TIPS TO AVOID PARTNERSHIP DISPUTES
When people decide to go into business together, everyone is usually getting along well and feeling very positive about the future and the success of their new company. The promise of a lucrative venture in an exciting new industry is enough to make anyone happy. With the many moving parts involved in setting up a new marijuana business, most new business owners are not concerned about governing documents. Most marijuana business owners are not thinking about what happens if they start to argue and can no longer operate the business together, or if one owner wants to sell her interest in the business.
We have seen numerous disputes between owners of marijuana businesses who leaped into business together without thinking about these issues. We often see operating agreements for limited liability companies that have been downloaded from the internet. These agreements have conflicting provisions, are not tailored to the marijuana industry, or simply do not make any sense. Without properly drafted governing documents, it is extremely difficult to determine the rights of the owners, transfer ownership interests, or unwind the company. While the Oregon statutes provide guidance, the issues are further complicated when the owners have made distinct contributions to the business. For example, one owner contributes the capital and the other sweat equity.
As these business disputes seem to be on the rise, here are some tips that may help you avoid them.
1. Draft a Business Plan.
It is no secret that a business plan is critical for any new business’s success. The process of creating that plan gives the marijuana business partners important insights into working with each other, and clarifies each partner’s values and goals for the company. Ensuring these values and goals are in-line early on helps avoid partnership disputes once the business is launched. The partners can learn about the talents and skills each are bringing to the company while creating the plan. Ideally, each partner will bring different strengths and experience to the company, which can avoid disputes later because of overlapping work areas.
2. Draft Governing Documents for your Business.
An experienced attorney can help you draft governing documents that are narrowly tailored to your marijuana company and its owners. Thinking through issues the new business owners may not have thought about and working through some worst-case scenarios can be critical to the future success of the company. Properly drafted documents are a resource for the partners when disputes arise. It’s the difference between playing a game where no one knows the rules verses all the players knowing the rules. There is less fighting and potential cheating when everyone knows the rules of the marijuana business.
If you are contributing significant capital to the new marijuana business or if there are several partners involved, consider hiring your own personal attorney. If all of the partners go to one firm, that firm will only be able to represent the company and not each individual partner.
3. Consider Including a Disqualifying Event and Expulsion Clause.
The OLCC imposes strict regulations and background checks on the owners of a licensed marijuana business in Oregon. The bad conduct of one owner can jeopardize the OLCC license for the entire company. Adding in a disqualifying event and expulsion provision to the company governing documents can prevent one partner’s conduct from causing the company its marijuana license. Here is sample definition:
“Disqualifying Event” means if a Member or Manager’s status or continued status as a Member or Manager (or if the ownership or management of a Member or Manager) could, for any reason, in the reasonable judgment of a Majority-in-Interest of Disinterested Members: (i) jeopardize the ability of the Company to obtain, maintain, or renew: (a) any necessary or desired license, registration, or permit from the Oregon Health Authority, the Oregon Liquor Control Commission, or any other Oregon governmental authority; or (b) any material license, registration, or permit from any governmental authority; or (ii) materially harm the business or reputation of the Company.
The governing documents should include the process whereby the disinterested business partners may expel the bad acting partner from the company upon the occurrence of a Disqualifying Event. Without such a clause, the disinterested business partners may be forced to buy-out the bad actor’s interest or face a long expulsion process through the judicial system.
4. If Disputes Still Arise, Consider Hiring a Mediator.
There are many highly skilled mediators who can assist business partners in resolving disputes. Having an objective third party to listen to both sides can often bridge the communication gap between fighting owners. Too often these cases end up in expensive litigation, so it’s worth the effort to avoid it.
5. Document the Behavior of the Bad Acting Partner.
If it looks like there is no path forward with the partner, gather as much evidence of the bad acts as possible. If there is video tape of the partner stealing product from the dispensary, make sure to keep a copy. Keep all emails and other written evidence of a partner breaching her fiduciary duties of loyalty or care to the company. If a lawsuit is necessary to expel the partner, this evidence will be crucial for success.
In conclusion, partnership disputes can be very damaging to a company. Taking steps in the early stages of the new marijuana business can help prevent disputes later. If you feel your governing documents are not where they should be, it’s not too late to get them properly drafted. If disputes have already begun, take action to resolve them before they go too far. Finally, if the relationship is broken with no hopes of repair, gather what evidence you can and seek legal counsel as soon as possible to come up with a damage control plan and resolution through either settlement or the judicial system.