The Role of a Lawyer in Cannabis Deals

16 Jan The Role of a Lawyer in Cannabis Deals

From startups to multi-state operators, most cannabis businesses will engage legal counsel at some point. All of these companies – but especially smaller ones or less experienced ones – need to grapple with the question of what the role of a lawyer in cannabis deals will be. This can be a difficult question to answer. We’re here today to give the legal take on it.

A lawyer’s general role in a deal

Subject to a few exceptions I’ll discuss below, a cannabis lawyer’s role in a transaction does not extend to things like (1) negotiating business decisions, (2) agreeing to aspects of a transaction, or (3) advising on non-legal issues. In other words, lawyers don’t assume the role of CEO or the business development team. Instead, generally speaking, cannabis deal lawyers (1) negotiate legal aspects of a transaction and (2) draft transaction documents. If there is a regulatory element, they may also (3) assist with required regulatory filings. This is usually it.

Ethical constraints on lawyer roles

The practice of law is highly regulated. Lawyers need to abide by a host of ethical rules when they practice. The rules are even more demanding and complicated in cannabis transactions due to federal cannabis illegality. See the California Bar’s opinion for example. They change from state to state, so even what we’re talking about here may be different in each state.

A lawyer’s ethical obligations can be difficult for clients to grasp. Sometimes clients ask their lawyers to do something that would be totally normal for non-lawyers, but prohibited by legal ethics rules. Lawyers who do these things risk their licenses. Those who don’t may lose a client if the lawyer fails to explain their regulatory prohibitions well enough, or the client does not care about the rules.

Tricky attorney-client issues in cannabis deals

Sometimes clients ask lawyers to do things that, while not necessarily unethical, may be outside a lawyer’s wheelhouse or just something that lawyers don’t do, like give tax advice (okay, tax lawyers don’t count here). Most of the time, the questions though straddle the border of what a lawyer can do. All of our cannabis attorneys have been asked to assist in some of these “gray areas” in the past. Here are some common examples:

Can you help us negotiate a purchase price or some other key non-legal business term?

Lawyers should not be advising on what purchase price to offer or how much to pay in a deal. If a lawyer has experience in an area and understands market prices, they can convey that information to the client when asked. But the payment terms are solely up to the parties. They are business terms.

That said, lawyers can help clients in negotiating a purchase price based on information and business decisions provided by the client. For example, a lawyer representing a buyer who wants to pay $X less than the purchase price, or to restructure the purchase price in some manner, can certainly help negotiate with the seller’s lawyer. In this example, the buyer’s lawyer can explain why legal issues flagged by that lawyer and business issues flagged his or her client mandate a lower or different price.

Your cannabis lawyers are experts in this field. Is this company really worth $X?

This too is a really tricky question for cannabis lawyers to answer. Lawyers are not expert valuators. Some lawyers may have information on what is market in a deal. But no two deals are alike and most are very different. Good cannabis lawyers will then diligence the transaction and the target business or assets (minus any diligence that needs to be done by CPAs or other experts) to determine whether what the seller says is true. Clients use this information, in part, to value deals. Our cannabis lawyers have seen prices drop or get restructured many times after finding skeletons in the closet during diligence.

What are the tax implications of this cannabis deal?

Most cannabis transactional lawyers know at least some information about tax to give some high-level tax information to clients. But complex tax questions are best answered by CPAs or tax attorneys. In many of our cannabis M&A or transactions or cannabis real estate transactions, we work with a client’s CPA early in the process to identify the most tax-efficient structures for the deal.

Can you introduce us to one of your other cannabis clients to do X deal with?

Some states may have rules that restrict or prohibit a lawyer’s ability to do something like this. Even in ones that don’t, lawyers need to be very clear that they do not represent both sides in a transaction, which is prohibited in almost all cases by ethical rules. And there are tons of other problems if a lawyer wanted to take a finder’s fee or broker fee for doing such an introduction.

Can you hold money in escrow?

The answer here depends on state law and a lawyer’s risk tolerance for holding money in trust generally– and especially for cannabis money. Many lawyers will not act as escrow on a transaction. A truly independent escrow company is better in the event of a dispute over release of escrow proceeds. Some lawyers nevertheless perform these services. If a client wants to save money in a transaction this is probably good information to determine at the outset of the attorney-client relationship.

You are a real estate attorney. Can you advise me on an employment dispute?

This is probably the most common type of question ALL lawyers get. Clients often think that because we went to law school and took the bar, we know everything about all areas of the law. We don’t. A lawyer typically focuses on a relatively narrow area or areas of the law. This can irritate clients who may just want one lawyer or firm to handle everything.

This problem is particularly challenging for sole practitioners or very small firms who need to either “figure out” a brand new area of the law in a short time (rarely a good call) or farm the work out (which neither lawyers nor clients like). Our cannabis team fortunately has experience in many different areas but even we need to refer specialized work out from time to time.

It’s good for clients to figure out what they need from a firm when engaging the firm. But it can often be hard to predict what kind of legal needs will crop up in the future.

So what is a lawyer’s role in a deal?

We’ve now talked about what lawyers can’t do. Now let’s talk about the actual role of lawyers in cannabis deals. In a cannabis deal, a lawyer’s role is to do some or all of the following:

• Identify legal and regulatory issues that would affect the transaction (including federal law issues)
• Advise clients on the legal impact of a transaction on their business
• Conduct due diligence on the target asset or business OR, if representing a seller, guide it through the diligence process
• Draft and negotiate definitive agreements
• Assist with regulatory or legal disclosures or permitting as required by the deal
• Guide clients through closing and post-closing legal obligations

This is a short list, but each bullet point can include a lot of substantive work and advice. The process of buying and selling a cannabis businesses or assets, or doing any other kind of deal for that matter, can be long and complicated. Good lawyers will know what they can and can’t do and advise clients to reach out to qualified professionals where needed.