Minnesota's state Court of Appeals has upheld criminal charges filed against two cannabis company officers accused of smuggling medical marijuana from Minnesota to New York.
The appellate decision Monday rejected the ex-Vireo Health officers’ bid to have the charges tossed, clearing the way for a potential trial.
The two former officers of Vireo, which has New York dispensaries in White Plains and Johnson City, are accused of using the company's armored vehicle to illegally transport medical cannabis oil from Minnesota to New York in December 2015.
The case is focused on whether state laws sufficiently addressed smuggling medical marijuana across state borders.
Sales of recreational marijuana in Maine are on track to begin next March, and the state is looking to learn from mistakes that other states have made in legalizing the drug.
The state’s voters chose to legalize adult use marijuana in November 2016, and months of delays and political squabbles have caused the implementation of rules to drag on. But the state now has draft rules in hand and a road map to approving them.
The final rulemaking push can help avoid problems such as overproduction, corporatization of the marijuana industry and overconsumption by users that have slowed other states, said Democratic Rep. Teresa Pierce of Falmouth, who sits on the state’s marijuana advisory commission. She said Maine can protect smaller growers and retailers in a way that Colorado, an early adopter of legalization, has not.
The cannabis industry investors, business owners and legalization advocates had met before to discuss the legal and regulatory headaches of operating in a world that’s licensed and regulated by states but illegal under federal law.
But what made those at Tuesday’s gathering describe it as a public relations milestone was the location: inside the Capitol complex.
Ohio Republican Rep. David Joyce, one of several members of Congress who dropped in throughout the day, said it was significant because people still have “the wrong idea” about the industry.
As rapid market consolidation continues in the cannabis industry, it is imperative that potential sellers understand how a purchase price will be paid by a buyer in order to negotiate the terms of a deal. This includes understanding how stock is paid, as well as how a buyer might use a clawback or holdback, according to Sabas Carrillo, CEO of Adnant Consulting.
Publicly traded companies may pay for an acquisition in a mixture of cash or stock, or it could be an all-stock transaction, which, for the seller, is essentially like writing a check to invest in the buyer’s company, Carrillo says.
“You have to understand how that benefits you or hurts you when making the decision,” he says. “If you have 100-percent cash, for example, you’re likely to get a smaller purchase price. If you take 100-percent stock, you’re likely to get a little bit more for your company; however, there’s risk in taking stock because the price of the stock could go down. But in the same token, the price of the stock could go up. So, you need to understand that mix.”
Sellers should also understand how clawbacks and holdbacks can affect purchase price when a buyer is paying in stock.
When a buyer doubts the seller’s revenue claims, he or she could institute a clawback, which says that although the buyer will pay a certain amount for the assets, he or she reserves the right to “claw back” some of that purchase price should the actual revenue not meet the seller’s claim.
“Let’s say you represent that your dispensary does $5 million in revenue a year, but I’m in doubt of that,” Carrillo says. “So, I might say, ‘OK, if your dispensary doesn’t do $5 million this year—let’s say it only does $3 million—then I reserve the right to claw back $2 million from that $10-million purchase price.’ Realize that that means you’re tied into … that dispensary for at least the term of the clawback. So, if the term of the clawback is 12 months, then you’re tied to the dispensary actually doing those revenue targets [for 12 months].”
Similarly, a holdback allows a buyer to “hold back” a certain amount of the purchase price until the end of the term.
“I’m going to give you $8 million now, and I’m going to hold back $2 million in value until 12 months later or six months later, until whatever thing I doubt occurs,” Carrillo says.
When accepting stock, sellers should be careful when negotiating when they will receive that stock after the term of the clawback or holdback ends, he adds, as stock prices fluctuate.
“Let’s say I sold my dispensary for $10 million,” Carrillo says. “If I have a holdback—for example, let’s say I’m going to get $8 million in stock when the deal closes and I’m going to get $2 million 12 months later. If that $2 million in stock is issued on the day the transaction closes—let’s just say that’s Jan. 1, 2019— … and my perception is that stock value is going to go up in the next 12 months, it benefits me to have that stock issued on Jan. 1, 2019, and held in escrow. [This is] because, by December, the stock might be a lot higher, and while I am promised $2 million, I didn’t get the benefit of the increase of stock price throughout the year. Conversely, if my perception is that the stock price of the company is going to go down, then maybe I would rather wait until Dec. 31 to have my stock issued. I still get … my $2 million in value, but if the stock price is going up, I want that stock to be issued sooner and held in escrow than later and vice versa.”
There are other nuances relating to stock that must be carefully negotiated, as well, to ensure the seller actually receives the amount promised, Carrillo adds.
For example, there is a distinction between requesting $2 million in stock at some point in the future versus requesting the number of stock shares that is equivalent to $2 million.
