TG Branfalt reports on the current state of Canada’s illicit cannabis market for Ganjapreneur. The sector is now worth 1.7 Billion, less than half of which is legal and licensed trade.
Boosting this sound advice from Justin Lipchitz for Cannabis Dispensary Mag, “3 Tips to Help Cannabis Dispensaries Buyers Select Vendors”. Tip #3, especially.
Cannabis businesses run a higher risk of facing a “D&O claim,” or a lawsuit aimed directly at the directors and officers of the company rather than at the company itself.
While directors and officers of cannabis-touching companies may no longer have to worry about losing their freedom for choosing to work in the industry, they still have to worry about losing their personal assets through civil litigation. That’s right—their personal assets!
Cannabis businesses run a higher risk of facing a “D&O claim” or a lawsuit aimed directly at the directors and officers of the company rather than at the company itself. In some cases, fighting a D&O claim is so expensive it can bankrupt both a company and its owners. D&O claims in all industries have been steadily increasing for the last two decades and unsurprisingly, more and more of these claims are now popping up in cannabis. It is essential for any business taking the risks of working in the industry to plan ahead and protect themselves from this sort of expensive and damaging litigation.
Fortunately, cannabis businesses have the ability to safeguard their business with specialized D&O insurance coverage. D&O insurance coverage provides broad balance sheet protection for the organization in addition to asset protection for the directors and officers who may be held personally liable for their actions. Lawsuits can be filed by a variety of stakeholders, which is why potential claims can arise from various scenarios. Some common D&O risk scenarios include:
● Shareholder actions or derivative claims
● Reporting errors
● Misrepresentation of prospectus
● Failure to comply with regulations or laws
● Creditor claims
● Competitor claims
Why D&O Coverage is Essential for Cannabis Companies
Any business has the potential to be sued by its employees, competitors, or shareholders. In the cannabis industry it is even more perilous for directors and officers who must also navigate constantly evolving regulations and limited banking resources.
Due to federal law, state-legal companies operate in a grey area, making it difficult to access capital, use banking services, obtain adequate insurance coverage, and access other services that make traditional businesses competitive. Most insurance carriers will exclude claims that fall within federal jurisdiction, so it is important for any cannabis business to seek out coverage that is catered to the industry by people who understand and support it.
While D&O claim insurance is still rare in this emerging sector, it is available—and essential—for cannabis companies. D&O liability insurance protects the personal assets of directors, officers, and their spouses if a suit is ever filed. Most policies cover defense costs, legal fees, and settlements.
Traditional business financing is not available in the cannabis industry, which forces businesses to seek out capital from outside investors, private equity sources and/or venture capital. If an investor feels they were misguided, deceived, or wronged, they may decide to file suit directly against the company’s directors and officers. Any time a business takes on a new investor, they increase the pool of people who could file a D&O claim against them.
All of these factors contribute to a vulnerable industry with steadily increasing D&O class action lawsuits. Here are just a few of the industry’s most notable cases so far:
● Canadian LP CannTrust’s CEO Peter Aceto violated regulations by growing cannabis in unlicensed rooms. His actions led to an 85% decline in the stock’s price, a class action lawsuit, and a personal loss of $8 million in the form of stock options.
● Canadian LP Aphria’s executives were accused of overvaluing Latin American assets. The stock lost over 60% of its value, the company’s co-founders and CEO resigned, and a class action lawsuit was launched.
● American cannabis company MedMen’s executives are facing a $20 million lawsuit over accusations that include a lack of transparency as well as the directors and officers enriching themselves at the expense of shareholders.
● Cronos Group shareholders filed a securities class action lawsuit against the company as well as CEO Michael Gorenstein. The complaint alleges that Cronos’s statements regarding the size of its distribution agreements were intentionally omitted due to their relatively small size in comparison to the premium investors were paying for the stock.
Cannabis Exclusions and Why They Matter
It is necessary to work with an insurance brokerage that specializes in cannabis to reduce risks. Most cannabis companies still operate as startups, and exclusionary clauses put their personal assets at risk. Many policies contain specific cannabis exclusions, so businesses need to seek out policies that cater to the industry. Cannabis insurance brokerages are trained to spot exclusions in policies which leave directors and officers personally liable for damages.
Insurance companies that provide D&O claim coverage to cannabis companies often exclude certain types of claims in the cannabis industry:
● Bankruptcy exclusions
● Creditor exclusions
● Major shareholder exclusions
● Class action exclusion
● Prior acts
● Fines and penalties.
