MJBizMag February 2021 - 50

Limiting Your Liability
to settle-without having to go through
litigation if the parties formally record
their relationships on paper through
investment agreements, loan agreements,
operating agreements, shareholder
agreements or company bylaws.
" At their heart, partnership disputes
are contractual disputes, " Young said.
Those documents govern the
relationships the company has with its
owners and shareholders. If those terms
are breached, a lawsuit could follow.
Without the documentation, individuals
and the business itself are unprotected,
Young said.
But many groups fail to create written
contracts-or, when they do, the
contracts are often poorly executed.
" We're often dealing with disputes that
have very little paper evidence, " Young said.
When operators do have the foresight
to have contracts drafted, they often do
it superficially. For example, they will
try to draft legal documents with the
help of web-based tools or templates.
But without an attorney's expertise, such
a document can omit critical terms,
leaving parties to the contract without
legal protections found in professionally
drafted documents.
Furman stressed that partnership
disputes aren't just an early stage-company
issue. They can come up in more mature
and growing companies, too.
" You're going to need to raise capital
to scale, which is going to involve
contractual obligations with the lender
or investor, " Furman said. " Expanding
in other states can also mean connecting
with new partners-and that is another
set of contracts. "
DON'T FEAR CONTRACTS
State-legal cannabis business operators
shouldn't fear contracts being used
against them by federal authorities.
Rather, marijuana business owners
should view contracts as a shield. The
more seriously a business owner takes its
contracts-and the more competent the
lawyer who drafts them-the stronger
the shield will be.
" Have a voice in it. Be active. Hire
a lawyer who is knowledgeable about
local and state regulations, " Young said.
" Never enter a contract unless you've had
a lawyer look at it. "
Attorneys stressed that disputes
turn unwieldy and ugly when there
aren't well-constructed agreements that
govern ownership and how assets will
be distributed when a partner exits the
business, among other situations.
" It's important to hire a really good
transactional lawyer to help you form
your corporation right in the first place, "
Young said.
Indeed, dealing with these issues now
can save tens of thousands of dollars in
litigation later, depending on whether
you're working with a boutique law office
or a national law firm. And that's not
counting additional, costly expenses such
as gathering evidence to bolster your
case.
" If there is evidence scattered all over
the internet that proves investments or
loans or expenses you've incurred, it
costs money to get vendors to retrieve
that information and pay paralegals to
put it together. It's usually five or six
figures, " Young said.
Furman advises clients to talk about
the relationship that they're forming and
what they want to get out of it before
actually committing to a definitive
agreement.
" Come up with a detailed term sheet
and actually find out if there is a meeting
of minds with either the investor or the
white-label relationship that you're trying
to enter it through, " she said.
Beyond that, official documents such
as operating or shareholder agreements
50 Marijuana Business Magazine | February 2021
can help push partners to consider important
details that can make any future
breakup less harmful to the business and
the individual parties.
" Not only does it set the legal
parameters for how to conduct and, if
needed, unwind the business, but it also
forces parties to think about term sheets
and where they might be in a year or
two if the company is successful, or if
the company is not successful. Have
some of those discussions at the outset, "
Furman added.
" You could do all sorts of diligence on
your partners, and that's always helpful.
But it's difficult to have that crystal ball
as a business owner to know how the
relationship is going to develop until
it's actually tested. So, protecting your
interests with contracts is certainly a
recommended protection. "
FACTORS TO CONSIDER
Graff said scores of issues must be
considered in any agreements. These
issues include:
* Voting rights-such as how much
do votes count for, and are they per
person or per share?
* The provisions governing a
partnership or company's
dissolution. If one partner or
shareholder wants to sell, does he
or she face restrictions governing
the terms of the sale or the
potential buyer? The other partners
or shareholders might not want
shares or ownership interests
transferred to a personality
that doesn't mesh with the
remaining team.
When drafting agreements, Graff
said, lawyers should consider how the
partners are working in the present and
anticipate potential scenarios should they
not work well down the road.
" Those are tough conversations to have
when the going is good and everyone
is still in that honeymoon phase, " Graff
said. " Of course, it becomes far more
subjective and emotional when you're in
an actual dispute. "

MJBizMag February 2021

Table of Contents for the Digital Edition of MJBizMag February 2021

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