It is common in the cannabis industry for individuals to seek or have partial ownership and control over multiple potentially competing businesses. This happens for a few reasons. One reason is that many marijuana businesses are applying for competitive licenses in states where ownership structures need to be set in stone before the application can be filed. People join multiple application groups to increase the odds that at least one of their groups will succeed. Another reason is simply that this burgeoning industry is ripe with opportunities and entrepreneurs are reluctant to turn down good business prospects.
These conflict and potential conflict situations can present real risks, especially if all of the parties involved fail to think them through and then deal with them. We mostly see these situations give rise to conflict of interest issues and antitrust issues.
Conflicts of interest issues arise from the fiduciary duties that certain persons associated with a company owe to that company. In a corporation, directors and officers owe fiduciary duties, including a duty of loyalty, to the company, though shareholders generally do not. The duty of loyalty requires that fiduciaries not divert corporate assets, opportunities, or information for personal gain, or put their own interests ahead of the company.
When a corporate director or officer has an ownership stake in more than company with the same (or even similar) line of business, conflicts can naturally emerge. Imagine a scenario where an individual owns 33% of the shares and a spot on the board of directors in two different companies involved in producing marijuana. A local retailer calls this individual and says: “Our shelves are empty and we are willing to pay three times the market price for ten pounds of product.” There is a conflict no matter what the individual does, as that sales opportunity cannot be given in whole to both companies. Even if the conflicted owner tries to be fair and give half the sale to each of his companies, it would still mean depriving each of them of half of the opportunity. This sort of situation creates the potential for liability for the conflicted owner.
The limited liability company model complicates things even more. Corporate fiduciary law has developed over hundreds of years, but LLCs are relatively new, and each state treats them a little differently. A starting presumption is that managers of manager-managed LLCs and members of member-managed LLCs do owe a duty of loyalty to the company, and are thus bound by conflict of interest rules. Each LLC can treat conflicts of interest differently, based on what the members agreed to in the LLC operating agreement.
All of this and we haven’t even looked at the antitrust law issues yet. Antitrust is a huge and complicated field, way too big for this blog post, but one area of antitrust law deals with collusion and price-fixing. Company liability can emerge if companies in an industry are not competing. Groups of marijuana businesses with overlapping owners may be tempted to engage in collusion in an effort to keep buying prices low or selling prices high. This kind of collusion that creates a form of cartel is per se illegal. The ownership overlap between companies just makes it even easier to presume at least tacit price-fixing, even where that may not have been the case.
When you are in a situation where susceptible to a conflict of interest you are constantly at a liability risk. Usually at the end of our posts, we like to include some specific solutions for resolving the issues we have raised, but that is very difficult here because the issues are so complicated and so varied.
The safest thing you can do is to have a financial interest in only one marijuana business if you have any decision-making or operations control over that business. If you cannot resist being involved in multiple cannabis businesses, you should, at minimum, carefully plan out how you plan to do that while staying clear as best you can of any conflicts and antitrust violations, all while being absolutely up front with all of your businesses about your split loyalties.