agriculture Improvement Act of 2018 (the “2018 Farm Bill“) Removed” hemp “from the definition of” marijuana, “and now hemp can generally be viewed as a commodity, much like any other agricultural culture. Because of hemp’s affinity for marijuana, the 2018 Farm Bill also directed the USDA to develop a national hemp regulatory structure, giving each state and tribe the leeway to develop their own hemp growing plan for approval by the USDA.
Since the term cannabis can refer to both marijuana and hemp, it is important to understand whether the acquisition target is marijuana, hemp, or both. As a rule, a target company specializes in one thing or the other.
While a hemp commercial is far less of a problem than a marijuana acquisition, many of the considerations in this blog series should be kept in mind when making a hemp acquisition to ensure that the target company’s businesses are clearly delineated and adhered to. We’ll delve deeper into this in our due diligence posts and in the representations and warranties sections of the transactional documents.
Can You Really Buy This Company?
Next, the buyer needs to determine what type of cannabis license will be obtained. Some states allow vertical integration into the industry – from plant genetics to retail sales – while other states like Washington prohibit all or part of vertical integration.
Other states may impose restrictions on the number of licenses that can be held in order to promote social justice or to avoid dominance by a single company or a small group of companies (antitrust concerns). These states may also restrict the types of contracts that can be entered into between licensed companies in an attempt to promote a freer and more complete marketplace among licensed companies.
Potential acquirers from another jurisdiction should be aware of the regulatory restrictions in the country of destination. State laws and regulatory systems vary widely between state borders, and you cannot reasonably determine the contours of a state’s marijuana market just by looking at the state’s political environment.
What do we do now?
In the following post, we’ll dive into these parts of a cannabis acquisition:
- Preparing to represent a cannabis customer for the first time
- Letter of intent and transaction structuring
- Perform due diligence
- The transaction documents
- First closing and final closing