General – Page 25 – Cannabis Industry

November 25, 2019 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

November 20, 2019 by Duane Morris

Regulatory Uncertainty Hangs Over Production of Industrial Hemp

Duane Morris Partner Frederick Ball is quoted in the Agri-Pulse article “Regulatory Uncertainty Hangs Over Production of Industrial Hemp.”

Nearly a year after the 2018 farm bill legalized industrial hemp production, the business community continues to seek answers to questions about testing and marketing of products derived from the crop, the commercial potential of which has sparked interest throughout the country. […]

Rick Ball, a lawyer with Duane Morris in Boston, said on the sidelines of the FDLI meeting that he has “no clue” when FDA might take action.

Ball said regulatory confusion is stoked in some cases by different rules in different states. In Massachusetts, for example, farmers were left holding their hemp after the state followed FDA and said CBD cannot be used in foods or dietary supplements or marketed with health claims.

“They lost a huge market for their product,” Ball said. […]

To read the full article, visit the Agri-Pulse website (subscription required).

November 19, 2019 by Brad A. Molotsky

NJ Legislators Opt to allow Voters to Decide on Cannabis Legalization in NJ instead of Legislating such a Change – Brad A. Molotsky, Esq. – Duane Morris LLP

New Jersey’s top lawmakers have decided to let voters decide on legalization of cannabis during the 2020 presidential elections.

The constitutional amendment introduced today, November 18, 2019, by Senate President Stephen Sweeney and Senator Nicholas Scutari would legalize the use of recreational marijuana for anyone at least 21 years of age, and establish a Cannabis Regulatory Commission to oversee the new market.

The amendment does NOT detail the taxation rate, which was $42 an ounce in the original bill. It is also not clear if the commission will have 5 members, like the original bill.

According to NJBiz., Gov. Phil Murphy and legislative leadership long-resisted pursuing legalization via a ballot question because any, inevitable, changes to the program would have to go before voters in yet another ballot referendum.

“We made further attempts to generate additional support in the Senate to get this done legislatively, but we recognize that the votes just aren’t there,” reads the joint statement from Sweeney, D-3rd District, and Scutari, D-21st District.

To appear on the 2020 ballot as a constitutional amendment, both houses would need to pass the measure by a super-majority by the summer, or they would need to pass it 2x in both houses by a simple majority for 2 years in a row.

Just hours earlier, several progressive and social justice groups made a plea to legislative leadership to push through a legalization bill, pointing to a growing increase in low-level cannabis offenses which have disproportionately affected people of color.

November 11, 2019 by Duane Morris

“Cannabis 206” Webinar Replay Available

A video replay of the webinar “Privacy and Data Protection in the Cannabis and Hemp Industries” is available to view.

November 8, 2019November 11, 2019 by Duane Morris

“Overview of New Federal Rules on Hemp Production” Webinar Replay Available

A video replay of the webinar “Overview of New Federal Rules on Hemp Production and Q&A” is available to view.

October 29, 2019 by Duane Morris

Neville Bilimoria Quoted on FDA Rules in Cannabis Era

Duane Morris partner Neville M. Bilimoria is quoted in the Law360 article, “CBD Rules In Limbo As FDA Grapples With New Cannabis Era.”

Hemp may have been legalized less than a year ago, but CBD derived from it is already on its way to becoming a multibillion-dollar industry. However, sales of everything from CBD gummies to lattes are occurring in a legal gray area as the U.S. Food and Drug Administration struggles with regulating the largely unstudied ingredient. […]

“This is a watershed year for the FDA and its coming to grips with the increasing demand from the consumer public over marijuana, cannabis, CBD, hemp. It’s trying to catch up to what the consumers are touting as being therapeutic uses for CBD and THC,” Mr. Bilimoria said. “It’s basically saying, ‘Wait, everybody slow down. We’re the FDA. We rely on science before we can approve any uses and regulate any uses of cannabis or CBD.'” […]

Mr. Bilimoria said he can’t blame the FDA for “taking it slow,” but said doing so is frustrating when CBD is already all over store shelves. […]

To read the full article, visit the Law360 website (subscription required).

October 29, 2019March 26, 2020 by Seth A. Goldberg

USDA Issues Regulatory Framework for Hemp Production Under 2018 Farm Bill

The long awaited regulations establishing a regulatory framework under the 2018 Farm Bill passed last December were issued today (10/29/19). An Interim Final Rule will be published in the Federal Register later this week, which will make the U.S. Domestic Hemp Production Program effective. As explained in the Interim Final Rule: “The program includes provisions for maintaining information on the land where hemp is produced, testing the levels of delta-9 tetrahydrocannabinol, disposing of plants not meeting necessary requirements, licensing requirements, and ensuring compliance with the requirements of the new part.” USDA has published the Interim Final Rule and Guidelines for Sampling and Guidelines for Testing pursuant to the Interim Final Rule on its website.

