There are a lot of bad ways to set up a cannabis business, and we like to think that we’ve seen them all. But there’s probably no worse category than 50/50 ownership of a business – a recipe for all sorts of disasters. Let’s look and why that is, and some ways to avoid it.
When I talk about 50/50 ownership, I mean two people or entities who own all of the outstanding voting rights in a business. For example, this would mean two people who each own half of the voting shares in a corporation or half of the membership interest in an LLC. This is an extremely common set-up for smaller companies where two partners may want to have equal control of a business (I may use the term “partner” in this post for ease of reference even though they’d be referred to as shareholders in a corporation or members in an LLC). But we’ve even seen bigger or more established companies try to have 50/50 joint ventures.
50/50 ownership means that any decision that must be put to a vote effectively needs unanimous approval because the vote of one owner doesn’t hit the majority threshold. While at first, most partners are aligned, over time as a business has ups and downs, those partners’ visions for the company drift apart – especially where a company is underperforming or has taken on a lot of debt. So inevitably, the partners will disagree and if those disagreements become too pronounced, votes won’t succeed and the company will grind to a halt.
In cannabis, it’s very common for someone with zero cannabis experience but lots of money to link up with someone with tons of experience and no money. Inevitably, some big decision will need to get made. The “experience” partner will want to go one way and justify it with their years of experience in the industry. The “money” partner will think the decision is too risky or not smart and will say “I’m the one putting in the cash, I want to call the shots.” This isn’t just a problem in money v. experience partnerships. It happens in all forms of 50/50 partnerships.
What will inevitably happen is one of the partners will lawyer up and ask a lawyer to help them fix the issue. The first thing any (good) lawyer will do is ask to see all corporate governance documents of the company–things like bylaws or a shareholder agreement for a corporation or an operating agreement for an LLC. Here are the three most common scenarios:
The good news is that there are a lot of ways to avoid this mess, such as:
You may be thinking this is all overly dramatic. It’s not. Our cannabis litigators have seen partnerships fail countless times, despite that it’s an issue that can be easily avoided with a little diligence and investment. Stay tuned to the Canna Law Blog, where we’ll be sure to highlight more bad ideas in the cannabis industry.
50/50 Cannabis Business Ownership: A Terrible Idea on Harris Bricken.