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Corporate Structure of Companies

Q: Given all the M&A activity in the sector, what is the best way for cannabis retailers to add new directors/officers with minimal impact to licences issued and/or under consideration by a provincial regulator?

Licence-holders must work together with their provincial regulators to determine when they must be notified of new directors and officers being added to the licence-holder’s organization. As far as I am aware, every province allowing private retailers requires directors and officers of licence-holders to fill out some sort of personal disclosure or background check. Sometimes these are self-attestations and sometimes the regulator will undertake a proactive search. Licence-holders should, at the very least, ascertain from their provincial regulator the forms that new directors and officers will have to fill out and the specific questions that they will be asked. If the target’s directors and officers are being added to a licence-holder in a province where they have never had such a position, during due diligence it would be wise to ascertain whether any of the questions on the respective province’s disclosure forms would cause an issue. Major red flags include individuals with provincial or federal criminal charges or convictions.

Q: What is the best corporate structure for holding cannabis retail licences? For example, should a parent company apply for a licence or some subsidiary?

The structure that I am least excited about is a sole proprietorship. Since you’re dealing with a large chunk of revenue, it will almost invariably be more expensive in terms of income tax to remain as a sole proprietorship.

Corporations are the best route to take, and Canadian-controlled private companies can take advantage of reduced taxes.

There are additional benefits to setting up the corporate structure with an operating company and a holding company. Assets can be separated, making you more desirable as a target if the acquiror wants to only purchase a segment of the whole business. You can also generate a tax-free dividend from the operating company and assign it to the holding company, which can provide some creditor protection.

A holding company can also allow you to place intellectual property assets in the parent and then license them to subsidiary operating companies to shield those assets from insolvency.

Harrison Jordan is a Cannabis Lawyer & Consultant in Ontario.