The fact that cannabis companies cannot access federal bankruptcy courts is old news. Even ancillary companies with indirect involvement in the federally illegal cannabis industry have been denied access to federal bankruptcy. And while there are signs that reform is coming, accessibility to bankruptcy courts will not become available until federal law changes. Until then, cannabis companies and investors must use state receiverships or out-of-court workouts to restructure an insolvent business.
Outlined below are six regulatory considerations cannabis investors and operators should keep in mind when thinking about court-supervised transfers of control of a cannabis business. These considerations are important in several business situations, such as when facing a potential state receivership action or when any kind of transaction is contemplated (such as a loan which could end in receivership). They also apply in personal situations, like a divorce or the settling of an estate upon death.
To illustrate how these considerations might impact cannabis businesses, this article examines the new Massachusetts regulations that address court appointees and the management of cannabis licenses.
1. Is there a unique process for transferring control of licenses in state receivership?
The initial issue is whether a state has any unique process for transferring licenses via state receiverships or through another court-appointed entity or individual. If this is not the case, typical changes-of-control processes will need to be followed. These can be both time-consuming and impractical in an insolvency scenario, leading to the destruction of all remaining value in a troubled business.
As of January 8, 2021, the Cannabis Control Commission (CCC) of Massachusetts now has regulations that address putting receivers in charge of cannabis licenses. It is covered through a new defined term called “court appointee,” which picks up instances where a person or entity may be appointed by a court to oversee a licensed business (such as receivers, trustees, administrators of estates, guardians, etc.).
2. How are local licenses treated?
In many states, such as California and Massachusetts, obtaining a state license is the easier part of licensing, but local licenses present the real challenge. It is important to understand how local license change-of-control issues work and if state cannabis receivership programs address the transfer of a local license.
Massachusetts regulations do not specifically address local licenses. Transfers of licenses and host community agreements (contracts which must be entered into with localities), need to be handled with the applicable local authorities.
3. Does the process contemplate other kinds of proceedings or transactions?
It is important to understand what kinds of transactions can be accommodated by the applicable regulations. Are only state receiverships contemplated, or are a wider range of court supervised transactions possible (such as an assignment for the benefit of creditors, known as an “ABC,” or settling the estate of someone who died)?
In Massachusetts, the cannabis regulations allow for anyone appointed by an appropriate court to take over control of a licensed cannabis company — although the CCC does have a role in vetting these court appointees. This should allow for a broader range of transactions involving cannabis businesses, including court-supervised ABCs.
4. Who approves receivers or other court appointees?
The process of determining who can serve as a receiver is critical to how a cannabis license will operate. In Massachusetts, court appointees may be preapproved or approved in connection with a court appointment.
5. How are license caps treated?
Many states have license caps that prohibit ownership of more than a certain number of a specific type of license. But it is not always clear how these kinds of restrictions would apply to state receivers or other court appointees.
In Massachusetts, receivers are subject to the same restrictions as other licensees. Receivers and all court appointees are subject to the same limits as any other licensee, including license caps (which would include acting as a receiver for too many of a certain license type).
6. What is the timeline?
In some states, traditional changes of control can take months to complete. It is important to evaluate how quickly a state’s cannabis regulator can move when approving receivers.
In Massachusetts, notice must be provided five days prior to the licensed business, or its controlling parties, filing a petition or upon receipt of notice a petition was filed. If a receiver is not preapproved, proposed court appointee must file an application within two days of an action with the CCC.
Since cannabis regulations vary in each state, and often in each locality, it remains impossible to provide definitive answers for any of these considerations. As with all things in cannabis, we await federal legalization and the possibilities it will bring.