Government regulators commonly engage in rigorous background checks before issuing a cannabis retail license. Officials also may revoke a license for numerous reasons including reasonable grounds to believe that a licensee will not act with honesty, integrity “or in the public interest.”
Less known is how and when a regulator may deny a license application or revoke an existing license based on the conduct of “interested persons” or “associates” connected to a licensee. A regulator may potentially derail an existing cannabis business and create a costly regulatory dispute based on the background or character of third parties who are closely connected with a cannabis licensee. In fact, these third parties, when labelled as an “interested person” or “associate” can receive as much regulatory scrutiny as the licensee herself.
The Third-Party’s Conduct at Issue
The terms “associate and “interested person” are defined by provincial licensing statutes. For example, Ontario’s Cannabis License Act defines an “interested person” as someone who:
- Has a direct or indirect beneficial interest of any kind in the cannabis licensee’s or applicant’s business;
- Exercises, or may exercise direct or indirect control over the licensee’s or applicant’s business; and,
- Provides, or may have provided, direct or indirect financing to the licensee or applicant’s business.
In Ontario, an applicant may be denied a license, or a licensee may have their license revoked, if they or “any interested person” does not meet a host of eligibility requirements such as: financial responsibility in respect to the cannabis business; a lack of compliance with the law; past convictions for certain offences; or a lack of integrity and honesty.
Similar provisions are found in cannabis legislation in provinces such as Alberta and New Brunswick among others. Other provinces, such as Manitoba, focus on individuals with a financial or share interest in the license.
How Are These Broad Terms Limited?
Outside of Ontario, it appears that no court or tribunal has considered what limitations exist on a regulator’s determination of who qualifies as an “associate” or “interested person”. Nor are there many cases outlining the conduct that a regulator may scrutinize as the basis for denying or revoking a cannabis license.
In Ontario, two 2022 decisions from the License Appeal Tribunal (LAT) placed limits on the regulator’s interpretation of the term “interested person”. These limits impact the regulator’s ability to deny or revoke a licensee’s cannabis license based on the conduct of someone other than the licensee.
When Conduct Constitutes a Beneficial Interest
In the first case, the LAT rejected the regulator’s broad interpretation of what conduct qualified an individual as an “interested person”. The regulator had sought to revoke a license due, in part, to the conduct of the cannabis licensee’s spouse. In the case of T-Dot Auto Collision Inc. o/a Cannaverse and Yalini Manoharan v. Registrar, Alcohol and Gaming Commission of Ontario Act, 2019, 2022 CanLII 49949, the LAT concluded that merely because someone is the spouse of a cannabis licensee does not mean they have a beneficial interest in the cannabis business. Nor does being a family member of a cannabis licensee, on its own, serve as the basis for having a beneficial interest in a cannabis business, according to the LAT’s decision.
In T-Dot, the LAT said that to have a beneficial interest, and therefore to be an “interested person” in a cannabis store, a family member or spouse of a cannabis license holder must have a right “to share the benefits of a property” even if they are not the legal owner.
The fact that the cannabis licensee employs or leases property to a family member or spouse, or enters contracts with a family member or spouse, does not presumptively make them an interested person either.
This means that a “beneficial interest” does not exist merely because a third party—the alleged “interested person”—gains some benefit from the operation of a cannabis business through contracting with the cannabis business. The LAT’s decision concluded that, “[t]hose relationships, while presumably beneficial to both parties, do not create a beneficial interest in the business.”
The Tribunal also held that when a cannabis licensee and the alleged “interested party” have consolidated economic interests, this fact alone will not suffice to prove a “beneficial interest” in a cannabis store. For example, if the alleged interested person may ultimately receive or spend the profits of a cannabis retail store because they are married to the licensee, this will not suffice for a “beneficial interest” to exist.
How or When Does a Third-Party Exercise Control Over a Cannabis Business?
In Havok Global Limited & Goldlist v. Registrar, Alcohol and Gaming Commission of Ontario Act, 2019, 2022 CanLII 49949, the LAT made additional conclusions about what conduct qualifies an individual as an interested party. In that case, the LAT considered the second prong of the statute—whether someone has direct or indirect control over a cannabis licensee. The LAT stated that the test for exercising “control” over a cannabis business is not met when a third party shares business or operational advice with the cannabis licensee. Rather, to “control” a cannabis retail operation, for purposes of being an interested person, the non-licensee must demonstrate involvement in the cannabis business itself, such as making decisions for the company or doing something that binds the business.
Understanding how the conduct of third parties affect a cannabis license is important for budding entrepreneurs and established cannabis retailers. Provincial regulators have broad powers to investigate such individuals’ conduct as the basis for license revocation. An important step in protecting one’s cannabis retail operation is understanding these statutory terms and the scope of regulators’ powers when it comes to the conduct of third-parties serving as the basis for revoking or denying issuance of a license.