Workouts and balance sheet restructurings will soon be a necessity in the cannabis industry. With the combination of increased use of debt financing, tightening capital markets and a shakeout of winners and losers in growing, processing and distribution, insolvencies are a certain issue in the near future. But, there are very real obstacles to restructuring a cannabis business in both the US and Canada, especially when compared to traditional industries.
In the United States, marijuana is legal to some degree, in all but three States, but remains illegal at the Federal level. Even the hemp business may not be as legal as everyone thinks, given the gap between State and Federal laws and the FDA regulation of CBD derived from hemp. The result is that cannabis companies are effectively prohibited from filing bankruptcy in the United States and therefore they are not able to seek protection from creditors and to use the courts to help facilitate a work out plan.
The Bankruptcy Courts generally dismiss cannabis-related cases on the grounds that a bankruptcy trustee cannot administer the assets without violating Federal law or the bankruptcy plan cannot comply with the good faith requirements of the Bankruptcy Code. This is true for those participating directly in the cannabis business (growers, processors, and sellers) as well as for businesses that indirectly touch the industry, including commercial landlords with cannabis tenants and gardening suppliers that may sell to growers.
In Canada, the issue is primarily regulatory. All market participants require a Health Canada license that permits a specific person to do a specific activity at a specific location. Companies cannot transfer licenses and, therefore, they are not independent assets to be used as collateral by a lender or as part of an asset sale. Also, security-cleared key individuals are required to be on site during all operations. It is unclear how a third party could be appointed to continue operating a cannabis company in a distressed situation.
The solutions to these obstacles are quickly evolving. Some of the current thinking is:
- In the US, to rely on State remedies such as ABC transactions, Receivership and foreclosures
- In Canada, to focus on security cleared CRO / Turnaround professionals and M&A transactions (unless the license is already suspended or revoked, in which case traditional insolvency techniques can work)
- For cross border companies, a creative use of Canadian Insolvency mechanisms combined with a US Chapter 15 filing
Want some more detailed discussion? Check out Episode 19 of Martinis With Scott. Remember to subscribe to Martinis With Scott on YouTube, Apple Podcasts and Spotify.