Last week, I wrote on Oregon cannabis company acquisitions, and the types of deal structures these transactions tend to follow. I mentioned that before a transaction is consummated, but after discussions have commenced, the purchasing entity will typically discuss its plans with counsel. The lawyer will then draft a letter of intent or a term sheet to present to the target company. If the target company accepts outright, the transaction will proceed. If the target company does not accept outright (more common), it will submit proposed revisions.
Term sheets take many forms, but in a basic sense a term sheet describes the terms of the acquisition at hand. Because each transaction is a snowflake, each term sheet is also unique and must be carefully considered and prepared. Sometimes, the parties will skip the term sheet and simply proceed to the transaction in an attempt at “efficiency.” We strongly advise against this: it invites a substantial risk of misunderstanding as to which documents will follow, and when, and may even cause confusion as to deal points themselves.
Here is a basic list of items for inclusion in any term sheet for an Oregon cannabis company acquisition:
Binding vs. non-binding provisions. As a general concept, a well written term sheet will be organized by binding and non-binding provisions. The binding provisions will include items like non-disclosure, exclusivity, jurisdiction, and choice of law. The non-binding provisions will include the unique deal point items, such as purchase price, payment terms and collateral agreements (e.g. consulting agreement, non-compete, lease or land sale contract, etc.). When a non-binding provision is misplaced into the “binding” category, or vice versa, both buyer and seller can expose themselves to serious legal risk.
Nature of acquisition. The term sheet should clearly lay out whether the transaction is an asset sale, stock sale or merger, and whether the purchase price will be paid via cash, debt, equity swap, or other method. This portion of the document should also detail whether the buyer will proceed in its own name, or through a newly created entity.
Liabilities. In nearly all acquisitions, the purchaser will assume certain liabilities of the seller. These liabilities may include everything under the sun related to seller, or liabilities may be limited to select items, like assignable contracts. If specific liabilities are known at term sheet preparation, they should be listed, perhaps on a separate schedule.
Indemnification. Limitations on both seller and buyer liability can be a heavily negotiated portion of any term sheet. The term sheet should deal with any potential claim that may arise out of the parties’ pending agreements. It should also address claims existing prior to the transaction, the possibility of breaches of representations and warranties, issues of title to assets, tax obligations, employee benefits, claims arising out of marijuana’s status as a controlled substance, etc.
Employment agreements. Every term sheet should deal with the seller’s employees. Will they stay, or will the seller be required to fire them? What happens with regular employees versus executives? When can employees be apprised of the transaction? Failure to address employment can cause serious headaches for both parties.
Conditions to closing (contingencies). This list may be long and varied, and include items from the acquisition of third-party financing, to approvals by the shareholders and/or directors of the purchasing and selling entity. The satisfactory completion of due diligence by the parties is always a crucial item, and in the cannabis context, licensing (see below) is a critical issue.
Marijuana licensing. Like other adult use states, Oregon requires its cannabis companies to maintain state licensure. In certain areas, a local license may also be required. The administrative protocol for changes in license ownership can be complex and time-consuming, and may take on a unique character, depending on the type of acquisition. The licensing update or transfer protocol must be carefully thought through and delineated in the term sheet.
If you made it this far, congratulations; but please note that the above list is not at all exhaustive. There are many nuances to a letter of intent or term sheet beyond the deal points highlighted here. Once a term sheet is negotiated and signed, the parties can move into the formal due diligence phase mentioned above, and ultimately, to closing.