All posts by Justin A. Santarosa

Canadian Securities Regulators Signal Increased Scrutiny for Cannabis M&A Disclosures

On November 12, 2019, the Canadian Securities Administrators (CSA), the organization that oversees securities regulations in the 10 Canadian provinces, released Multilateral Staff Notice 51-359 Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry (the “Guidance”). The Guidance specifically relates to the disclosures required in merger and acquisition transactions. The CSA expressed concern over the perceived inadequate transparency relating to the cross-ownership of financial interests involved in such transactions.

The rapid growth of the cannabis industry and the heightened pace of mergers and acquisitions has resulted in many cannabis companies and their directors and executive officers having a higher than usual crossover of financial interests. Often times these interests are intertwined within various management companies, leasing companies, real estate companies and across numerous license holders, as well as interests in investment advisory services entities and other transaction service providers that are receiving compensatory transaction fees.

The Guidance reiterates that in the disclosure document filed in connection with the transaction, the acquiror and/or the acquiree should disclose all relevant and material the cross-ownership of financial interests held by either by the acquirer, the acquiree, or either of their directors or executive officers.

“Investors need to understand the conflicts of interest that could arise when issuers have crossover of financial interests, because those conflicts could have implications for the possible M&A transaction,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers.  We would advise, to avoid potential shareholder litigation, that the disclosure should go beyond the Canadian disclosure requirements and adhere to the more stringent related party transaction disclosure required under U.S. securities laws as many of the cannabis companies have US shareholders or dual listings in the US.

The second issued raised by the Guidance is the determination of director independence as a result of such cross-ownership of financial interests. The CSA stated that they have, “observed instances where cannabis issuers have identified board members as being independent, without giving adequate consideration to potential conflicts of interest or other factors that may compromise their independence.”  Again, the cross-over relationships should be reviewed to make a full independent determination.

It is important for reporting issuers to review closely all disclosures made in connection with a merger and acquisition. As a result of the release of the Guidance, the review conducted by the reporting issuer and its counsel is more critical than ever.  The board of the reporting issuer should review closely all potential conflicts among its members and should consult with its code of business conduct and ethics to ensure that all procedures have been followed relating to conflicts of interest, as well as considering the jurisdiction rules of its shareholder base.

The importance of proper disclosures has been highlighted by a recent proposed class action lawsuits filed against Canopy Growth and Aurora Cannabis, each lawsuit alleging that the companies made false and misleading statements or withheld material information in their securities filings. While the lawsuit is not related to statements in connection with an M&A transaction, these lawsuits do highlight the importance of reviewing closely all disclosures made in US and Canadian securities filings.

By: Nanette C. Heide and Justin A. Santarosa

California Industrial Hemp Registration is Now Open

On April 30, 2019, the California Department of Food and Agriculture (CDFA) made available registration applications to cultivate industrial hemp. The CDFA’s approved regulations require, among other things, a prospective cultivator to register with the county agricultural commissioner where the cultivator is located and pay a $900 registration fee.

However, even though applications are now live, several counties throughout California still restrict or prohibit the cultivation of hemp. The CDFA has identified the following counties as restricting hemp cultivation: Amador, Calaveras, Glenn, Humboldt, Lassen, Marin, Mariposa, Mendocino, Merced, Modoc, Mono, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Bernardino, San Joaquin, Santa Barbara, Shasta, Sierra, Siskiyou, Sonoma, Tehama, Trinity, Tulare, Tuolumne, Yolo, and Yuba.

It remains unclear how these current regulations will be affected by the Agricultural Improvement Act of 2018 (2018 Farm Bill). Under the 2018 Farm Bill, the CDFA is required to submit its hemp-production plan to the United States Department of Agriculture (USDA) for approval but as of the date of this post the USDA has not issued regulations relating to that review. Additionally, it is unclear how this program will operate in the interim under the 2014 Farm Bill. We will continue to watch as this program develops alongside the USDA’s 2018 Farm Bill program.

Jennifer Fisher and Justin Santarosa

California Department of Public Health’s Re-Adopted Emergency Regulations

The California Department of Public Health (CDPH) is the state agency designated under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) as responsible for regulating cannabis manufacturing.

The CDPH issued emergency regulations for manufacturers in November 2017, and has now proposed readopting those regulations for another 180 days. Based on feedback from the public and stakeholders in the industry, the CDPH has proposed some changes to these regulations.

This blog post will highlight the changes to the CDPH emergency regulations and identify key issues for manufacturers. In separate posts, we will be describing the changes made by the California Department of Food and Agriculture and the California Bureau of Cannabis Control.

Changes to Emergency Regulations:

  • The CDPH has removed the distinction of A and M Licenses and now only requires one application and applicants will only have to pay one licensing fee. Previously you had to submit two applications and pay two separate licensing fees if you wanted to operate in the medicinal and adult-use market.
  • The readopted regulations have now incorporated the previously released shared-use facility regulations, which allow a manufacturing premises to be used my multiple businesses that take turns utilizing the space and equipment. This allows for operations similar to a commercial kitchen or agreements in which larger manufacturers offer space and use of equipment to smaller manufacturers.
  • The CDPH has removed tinctures from the definition of a product containing more than 0.5% alcohol by volume. However, tinctures cannot be sold in a package larger than two fluid ounces and shall include a calibrated dropper or other measuring device

The change to only a single application for both medical and adult-use is a welcome change for manufacturing businesses. Overall, the CDPH did not make significant changes to its regulations.

If you have any questions about the regulations, please contact Jennifer Briggs Fisher in our San Francisco office or Justin Santarosa in our Los Angeles office.