“Let’s say, for example, that the publicly traded company that’s buying me, the stock price is $1,” Carrillo says. “So, on Jan. 1, when we close this transaction, I’m supposed to get $2 million in stock, and that means I get two million shares. So, in the agreement, if it says, two million shares, then when that stock is issued, regardless of what the stock price is, I’m getting two million shares. So, if on Jan. 1, I agree to receive two million shares and on that day the value of the stock is $1, it’s $2 million in value. But again, if I have this clawback or holdback and my shares are issued on Dec. 31, if the stock price has gone up, great, I get my two million shares and I benefit from the stock going up. If, conversely, the stock has gone down, I still get my two million shares, it doesn’t matter, but then the value is lower.”
Therefore, if a seller believes the stock price will go up, he or she should denote in the contract the number of shares received versus the dollar value. Conversely, if a seller believes the stock price will go down, he or she should denote the dollar value and not the number of shares.
“All of those little things should be thought about because you might sell your company for $10 million, but if you benefit from the upside of the stock, you can actually do way better than just your $10 million,” Carrillo says.
SeanPavonePhoto/Adobe Stock
Massachusetts Regulators Delay Canadian Acquisition of Sira Naturals
The Cannabis Control Commission is seeking more information from Cannabis Strategies Acquisition Corp. before approving the transaction.
The Massachusetts Cannabis Control Commission was all set to approve a Canadian company’s acquisition of Sira Naturals, but regulators pumped the brakes and called for greater scrutiny into the deal—and into similar deals moving forward.
In October 2018, Toronto-based Cannabis Strategies Acquisition Corp. announced that it would acquire Sira Naturals. The company trades on the Nasdaq, and its management team combined the Sira Naturals news with acquisitions of four other cannabis businesses in Nevada and Colorado. Cannabis Strategies Acquisition Corp. is a SPAC, which means that it leverages public investments for private equity transactions.
Sira Naturals holds vertically integrated licenses, and currently operates three dispensaries in the state.
The request to change ownership is a sensitive topic in Massachusetts and elsewhere right now, in light of rapid market consolidation and especially in light of a recent Boston Globereport on major companies asserting ownership of more than the allowable number of cannabis business in the state. Regulatory approval is needed to complete these M&A transactions in the cannabis space, and recent debates over the expanding scope of ownership for some multi-state operators has prompted questions about who’s moving into a particular state-legal cannabis market.
At its May 16 meeting, the state’s Cannabis Control Commission pushed back on Cannabis Strategies Acquisition Corp. During the debate over the recommendation to approve this transaction, commissioners decide to pursue even more records from the Canadian company.
Commissioner Shaleen Title said, “It’s in the public’s interest to scrutinize these transactions.”
She requested that the commission seek “all legal documents that address this transfers of ownership, whether public or not.”
Prior to the meeting, the commission’s leadership team had performed its required due diligence on the transaction and offered a recommendation to approve the deal.
“In this instance, I want to thank the staff,” she said. “I believe that you’ve gone above and beyond to review this transaction, to review hundreds of documents. I have full confidence in the staff, and I appreciate it. But as I look ahead, as this is the first time we reviewed a transaction like this, I’m thinking about establishing a fair and consistent process and I’m not sure that this is sustainable. The reason I’m focused on the process is because there is a long queue of these changes to be reviewed.”
The commission dug into what Title was looking for, pointing out that investor contracts and management agreements had already been requested. The group questioned what a “practical” request for legal documents—beyond what has already been released to the commission—would look like.
Chairman Steve Hoffman circumscribed Title’s amendment a bit, specifying that the commission would request all documents relevant to ownership, control and cap limitations. “We want these documents because we have specific issues or specific things that we’re concerned about and we want to make sure we’re comfortable with before taking a vote,” he said.
The other question became one of timelines: At what point does the process of regulatory scrutiny need to give way to a timely vote on the matter?
“We are not bound by any external deadline on this,” Hoffman said. “I think, however, in our decision-making, we should be cognizant that these deals do—some of them do have timelines, [and] that we will be causing economic impact if don’t approve or disapprove within a certain timeline.”
The commission delayed the vote on the change of ownership, and allowed Cannabis Strategic Acquisitions Corp. to return with more corporate documents within a week.
The commission will meet again May 30.
The commission also debated whether to bring in a third-party agency to probe these change-of-ownership acquisition deals.
Executive Director Shawn Collins, whose team oversees the due diligence process on changes of ownership, said that any third-party investigation into an acquisition would match the level of detail that his staff is already putting into the work. And the investigations into changes of ownership are just one portion of those staffers’ workload, which also includes facility inspections and application evaluations. He did say, however, that adding a layer of scrutiny would increase his team’s “bandwidth, scalability and the ability the turn around [investigations] faster.”
With an increasing pace of M&A moves around the cannabis industry, and with the Massachusetts Cannabis Control Commission already taking the lead on debating and scrutinizing those market forces, any lasting trends that emerge from conversations over ownership changes will be worth watching in all corners of the cannabis industry.
“For me, this is about fairness and consistency—not necessarily just this one,” Title said.
Legislative Map
Cannabis Business Times’ interactive legislative map is another tool to help cultivators quickly navigate state cannabis laws and find news relevant to their markets. View More
Melissa Schiller
Eric Sandy
