What You Need to Know When Buying a Cannabis Business, Part 3: Hiring Your Lawyer

23 May What You Need to Know When Buying a Cannabis Business, Part 3: Hiring Your Lawyer

Buying a cannabis business does not occur in a matter of days, and transactions fall apart for a variety of reasons, as we discussed in Part 1 of this blog series focused on the buy-side of a cannabis M&A transaction. In Part 2, we focused on the regulatory environment, discussing concepts that first-time buyers and their attorneys should be aware of. In this Part 3, we look into things to consider when hiring your cannabis attorney.

Why Hire an Attorney?

In my time representing clients in the cannabis industry, I have learned that cannabis company owners can be, on balance, less willing to engage attorneys to help them with their work than clients in other industries like our international practice. I am not sure whether that is because of the relative “simplicity” compared to international transactions or whether cannabis owners generally distrust lawyers or do not see the value in us. The last reason is often why clients who have been burned once in a business deal make great clients: they know what problems their attorneys can help them avoid and they can put a price tag on that value.

In a transaction, sellers are generally less willing to hire an attorney than buyers because sellers are more concerned with getting paid, while buyers are beginning to navigate a whole host of potential business issues, including many of seller’s legacy business issues the buyer will not know about.

What’s in the Engagement Letter?

When hiring your cannabis attorney, you should expect to see an engagement letter with language like the below capitalized text. Cannabis work is still very nebulous, so your attorney’s engagement letter will probably seek to protect their firm to the greatest extent possible. Most cannabis engagement letters will contain additional disclaimer language to protect the law firm from future malpractice claims and ensure that you as the client have reasonable expectations, and it will probably be in all caps:

WE CANNOT GUARANTEE YOUR ABILITY TO RECEIVE A MARIJUANA-RELATED BUSINESS LICENSE IN ANY WAY.

POSSESSING, USING, CULTIVATING, MANUFACTURING, PROCESSING, DISTRIBUTING, AND SELLING MARIJUANA ARE ALL FEDERAL CRIMES. NO LEGAL ADVICE WE GIVE YOU IS INTENDED TO ASSIST YOU IN VIOLATING ANY LAW OR AVOIDING DETECTION OR PROSECUTION OF SUCH VIOLATIONS.

OUR ADVICE IS INTENDED SOLELY TO ASSIST YOU IN COMPLYING WITH STATE CANNABIS LAWS. THE ILLEGAL STATUS OF MARIJUANA UNDER FEDERAL LAW MAY IMPACT THE ATTORNEY-CLIENT RELATIONSHIP, THE ATTORNEY-CLIENT PRIVILEGE, AND THE CONFIDENTIALITY OF INFORMATION PROVIDED.

How Much of Your Attorney’s Advice Should You Follow?

As with all transactions, your legal counsel is considering their ethical obligations in advising you to comply with applicable laws and regulations. No ethical attorney will ever advise you to break applicable state laws and regulations (but federal and state law conflicts are another thing).

Your counsel must be familiar with the applicable regulatory structure and will likely document all guidance provided to you regarding the regulatory environment either through regular emails and memos to you or to your counsel’s own files. This especially includes instances where you want to toe the legal or regulatory line, even where your attorney personally feels like some laws and regulations are nonsensical.

What if the Seller Doesn’t Have a Lawyer?

Some cannabis company owners are inherently suspicious of legal counsel, so it is not uncommon for you as the buyer to be the only party engaging counsel in the transaction. If the seller will not be hiring legal counsel, then you and your attorney will need to determine whether your attorney should engage directly with the seller or whether all negotiations should remain at the buyer and seller level. This is generally a strategic decision about what the seller will expect and be comfortable with.

If your attorney will be the only attorney involved, then you should plan on paying additional legal costs associated with your attorney performing all of the transactional work without seller’s counsel involved. You may want to address this added expense with the seller and increase the purchase price accordingly. You also need to determine whether you, the seller, or your attorney will take on the additional work of filling out license transfer forms and dealing with your state regulators.

You may want your attorney to explain contract provisions generally to the seller, but your counsel may be hesitant to do so and will at least clarify that they will not be providing legal advice to the seller when doing so.

Employing the lone attorney in the transaction is not all bad. When seller does not engage counsel, the transaction often moves forward faster, with the initial closing occurring quickly after the initial drafts are provided to the seller. Counsel will ensure that the transaction documents include representations by the seller that the seller has had ample time and opportunity to engage its own counsel.

For more on this topic, check out Hilary Bricken’s recent post, titled Cannabis Lawyers and Law Firms: The Good, the Bad and the Ugly. For earlier posts in this series, see: