Cannabis Musings - July 18, 2023

The cannabis industry doesn't care enough about fiduciary duties.

Jul 18, 2023

Friends, we need to talk about one of my favorite legal topics – fiduciary duties (I did practice corporate law for 24 years…). It’s not as arcane as the dormant commerce clause, as sexy as securities fraud, or as hilarious as illegality as a contract defense, but it’s fundamental to the way our system of business works. Unfortunately, I continue to be reminded that too many in the cannabis industry don’t seem to care about it.

Let’s start off with a quick primer. When we talk about corporate fiduciary duties, it means that a company’s officers and directors are required (by state law) to make decisions that are in the best interest of the company and its equityholders, rather than themselves or others. There’s plenty of nuances to that basic idea, and different states and courts put their own spins on the concept, but the gist is that officers and directors need to put the company (and its owners) first.

There are two basic categories of corporate fiduciary duties – the duty of care and the duty of loyalty. The first one means that you need to use care when making decisions on behalf of the company and its owners. The second one means that you need to put the company’s (and its owners’) interests ahead of your own.

Let’s say I’m CEO of company that makes infused knishes. I go to the company’s board with an idea to start selling a new line of THC knishes in grocery stores with bright, colorful packaging and branded with a cute, cuddly mascot that kids will adore. If no one on the board says “hey, maybe we should check with a lawyer first to see if this is legal,” then they’re almost certainly violating a duty of care. Then, my side hustle sells schmaltz (the chicken fat that makes the knishes so scrumptious) to the company at a hefty premium, but I don’t bother to tell the board. This is almost certainly violating my duty of loyalty to the company.

In short, don’t be a schmuck and don’t be a chazzer (not legal advice, but thoughtful nonetheless).

When I first started working in the cannabis industry, I was quickly struck by the utter lack of concern for corporate fiduciary duties. Fun stuff like producers buying biomass from the CEO’s own farm, and companies using excise taxes to manage cashflow. As a lawyer, that gave me significant tsuris as I advised companies on these issues (which Hauser Advisory still does, though without the legal advice part!). I chalked it up to the nascency of the industry, figuring that the transition from illegal to licensed would shake out the grifters over time.

Well, that’s one prediction I’ve unfortunately gotten wrong (Cf., my year-end sonnet). You can’t swing a dead cat these days without hitting yet another lawsuit alleging a breach of fiduciary duties, or news report about self-dealing. I’m not going to call out any actors in particular (I’m a lover, not a fighter), but it’s disappointing to me that the industry still seems to have such a high level of tolerance for such shenanigans. The industry isn’t going to attract major institutional capital, or gain the partnership of large, multinational companies, or ever be trusted enough by Congress to support full legalization, if it continues to portray itself and act like a rogue state.

The cannabis industry can’t have it both ways. If it wants to play in the sandbox and be treated like a legitimate business like everyone else, it needs to (fortunately and unfortunately) abide by the rules that legitimate business play by. I truly think that the industry doesn’t need to shed its outsider mojo, or push out the small and midsized operators, in order to achieve what it wants. But ignoring Business 101 basics like fiduciary duties, which are there to make sure that the ones in control are being good (or, at least, not thoughtless) stewards of their investors’ capital, is not the way to get there.

Be seeing you!

Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network and twenty-five years of dealmaking and capital markets experience.