My minority partner came back years later and wanted money. what do I do?
In my practice, including several instances in the past six months, when the current partner came back to trouble the business operation, I once provided advice to the cannabis business owner, usually looking for some type of expenditure based on previous conversations or agreements. It was written on the missing napkin or envelope.
If you have not completed the cooperation agreement, then you are not uncommon
In a perfect world, business partners would agree to all their business terms, form an entity, sign an operating agreement, give everything to their lawyers, and unswervingly abide by their original agreement. I don’t practice law in a perfect world. From a legal point of view, business owners almost never do things in the “correct” order.
Your marijuana business usually develops organically, and no one wants to slow down and spend money to write things that you all agree on on paper. I get it. At the beginning, midstream, or end of the business, when the final sales are coming or the company is significantly changing its ownership structure, I have had dozens or even hundreds of conversations with business owners.
Ignoring your agreement won’t let them disappear
Usually, core cannabis business owners grant minority equity (such as stocks) to promising talents in the early stage of the enterprise because: (a) the company has almost no financial assets to provide other than equity, (b) equity may appreciate in value to recipients One reason to stay in the company and work hard for a long time.
Business disputes occur at all stages of the company’s business, so it is not uncommon for some of the minority shareholders to have disputes with core owners and leave, and they often fail to deal with the granted equity. The outgoing minority shareholders believe that the equity value of the cannabis company is not high, so they do not feel that they have missed anything when they exit. Major shareholders usually continue to operate the business, ignoring the absence of a certain person in the company’s cap table. This information is not always passed on to accountants for year-end tax reports or lawyers for record updates.
You issued securities. How to do?
When you offer debt, equity, or quasi-equity (such as options or convertible debt) to someone in your business in exchange for something of value (funds, intellectual property, other assets, or sweat), you issue SecuritiesAll state attorneys and securities departments take this seriously, and so does the Federal Securities and Exchange Commission (even for marijuana). If you provide and the recipient accepts and fulfills the obligation to earn minority equity, it constitutes a securities issuance.
Although the treatment of employee equity grants is different from that of external investors who put money into the cannabis business, the traps are similar. The most common way these types of transactions fail is when investors claim that they were defrauded because the company obtained something of value from the investor and the investor did not get their promise.
State attorneys sometimes add investigations that violate securities laws to investors’ fraud claims. The national labor department may participate in the distribution of equity grants as part of the compensation plan.
When cannabis companies issue securities, they usually need to submit regulatory documents (or at least one or two legal analyses). This is true in every state, but there are often declaration exemptions to eliminate these declaration obligations-so an analysis is required from the beginning.
For securities filings, the rule of thumb is that late filing is better than no filing, even after a few years. Your legal counsel can help you analyze compliance steps and risks.
Our company structure is completely different from five years ago. This is not fair!
The company may expand to include parent companies, subsidiaries, and related entities as they add licenses, assets, and other business partners. Long-lost business partners often reappear when they hear that the company or owner is about to enter into a major transaction that may bring a substantial return on their investment.
You can expect your profligate business partners to strive for the highest possible valuation for their ownership interests (of the entire enterprise), even if you think they are not entitled to large expenditures because they left the company a few years ago. Although this windfall may seem unfair, you need to deal with business partners, and the sooner you reach a negotiated purchase price, the better.
Negotiated settlement is almost always better than Fight in court even Hire one or more valuation companies Reach an agreement on the value of the ownership interest of the minority partners. Please also keep in mind that any potential purchasers throughout the company will require you to disclose any ownership-related disputes during the potential sales process, and if you have not resolved internal ownership matters, they will not be willing to proceed.
In the next article, I will discuss how to deal with valuation issues when trying to decide how to acquire a long-lost (and unpopular) minority partner who has recently resurfaced.