D&O Coverage as a Recruiting Tool: A Must-have for Cannabis Executives
A cannabis company with specialized D&O coverage has a significant competitive advantage in the hiring process. Many experienced executives coming to cannabis from other industries have become accustomed to working with companies that ensure their personal assets are safe from litigation. Whether a company is recruiting a new CEO, president, risk manager, or CFO, the first question these individuals will ask is simple: Does your company have D&O coverage?
If the answer to this question is no, then it is likely the company has already lost the recruit. When looking for a new landing spot, no corporate executive is going to risk joining a team where they can be held personally liable for their decisions.
When a company purchases D&O insurance, they can reassure potential hires their personal assets are not at stake. The insurance policy will often provide protection against some of these common claims:
● Disputes regarding human resources and employment law
● Failure to implement a plan that follows cannabis regulations
● Fraudulent misrepresentation in corporate dealings
● Negligence while performing duties
As a company continues to grow, D&O coverage becomes increasingly more important. This is especially true for companies working towards a public listing or in the process of sourcing additional funding.
Kirk Miller is a commercial insurance, risk management, and business strategy leader with more than 20 years of cannabis consulting and insurance industry experience. Kirk is an Executive Producer at Nine Point Strategies. Follow him on LinkedIn, here.
MJ Biz Daily spoke with Purple Heart Patient Center’s CEO and Founder Keith Stephenson to discuss the state of the dispensary and industry amidst Covid-19 and following looting. Read for his insights and advice to other cannabis leaders in similar situations.
Today we’re re-sharing this important article by David Lesser, CEO of Numina.
|IS YOUR TEAM BEING STRAIGHT WITH YOU?
Workplace hostility is in the news again. Enlightened bosses want to understand what people are experiencing and often ask us to interview key members of their teams. Almost always, there is something withheld. Members of the team will tell us things about which they are not speaking up candidly in meetings or one-on-one reviews. Here are two ways you can make it safe for your people to tell you what is really going on.
Reward Blunt Candor
Unless there is some material acknowledgement of the behaviors you want to see, all the lip service in the world won’t move the cultural needle. How do we measure candor? The most potent method is to delegate the scoring to your people’s direct reports. For each person reporting to you, collect five or six “candor” scores from those he or she works with most closely. Do this each year. If your key executives are being candid with you, the people they work with will know. They will see their boss thinking about how to report hard truths to you. They will see you acting on things that they found painful.
Channel Of Personal Connection
We have clients who have instituted regular correspondence with everyone on their teams. One leader I know sends a personal letter each month, adding a handwritten note each quarter to all 200 of his employees. I have seen a leader encompass a monthly correspondence with as much as 2,000 team members. That takes help. One who receives well-written notes from 400 people says that it takes less time than you might expect. And the benefit of being attuned to people in this way are invaluable.
The key to opening such a channel of personal connection is not so much what you say to the people. It is what they say to you. When you find a way to make it safe and make it fun for people to share what it is like to work for you, great leadership moves just naturally emerge. You look like a genius, when in fact the most brilliant solutions were just sitting there all along.
We would love to hear your experience of rewarding straight talk in a corporate culture and creating channels of personal connection that enhance the team’s intelligence and deepen their sense of belonging.
Cannabis regulators in Michigan issued a broad recall following the confirmed complaint. This employee’s less-than-appropriate decision holds even more weight amidst the Covid-19 pandemic, a highly contagious virus spread through respiratory droplets and saliva.
Jesse Parenti, Director of Programs at Nine Point Strategies, has been featured in today’s Cannabis Insurance Broker Spotlight on InsuranceJournal.com. How did Jesse get into the cannabis space? “I have family and friends that have been cottage growers for over 20 years. Protecting and having them be able to have a legal farm was very exciting to know could happen. When we saw the opportunity that was happening in Colorado, Oregon, Washington and California, we went all in.” Read the full interview.
The Public Utilities Commission has proposed a requirement that all indoor cultivation operations use only LED lights by 2023. This allots a 3 year period for California’s 3.4 million square feet of indoor cultivation facilities to completely switch over. Cultivators have pushed back, expressing that this regulation would be excessive considering the standing environmental regulations they already must comply with. The push back is warranted, considering LED lights typically cost up to $90 more than traditional HPS lighting. The situation is still unfolding, but it’s clear there is a major sustainability issue, and any solution will require major buy in from all parties.