MJBizMag February 2021 - 49

Breaking Up is Hard to Do
Cannabis companies can head off partnership disputes before they happen-and
lay the groundwork to better manage any tussles that do arise
By Omar Sacirbey
P
artnership disputes-whether
between business partners or
owners and investors-continue
to be an ugly feature of the cannabis
industry. Such conflicts can be costly and
time-consuming; plus, they can sink a
cannabis company.
But there are steps companies can take
to head off disputes-or at least manage
them more effectively when they do
happen, which is all too often.
" In terms of litigation in the cannabis
industry to date, the most common
issue we probably see is partnership
disputes, " said Cassia Furman,
managing partner of Vicente Sederberg's
California Practice Group.
For any business, a fight between
partners can divert millions of dollars in
financial resources into legal fees. That is
especially true with cannabis companies.
The industry is young and rife with
inexperienced operators as well as
friend-and-family investors who might
neglect to draft documents governing
their business relationships.
In addition, many legal operators are
former illicit-market players who didn't
draw up contracts before legalization
because they didn't want to leave a paper
trail for law enforcement. Now, these
owners have carried that habit over into
the legal market.
To avoid legal pitfalls, marijuana operators
can take a variety of steps to mitigate
the risk of and damage from partnership
disputes. Those steps boil down to:
* Vetting partners and investors
beforehand.
* Putting ownership, investments
and other business relationships on
paper through formal contracts
and agreements.
* Having attorneys review those
documents to ensure they don't
contain terms that could be
detrimental.
MANY DIFFERENT CONFLICTS
Disputes typically arise at two points
in a business relationship, said Katy
Young, managing partner at Ad Astra
Law, a cannabis-focused law firm in San
Francisco.
Disputes can happen when the
company is doing poorly, prompting the
partners to start fighting and blaming
each other. Conversely, disputes can
come up when the company is making
lots of money and partners get greedy
and try to push others out.
Young said it is also important to
recognize the types of personalities and
situations that can give rise to conflicts.
One problem she often sees is when
startup marijuana business owners
overpromise the amount of money
investors will earn. These investors often
are friends and family, and the owner
ends up owing too much money to too
many people.
Another common situation is what
Katy
Young
Young calls the " absentee financier. " In
this case, a financier might give a grower
a large sum of money to purchase a
greenhouse. Next, the investor
gives the marijuana operator-who
often has relatively little business
experience-control of the bank account,
like any other company owner.
The investor takes their " eyes off the
ball " for several weeks or months-only to
return and find the bank account is empty
and the cultivator has only excuses to
show for it: The crop was stolen, for example,
or bad weather damaged the plants.
In other cases, Young said, partners
neglect to write contracts or agreements
when they tap friends and family for
loans or investments, complicating the
settlement of any disputes that develop.
Another problem is mismatched
personalities-for example, one partner
funds a venture and the other puts in
sweat equity and works much harder. In
the end, the funder feels more entitled
because of the financial risk he or she
took. By contrast, the other partner feels
more entitled because he or she worked
much harder.
" Oftentimes, we see partnership
disputes arise out of half-baked
partnerships, operating agreements or
bylaws and shareholder agreements
that do not appropriately encapsulate
the relationship, " said Garrett Graff,
managing partner at the Hoban Law
Group in Denver.
PUT IT IN WRITING
Such partner disputes can be relatively
easy to avert-or at least be made easier
February 2021 | mjbizdaily.com 49
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MJBizMag February 2021

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