Among other key provisions, the new regulatory framework provides for USDA’s approval of State and Tribal Land hemp programs established under the 2018 Farm Bill, which will end debate as to whether hemp activities in a State or Tribal Land receiving such approval are federally lawful. To be approved, those plans will have to contain stringent requirements for testing the THC content of hemp to ensure it does not meet the definition of marijuana, and contain procedures for the enforcement of violations of the State or Tribe’s hemp program. Importantly, the regulatory framework provides for USDA’s granting of hemp production permits in states and territories that do not establish hemp programs for approval by USDA.

Duane Morris attorneys will be publishing a more fulsome review of the Interim Final Rule. Please visit our Alerts and Updates webpage, or our cannabis industry webpage for that information.

October 23, 2019 by Duane Morris

“Cannabis 205” Webinar Replay Available

A video replay of the webinar “Cannabis 205: What Big Global Companies Should Know About Entering the Cannabis Space” is available to view.

October 17, 2019December 4, 2019 by Duane Morris

Michigan Court Issues Preliminary Injunction Prohibiting State’s Emergency Ban of Flavored Nicotine Products From Taking Effect

By Joe Pangaro and Jessica Linse

On September 18, 2019, Michigan became one of the first states to impose a ban on flavored e-cigarettes. The Michigan Department of Health and Human Services (“MDHHS”) issued emergency regulations that stated, in part, that a retailer shall not “[s]ell, offer for sale, give, transport, or otherwise distribute, nor possess with intent to sell, give, or otherwise distribute a flavored nicotine vapor product.” The ban went into effect immediately upon the release of the emergency regulations and was supposed to last for six months.

Shortly thereafter a local vape shop owner filed suit in state court against MDHHS, Governor Gretchen Whitmer, and the State of Michigan seeking a preliminary injunction to prevent the emergency rules from going into effect. See Marc Slis, et al. v. State of Michigan et at., Nos. 19-000152-MZ, 19-000154-MZ (Mich. Ct. Cl., Oct. 15, 2019). At the preliminary injunction hearing, one plaintiff testified the emergency rules forced him to “shutter[] his business and that his customers have been obtaining their flavored vaping products from Wisconsin.” Id. at 7. Another presented evidence that the emergency rules “ban plaintiff from using its tradename and branding.” Id. The court found both harms constituted “irreparable harm” necessary for preliminary injunction.

The court also found the Plaintiffs established a likelihood of success on the merits of their claims, because the MDHHS rules were procedurally invalid under Michigan law. Id. at 8. Specifically, an agency must comply with standard procedures for the promulgation of new rules except in “emergency” situations, and the Court did not find there was a “genuine emergency” that warranted circumventing the standard rule-making process with respect to flavored nicotine vaping. “The plaintiffs have convinced the Court that defendants’ proffered reasons for the emergency declaration have fallen short. It is not enough under [Michigan law] for DHHS to merely identify a problem.” Id. at 10.

The court also considered the potential harm to the public that would result from allowing the ban to be enacted. After recognizing “compelling interests on both sides of the issue,” the court cited witnesses for the Plaintiffs that testified about their improved health after switching from traditional tobacco products to e-cigarettes. “Thus, plaintiffs have presented evidence that at least some segment of the population will be harmed by the vaping ban.” Id. at 14. Ultimately, after carefully weighing all factors pertinent to granting a preliminary injunction, the court concluded the Plaintiffs carried their burden, and issued a preliminary injunction preventing Michigan’s emergency rules from going into effect.

The Michigan ban of flavored e-cigarettes is significant because many other states around the country have since enacted similar bans, either through emergency regulation or executive order. These states include Rhode Island, Oregon, New York, Washington, Missouri and Montana, and the city of Los Angeles. Each of these bans may face similar challenges in the near future, and this court’s decision to block the emergency rules, which is in line with another recent ruling by a District Court in Indiana, indicate that such challenges may be successful.

October 7, 2019 by Duane Morris

Duane Morris Named One of America’s Top Trusted Corporate Law Firms

Duane Morris has been named one of America’s Top Trusted Corporate Law Firms by Forbes.

The publication writes:

More than 13 million attorneys practice at more than 400,000 law firms in the U.S., according to the American Bar Association, and those firms are becoming increasingly specialized. … Many firms have been expanding into new areas of law necessitated by the emergence of technologies such as blockchain and of state laws legalizing cannabis use. …

[Duane Morris] has a growing and strong focus on the legal cannabis industry, partnering with the American Trade Association of Cannabis and Hemp and representing cannabis companies in one of the first public cannabis industry mergers, a $640 million deal.

For more information, visit the Forbes website.