Without being too cynical, the fundamental objective of the individual in any business partnership is to structure an arrangement that most benefits him.  That really is the name of the game; design a deal that maximizes YOUR profit while minimizing cost and risk. Of course, both sides of the table recognize this higher imperative (presumably), and it is precisely this mutual understanding that makes negotiations between a couple of savvy and profit-seeking businesses interesting and precarious.

The cannabis industry is no exception to this time-tested rule of self-advancement and as sophisticated businesses increasingly rely on the expertise of inexperienced-in-business, but highly-knowledgable cannabis experts, the Joint Venture is an increasingly popular route to strike a deal.   

Understanding A Joint Venture

Perhaps most important to understand, marijuana Joint Ventures can take many forms and are not structured with the same rigidity and indeed conformity as more standard business formations like LLCs or C-Corps. Fundamentally, Joint Ventures consist of an agreement between two or more business entities that involve some level of profit sharing for joint activities. Joint Ventures are desirable because they are flexible vehicles which allow for some collaboration between cooperating companies without demanding a bona fide conjoining and division of equity.  

Under a Joint Venture, the parties to the deal maintain their superseding fiduciary duty to their original shareholders and continuously work to promote the interests of their respective unitary companies – the Joint Venture is therefore ultimately designed to serve each party singularly, albeit in a mutually beneficial capacity.

What is the Value of a Joint Venture?

As mentioned, Joint Ventures are lauded for their malleability and ease of formation. Consider for the moment just how much goes into structuring the merging of two existing companies with complex equity transfers. Many legal documents need to be both amended and created along with various filings with state regulators.  Negotiations over dividends and stock options can prove to be deal breakers. The Joint Venture requires none of this. Indeed, unlike an acquisition or sale of a company, a Joint Venture is merely an agreement of limited co-operation between the entities.  Nothing more and nothing less.

Joint Venture’s Are a Big Deal: Choose Your Partner Carefully

The Joint Venture must lay out in excruciating and precise detail the division of labor and responsibilities of each joining party. Some of these provisions will include the overall governance of the Joint Venture, working capital oversight, labor issues, and the designation of the workflow.  Of course, the exclusive responsibility of running certain aspects of the business will be a function of the organic skills and expertise of each party.

It goes without saying that a company should only enter into a Joint Venture with a partner that is sufficiently familiar with the idiosyncratic rules and regulations of the Cannabis industry. Remember, Cannabis is still federally illegal which means that there a number of Federal red-lines that must not be transgressed, even when operating in a Cannabis-friendly state.

As this pertains to state licensing, please remember that states do not recognize the Joint Venture as an entity eligible to receive a cannabis license.  Instead, one (or potentially more) of the joining parties must already hold the license.  Therefore, if you’re sole reason for entering the agreement is to get licensure, the Joint Venture is not for you.  

Similarly, companies that intend on selling or merging their company with a larger business at a later time should seriously reconsider the Joint Venture. Joint Ventures necessarily involve a certain amount of entanglement with the partner company, and it may, therefore, be challenging in the future to determine proprietary rights to specific aspects of the operation. From the perspective of an acquiring company, this is worrisome and a potential deterrent to proceeding with the merger.

Marijuana Joint Ventures: The Takeaway

The cannabis industry is still fraught with legal uncertainty, and marijuana businesses would do well to be more, rather than, less cautious. The Joint Venture can be an incredibly powerful way to establish an effective, but not an excessively burdensome partnership with a worthy collaborator. Just make sure you are picking the Joint Venture for the right reasons. As always, #protectyourstash.

Abe Cohn manages THC Legal Group, a Marijuana Law Firm specializing in the cannabis industry. Their attorneys assist startups, entrepreneurs and established businesses protect their most prized assets.  Connect with them to learn more.

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