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Breaking Up is Hard to Do Cannabis companies can head off partnership disputes before they happen—and lay the groundwork to better manage any tussles that do arise By Omar Sacirbey

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artnership disputes—whether between business partners or owners and investors—continue to be an ugly feature of the cannabis industry. Such conflicts can be costly and time-consuming; plus, they can sink a cannabis company. But there are steps companies can take to head off disputes—or at least manage them more effectively when they do happen, which is all too often. “In terms of litigation in the cannabis industry to date, the most common issue we probably see is partnership disputes,” said Cassia Furman, managing partner of Vicente Sederberg’s California Practice Group. For any business, a fight between partners can divert millions of dollars in financial resources into legal fees. That is especially true with cannabis companies. The industry is young and rife with inexperienced operators as well as friend-and-family investors who might neglect to draft documents governing their business relationships. In addition, many legal operators are former illicit-market players who didn’t draw up contracts before legalization because they didn’t want to leave a paper trail for law enforcement. Now, these owners have carried that habit over into the legal market. To avoid legal pitfalls, marijuana operators can take a variety of steps to mitigate the risk of and damage from partnership disputes. Those steps boil down to: • Vetting partners and investors beforehand. • Putting ownership, investments and other business relationships on

Katy Young

paper through formal contracts and agreements. • Having attorneys review those documents to ensure they don’t contain terms that could be detrimental.

MANY DIFFERENT CONFLICTS Disputes typically 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 happen when the company is doing poorly, prompting the partners to start fighting and blaming each other. Conversely, disputes can come up when the company is making lots of money and partners get greedy and try to push others out. Young said it is also important to recognize the types of personalities and situations that can give rise to conflicts. One problem she often sees is when startup marijuana business owners overpromise the amount of money investors will earn. These investors often are friends and family, and the owner ends up owing too much money to too many people.

Another common situation is what Young calls the “absentee financier.” In this case, a financier might give a grower a large sum of money to purchase a greenhouse. Next, the investor gives the marijuana operator—who often has relatively little business experience—control of the bank account, like any other company owner. The investor takes their “eyes off the ball” for several weeks or months—only to return and find the bank account is empty and the cultivator has only excuses to show for it: The crop was stolen, for example, or bad weather damaged the plants. In other cases, Young said, partners neglect to write contracts or agreements when they tap friends and family for loans or investments, complicating the settlement of any disputes that develop. Another problem is mismatched personalities—for example, one partner funds a venture and the other puts in sweat equity and works much harder. In the end, the funder feels more entitled because of the financial risk he or she took. By contrast, the other partner feels more entitled because he or she worked much harder. “Oftentimes, we see partnership disputes arise out of half-baked partnerships, operating agreements or bylaws and shareholder agreements that do not appropriately encapsulate the relationship,” said Garrett Graff, managing partner at the Hoban Law Group in Denver.

PUT IT IN WRITING Such partner disputes can be relatively easy to avert—or at least be made easier

February 2021 | mjbizdaily.com 49

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Marijuana Business Magazine February 2021  

The cannabis industry's first printed trade magazine, featuring in-depth trend pieces and profiles. Print subscriptions are available for fr...

Marijuana Business Magazine February 2021  

The cannabis industry's first printed trade magazine, featuring in-depth trend pieces and profiles. Print subscriptions are available for fr...

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