/>iIt is no secret that the cannabis industry has been on a wild ride lately, especially in mature markets. Many operators are feeling the pressure, and they are not alone. Let us break down the current landscape, why it is tough out there, and how receiverships and distressed sales might actually be a positive move for struggling cannabis companies.
Many developed cannabis markets are facing serious challenges. Inflation and a shaky economy are making it harder for businesses to stay afloat (regardless of industry type), on top of market saturation that has caused cannabis prices to drop, and tight profit margins for businesses in the more established marijuana states. This is compounded with the harsh effects of tax burdens due to 280E—where cannabis companies are unable to deduct otherwise established business expenses from gross income as a result of the federal illegality of cannabis in the United States—and lack of liquidity from inability to access traditional debt financing and institutional equity markets. As a result, many cannabis companies are finding it difficult to pay their debts and keep the lights on. And because cannabis is still federally illegal in the United States, struggling cannabis operators are limited when it comes to utilizing federal bankruptcy mechanisms for relief.
But hope is not lost. Even in tough times, cannabis businesses along with their management, creditors, and investors, have found options to help their companies restructure and move forward. One of those is a state-level receivership.
What Is a Receivership and What Is the Goal?
A state-level receivership is a legal process where a court appoints a receiver to manage and dispose of the assets of a distressed company. A receivership generally occurs with the filing of a complaint and a separate motion or petition seeking the appointment of a receiver. Usually, a secured creditor brings such an action, but some state laws allow a company to petition itself into a receivership, mostly in furtherance of a state law dissolution. The receiver steps in as a neutral third party, taking control of the company’s assets and operations, with the main objective being to preserve and maximize the value of the company’s assets for the benefit of creditors and other stakeholders.
Depending on the powers of the receiver delegated by the court, the applicable state law, and the facts and circumstances of the cannabis company at play, the receiver might:
- Keep the business running
- Resolve shareholder or management disputes
- Bring or defend litigation in the name of the receivership entity
- Sell some or all assets
- Liquidate the company entirely
- Any combination of the above
The receiver is tasked with evaluating operational deficiencies and creating a plan for administering the receivership estate, such as strategies for continuing business operations, initiating or defending any necessary litigation, negotiating with creditors and potential bidders, and facilitating the sale of any assets. This process encompasses a rigorous commitment to applicable state and local law compliance—an effort that can be particularly challenging in the cannabis industry due to its complex and nuanced legal landscape.
The receivership process is closely monitored by the court to ensure transparency and fairness.
What Happens to the Money?
When assets are sold, the proceeds are distributed according to the court’s order. Typically, so-called administrative claims get paid first followed by secured creditors, but it is in the court’s purview to make sure all entities owed money are paid in accordance with state law priorities.
How Can This Be a Good Thing?
It might sound all doom and gloom, but state-level receivership and distressed sales can actually be a fresh start. By bringing in a neutral party (the receiver) and following a clear legal process (through the receivership), companies can, among other things:
- Maximize the value of their assets and preserve the cannabis business or a division of a business.
- Find new owners or partners, and give rise to new business opportunities.
- Move forward with a clean slate: as a result of the bidding process, the court will order a sale of the receivership estate to the winning bidder, free of all liens and encumbrances on the assets being sold.
- Preserve jobs: often times the company, due to dwindling liquidity, would be forced to shut down completely. A receivership sale offers a means by which other companies may take over such a distressed company or its assets, thereby saving employee jobs and livelihood.
So, while the cannabis industry is facing challenging times, there are still ways to turn things around. Whether you are a secured creditor or company principal, a state-level receivership might just be the new leaf your company needs.