 

Jennifer Fisher and Justin Santarosa

Bureau of Cannabis Control’s Re-Adopted Emergency Regulations

The Bureau of Cannabis Control is the state agency designated under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) as responsible for issuing licenses to and regulating distributors, retailers, delivery-only retailers, microbusinesses, and testing labs.

The BCC issued emergency regulations in November 2017, and has now proposed readopting those regulations for another 180 days. Based on feedback from the public and stakeholders in the industry, the BCC has proposed some changes to these regulations.

This blog post will highlight the changes to the BCC emergency regulations and identify key issues for distributors, retailers, delivery-only retailers, microbusinesses, and testing labs. In separate posts, we will be describing the changes made by the California Department of Food and Agriculture and the California Department of Public Health. Those posts can be found here and here.

Changes to Emergency Regulations:

  • The BCC has removed the distinction of A and M Licenses and now only requires one application and applicants will only have to pay one licensing fee. Additionally, license fees have been reduced. Previously you had to submit two applications and pay two separate licensing fees if you wanted to operate in the medicinal and adult-use market.
  • A delivery employee may now complete multiple deliveries of cannabis goods if they are prepared by the retailer prior to the delivery employee leaving the licensed premises. The total amount of cannabis goods in the delivery vehicle may be up to $10,000, the previous limit was set at $3,000.
  • The definition of owner has been amended to specify that the chief executive officer and/or the members of the board of directors of any entity that own 20% or more of a commercial cannabis business will be considered “owners.”
  • The definition of financial interests has been amended to include “an agreement to receive a portion of the profits of a commercial cannabis business.” Commercial cannabis business and service providers will have to review their agreements and applications to determine if certain amendments will need to be made to include other people or businesses as having a “financial interest” in a commercial cannabis business. Interestingly, this change was not made in the definition of “financial interest” under the CDFA and CDPH regulations.
  • Retail stores may not sell or deliver cannabis goods through a drive-through or pass-out window and sales cannot be made to people within motor vehicles.
  • License applications must now include:
    • Cannabis waste procedures; and
    • Delivery procedures, if applicable.

These changes show that the BCC and the other regulatory agencies are being responsive to their stakeholders and while not all changes are positive, we believe this is a step in the right direction for cannabis businesses in California.If you have any questions about the regulations, please contact Jennifer Briggs Fisher in our San Francisco office or Justin Santarosa in our Los Angeles office.

Justin Santarosa

California’s Online Licensing System is Now Active

California took the next big step in establishing its legal cannabis market. It officially launched its online licensing system and is now accepting applications for commercial cannabis licenses for retailers, distributors, microbusinesses, testing laboratories and cannabis events.  The online system can be used by applicants to easily apply for a temporary and annual commercial cannabis license, submit payments and track the status of an existing application.

All business owners applying for a medical and/or adult use cannabis business license must be registered and have an active account on the licensing system. In addition, those individuals or companies that are considered “owners” of the applicant business  will need to register as well in order to submit the necessary information that is required to be disclosed by each “owner.”

The link to the online licensing system can be accessed here: http://online.bcc.ca.gov/.

Cultivators must apply for a cultivation license with the California Department of Food and Agriculture’s CalCannabis Cultivation Licensing program. CalCannabis expects to launch its online application process  later this month. The California Department of Public Health is currently accepting paper applications by mail or email for manufacturing licenses.

Jennifer Fisher and Justin Santarosa

How California’s Emergency Cannabis Regulations Affect Dispensaries

On November 16, 2017, the California Bureau of Cannabis Control published emergency regulations governing both the medical and the adult-use cannabis industries in California. Below are the highlights of the emergency regulations and how they may impact adult-use and/or medicinal retailers, or dispensaries as they are more commonly known.

This post is the third in a series of entries on the Duane Morris Cannabis Industry blog that will provide an analysis of the new California emergency regulations. If you have any questions about the regulations, please contact Jennifer Briggs Fisher in our San Francisco office or Justin Santarosa in our Los Angeles office.  Continue reading How California’s Emergency Cannabis Regulations Affect Dispensaries

Jennifer Fisher and Justin Santarosa

The Impact on Growers – California’s Emergency Cannabis Regulations

Last Thursday, California’s three cannabis licensing agencies published emergency regulations to govern both the medical and adult-use cannabis industry in California under the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) (Bus. & Prof. Code 26000 et seq.).

The California Department of Food and Agriculture (CDFA), through its CalCannabis Cultivation Licensing Division (CalCannabis), is the licensing authority for all cannabis cultivators in California. CalCannabis is also developing the track-and-trace systems that will record the movement of cannabis through the supply chain from cultivation to sale. Below are the highlights of the CDFA’s emergency regulations and how they may impact growers.

This post is the second in a series of entries on the Duane Morris Cannabis Industry blog that will provide an analysis of the new regulations. If you have any questions about the regulations, please contact Jennifer Briggs Fisher in our San Francisco office or Justin Santarosa in our Los Angeles office.  Continue reading The Impact on Growers – California’s Emergency Cannabis Regulations

Jennifer Fisher and Justin Santarosa

California Releases Emergency Cannabis Regulations

On November 16, 2017, California’s three cannabis licensing agencies published emergency regulations to govern both the medical and adult-use cannabis industry in California under the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) (Bus. & Prof. Code 26000 et seq.). The regulations published by the Bureau of Cannabis Control, the Department of Food and Agriculture and the Department of Public Health cover, among other things, cultivating, manufacturing, testing, growing, packaging and potency requirements.

Below are highlights of the emergency regulations. This post is the first in a series of entries on the Duane Morris Cannabis Industry blog that will provide an analysis of the new regulations. If you have any questions about the regulations, please contact Jennifer Briggs Fisher in our San Francisco office or Justin Santarosa in our Los Angeles office.  Continue reading California Releases Emergency Cannabis Regulations